Jon Anderson

Trial balance 31.3.06

Capital 65,000
Buildings 0
Equipment 85,000
Motor vehicle 9,500
Opening stock 1,750
Cash 275
Bank overdraft 2,920
Money in bank 0
Bank loan (long term) 28,000
Purchases 155,250
Sales 248,150
Creditors 6,250
Debtors 3,450
Wages 43,500
Drawings 24,950
Purchase returns 1,960
Sales returns 2,575
Non-operating receipts 5,000
Rent and rates 26,845
Advertising 1,560
Sundry expenses 45
Motor expenses 1,950
Telephone and postage 630
357,280 357,280
Additional information
Closing stock 2,350
Depreciation on straight-line basis
Equipment 15% on cost
Motor vehicle 20% on cost
Buildings 0% on cost

Jon Anderson
Trading account for year ended 31.3.06
£000s £000s £000s
Sales 248,150
Less sales returns 2,575
Net sales (or turnover) 245,575
less cost of goods sold
Opening stock 1,750
Purchases 155,250
Less purchase returns 1,960
Net purchases 153,290
155,040
Less closing stock 2,350
Cost of goods sold 152,690
Gross profit 92,885
Non-operating receipts (rental income) 5,000
97,885

Trial balance 31.3.03

Capital 45,000
Buildings 50,000
Equipment 5,000
Motor vehicle 8,000
Opening stock 3,500
Cash 25
Bank overdraft 300
Money in bank 0
Bank loan (long term) 10,000
Purchases 21,630
Sales 84,080
Creditors 550
Debtors 0
Wages 15,000
Drawings 29,575
Purchase returns 240
Sales returns 0
Non-operating receipts 0
Rent and rates 6,050
Advertising 100
Sundry expenses 90
Motor expenses 1,000
Telephone and postage 200
140,170 140,170
Additional information
Closing stock 3,600
Depreciation on straight-line basis
Equipment 20% on cost
Motor vehicle 20% on cost
Buildings 0% on cost

Jon Anderson
Profit and loss account for year ended 31.3.06
£000s £000s £000s
Sales 248,150
Less sales returns 2,575
Net sales (or turnover) 245,575
less cost of goods sold
Opening stock 1,750
Purchases 155,250
Less purchase returns 1,960
Net purchases 153,290
155,040
Less closing stock 2,350
Cost of goods sold 152,690
Gross profit 92,885
Non-operating receipts (rental income) 5,000
97,885
Less expenses
Administration
Rent and rates 26,845
Wages and salaries 43,500
Telephone and postage 630
Motor expenses 1,950
Advertising 1,560
Sundry expenses 45 Equipment 12,750
Depreciation Motor vehicles 1,900 89,180
Buildings 0 Net profit 8,705

Learning Objectives:

1. Prepare trading and profit and loss account and balance sheet.

Example 1:

From the following balances extracted from the books of X & Co., prepare a trading and profit and loss
account and balance sheet on 31st December, 1991.

$ $
Stock on 1st January 11,000 Returns outwards 500
Bills receivables 4,500 Trade expenses 200
Purchases 39,000 Office fixtures 1,000
Wages 2,800 Cash in hand 500
Insurance 700 Cash at bank 4,750
Sundry debtors 30,000 Tent and taxes 1,100
Carriage inwards 800 Carriage outwards 1,450
Commission (Dr.) 800 Sales 60,000
Interest on capital 700 Bills payable 3,000
Stationary 450 Creditors 19,650
Returns inwards 1,300 Capital 17,900

The stock on 21st December, 1991 was valued at $25,000.

