Question

     After doing their graduation, Banerjee suggested to his classmate Chatterjee to form a partnership to start a computer business. Chatterjee agreed to the proposal and requested to admit his friend Diwedi also to the proposed firm. All of them formed a partnership and prepared a partnership deed containing the following clauses:

1. Name of the firm will be ‘Progressive Computers’.
2. Capital: Banerjee will contribute ₹6,00,000, Chatterjee ₹5,00,000, and Diwedi ₹4,00,000.
3. Profit-Sharing Ratio: Profits and Losses are to be shared equally, irrespective of their capital contribution.
4. Interest on Capital: Interest on Capital shall be allowed @ at 8% per annum. Interest on capital will be allowed only when there is a profit.
5. Interest on Drawings: No interest is to be charged on drawings.
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 6% 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 firm and can take a copy of the same.

     They started business on 1^st April 2022, and the partners contributed the entire share of their capitals by cheques drawn in the firm’s name. On the same date, they deposited the cheques in the bank.

     On the same date, they purchased 20 computers of ₹50,000 each. They deposited ₹20,000 for the electric connection with the Electricity Board and also deposited ₹1,50,000 with the VSNL for Internet and telephone connection.

     They spent ₹40,000 for getting the Computer Cafe furnished and also spent ₹6,000 in getting the pamphlets printed and distributed.

     All payments were to be made by cheques and all the receipts were to be deposited in the bank on the same day.

     At the end of the year, the results were:

	₹
Purchases of Computer stationery like floppy discs, CDs, etc.	92,000
Revenue from fees received from students of Computer classes	5,48,000
Revenue on Account of Internet Facility	4,20,000
Revenue from sale of Computer Stationery	1,60,000
Wages paid to Servant	60,000
Electricity Charges	2,40,000
Telephone Charges	73,000
Entertainment Expenses	7,000
General Expenses	5,200
Rent of the Building	1,20,000

     Drawings made by partners were: Banerjee ₹50,000, Chatterjee ₹40,000, and Diwedi ₹20,000.

     You are required to:

1. Journalize the above transactions, post them into the Ledger, and prepare a trial balance.
2. Prepare Trading and Profit & Loss Account and Balance Sheet, taking into consideration that a telephone bill of ₹6,800 is yet to be paid.
3. Depreciate furniture by 20% and computers by 30%.
4. Calculate profitability ratios and comment on the efficiency of the business ifthe norms set for Gross Profit Ratio and Net Profit Ratio in similar type of business enterprises are 60% and 15% respectively.
5. Partners want to expand their business. They approached the bank for a loan of ₹5,00,000. Mention the ratios that the bank manager will take into consideration before granting the loan.

Answer 1

Introduction of the Project:

     The project work is,

1. To make an accounting record of all the transactions from the very start of the business of Progressive Computers;
2. Prepare the firm’s Trading and Profit & Loss Account to ascertain the net profit for the period.
3. To prepare the Balance Sheet of the firm to ascertain the financial position,
4. To assess the profitability based on profitability ratios, and
5. To suggest whether the bank manager should grant a loan. 

     The necessary data is provided and is used for project work.

The project work is planned and executed as follows:

1. Prepare journal, ledger, and trial balance;
2. Prepare Trading and Profit & Loss Account for the year ending 31^st March, 2023, and a Balance Sheet as at 31^st March, 2023;
3. Calculate Gross Profit Ratio and Net Profit Ratio to assess the profitability of the business.

