Q.1 The following Trial Balance was extracted from the books of Ahmad traders on 30 June 2023.

From
the given information you are required to prepare a trading profit & loss account and balance sheet for the
year ended on 30th June 2023. (20)

Trial Balance on 30th June, 2023as follows.

Title of Accounts Dr. (Rs.) Cr. (Rs.)
Cash 570,000
Account Receivable 190,000
Merchandise inventory on 1st 60,000
July, 2022
Plant and machinery 670,000
Furniture and fixtures 820,000
Capital 2,360,000
Account payable 38,000
Purchases 600,000
Discount on Purchases 6,000
Sales 700,000
Sales Return and Allowances 30,000
Sales Discount 16,000
Insurance Prepaid 10,000
Advertisement Expenses 40,000
Salaries Expenses 120,000
Total Expenditure 3,126,000 3,126,000

Additional Information
1) Prepaid insurance on 30 June, 2023 is Rs. 4,000/-
2) Outstanding salaries Rs. 15,000/-
3) Depreciation on plant and machinery @ 10% pa
4) Merchandise inventory on 30 June 2023 was valued at Rs.60,000/-
1. Trading Account
The trading account calculates the gross profit or loss for the business, using the information from the trial
balance.
Trading and Profit & Loss Account for the Year Ended 30th June 2023
Trading Account:
Particulars Rs. Rs.
Sales 700,000
Less: Sales Return (30,000)
Less: Sales Discount (16,000)
Net Sales 654,000
Opening Inventory 60,000
Add: Purchases 600,000
Less: Purchase Discount (6,000)
Net Purchases 594,000
Cost of Goods Available for Sale 654,000
Less: Closing Inventory (60,000)
Cost of Goods Sold (COGS) 594,000
Gross Profit (Sales – COGS) 60,000

2. Profit & Loss Account

The profit & loss account calculates the net profit after deducting operating expenses from the gross profit.
Profit & Loss Account:
Particulars Rs.
Gross Profit (b/f from Trading Account) 60,000
Less: Expenses:
Salaries Expenses (135,000)
Advertisement Expenses (40,000)
Depreciation on Plant & Machinery (10%) (67,000)
Prepaid Insurance Expense (6,000)
Total Expenses (248,000)
Net Loss (188,000)
3. Balance Sheet
The balance sheet shows the financial position of the business by listing assets and liabilities.
Balance Sheet as at 30th June 2023
Assets Rs. Rs.
Non-Current Assets
Plant & Machinery 670,000
Less: Depreciation (67,000) 603,000
Furniture & Fixtures 820,000
Total Non-Current Assets 1,423,000
Current Assets
Cash 570,000
Accounts Receivable 190,000
Merchandise Inventory (Closing) 60,000
Prepaid Insurance 4,000
Total Current Assets 824,000
Total Assets 2,247,000
Liabilities and Capital Rs. Rs.
Capital
Capital (Opening) 2,360,000

Less: Net Loss (188,000)

Adjusted Capital 2,172 ,000
Current Liabilities
Accounts Payable 38,000
Outstanding Salaries 15,000

Total Liabilities 53,000

Total Liabilities & Capital 2,225,000
Summary of Important Adjustments:
1. Closing Inventory of Rs. 60,000 is adjusted in the trading account and balance sheet.
2. Depreciation on plant and machinery at 10% is Rs. 67,000.
3. Outstanding Salaries of Rs. 15,000 are added as an expense and a liability.
4. Prepaid Insurance adjustment reduced the insurance expense to Rs. 6,000.

Q.2 Define partnership and illustrate its kinds of partners. (10)

Answer:

A partnership is a formal arrangement in which two or more individuals or entities collaborate to manage and
operate a business. Each partner contributes to the business, sharing in its profits, losses, and responsibilities.
Partnerships are governed by a partnership agreement that outlines the terms of the partnership, including roles,
contributions, profit-sharing, and responsibilities.

Types of Partners in a Partnership

1. General Partner:
Definition: A general partner has unlimited liability, meaning they are personally responsible for all debts and
obligations of the partnership. They manage the day-to-day operations and decision-making.
Responsibilities: Active involvement in the business, managing operations, making financial decisions, and
representing the partnership in legal matters.
Example: In a law firm, the senior attorneys often act as general partners, handling client cases and firm
management.

2. Limited Partner:
Definition: A limited partner contributes capital to the business but has limited liability, which means their
personal assets are protected beyond their investment in the partnership. They do not participate in daily
management.
Responsibilities: Primarily investors, limited partners receive a share of the profits without taking on the
operational risks of running the business.
Example: In a real estate investment partnership, a limited partner might provide funding for a property
development while the general partner manages the project.
3. Silent Partner:
Definition: A silent partner invests in the business but does not participate in its management or operations.
They typically have limited or no visibility in the day-to-day activities.
Responsibilities: Financial contribution and potentially sharing in profits, but they remain passive in decision-
making.
Example: A family member who invests in a restaurant but does not get involved in daily operations or
management decisions.
4. Active Partner:
Definition: An active partner is involved in the day-to-day management and decision-making of the business.
They share responsibilities equally or based on their role.
Responsibilities: Similar to a general partner but might share responsibilities more equally among all active
partners.
Example: In a small startup, co-founders who are actively involved in product development and marketing are
considered active partners.

