COMPREHENSIVE PROBLEM

Mr. NarainShanker of Delhi won ` 30,00,000 after the payment of tax from a money

game show, KBC - KaunBanegaCrorepati in June 2016.

Out of the net amount received after tax, he donated ` 15,00,000 to a charitable
institutionbeing run for the welfare of old people and orphans as per the wish of his mother.
In addition, hespent ` 2,50,000 on his daughter‟s marriage. The remaining amount of`
12,50,000 was investedin his own newly started business of manufacturing Superior quality
“Electronic Toys” on 1.1.2017.

Mr. Narain deposited ` 10 Lakh in PNB in the firm‟s name and remaining amount
was

retained as Cash in hand.

He hired a premise for which he paid a rent of ` 15,000 per month. The factory and
shopoccupied the ground floor and he used the upper story for residential purpose. Wages,
runningexpenses of van and petty expenses are to be paid in cash while all other payments
and expenseare to be made through bank.

One fourth of all expenditure on rent, electricity and insurance was attributed to
residentialportion and the balance for business purpose.

He also purchased a delivery van on 1.1.2017 for `2,50,000. The estimated useful life
ofthe van is 10 years with an anticipated residual value of `30,000. The monthly running
expensesof the van is ` 1,000. The delivery van was used to the extent of 2/5 for delivering
goods tocustomers and 3/5 for collecting raw materials from suppliers. Mr. Narain Shankar
use his privatetelephone for business call but has paid the total bill from the business bank
account. He estimatesthat the business calls account for 4/5th of the total charge. The total
charge amounted to ` 25,550.

He spent ` 25,450 on furnishing his office. An imported Japanese Toy making

machinewas purchased costing ` 2,00,000 with estimated useful life of l0 years and an
anticipatedresidual value of `25,000.

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 Installation charges amounted to `15,000 on the above machinery were wrongly
includedin wages.

Following figures are extracted from his books at the end of the first year 2017.

Total sales during the year amounted to 2,000 Toys sold @ ` 460 each. One-fourth of
thetotal sales are on credit and balance for cash. Out of the total cash sales 3/5th of the
receipts wererealized by cheques.

The expenses incurred during the year 2017

`
Wages (inclusive of installation charges to toy machine) 18,000

Raw materials purchased for cash for Toys 2,36,000

General Expenses 23,750

Advertisement 20,750

Electricity Charges 30,000

Insurance 20,000

Amount paid to suppliers 2,30,000

Petty expenses incurred 15,000

Salary to Salesman 6,000 per month

Discount allowed to customers 23,500

Bed debts 12,500

Returns inward out of credit sales 11,000

Returns outward out of credit purchases 45,000

Rent 1,80,000

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Discount received from suppliers during the year amounted to`15,500.

Interest received from PNB during the year ` 75.000

At the end of the year :

a) Amount due from credit customers was `50,000 including `2,000 recovered from
acustomer who already had returned the goods and this amount was to be adjusted
againstsubsequent purchases by customers.

b) Amount due for credit purchases was ` 130,000

c) Closing stock valued at ` 2,35,800. This includes goods costing that are
worthlessbecause of some technical defects in them.

d) Cost of goods lying with customers on approvalbasis (Sale price`10,000) is

`7,500which are wrongly included in credit sales.

e) Closing stock also includes stock‟ of finished goods along with stock of raw materials.

Aim of the Project (Finding)

a) - Cash received during the year from debtors assuring that they pay only through
cheque.
- Credit purchases of raw materials.
- Bank Balance at the end of the year 2017.
- Cash in hand at the end of the year 2017.
- Drawings made during the year and also prepare a Trial Balance.

b) Prepare financial statement of Mr. Narain for the year ending 2017.

c) Calculate the relevant ratios so to ascertain whether Mr. Narain Shankar‟s business
hasbeen well managed and also whether it has been efficiently managed in terms of
profitability.

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SOLUTION

CASH BOOK

Date Particulars Cash Bank Date Particulars Cash Bank

2017 2017 By Rent A/c 1,80,000
Jan1 To Capital A/c 2,50,000 10,00,000 Jan By Delivery van A/c 2,50,000
To Sales A/c 2,70,000 4,05,000 By Telephone Charges A/c 25,550
To Debtors A/c 1,30,000 BY Furnishing Charges 25,450
To Interest A/c 75,000 A/c 2,00,000
By Imported Machine A/c 18,000
By Wages A/c 2,36,000
By Purchase A/c 23,250
By General Exp. A/c 20,750
By Advertisement A/c 30,000
By Electricity Charges A/c 20,000
By Insurance A/c 2,30,000
By Suppliers/Creditors A/c 15,000
By Pretty Exp. A/c 72,000
By Salaries A/c 12,000
By Running Expenses of
delivery van A/c
Jan31 4,75,000 2,97,000
By Balance c/d
2018
5,20,000 16,10,000 5,20,000 16,10,000
Jan1 To Balance b/d
4,75,000 2,97,000

