Financial statements of sole trader & partnership firms

(a) Profit and Loss Account of Nabin Traders for the year ended Chaitra 30, 2071

Working notes: depreciation $= 10\% \times 50{,}000 = 5{,}000$; salaries $= 20{,}000 + 4{,}000 = 24{,}000$; bad debt $= 2{,}000 + 1{,}000 = 3{,}000$. No rate is given for a new provision, so the existing provision of Rs 2,000 is kept.

(b) Balance Sheet as at Chaitra 30, 2071

Deepak Store

Working notes:

• Salary Rs 71,000: selling $80\% = 56{,}800$; administrative $20\% = 14{,}200$.
• Insurance expired Rs 18,000 (administrative); prepaid insurance left $24{,}000 - 18{,}000 = 6{,}000$.
• Depreciation $15\% \times 3{,}60{,}000 = 54{,}000$ on the cost of plant and machinery (administrative); accumulated depreciation becomes $45{,}000 + 54{,}000 = 99{,}000$.
• No interest on the bank loan appears in the trial balance or the adjustments, so none is charged.

(a) Income Statement for the year ended 31st December 2020

(b) Balance Sheet (Statement of Financial Position) as at 31st December 2020

Two differences between revenue profit and capital profit:

Working notes

• Salary charged: $26{,}000 - 4{,}000 \text{ (advance, a current asset)} = Rs\ 22{,}000$.
• Depreciation on building: $10\% \text{ of } 3{,}00{,}000 = Rs\ 30{,}000$.
• Debtors after bad debt: $1{,}00{,}000 - 4{,}000 = Rs\ 96{,}000$.
• New provision: $5\% \text{ of } 96{,}000 = Rs\ 4{,}800$. Old provision is Rs 5,000, so the provision is reduced by $5{,}000 - 4{,}800 = Rs\ 200$, which is a gain.

(i) Trading Account for the year ended 30th Chaitra 2076

(ii) Profit and Loss Account for the year ended 30th Chaitra 2076

The question gives no adjustment for interest on the 10% loan, so none is charged. If a full year's interest ($10\% \times 1{,}50{,}000 = Rs\ 15{,}000$) were unpaid, net profit would fall to Rs 1,95,200.

(iii) Balance Sheet as on 30th Chaitra 2076

Two examples of capital gains are:

1. Profit earned from the sale of a fixed asset such as land, building or machinery for more than its book value.
2. Profit earned from the sale of long-term investments such as shares or debentures above their cost.

NFRS (Nepal Financial Reporting Standards) are the accounting and financial reporting standards adopted in Nepal on the basis of the International Financial Reporting Standards (IFRS), and NAS (Nepal Accounting Standards) are the earlier standards based on the International Accounting Standards (IAS). They are issued by the Accounting Standards Board (ASB) of Nepal and lay down uniform rules for preparing and presenting financial statements.

Cost of goods sold is the cost of the stock available for sale less the closing stock.

$\text{Cost of goods sold} = \text{Opening stock} + \text{Purchases} - \text{Closing stock}$

$= 20{,}000 + 80{,}000 - 15{,}000 = \text{Rs } 85{,}000$

Everest Traders: Profit and Loss Account for the year ended 31 Ashadh 2082

Working notes:

• Salaries $= 45{,}000 + 5{,}000 = 50{,}000$.
• Insurance $= 12{,}000 - 3{,}000 = 9{,}000$.
• Depreciation: machinery $10\% \times 2{,}00{,}000 = 20{,}000$; furniture $5\% \times 50{,}000 = 2{,}500$.
• Provision for doubtful debts $= 5\% \times 65{,}000 = 3{,}250$.

Balance Sheet as on 31 Ashadh 2082

(a) Trading Account for the year ended Chaitra 2077

No closing stock is given, so it is taken as nil.

(b) Profit and Loss Account for the year ended Chaitra 2077

Working notes:

• Salary $= 30{,}000 + 4{,}000 = 34{,}000$.
• Depreciation on equipment $= 10\% \times 3{,}53{,}000 = 35{,}300$.
• Provision for bad debts $= 10\% \times 60{,}000 = 6{,}000$.
• Interest on the 10% loan is not provided for, as no information is given about it.

(b) Closing entries transfer the balances of temporary accounts to the capital account.

Closing entries are passed at the end of the accounting period to close the temporary (nominal) accounts — revenue, expenses and drawings — by transferring their balances to the capital account. Permanent (real) accounts such as assets, liabilities and capital are not closed.

Trading and Profit & Loss Account For the year ended 31st Chaitra 2080

Trading Account

Working:

$\text{Net Purchases} = 2{,}10{,}000 - 10{,}000 = \text{Rs } 2{,}00{,}000$

$\text{Cost of Goods Sold} = 40{,}000 + 2{,}00{,}000 + 5{,}000 + 20{,}000 - 50{,}000 = \text{Rs } 2{,}15{,}000$

$\text{Gross Profit} = 3{,}45{,}000 - 2{,}15{,}000 = \text{Rs } 1{,}30{,}000$

Profit & Loss Account

Working:

$\text{Net Profit} = 1{,}30{,}000 + 0 - (25{,}000 + 12{,}000 + 8{,}000) = \text{Rs } 85{,}000$

Result: Gross profit = Rs 1,30,000; Net profit = Rs 85,000.

The year runs from 1st Baisakh to 31st Chaitra (12 months). A's additional capital (1st Ashwin) remains for 7 months (Ashwin to Chaitra); B's withdrawal (1st Magh) affects 3 months (Magh, Falgun, Chaitra).

Calculation of interest on capital at 10% p.a.

$\text{A: } 2{,}00{,}000 \times \frac{10}{100} + 50{,}000 \times \frac{10}{100} \times \frac{7}{12} = 20{,}000 + 2{,}917 = \text{Rs } 22{,}917$

$\text{B: } 1{,}50{,}000 \times \frac{10}{100} - 30{,}000 \times \frac{10}{100} \times \frac{3}{12} = 15{,}000 - 750 = \text{Rs } 14{,}250$

Total interest on capital = 22,917 + 14,250 = Rs 37,167

Profit and Loss Appropriation Account for the year ended 31st Chaitra 2080

Divisible profit = 1,20,000 − 37,167 = Rs 82,833, shared in the ratio 3:2.

Taking "Returns" as sales returns Rs 10,000 (Dr.) and purchase returns Rs 15,000 (Cr.).

Trading Account for the year ended 31st Chaitra 2080

Profit and Loss Account for the year ended 31st Chaitra 2080

Provision required = 5% of Rs 90,000 = Rs 4,500; existing provision is Rs 7,000, so Rs 2,500 is written back.

Balance Sheet as on 31st Chaitra 2080

Note on the question data: the debit items of the given trial balance add up to Rs 7,73,000 and the credit items to Rs 8,02,000, not Rs 7,26,000 as printed. The Rs 29,000 difference is therefore shown above as a "difference in trial balance" so that the Balance Sheet tallies. The Trading Account and Profit and Loss Account figures are unaffected.

Gross profit = Rs 1,47,000; Net profit = Rs 71,500.