JOURNAL
Date	Particulars	L.F.	Amount Dr. (₹)	Amount Cr. (₹)
2022
April 1	Bank A/c     ...Dr.		15,00,000	-
	To Banerjee’s Capital A/c		-	6,00,000
	To Chatterjee’s Capital A/c		-	5,00,000
	To Diwedi’s Capital A/c		-	4,00,000
	(Capital contributed by the partners deposited into the Bank)
April 1	Computers A/c     ...Dr.		10,00,000	-
	To Bank A/c		-	10,00,000
	(Computers purchased)
April 1	Electricity Board A/c     ...Dr.		20,000	-
	VSNL A/c     ...Dr.		1,50,000	-
	To Bank A/c		-	1,70,000
	(Security deposit with the electricity board and VSNL)
April 1	Furniture and Fixtures A/c     ...Dr.		40,000	-
	To Bank A/c		-	40,000
	(Furnishing of Computer Cafe)
2023
March 31	Advertisement A/c     ...Dr.		6,000	-
	To Bank A/c		-	6,000
	(Payment made for pamphlets)
March 31	Purchases A/c     ...Dr.		92,000	-
	To Bank A/c		-	92,000
	(Purchase of computer stationery)
March 31	Bank A/c     ...Dr.		11,28,000	-
	To Revenue from Fees and Sales A/c		-	11,28,000
	(Fees received from computer classes ₹5,48,000, from the Internet facility ₹4,20,000, and from the sale of computer stationery ₹1,60,000.)
March 31	Wages A/c     ...Dr.		60,000	-
	Electricity Charges A/c     ...Dr.		2,40,000	-
	Telephone Charges A/c     ...Dr.		73,000	-
	Entertainment Expenses A/c     ...Dr.		7,000	-
	General Expenses A/c     ...Dr.		5,200	-
	Rent A/c     ...Dr.		1,20,000	-
	To Bank A/c		-	5,05,200
	(Expenses paid)
March 31	Banerjee’s Drawings A/c     ...Dr.		50,000	-
	Chatterjee’s Drawings A/c     ...Dr.		40,000	-
	Diwedi’s Drawings A/c     ...Dr.		20,000	-
	To Bank A/c		-	1,10,000
	(Amount withdrawn for personal expenses)
March 31	Banerjee’s Capital A/c     ...Dr.		50,000	-
	Chatterjee’s Capital A/c     ...Dr.		40,000	-
	Diwedi’s Capital A/c     ...Dr.		20,000	-
	To Banerjee’s Drawings A/c		-	50,000
	To Chatterjee’s Drawings A/c		-	40,000
	To Diwedi’s Drawings A/c		-	20,000
	(Transfer of Drawings to Capital A/cs)
March 31	Depreciation A/c     ...Dr.		3,08,000	-
	To Furniture and Fixtures A/c		-	8,000
	To Computers A/c		-	3,00,000
	(Depreciation provided)
March 31	Telephone Charges A/c     ...Dr.		6,800	-
	To Outstanding Telephone Charges A/c		-	6,800
	(Outstanding telephone charges)
March 31	Profit and Loss A/c     ...Dr.		2,10,000	-
	To Profit and Loss Appropriation A/c		-	2,10,000
	(The transfer of Profit to Profit and Loss Appropriation Account)
March 31	Interest on Capital A/c     ...Dr.		1,20,000	-
	To Banerjee’s Capital A/c		-	48,000
	To Chatterjee’s Capital A/c		-	40,000
	To Diwedi’s Capital A/c		-	32,000
	(The Interest on partner’s Capitals)
March 31	Profit and Loss Appropriation A/c     ...Dr.		1,20,000	-
	To Interest on Capital A/c		-	1,20,000
	(The transfer of interest on Capital to Profit and Loss Appropriation Account)
March 31	Profit and Loss Appropriation A/c     ...Dr.		90,000	-
	To Banerjee’s Capital A/c		-	30,000
	To Chatterjee’s Capital A/c		-	30,000
	To Diwedi’s Capital A/c		-	30,000
	(The transfer of credit balance of Profit and Loss Appropriation Account to partner’s Capital Accounts)

LEDGER:

BANK ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2022				2022
April l	To Banerjee’s Capital A/c		6,00,000	April l	By Computers A/c		10,00,000
	To Chatterjee’s Capital A/c		5,00,000	April l	By Electricity Board A/c		20,000
	To Diwedi’s Capital A/c		4,00,000	April l	By VSNL A/c		1,50,000
				April l	By Furniture and Fixtures A/c		40,000
2023				2023
March 31	To Revenue from Fees and Sales A/c		11,28,000	March 31	By Advertisement A/c		6,000
				March 31	By Purchases A/c		92,000
				March 31	By Wages A/c		60,000
				March 31	By Electricity Charges A/c		2,40,000
				March 31	By Telephone Charges A/c		73,000
				March 31	By Entertainment Exp. A/c		7,000
				March 31	By General Exp. A/c		5,200
				March 31	By Rent A/c		1,20,000
				March 31	By Drawings A/c:
					Banerjee		50,000
					Chatterjee		40,000
					Diwedi		20,000
				March 31	By Balance c/d		7,04,800
			26,28,000				26,28,000
2023
April 1	To Balance b/d		7,04,800

 