Working Notes :

(i) Total Sales = 2,000 toys @ `450 = ` 9,00,000

Credit Sale = ¼ th of total sale
=¼ x 9,00,000 = ` 2,25,000
Cash Sale = Total Sale – Credit Sale
=9,00,000 – 2,25,000 = ` 6,75,000

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 2/5 th of the cash sales is received in cash i.e. 2/5 x ` 6,75,000 = ` 2,70,000
Sales collected through cheque = ` 6,75,000 - ` 2,70,000 = ` 4,05,000

Debtors A/c

Dr. Cr.

Particulars ` Particulars `

To Credit Sales A/c 2,25,000 By Discount A./c 23,500

(including goods sold on By Bad Debts. A/c 12,500
approval basis) By returns Inward A./c
(Including ` 2000) 11,000
By Bank A/c (Cash collected
from debtors) 1,30,000
(balancing figures)
By Balance c/d (50,000-2,000) 48,000

2,25,000 2,25,000
To Balance c/d
48,000
Note : Returns include ` 2000/- which have also been deducted from ` 50,000.

Creditors A/c

Dr. Cr.

Particulars ` Particulars `

To Bank A/c 2,30,000 By Purchasing (Balancing Fig.) 4,20,500

To Discount A/c 15,500 (Credit Purchases)
To Returns Outwatrd A/c 45,000
To Balance c/d (given) 1,30,000

4,20,500 4,20,500
1,30,000
By Balance b/d

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 (ii) Total purchase = Cash purchases + Credit purchases
= `2,36,000 + `4,20,500 = `6,56,500
(iii) Depreciation on „Delivery Van‟ = =
2,50,000−30,000 2,20,000

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10

= `22,000 per annum

(iv) Value of Delivery Van on 31.12.2017 after charging depreciation

= `2,50,000 – `22,000
= `2,28,000

(v) Depreciation on Imported Toy Machine

= −

= (2,00,000+15,000+25,000) = 1,90,000 = `19,000

10 10

(vi) Value of imported machine after

depreciation = `2,15,000 – 19,000 =
`1,96,000

(vii) Value of closing stock after including the cost of goods sent on approval basis and
excluding the defective goods will be `2,42,200
(i.e. `2,35,800 + 7,500 – 1100)

Drawing made by Mr. Narain Shankar is as follows

(A) Rent = 1,80,000

Electricity = 30,000
Insurance = 20,000

= 2,30,000
= ¼ x `2,30,000 = `57,500

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 Rent , Electricity and Insurance used for business purpose
=`2,30,000 - `57,500
=`1,72,500

(B) Drawing in respect of telephone used for personal purpose:

=1/5 th of the total telephone charges `25,550 be treated as drawing

=`5,110

Business Charges of Telephone = 25,550 x 4/5 = `20,440

Delivery van running expenses and depreciation :

Running expenses = `12,000

Depreciation = `22,000

`34,000

3/5 th of `34,000 will be charged to Trading Account as carriage inwards and

th
2/5 of `34,000 will be charged to P and L. A/c as carriage the outwards.

Carriage inward = 3/5 x `34,000 = `20,400

th
Carriage outward = 2/5 x `34,000 = `13,600

Total `34,000

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 TRIAL BALANCE

As on 31.12.2017

[Link]. Name of the Account L.F. Dr. (`) Cr. (`)

1 Cash in hand 4,75,000

2 Cash at Bank 2,97,000
3 Debtor A/c 48,000
4 Creditors A/c 1,30,000
5 Wages A/c (excluding `15,000 installation charges) 3,000
6 Delivery Van A/c 2,28,000
7 Depreciation on delivery Van A/c 22,000
8 Interest from PNB A/c 75,000
9 Running Expenses on Delivery Van A/c 12,000
10 Advertisement Expenses A/c 20,750
11 Petty Expenses A/c 15,000
12 General Expenses A/C 23,250
13 * 1,80,000
Rent A/c
14 * 30,000
Electric Charges A/c
15 * 20,000
Insurance A/c
16 Telephone Charges A/c 25,550
17 Furnishing Charges A/c 25,450
18 Toy machine (inclusive `15,000 installation 1,96,000
charges) A/c
19 Depreciation Toy Machine A/c 19,000
20 Salary A/c 72,000
21 Purchases (Cash + Credit) A/c 6,56,500
22 Sales A/c (including sales return) 9,00,000
23 Capital A/c 12,50,000
24 Discount Allowed A/c 23,500
25 Bad Debts A/c 12,500
26 Returns inward (including `2,000) A/c 11,000
27 Discount Received A/c 15,500
28 Returns Outward A/c 45,000
24,15,500 24,15,500

Note: To be adjusted for residence and office.

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 TRADING A/C
For the year ended 31.12.2017
Dr. Cr.

Particulars ` Particulars `
To Purchase A/c 6,56,500 By Sales A/c 9,00,000
Less: Purchases Less: Sales Returns A/c (11,000)
Returns A/c 45,000 6,11,500 Less : Sales on
To Wages A/c(18,000-15,000) 3,000 Approval Basis (10,000) 8,79,000
To Expenses on Delivery Van A/c 20,400 By Closing Stock A/c 2,42,200
(Carriage inward)
To Gross Profit transferred to P and L 4,86,300
A/c

11,21,200 11,21,200

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 PROFIT AND LOSS A/C
For the year ended 31.12.2017
Dr. Cr.

Particulars ` Particulars `
To Advertisement Expenses A/c 20,750 By Gross Profit 4,86,300
To Petty Expenses A/c 15,000 By Interest from PNB A/c 75,000
To General Expenses A/c 23,250 By Discount Received A/c 15,500
To, Rent, Electricity and Insurance
(3/4) of `2,30,000 A/c 1,72,500
To Depreciation on Delivery Van and
Running Expenses A/c 13,600
To Telephone Expenses A/c 20,440
To Discount Allowed A/c 23,500
To Salary A/c 72,000
To Bad Debts A/c 12,500
To Dep. On Toy Machine A/c 19,000
To Net Profit 1,84,260

5,76,800 5,76,800

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 BALANCE SHEET
As on 31 December 2017
Liabilities ` Assets `
Creditors 1,30,000 Cash in hand 4,75,000
Cash at Bank 2,97,000
Capital 12,50,000 Debtors*(See working note given
below) 38,000
Less : Drawings:
a) Telephone 5,110 Delivery Van
b) Rent, Electricity (Working Note-VI) 2,28,000
Insurance Furniture 25,450
Premium + 57,50062,610 To machine
11,87,390 (Working Note-viii) 1,96,000
+ Net Profit + 1,84,260 13,71,650 Stock(See Working Note-IX) 2,42,200

15,01,650 15,01,650

Working Note : Details of Debtors*

Debtors as per Books 50,000

Less : Goods sent for Approved wrongly recorded as sales (10,000)

Less : Sales Return (2,000)
38,000

(C) Following ratios are calculated so as to ascertain the profitability of Mr. Narain’s
business 100

a) Gross Profit Ratio =

4,86,300 X 100
= 8,79,000

= 55.32%
X 100
b) Net Profit Ratio =
1,84,260 X 100
= 8,79,000

= 21.02%

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c) Return on Capital Employed :
X 100= 1,84,260 X 100 = 13.43%
13,71,650

d) Operating Profit Ratio = X 100

[Operating Profit = Net Profit – Interest received – Discount received]

= `1,84,260 – `75,000 – `15,500
= ` 93,760
= 93,760 X 100 = 10.67%
8,79,000

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 COMMENT ON THE PROFITABILITY POSITION :

a) Gross Profit Ratio :

The Gross Profit Ratio is higher than the norm fixed for the firm. This may
be due to (i) High selling price (ii) Lower prices to raw materials or (iii) efficiency of the
labour.

b) Net Profit Ratio:

The actual net profit ratio is near to the norm set for the firm. This shows Mr.
Narain has been able to achieve the desired level of profit.

c) Return on Capital Employed :

The actual Return on Capital Employed ratio is less than the norm set for
the firm. It shows the capital employed has not been used to the desired manner by Mr.
Narain. He must take proper steps so as to use the capital in an efficient and effective
manner so as to increase the returns. So the first year performance of Mr. Narain‟s
business is not very satisfactory.

d) Operating Profit Ratio:

The norm set for the operating profit ratio was 15% but the actual ratio is
only10.67%, which is not acceptable. It might be due to increased operating
expenses, such as rent, salary, insurance charges etc. Therefore, Mr. Narain is advised
to keep a check on these expenses.

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 CONCLUSION

Through the Cash Book I know the methods and techniques of recovering cash
transaction bitterly.

And also I know how to entry in Journal, Posting in Ledger & Preparation of Final
Account.

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 BIBLIOGRAPHY
 Kalyani Publishers
 C. Mohan Juneja

 J.S. Arora

 R.C. Chowla

 [Link]

 [Link]

 V.K. Publisher

 A.K. Jain

 Vareen Jain

 V.K. Global Publishers Pvt. Ltd.

 [Link]

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