Solution:

X & Co.
Trading and Profit and Loss Account
For the year ended 31st December, 1991

To Opening stock 11,000 |By Sales 60,000

Less
To Purchases 39,000 | 1,300
returns i/w
Less returns o/w 500 | 58,700
By Closing
38,500 | 25,000
stock
To Carriage inwards 800 |
To Wages 2,800 |
To Gross profit c/d 30,600 |
 |
83,700 | 83,700
|
By Gross
To Stationary 450 | 30,600
profit b/d
To Rent and rates 1,100 |
To Carriage outwards 1,450 |
To Insurance 700 |
To Trade expenses 200 |
To Commission 800 |
To Interest on capital 700 |

To Net profit |
transferred to capital 25,200
a/c |
|
30,600 | 30,600
Illustration 3:

The following adjustments are to be made:

(a)Stock on 31st March,2006 was valued at Rs.52,000/-

(b)Rent due but not paid Rs.2,000/-

(c)Lightning due but not paid Rs.300/-

(d)Insurance Paid in advance Rs.100/-

(e)Depreciate Plant & Machinery @ 331/3%; Office Furniture @ 10%; Motor Van @

331/3%

(f)The Provision for Bad Debts has to be increased to Rs.3,000/-

(g)The Provision for Discount on Debtors and Discount on Creditors is to be made @

2.5%

(G.P. Rs.1,16,700/-; N.P. Rs.57,890/-; B/S Total Rs.1,51,490/

llustration 4………………….
Adjustments:
1. Loose Tools were valued at Rs.1,600/- on 31-3-2006
2. Depreciate Plant by 10%
3. Manager is entitled to a commission of 10% of net profits after
charging such commission.
4. One-third of the building was occupied by the employees who
reside in the business building. Treat the value of the perquisite as
wages.
5. Wages include Rs.500/- for installation of a plant on 1-10-2005.
6. Loss of stock by fire on 20-3-2006 amounted to Rs.10,000/- and
100% claim was admitted by the Insurance Company.
(G.P. Rs.9,050/-; N.L. Rs.575/-; B/S Total Rs.51,975/-)

Prepare Trading & Profit and Loss A/c for the year ended
on 30th September,2007 and a Balance Sheet as on that

date after taking into account the following adjustments:

1. Closing Stock was Valued at Rs.34,220/-

2. Provision for Doubtful Debts is to be kept at Rs.500/-

3. Depreciate Plant & Machinery @ 10%

4. The proprietor has taken goods worth Rs.5,000/- for

personal use and additionally distributed goods worth
Rs.1,000/- as samples.
5. Purchase of furniture Rs.920/- has been passed through
Purchases Book.
(G.P. Rs.67,890; N.P. Rs.38,740/-, B/S Total
Rs.1,58,740/-)
How VAT is Misused

Let us take two examples to understand the working of VAT.

Example A shows the pricing structure of a trader who uses VAT as

an excuse for overcharging his customers.

Example B shows the pricing structure of a trader who does not use
VAT as a tool for price escalation. For both examples, the relative
data is:

• Basic purchase of goods: Rs 10,000

• 12.5 per cent VAT of the basic purchase price: Rs 1,250
• Overheads related to the goods: Rs 100
• Profit margin 20 per cent.

Example A (Rs)
Basic purchase price 10,000
Add 12.5 per cent VAT 1,250
VAT inclusive purchase 11,250
price
Add overheads 100
Total 11,350
Add 20 per cent profit 2,270
margin
Basic selling price 13,620
Add 12.5 per cent VAT 1,703
VAT inclusive selling 15,323
price

Example B (Rs)
Basic purchase price 10,000
Add 12.5 per cent VAT 1,250
VAT inclusive purchase 11,250
price
Less VAT input 1,250
VAT free purchase 10,000
price
Add overheads 100
Total 10,100
Add 20 per cent profit 2,020
margin
Total 12,120
Basic selling price 13,620
Add 12.5 per cent VAT 1,515
VAT inclusive selling 13,635
price

The VAT of 12.5% is charged on the 'Total'. Thus the VAT inclusive
selling price will be 'Total' + 'VAT.'

You will note that in Example A, the trader has overcharged his
customer to the extent of Rs 1,688. Thus a trader is advised to adopt
Example B as a guideline and nt overcharge the consumer. If he
does, he will lose his customers before long.

VAT Account

You are required to maintain a VAT account as part of your records.

This should have details of your Output Tax, Input Tax and under or
over declaration in the previous VAT accounting period(s).

A specimen of such a VAT account is given below.

VAT Accounting for Filing VAT Return for April to June 2005

Purchases (in Rs )
Period Purchases Input VAT paid Total
Total
April- 100,000.00 12,500.00 112,500.00
June

Sales (in Rs )
Period Purchases Input VAT paid Total
Total
April- 120,000.00 15,000.00 135,000.00
June

Hence, VAT to be paid is Output VAT less Input VAT or Rs 15,000 –

12,5000 = 2,500.

VAT Accounting with Opening Stock for April to June 2005

(As per the guidelines of VAT White Paper of 17 January 2005.)

Opening Stock on 1 April Rs 500,000

2005
Less Tax Free Stock Rs 300,000
Balance Rs 200,000
Sales Tax @ 10% paid Rs 20,000
before VAT

This credit of Rs 20,000 has to be carried forward in VAT account

shown below.

Purchases (in Rs )
Period Purchases ST paid Input VAT paid
Opening 500,000.00 20,000.00 --
stock
April-June 100,000.00 -- 12,500.00
Sales (in Rs )
Period Sales Input VAT paidTotal
Opening 120,000.00 15,000.00 135,000.00
stock

Hence, the credit of Sales Tax paid on opening stock (Rs 20,000) can
be claimed in addition to Input Tax payable for VAT of 12,500.

This means the total tax paid (Sales Tax + VAT) will be Rs 20,000 +
12,500 = Rs 32,500.

In filing the VAT Return, the VAT payable is Rs 15,000 as per sales
record.

This has to be deducted from the total tax paid of Rs 32,500, leaving
a balance of Rs.17,500 to be claimed in the next VAT Return.

VAT Accounting For Inter-State Supplies and Taxes

Raw materials supplier in Mumbai sells to manufacturer in Delhi.

Delhi manufacturer Rs
Cost Price 10,000
Central Sales Tax @ 4% 400
Total Cost 10,400

Delhi manufacturer cannot claim central Sales Tax @4% of Rs 400

against Form C. hence his cost price will increase by Rs 400.
 Rs

Manufacturer's Cost Price 10,400

Value Added 2,000
Selling Price 12,400
VAT 1,550
Cost 13,950

Manufacturer pays VAT of Rs 1,550.00.

Rs

12,400
Wholesaler's Cost Price
Value Added 2,000
Selling Price 14,400
VAT @ 12.5% 1,800

Wholesaler pays VAT of Rs 250. This is arrived at by deducting Rs

1,550 that he paid to manufacturer from Rs 1,800 that he collected
brown i.e., 1,800.00 – 1,550.00 = 250.00.

Rs

Retailer's Cost Price 14,400

Value Added 2,000
Selling Price 16,400
VAT @ 12.5% 2,050

Retailer pays VAT of Rs 250. This is arrived at by deducting Rs 1,800

that he paid to manufacturer from Rs 2,050.00 that he collected, i.e.,
Rs 2,050-1,800 = 250.

Rs

Customer Price 16,400

VAT @ 12.5% 2,050
Price with VAT 18,450
Cross Checking

Total VAT paid will be Rs 1,550 (Manufacturer) + 250 (Wholesaler) +

250 (Retailer) = Rs 2,050.

• * If the trader's turnover is between Rs 5 and Rs 50 lakh and he

decides to pay one per cent Composition Tax instead of VAT,
he cannot claim credit for the VAT paid by him. So this amount
has to be added to his cost and his goods become more
expensive as compared to a trader with a turnover of between
Rs 5 and Rs 50 lakh who has registered to pay VAT. Thus
more traders are encouraged to register for VAT.