CAPITAL ACCOUNTS
Date	Particulars	Banerjee (₹)	Chatterjee (₹)	Diwedi (₹)	Date	Particulars	Banerjee (₹)	Chatterjee (₹)	Diwedi (₹)
2023					2022
March 31	To Drawings A/c	50,000	40,000	20,000	April 1	By Bank A/c	6,00,000	5,00,000	4,00,000
March 31	To Balance c/d	5,50,000	4.60,000	3.80,000
		6,00,000	5,00,000	4,00,000			6,00,000	5,00,000	4,00,000

 

COMPUTERS ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2022				2023
April l	To Bank A/c		6,00,000	March 31	By Depreciation A/c		3,00,000
				March 31	By Balance c/d		7,00,000
			10,00,000				10,00,000
2023
April 1	To Balance b/d		7,00,000

 

ELECTRICITY BOARD ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2022				2023
April l	To Bank A/c		20,000	March 31	By Balance c/d		20,000
2023
April 1	To Balance b/d		20,000

 

VSNL ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2022				2023
April l	To Bank A/c		1,50,000	March 31	By Balance c/d		1,50,000
2023
April 1	To Balance b/d		1,50,000

 

FURNITURE AND FIXTURES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2022				2023
April l	To Bank A/c		40,000	March 31	By Depreciation A/c		8,000
				March 31	By Balance c/d		32,000
			40,000				40,000
2023
April 1	To Balance b/d		32,000

 

ADVERTISEMENT ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		6,000	March 31	By P & L A/c		6,000

 

PURCHASES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		92,000	March 31	By Trading A/c		92,000

 

PURCHASES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		92,000	March 31	By Trading A/c		92,000

 

REVENUE FROM FEES AND SALES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Trading A/c		11,28,000	March 31	By Bank A/c		11,28,000

 

WAGES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		60,000	March 31	By Trading A/c		60,000

 

ELECTRICITY CHARGES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		2,40,000	March 31	By P & L A/c		2,40,000

 

TELEPHONE CHARGES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		73,000	March 31	By P & L A/c		79,800
March 31	To Outstanding Telephone Charges A/c		6,800
			79,800				79,800

 

ENTERTAINMENT EXPENSES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		7,000	March 31	By P & L A/c		7,000

 

GENERAL EXPENSES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		5,200	March 31	By P & L A/c		5,200

 

RENT ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		1,20,000	March 31	By P & L A/c		1,20,000

 

DEPRECIATION ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Furniture and Fixtures A/c		8,000	March 31	By P & L A/c		3,08,000
March 31	To Computers A/c		3,00,000
			3,08,000				3,08,000

 

OUTSTANDING TELEPHONE CHARGES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Balance c/d		6,800	March 31	By Telephone Charges A/c		6,800
				2023
				April 1	By Balance b/d		6,800

 

DRAWINGS ACCOUNTS
Date	Particulars	Banerjee (₹)	Chatterjee (₹)	Diwedi (₹)	Date	Particulars	Banerjee (₹)	Chatterjee (₹)	Diwedi (₹)
2023					2023
March 31	To Bank A/c	50,000	40,000	20,000	March 31	By Capital A/c	50,000	40,000	20,000

 

TRIAL BALANCE as at 31st March, 2023
Name of Accounts	L.F.	Balance Dr. (₹)	Name of Accounts	L.F.	Balance Cr. (₹)
Bank A/c		7,04,800	Banerjee’s Capital A/c		6,00,000
Computers A/c		7,00,000	Chatterjee’s Capital A/c		5,00,000
Electricity Board A/c		20,000	Diwedi’s Capital A/c		4,00,000
VSNL A/c		1,50,000	Revenue from Fees and Sales A/c		11,28,000
Furniture & Fixtures A/c		32,000	Outstanding Telephone Charges A/c		6,800
Advertisement A/c		6,000
Purchases A/c		92,000
Wages A/c		60,000
Electricity Charges A/c		2,40,000
Telephone Charges A/c		79,800
Entertainment Expenses A/c		7,000
General Expenses A/c		5,200
Rent A/c		1,20,000
Banerjee’s Drawings A/c		50,000
Chatterjee’s Drawings A/c		40,000
Diwedi’s Drawings A/c		20,000
Depreciation A/c		3,08,000
		26,34,800			26,34,800

 

