The following trial balance was extracted from the books of Rose Martins, a sole trader on 31 December 2005. Sh. Sh.Capital 2,880,000Freehold land and buildings at cost 1,120,000Motor vehicles at cost 1,094,000Furniture and fittings at cost 240,000Stock at 1 January 2005 960,000Purchases and sales 9,408,000 11,088,000Debtors and creditors 936,000 695,200Discounts allowed and received 195,200 119,200 Returns inwards and outwards 16,000 28,800Rent received 44,000 Loan (interest payable 5% per annum) 192,000Interest on loan 4,800Proceeds of sale of motor vehicle 150,000Provision for doubtful debts 27,200Bad debts 52,000Wages and salaries 1,127,200Drawings 256,000General expenses 138,400Bank balance 108,800Rates and insurance 48,000Provisions for depreciation: Furniture and fittings 160,000 Motor vehicle 320,000 15,704,400 15,704,400Notes:1. Stock at 31 December 2005 was valued at Sh. 1,360,000.2. Included in general expenses is a sum of Sh. 26,400 being expenses on electricity for domestic use.3. A vehicle purchased on 1 January 2003 at Sh. 450,000 was sold for Sh. 150,000. The only record of the transaction is the credit of Sh. 150,000 to the proceeds of sale of motor vehicle account.4. As at 31 December 2005, wages and salaries outstanding amounted to Sh. 66,400.5. Prepaid rates and insurance as at 31 December 2005 stood at Sh. 12,000.6. Interest paid is only a half of the amount due for the year ended 31 December 2005.7. Provision for doubtful debts is to be adjusted to 5% of the debtors.8. Depreciation is to be provided for as follows:(i) Furniture and fittings at 5% on reducing balance method(ii) Motor vehicles at 20% on straight line method.9. Rent owing from a tenant who occupies a part of the building was Sh. 40,000 on 31 December 20005.Required:a) Profit and loss account for the year ended 31 December 2005.b) Balance sheet as at 31 December 2005.
Question
The following trial balance was extracted from the books of Rose Martins, a sole trader on 31 December 2005. Sh. Sh.Capital 2,880,000Freehold land and buildings at cost 1,120,000Motor vehicles at cost 1,094,000Furniture and fittings at cost 240,000Stock at 1 January 2005 960,000Purchases and sales 9,408,000 11,088,000Debtors and creditors 936,000 695,200Discounts allowed and received 195,200 119,200 Returns inwards and outwards 16,000 28,800Rent received 44,000 Loan (interest payable 5% per annum) 192,000Interest on loan 4,800Proceeds of sale of motor vehicle 150,000Provision for doubtful debts 27,200Bad debts 52,000Wages and salaries 1,127,200Drawings 256,000General expenses 138,400Bank balance 108,800Rates and insurance 48,000Provisions for depreciation: Furniture and fittings 160,000 Motor vehicle 320,000 15,704,400 15,704,400Notes:1. Stock at 31 December 2005 was valued at Sh. 1,360,000.2. Included in general expenses is a sum of Sh. 26,400 being expenses on electricity for domestic use.3. A vehicle purchased on 1 January 2003 at Sh. 450,000 was sold for Sh. 150,000. The only record of the transaction is the credit of Sh. 150,000 to the proceeds of sale of motor vehicle account.4. As at 31 December 2005, wages and salaries outstanding amounted to Sh. 66,400.5. Prepaid rates and insurance as at 31 December 2005 stood at Sh. 12,000.6. Interest paid is only a half of the amount due for the year ended 31 December 2005.7. Provision for doubtful debts is to be adjusted to 5% of the debtors.8. Depreciation is to be provided for as follows:(i) Furniture and fittings at 5% on reducing balance method(ii) Motor vehicles at 20% on straight line method.9. Rent owing from a tenant who occupies a part of the building was Sh. 40,000 on 31 December 20005.Required:a) Profit and loss account for the year ended 31 December 2005.b) Balance sheet as at 31 December 2005.
Solution
This is a complex accounting problem that requires the preparation of a Profit and Loss account and a Balance Sheet based on the given trial balance and additional notes. Here's how to approach it:
Step 1: Adjustments to the Trial Balance First, we need to make adjustments to the trial balance based on the notes provided.
- Stock: The closing stock is valued at Sh. 1,360,000. This will be used in the calculation of the cost of goods sold and will also appear in the balance sheet.
- General Expenses: Sh. 26,400 of the general expenses is for domestic use and should be deducted from the business expenses.
- Motor Vehicle: A vehicle was sold for Sh. 150,000. This will reduce the value of the motor vehicles in the balance sheet.
- Wages and Salaries: There are outstanding wages of Sh. 66,400. This will increase the wages and salaries expense and will also appear as a liability in the balance sheet.
- Rates and Insurance: There is prepaid rates and insurance of Sh. 12,000. This will reduce the rates and insurance expense and will also appear as an asset in the balance sheet.
- Interest on Loan: Only half of the interest due has been paid. This will increase the interest expense and will also appear as a liability in the balance sheet.
- Provision for Doubtful Debts: This needs to be adjusted to 5% of the debtors. This will affect the value of the debtors in the balance sheet.
- Depreciation: This needs to be provided for the furniture and fittings and the motor vehicles. This will reduce the value of these assets in the balance sheet.
Step 2: Prepare the Profit and Loss Account The Profit and Loss account shows the revenues, costs and expenses of the business for the year. It is prepared by subtracting the cost of goods sold and the expenses from the sales. The result is the net profit or loss for the year.
Step 3: Prepare the Balance Sheet The Balance Sheet shows the financial position of the business at a specific point in time. It is prepared by listing the assets, liabilities and owner's equity of the business. The total assets should equal the total liabilities and owner's equity.
This is a simplified explanation of the process. The actual calculations would require more detailed work and understanding of accounting principles.
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