Final Accounts-II

Provision for Discount on Debtors

• Calculated at 2% on debtors after subtracting provision for bad debts.
• Example: On $Rs. 38,000$ (Rs. 40,000 - Rs. 2,000), it amounts to $Rs. 760$.
• Order of Calculation: Provision for bad debts is calculated first, then provision for discount.
• Adjustment Entry
  • Debit: Profit and Loss A/c
  • Credit: Provision for Discount on Debtors A/c
  • (Being the Provision made for discount on debtors)
• Presentation in Final Accounts
  • Debit side of Profit and Loss Account: Shown as a separate item.
  • Assets side of Balance Sheet: Shown as a deduction from Sundry Debtors.
• Balance is carried forward; discounts allowed are set off against it. Similar to handling bad debts.

Provision for Discount on Creditors

• Discount received from creditors for prompt payments.
• Calculated as a percentage on Sundry Creditors.
• Goes against the Conservatism Concept, so it is usually avoided.
• Adjustment Entry
  • Debit: Provision for Discount on Creditors A/c
  • Credit: Profit and Loss Account
  • (Being the Provision made for discount on creditors)
• Presentation in Final Accounts
  • Credit side of Profit and Loss Account: Shown as a separate item.
  • Liabilities side of Balance Sheet: Shown as a deduction from Sundry Creditors.
• Balance is carried forward; discount received is adjusted against it.

Manager’s Commission

• Commission on profits earned by the business, usually a fixed percentage.
• Calculated on profits before charging such commission.
• Treated as an outstanding expense.
  • Debited to Profit and Loss Account.
  • Shown as a current liability in the Balance Sheet.
• Formula for commission on profit after charging such commission
  • ${\text{Commission} = \frac{\text{Percentage of Commission}}{\text{100 + Percentage of Commission}} \times \text{Net Profit before Commission}}$
  • Example: 5% commission on Rs. 60,000
  • ${\frac{5}{100 + 5} \times 60,000 = Rs. 2,857}$
• Verification: Net Profit = $Rs. 60,000 - Rs. 2,857 = Rs. 57,143$. $5\% \text{ of } Rs. 57,143 = Rs. 2,857$

Abnormal Loss of Stock

• Loss of stock due to accidental or rare reasons (e.g., theft, fire).
• Normal loss is due to inherent characteristics (e.g., evaporation).
• Abnormal loss is shown separately in books; normal loss is absorbed by remaining units.
• Adjustment Entry
  • Debit: Loss by Fire A/c
  • Credit: Trading Account
  • (Being stock lost by fire)
• To avoid loss, businessmen get stock insured; can be uninsured, fully insured, or partially insured.

Accounting Treatment

1. Uninsured Stock

• Total abnormal loss is transferred to the Profit and Loss Account.
  • Debit: Profit and Loss A/c
  • Credit: Loss by Fire A/c

2. Fully Insured Stock

• Total loss is paid by the insurance company; no loss to the company.
  • Debit: Insurance Company
  • Credit: Loss by Fire A/c

3. Partially Insured Stock

• Insurance Company pays part of the loss; the business bears the rest.
  • Debit: Insurance Company
  • Debit: Profit and Loss A/c
  • Credit: Abnormal Loss A/c
• Treatment in Final Accounts
  • Credit Trading Account with total loss.
  • Uninsured: Debit Profit and Loss Account with full amount.
  • Fully Insured: Insurance claim shown as an asset in the Balance Sheet.
  • Partially Insured: Insurance claim is an asset; remaining loss debited to Profit and Loss Account.

Illustration: Stock worth Rs. 40,000 destroyed by fire; claim of Rs. 30,000 admitted.
Loss by Fire A/c Dr. 40,000
To Trading A/c 40,000

Insurance Company Dr. 30,000
Profit and Loss A/c Dr. 10,000
To Loss by Fire A/c 40,000

Trading Account
By Loss of Fire 40,000

Profit and Loss Account
To Loss by fire 10,000
(40,000 - 30,000)

Balance Sheet
Current Assets:
Claim due from insurance company: 30,000

Drawing of Goods by the Proprietor

• Goods taken by the proprietor for personal use.
• Recorded by debiting Drawings Account and crediting Purchases Account.
• Treatment in Final Accounts
  • Debit side of Trading Account: Deduct from Purchases.
  • Liabilities side of the Balance Sheet: Deduct from capital (separate item or included in drawings).