5. Equity Partner:
Definition: An equity partner is typically a general partner who has made a significant investment in the
partnership and holds a share of ownership.
Responsibilities: They are involved in management and share in profits based on their equity stake.
Example: In an accounting firm, a senior accountant who becomes an equity partner has both management
responsibilities and a financial stake in the firm's profits.

6. Joint Venture Partner:

Definition: This type of partner comes together with another business for a specific project or goal, forming a
temporary partnership. Each partner retains their individual identities.
Responsibilities: Collaborate on a specific project while sharing resources, risks, and profits.
Example: Two technology companies may form a joint venture to develop a new software product, sharing
their expertise and resources.

7. Strategic Partner:
Definition: Strategic partners collaborate to achieve mutual business goals, often through sharing resources,
expertise, or technology, without forming a formal partnership.
Responsibilities: Each partner maintains independence while working together towards common objectives.
Example: A software company might partner with a hardware manufacturer to create integrated solutions,
benefiting from each other’s market presence.
Q.2 (b) If the profit earned during the last five years Rs. 60,000, Rs. 62,000, Rs.61,000, Rs. 55,000 and Rs.
60,000. Calculate the value of good will, under the average profit method and 3-year purchase of the average
profits of the last five years? (10)

Answer:

To calculate the value of goodwill using the average profit method and a 3-year purchase of the average profits
of the last five years, follow these steps:

Step 1: Calculate the Average Profit

First, we need to sum the profits earned over the last five years and then divide by the number of years.
Profits for the last five years:
Year 1: Rs. 60,000
Year 2: Rs. 62,000
Year 3: Rs. 61,000
Year 4: Rs. 55,000
Year 5: Rs. 60,000

Total Profit:
Total Profit = 60,000 + 62,000 + 61,000 + 55,000 + 60,000 = 298,000
Average Profit:
Average Profit = Total Profit / Number of Years = 298,000 / 5 = 59,600

Step 2: Calculate the Value of Goodwill

Using the average profit and applying a 3-year purchase of the average profits:

Goodwill:
Goodwill = Average Profit x Number of Years Purchase
Goodwill = 59,600 x 3 = 178,800
Conclusion: The value of goodwill under the average profit method, based on a 3-year purchase of the
average profits of the last five years, is Rs. 178,800.

Q.3 The record Bookkeeper of old age club prepares the following Receipts and Payments account for the year ended on
31st December 2023. (20)
Receipts Amount Payment Amount
Balance b/d 140,500 General Expenses 11,520
Salaries 15,000
Last year 15,000 Fixed deposit 30-6- 80,000
Subscription 2024@6% p.a
Premises 15,400
Current year Printing 3,000
Subscription Outstanding
7,000 expenses for the last
Coming year year 5,600
Subscription Repairs 2,700
Life Membership Balance 31 Dec.
fees 6,000 2023.
Cash in hand 42,140
Entrance fees Cash in bank 15,200
Miscellaneous
income 5660
Donations
1,200
5,200

10,000
190,560 190,560

Additional Information
The assets and liabilities on 1 January 2023 were.

Premises Rs. 16, 000 furniture Rs 200,000 Machinery Rs.25, 000 outstanding expenses Rs.2, 500 The other assets and
liabilities on 31st December 2023 were salaries prepaid Rs. 2,500 subscriptions outstanding Rs. 4,500 depreciated
furniture by 10% and premises by 7.5% on opening balance 50% of Donation be capitalized.

Answer:

1. Income and Expenditure Account for the year ended 31st December 2023 (similar to a profit and loss
account for non-profit organizations).
2. Balance Sheet as of 31st December 2023.

Step 1: Prepare the Income and Expenditure Account

Income and Expenditure Account for the Year Ended 31st December 2023

Expenditure Rs. Income Rs.

General Expenses 11,520 Last Year Subscription 15,000
Salaries (15,000 - 2,500 prepaid) 12,500 Current Year Subscription 7,000
Printing 3,000 Coming Year Subscription (to balance) Deferred
Repairs 2,700 Miscellaneous Income 1,200
Outstanding Expenses (Last Year) 5,600 Entrance Fees 5,200
Depreciation on Furniture (10%) 20,000 Donations (50% Capitalized) 5,000
Depreciation on Premises (7.5%) 1,200
Life Membership Fees (capitalized) -
Total Expenditure 56,520 Total Income 33,400
Excess of Expenditure over Income 23,120

Step 2: Balance Sheet as of 31st December 2023

1. Assets:
o Cash in Hand: Rs. 42,140
o Cash in Bank: Rs. 15,200
o Premises (Rs. 16,000 - Rs. 1,200 depreciation): Rs. 14,800
o Furniture (Rs. 200,000 - Rs. 20,000 depreciation): Rs. 180,000
o Machinery: Rs. 25,000
o Prepaid Salaries: Rs. 2,500
o Subscriptions Outstanding: Rs. 4,500
o Fixed Deposit: Rs. 80,000

Total Assets = Rs. 42,140 + Rs. 15,200 + Rs. 14,800 + Rs. 180,000 + Rs. 25,000 + Rs. 2,500 + Rs.
4,500 + Rs. 80,000
Total Assets = Rs. 364,140

2. Liabilities:
o Outstanding Expenses: Rs. 2,700
o Capitalized Donations: Rs. 5,000
o Life Membership Fees: Rs. 5,660

Total Liabilities = Rs. 2,700 + Rs. 5,000 + Rs. 5,660

Total Liabilities = Rs. 13,360

3. Accumulated Fund (Opening Balance):

o Assets (opening):
▪ Premises: Rs. 16,000
▪ Furniture: Rs. 200,000
▪ Machinery: Rs. 25,000
o Liabilities (opening):
▪ Outstanding Expenses: Rs. 2,500
o Opening Fund = Rs. (16,000 + 200,000 + 25,000) - Rs. 2,500 = Rs. 238,500
o Add: Donations Capitalized = Rs. 5,000
o Less: Excess of Expenditure over Income = Rs. 23,120

Closing Accumulated Fund = Rs. 238,500 + Rs. 5,000 - Rs. 23,120 = Rs. 220,380

Final Balance Sheet

Assets Rs. Liabilities Rs.

Premises 14,800 Outstanding Expenses 2,700
 Furniture 180,000 Capitalized Donations 5,000
Machinery 25,000 Life Membership Fees 5,660
Fixed Deposit 80,000
Cash in Hand 42,140
Cash in Bank 15,200
Prepaid Salaries 2,500
Subscriptions Outstanding 4,500
Total Assets 364,140 Total Liabilities 13,360
Accumulated Fund 220,380
Balance 364,140

Q.4 Mr. Zahid is an owner of sole proprietorship business. During the month of December 2023, he opened a
current account with Allied Bank Ltd. The following transactions were recorded you are required to enter
the transaction in cash Book and in the passbook. (20)
“2023”
December 1. Mr. Zahid opened current account with Allied Bank Ltd. for Rs. 8,000,000.
December 5. A cheque received from Noman Rs.80, 000 and deposited into the bank the same day.
December 11. Purchased furniture Rs. 90,000 paid by cheque.
December 17. Cash drew from bank for office use Rs. 95,000.
December 19. Paid rent by cheque Rs. 35,000.
December 21. Misc. expense debited by bank Rs. 40,000
December 25. Purchased goods from Mr. Ali paid by cheque Rs. 95,000.
December 30. Interest received from bank Rs. 55,000.
Answer:

Let's record the transactions in Mr. Zahid's cash book and his bank passbook for December 2023.

Cash Book

The cash book will record all cash and bank transactions. It typically has two columns: one for cash and one for
the bank.

Date Particulars Cash (Rs.) Bank (Rs.) Balance

DEC 1 Opening Balance 80,00,000 80,00,000

DEC 5 Cheque for Noman 80,000 80,80,000

DEC 11 Purchase of furniture (90,000) 79,90,000

DEC 17 Cash drawn for office use 95,000 (95,000) 79,90,000

DEC 19 Rent paid by cheque (35,000) 79,55,000

DEC 21 Misc. expense by bank (40,000) 79,15,000

DEC 25 Purchase of goods from Ali (95,000) 78,20,000

DEC 30 Interest received from bank 55,000 78,75,000

Passbook

The passbook reflects the transactions recorded by the bank.

Date Particulars Withdrawals (Rs.) Deposits (Rs.) Balance

DEC 1 Opening Balance 80,00,000 80,00,000

DEC 5 Cheque for Noman 80,000 80,80,000

DEC 11 Purchase of furniture 90,000 79,70,000

 DEC 17 Cash drawn for office 95,000 78,95,000

DEC 19 Rent paid by cheque 35,000 78,60,000

DEC 21 Misc. expense debited by bank 40,000 78,20,000

DEC 25 Purchase of goods from Ali 95,000 77,25,000

DEC 30 Interest received from bank 55,000 77,80,000

Summary

• The cash book reflects the transactions related to cash and the bank balance.

• The passbook reflects only the bank's perspective on withdrawals and deposits.

• The final balances in both the cash book and passbook represent Mr. Zahid's available funds as of
December 30, 2023.

Q.5 Solve the following short questions. (5x4=20)

(i) A, B and C share profit and losses in the ration of 6:5:3. D is admitted into partnership for 1/8th share
calculate the sacrificing ratio of A: B: C

Answer:

To find the sacrificing ratio of A, B, and C when D is admitted for 18\frac{1}{8}81 share, follow these steps:

1. Current Profit-Sharing Ratios:

A = 6/14
 B = 5/14

C = 3/14

2. Total Share of A, B, C:

Total share of A, B, C = 1 − 1/8 = 7/8

3. D’s Share: 1/8

4. Calculation of Sacrifices:

A's sacrifice = 6/14 −6/14 × 7/8 = 6/14 −21/56 = 24/56 – 21/56 = 3/56

B's sacrifice = 5/14 – 5/14 ×7/8 = 20/56 −25/56 = − 5/56 (No Sacrifice)

C's sacrifice = 3/14 − 3/14 × 7/8 = 12/56 − 21/56 = − 9/56 (No Sacrifice)

5. Total Sacrifice:

A sacrifices 3/56

B and C do not sacrifice anything.

6. Sacrificing Ratio: Since only A sacrifices, we consider the ratios of their sacrifices:

Sacrificing Ratio = A:B:C = 3:0:0

Thus, the sacrificing ratio of A, B, and C is 3:0:0.

(ii) At the time of admission of a new partner, on preparing the revaluation account, if there is a loss, then
what entry should be passed to transfer the loss to the partner’s capital account?

Answer:

When there is a loss on revaluation at the time of admitting a new partner, the loss should be transferred to the
partners' capital accounts in accordance with their profit-sharing ratios. The journal entry to record this would
be:
Journal Entry:

Dr. Revaluation Account

Cr. A’s Capital Account

Cr. B’s Capital Account

Cr. C’s Capital Account

Explanation:

Debit the Revaluation Account: This indicates that the loss is being recognized.

Credit the Partners' Capital Accounts: Each partner's capital account is credited based on their respective share
in the loss as per the profit-sharing ratio.

For example, if the loss is X, and the profit-sharing ratio is 6:5:3 , then the loss would be allocated as follows:

- A's share of the loss = 6/14x X

- B's share of the loss = 5/14 x X

- C's share of the loss = 3/14 x X

This ensures that the loss is appropriately distributed among the partners.

(iii) If the actual profit of the business is Rs. 800,000 and the normal rate of return is 7.5%. Calculate the
value of the whole business.

Answer:

To calculate the value of the whole business using the actual profit and the normal rate of return, you can use
the formula:
Value of Business = Actual Profit / Normal Rate of Return

Where the normal rate of return should be expressed as a decimal. Given:

- Actual Profit = Rs. 800,000

- Normal Rate of Return = 7.5% = 0.075

Now, substituting the values into the formula:

Value of Business = 800,000 / 0.075

Calculating this gives:

Value of Business = 10,666,666.67

Thus, the value of the whole business is approximately Rs. 10,666,667.

(iv) State with reasons whether the following items of expenditure are capital or revenue.

a. Wages paid on the purchase of goods.

b. Land was purchased for Rs. 1,000,000 and Rs. 25000 were paid for legal expenses.

c. Old furniture was repaired at a cost of Rs.5000

d. Compensation paid to workers of termination of their services.

Answer:
Here's an analysis of each item of expenditure to determine whether it is capital or revenue, along with the
reasons:

a. Wages paid on the purchase of goods:

Classification: Revenue Expenditure

Reason: Wages paid on the purchase of goods are part of the cost of goods sold. They are incurred in the
normal course of business operations and are typically considered as operating expenses, which are deducted
from revenue in the income statement.

b. Land was purchased for Rs. 1,000,000 and Rs. 25,000 were paid for legal expenses

Classification: Capital Expenditure

Reason: The purchase of land is a capital expenditure as it provides a long-term asset to the business. The legal
expenses incurred in acquiring the land are also capital in nature because they are directly attributable to the
acquisition of the asset and are necessary to bring the asset to its intended use.

c. Old furniture was repaired at a cost of Rs. 5,000

Classification: Revenue Expenditure

Reason: Repairing old furniture is considered a revenue expenditure because it maintains the asset in its current
condition without significantly enhancing its value or extending its useful life. These costs are typically
expensed in the period incurred.

d. Compensation paid to workers on termination of their services

Classification: Revenue Expenditure

Reason: Compensation paid to workers for termination is generally considered a revenue expenditure as it
relates to normal business operations. This expense is incurred as part of the costs associated with employee
management and is deducted from the revenue in the income statement.

In summary:

- a. Revenue
- b. Capital

- c. Revenue

- d. Revenue