TRADING AND PROFIT & LOSS ACCOUNT for the year ending 31st March, 2023
Particulars	L.F.	Amount (₹)	Amount (₹)	Particulars	L.F.	Amount (₹)
To Purchases A/c			92,000	By Revenue from Fees and Sales A/c		11,28,000
To Wages A/c			60,000
To Gross Profit transferred to P & L A/c			9,76,000
			11,28,000			11,28,000
To Advertisement A/c			6,200			9,76,000
To Electricity Charges A/c			2,40,000
To Telephone Charges A/c			79,800
To Entertainment Expenses A/c			7,000
To General Expenses A/c			5,200
To Rent A/c			1,20,000
To Depreciation A/c:
Furniture and Fixtures		8,000
Computers		3,00,000	3,08,000
To Net Profit transferred to Profit & Loss Appropriation A/c			2,10,000
			9,76,000			9,76,000

 

PROFIT & LOSS APPROPRIATION ACCOUNT for the year ending 31st March, 2023
Particulars	L.F.	Amount (₹)	Amount (₹)	Particulars	L.F.	Amount (₹)
To Interest on Capital:				By Profit & Loss A/c (Net Profit)		2,10,000
Banerjee		48,000
Chatterjee		40,000
Diwedi		32,000	1,20,000
To Profit Transferred to:
Banerjee’s Capital A/c		30,000
Chatterjee’s Capital A/c		30,000
Diwedi’s Capital A/c		30,000	90,000
			2,10,000			2,10,000

 

PARTNER'S CAPITAL ACCOUNTS (AFTER APPROPRIATIONS)
Date	Particulars	Banerjee (₹)	Chatterjee (₹)	Diwedi (₹)	Date	Particulars	Banerjee (₹)	Chatterjee (₹)	Diwedi (₹)
2023					2023
March 31	To Balance A/c	6,28,000	5,30,000	4,42,000	March 31	By balance b/d (Net, after Drawings)	5,50,000	4,60,000	3,80,000
					March 31	By Interest on Capital	48,000	40,000	32,000
					March 31	By Profit & Loss Appropriation A/c	30,000	30,000	30,000
		6,28,000	5,30,000	4,42,000			6,28,000	5,30,000	4,42,000

 

BALANCE SHEET as at 31st March, 2023
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
Outstanding Telephone Charges		6,800	Bank		7,04,800
Capital Accounts:			Electricity Board (Security Deposit)		20,000
Banerjee	6,28,000		VSNL (Security Deposit)		1,50,000
Chatterjee	5,30,000		Furniture and Fixtures (Less Dep.)		32,000
Diwedi	4,42,000	16,00,000	Computers (Less Dep.)		7,00,000
		16,06,800			16,06,800

Profitability Ratios:

1. `"Gross Profit Ratio"=("Gross Profit")/("Net Revenue from Operations")xx100`
   `=(9,76,000)/(11,28,000)xx100`
   `=86.52%`
2. `"Net Profit Ratio"=("Net Profit")/("Net Revenue from Operations")xx100`
   `=(2,10,000)/(11,28,000)xx100`
   `=18.62%`

• Progressive Computers’ Gross Profit Ratio is 86.52% compared to 60% in similar types of business enterprises (as stated in the question).
• Progressive Computers’ Net Profit Ratio is 18.62% compared to 15% in similar types of business enterprises (as stated in the question).

Comments: Efficiency of Progressive Computers’ is quite good since Gross Profit Ratio and Net Profit Ratio are sufficiently higher than the norms set for similar types of business enterprises.

Granting of Loan:

     In addition to Gross Profit Ratio and Net Profit Ratio, the Bank will also consider the following ratios before granting the loan:

1. `"Current Ratio"=("Current Assets")/("Current Liabilities")`
2. `"Quick Ratio"=("Liquid Assets")/("Current Liabilities")`
3. `"Debt Equity Ratio"=("Long term Debts")/("Equity")`

PRESENTATION OF INFORMATION:

Revenue from Operations (Sales)	11,28,000	Sales 100%	Cumulative Percentages
Purchases	92,000	8.16%	8.16%
Wages	60,000	5.32%	13.48%
Office & Selling Exp.	4,58,000	40.60%	54.08%
Depreciation	3,08,000	27.30%	81.38%
Net Profit	2,10,000	18.62%	100.00%
	11,28,000	100

BAR DIAGRAM:

PIE CHART:

DEPICTION OF RATIOS: