The following are the extracts from the trial balance of M/s Bhola & Sons as on March 31, 2017: Opening stock (Dr) ₹2,00,000; Purchases (Dr) ₹8,10,000; Sales (Cr) ₹10,10,000. Closing Stock as on date was valued at ₹3,00,000. You are required to record the necessary journal entries and show how the above items will appear in the trading and profit and loss account and balance sheet of M/s Bhola & Sons.
Journal Entry
Closing Stock A/c Dr. 3,00,000 To Trading A/c 3,00,000 (Being closing stock brought into books)
Trading Account for the year ended March 31, 2017
| Dr. | Cr. | |
|---|---|---|
| Particulars | Amount (₹) | Particulars |
| Opening Stock | 2,00,000 | Sales |
| Purchases | 8,10,000 | Closing Stock |
| Gross Profit c/d | 3,00,000 | |
| Total | 13,10,000 | Total |
Profit & Loss Account for the year ended March 31, 2017
| Dr. | Cr. | |
|---|---|---|
| Particulars | Amount (₹) | Particulars |
| Net Profit transferred to Capital | 3,00,000 | Gross Profit b/d |
| Total | 3,00,000 | Total |
Balance Sheet as on March 31, 2017
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital (see note) | - | Closing Stock | 3,00,000 |
| Add: Net Profit | 3,00,000 | ||
| Total | 3,00,000 | Total | 3,00,000 |
Note: Other items of the Balance Sheet are not given; hence only relevant items are shown. Capital balance is assumed to be adjusted with Net Profit.
Calculation of Gross Profit:
Gross Profit = Sales + Closing Stock – (Opening Stock + Purchases) = ₹10,10,000 + ₹3,00,000 – (₹2,00,000 + ₹8,10,000) = ₹3,00,000.
Explanation
This question tests the adjustment for closing stock and its presentation in final accounts. As per the textbook, closing stock is not in the trial balance and is brought into books by debiting Closing Stock Account and crediting Trading Account. The Trading Account is prepared by debiting opening stock and purchases and crediting sales and closing stock; the balance is gross profit. The gross profit is transferred to Profit & Loss Account, and since no other expenses or incomes are given, net profit equals gross profit. In the Balance Sheet, closing stock appears as an asset, and net profit is added to capital.
Solution Steps
Step 1: Pass journal entry for closing stock: Debit Closing Stock Account and Credit Trading Account.
Step 2: Prepare Trading Account: debit side includes Opening Stock and Purchases; credit side includes Sales and Closing Stock. The balancing figure is Gross Profit (₹3,00,000).
Step 3: Prepare Profit & Loss Account: credit side shows Gross Profit; debit side shows Net Profit (₹3,00,000) as there are no other items.
Step 4: Show Closing Stock on Assets side of Balance Sheet and Net Profit on Liabilities side (as addition to Capital).