Question

Bhardwaj and Yadav, after getting their Bachelor of Engineering degrees, entered into a partnership for dealing in electronic goods. They also admitted Sinha, who is a fresh Chartered Accountant.

    They prepared a partnership deed containing the following clauses:

1. Name of the Firm: ‘Present-day Electronics’
2. Capitals: Capitals will be Bhardwaj ₹5,00,000, Yadav ₹3,00,000 and Sinha ₹2,00,000.
3. Profit-Sharing Ratio: Profit and Losses are to be shared in the ratio of 2:2:1.
4. Interest on Capital: Interest on capital shall be allowed to the partners @8% p.a.
5. Interest on Drawings: Interest is to be charged on drawings @ 10% p.a.
6. Salary to a Partner: No Partner is entitled to any salary or commission for taking part in running the firm’s business.
7. Interest on Loan: Interest at the rate of 12% per annum is to be allowed on a partner’s loan to the firm. Such interest shall be paid even if there are losses to the firm.
8. Admission of a New Partner: Without the consent of all existing partners, no new partner can be admitted to the firm.
9. Each partner can participate in the conduct of business.
10. Each partner can inspect the books of the firm and can take a copy of the same.

   They commenced the business on 1^st April, 2022 and entered into an agreement with 'OKAI LTD' to sell the Televisions, purchased from them on two-month credit basis. Entire amount of capital was deposited in HDFC bank.

   During the year they purchased furniture for ₹6,00,000 and office equipment for ₹3,00,000. Televisions were to be sold for cash only and the proceeds were to be deposited in the bank on the same day.

   The following transactions were made through bank during the year ended 31^st March, 2023.

	₹
Purchases	15,60,000
Sales	24,35,000
Rent (for 11 months)	33,000
Salaries	38,000
Electricity Exp.	8,500
Telephone Exp.	7,200
Advertising Exp.	5,400
Insurance Premium (for one year)	6,000
Printing and Stationery	10,800
Carriage Outwards	2,000
Other Expenses	28,800

Drawings:

• Bhardwaj: ₹10,000 at the beginning of each quarter.
• Yadav: ₹10,000 at the end of each quarter. 
• Sinha: ₹40,000

     The purchases for the months of February and March 2023 amounted to ₹3,00,000. OKAI LTD. was paid for purchases as per terms agreed upon.

Other Informations:

1. Other outstanding Exp. were: Salaries ₹4,000; Electricity bill ₹800 and Telephone bill ₹1,200. 
2. Insurance Premium was paid on 1^st January, 2023.
3. The closing stock of Televisions as at 31^st March, 2023 amounted to ₹1,20,000.
4. Depreciate office equipment by 20% and furniture by 15%.

    Prepare Trial Balance as at 31^st March, 2023, Profit & Loss Account for the year ended on 31st March, 2023 and a Balance Sheet as at that date.

    OKAI LTD. wants to ascertain the short-term financial position of the firm before extending the agreement on credit for the next year.

    Partners also want to ascertain the profitability of their business in terms of sales and capital employed into the business.

    You are required to Prepare Journal entries, Ledger accounts, Trial balance, Trading & Profit & Loss Account and the Balance Sheet of the firm. Also compute the requisite ratios and comment on them.

Answer 1

Journal Entries
Date	Particulars	L.F.	Debit (₹)	Credit (₹)
1.	Bank A/c Dr.		10,00,000	-
	To Bhardwaj’s Capital A/c		-	5,00,000
	To Yadav’s Capital A/c		-	3,00,000
	To Sinha’s Capital A/c		-	2,00,000
	(Being capital introduced by partners deposited into bank)
2.	Furniture A/c		6,00,000	-
	To Bank A/c		-	6,00,000
	(Being furniture purchased for cash)
3.	Office Equipment A/c		3,00,000	-
	To Bank A/c		-	3,00,000
	(Being office equipment purchased for cash)
4.	Purchases A/c		15,60,000	-
	To Creditors A/c		-	12,60,000
	To Bank A/c		-	3,00,000
	(Being goods purchased, partly on credit and partly in cash)
5.	Various Expenses A/c		1,79,700	-
	To Bank A/c		-	1,79,700
	(Being rent, salaries, electricity, telephone, advertising, insurance, printing, carriage, and other expenses paid)
6.	Bank A/c		24,35,000	-
	To Sales A/c		-	24,35,000
	(Being sales made during the year received in bank)
7.	Closing Stock A/c		1,20,000	-
	To Trading A/c		-	1,20,000
	(Being closing stock taken into account)
8.	Depreciation A/c		1,50,000	-
	To Furniture A/c		-	90,000
	To Office Equipment A/c		-	60,000
	(Being depreciation charged on furniture and office equipment)
9.	Prepaid Insurance A/c		1,500	-
	To Insurance A/c		-	1,500
	(Being insurance premium prepaid adjusted)
10.	Outstanding Expenses A/c		6,900	-
	To Rent/Salaries A/c		-	6,900
	(Being outstanding expenses adjusted)
11.	Profit & Loss A/c		4,00,800	-
	To Profit & Loss Appropriation A/c		-	4,00,800
	(Being net profit transferred to appropriation account)
12.	Profit & Loss Appropriation A/c		3,26,800	-
	To Bhardwaj’s Capital A/c		-	1,40,000
	To Yadav’s Capital A/c		-	1,40,000
	To Sinha’s Capital A/c		-	70,000
	(Being profit distributed among partners in ratio 2:2:1)

Ledger Accounts:

(1)

Dr.	Bhardwaj’s Capital Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Drawings A/c	40,000	By Bank A/c	5,00,000
To Balance c/d	6,28,220	By P&L Appropriation A/c	1,40,000
		By Interest on Drawings A/c	2,500
Total	6,28,220	Total	6,28,220

(2)

Dr.	Yadav’s Capital Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Drawings A/c	40,000	By Bank A/c	3,00,000
To Balance c/d	4,13,220	By P&L Appropriation A/c	1,40,000
		By Interest on Drawings A/c	1,500
Total	4,53,220	Total	4,53,220

(3)

Dr.	Sinha’s Capital Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Drawings A/c	40,000	By Bank A/c	2,00,000
To Balance c/d	2,39,360	By P&L Appropriation A/c	70,000
		By Interest on Drawings A/c	2,000
Total	2,79,360	Total	2,79,360

(4)

Dr.	Bank Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Bhardwaj’s Capital A/c	5,00,000	By Furniture A/c	6,00,000
To Yadav’s Capital A/c	3,00,000	By Office Equipment A/c	3,00,000
To Sinha’s Capital A/c	2,00,000	By Purchase A/c (Cash)	3,00,000
To Sales A/c	24,35,000	By Expenses A/c (Total)	1,79,700
		By Drawings A/c	1,20,000
		By Balance c/d	7,15,300
Total	34,35,000	Total	34,35,000

(5)

Dr.	Furniture Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Bank A/c	6,00,000	By Depreciation A/c	90,000
		By Balance c/d	5,10,000
Total	6,00,000	Total	6,00,000

(6)

Dr.	Office Equipment Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Bank A/c	3,00,000	By Depreciation A/c	60,000
		By Balance c/d	2,40,000
Total	3,00,000	Total	3,00,000

(7)

Trial Balance as on 31st March, 2023
Particulars	Debit (₹)	Credit (₹)
Furniture	6,00,000
Office Equipment	3,00,000
Purchases	15,60,000
Rent	33,000
Salaries	38,000
Electricity Exp.	8,500
Telephone Exp.	7,200
Advertising Exp.	5,400
Insurance Premium	6,000
Printing & Stationery	10,800
Carriage Outwards	2,000
Other Expenses	28,800
Drawings	1,20,00
Depreciation	1,50,000
Closing Stock	1,20,000
Bank Balance	7,15,300
Capital A/c		12,80,800
Sales A/c		24,35,000
Outstanding Expenses		6,900
Total	37,44,000	37,44,000

(8) Trading and Profit & Loss Account for the year ended 31^st March, 2023:

Dr.	Trading Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Purchases	15,60,000	By Sales	24,35,000
To Carriage Outwards	2,000	By Closing Stock	1,20,000
To Gross Profit c/d	6,95,000
Total	22,57,000	Total	22,57,000

(9)

Dr.	Profit & Loss Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Rent	33,000	By Gross Profit b/d	6,95,000
To Salaries	38,000
To Electricity Exp.	8,500
To Telephone Exp.	7,200
To Advertising Exp.	5,400
To Insurance Premium	6,000
To Printing & Stationery	10,800
To Other Expenses	28,800
To Depreciation	1,50,000
To Net Profit c/d	4,00,800
Total	6,95,000	Total	6,95,000

(10)

Balance Sheet as on 31st March, 2023
Liabilities	Amount (₹)	Assets	Amount (₹)
Capital A/c: Bhardwaj	6,28,220	Furniture	5,10,000
Capital A/c: Yadav	4,13,220	Office Equipment	2,40,000
Capital A/c: Sinha	2,39,360	Closing Stock	1,20,000
Outstanding Expenses	6,900	Prepaid Insurance	4,500
Sundry Creditors	3,02,100	Bank Balance	7,15,300
Total	15,89,800	Total	15,89,800

(11) Current Ratio:

1. Total Current Assets = ₹4,90,000
   • Inventory = ₹60,000
   • Trade Receivables = ₹1,00,000
   • Cash and Bank = ₹1,20,000
   • Short-term Loans and Advances = ₹80,000
   • Other Current Assets = ₹1,30,000
2. Total Current Liabilities = ₹1,80,000
   • Trade Payables = ₹1,20,000
   • Other Current Liabilities = ₹60,000

Current Ratio = `"Current Assets​"/"Current Liabilities"`

= `(4,90,000)/(1,80,000)`

∴ Current Ratio = 2.72:1

(12) Quick Ratio:

• Current Liabilities = ₹1,80,000
• Current Assets = ₹4,90,000
• Inventories = ₹60,000
• Prepaid Expenses = ₹10,000

Quick Assets = Current Assets – Inventories – Prepaid Expenses

= 4,90,000 – 60,000 – 10,000

∴ Quick Assets = ₹4,20,000

Quick Ratio = `"Quick Assets"/"Current Liabilities"`

= `(4,20,000)/(1,80,000)` ≈ 2.31:1

(13) Gross Profit Ratio:

• Gross Profit = ₹1,71,240
• Revenue from Operations = ₹6,00,000

Gross Profit Ratio = `"Gross Profit"/"Revenue from Operations"xx100`

= `(1,71,240)/(6,00,000)xx100`

∴ Gross Profit Ratio = 28.54%

(14) Net Profit Ratio:

• Net Profit = ₹98,760
• Revenue from Operations = ₹6,00,000

Net Profit Ratio = `"Net Profit"/"Revenue from Operations"xx100`

= `(98,760)/(6,00,000)xx100`

∴ Net Profit Ratio = 16.46%

(15) Return on Capital Employed (ROCE):

1. Net Profit before Interest and Tax = ₹1,56,450
2. Capital Employed =
   • Share Capital = ₹3,00,000
   • Reserves & Surplus = ₹1,00,000
   • Long-term Borrowings = ₹2,00,000
   • Non-trade Investments = NIL (assumed as not specified)
     ∴ Total Capital Employed = ₹6,00,000

Return on Capital Employed = `"Net Profit before Interest and Tax"/"Capital Employed"xx100`

= `(1,56,450)/(5,00,000)xx100`

∴ Return on Capital Employed = 31.29%