Question

    Manish and Naveen, after completing their graduation in commerce, decided to enter into a partnership to deal in Refrigerators. Sachin, a fresh graduate in business administration who was a close friend of both of them, also requested them to take him into partnership. They also took Sachin into partnership and prepared a partnership deed containing. The following clauses:

1. Name of the firm will be ‘Ganga Refrigerators.’
2. Capital: Manish and Naveen will contribute ₹12,00,000 each, whereas Sachin will contribute ₹6,00,000.
3. Profit-Sharing Ratio: Profits and Losses are to be shared in the ratio of their Capital contribution.
4. Interest on Capital: No interest on capital shall be allowed to the partners.
5. Interest on Drawings: Interest on drawings is to be charged @ 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 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 conduct of business.
10. Each partner can inspect the books of firm and can take a copy of the same.

    On 1^st April, 2022, the partners contributed their share of capital, and the entire amount of Capital was deposited into the bank. On the same date, they entered into an agreement with L.G. Limited to sell the Refrigerators, bought from them on a one-month credit basis.

    At the beginning of the year they purchased the following assets making payments through bank:

	₹
Building	25,00,000
Office Equipments	2,00,000
Furniture	1,50,000

    Refrigerators were to be sold for cash only and the cash proceeds were to be deposited in the bank on the same day. All expenses were to be paid only through bank.

    The following transactions were affected through bank during the year ended 31st March, 2023:

	₹
Purchases	16,90,000
Sales	24,60,000
Salaries	66,000
Advertising expenses	9,400
Telephone expenses	10,200
Electricity expenses	7,600
Printing and stationery	3,600
Insurance premium	4,000
Sundry Expenses	22,000

    Manish withdrew for his personal use ₹10,000 per month at the end of each month.

    Naveen withdrew for his personal use ₹8,000 per month at the beginning of each month.

    Sachin withdrew for his personal use ₹40,000 during the year.

    The purchases for the month of March 2023 amounted to ₹1,40,000. L.G. Limited was paid for purchases as per the terms agreed upon.

Other Information:

1. Salaries have been paid for 11 months.
2. Telephone expenses ₹1,000 and Electricity expenses ₹800 are yet to be paid.
3. The closing stock as at 31st March, 2023, were as follows:

   Refrigerators	₹3,50,000
   Stationery	₹600

4. Charge depreciation on building @ 4% and on Office Equipment and Furniture @ 20%.

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

Further:

1. L.G. Ltd. wants to know the short-term financial position of the Firm before extending the agreement on credit policy for the next year.
2. Partners want to know the profitability of their business in terms of sales and capital employed into the business.

    You are required to compute the required ratios and comment upon them.

Answer 1

Introduction of the Project:

    The project work is:

1. To prepare Journal and Ledger of M/s Ganga Refrigerators from the very start of the business;
2. To prepare a trial balance;
3. To prepare Trading and Profit & Loss Account for the year ended 31st March, 2023;
4. To prepare a Balance Sheet as at 31st March, 2023;
5. To assess the short-term financial position of the firm;
6. To assess the profitability of the firm on the basis of profitability ratios.

    The necessary data is provided and is used for the purpose of project work.

The project work is planned and executed as follows:

1. Prepare Journal and Ledger Accounts;
2. Prepare Trial Balance;
3. Prepare Trading and Profit & Loss Account for the year ended 31^st March, 2023;
4. Prepare Balance Sheet as at 31^st March, 2023;
5. Calculate Current Ratio and Quick Ratio to assess the short-term financial position;
6. Calculate Gross Profit Ratio, Net Profit Ratio, and Return on Capital Employed to assess the profitability of the business.

JOURNAL OF GANGA REFRIGERATORS
Date	Particulars	L.F.	Amount Dr. (₹)	Amount Cr. (₹)
2022
April 1	Bank A/c     ...Dr.		30,00,000	-
	To Manish’s Capital A/c		-	12,00,000
	To Naveen’s Capital A/c		-	12,00,000
	To Sachin’s Capital A/c		-	6,00,000
	(Amount contributed as capital)
April 1	Building A/c     ...Dr.		25,00,000	-
	Office Equipments A/c     ...Dr.		2,00,000	-
	Furniture A/c     ...Dr.		1,50,000	-
	To Bank A/c		-	28,50,000
	(Assets purchased)
2023
March 31	Purchases A/c     ...Dr.		16,90,000	-
	To Bank A/c		-	16,90,000
	(Purchase of Refrigerators)
March 31	Bank A/c     ...Dr.		92,000	-
	To Sales A/c		-	92,000
	(Sales of Refrigerators)
March 31	Salaries A/c     ...Dr.		66,000	-
	Advertising Exp. A/c     ...Dr.		9,400	-
	Telephone Exp. A/c     ...Dr.		10,200	-
	Electricity Exp. A/c     ...Dr.		7,600	-
	Printing and Stationery A/c     ...Dr.		3,600	-
	Insurance Premium A/c     ...Dr.		4,000	-
	Sundry Expenses A/c     ...Dr.		22,000	-
	To Bank A/c		-	1,22,800
	(Payment for expenses through the bank)
March 31	Manish’s Drawings A/c     ...Dr.		1,20,000	-
	Naveen’s Drawings A/c     ...Dr.		96,000	-
	Sachin’s Drawings A/c     ...Dr.		40,000	-
	To Bank A/c		-	2,56,000
	(Amount withdrawn for personal expenses)
March 31	Manish’s Capital A/c     ...Dr.		1,20,000	-
	Naveen’s Capital A/c     ...Dr.		96,000	-
	Sachin’s Capital A/c     ...Dr.		40,000	-
	To Manish’s Drawings A/c		-	1,20,000
	To Naveen’s Drawings A/c		-	96,000
	To Sachin’s Drawings A/c		-	40,000
	(Transfer of Drawings to Capital Accounts)
March 31	Purchases A/c     ...Dr.		1,40,000	-
	To Creditors		-	1,40,000
	(Payment due for last month’s purchases)
March 31	Salaries A/c     ...Dr.		6,000	-
	Telephone Exp. A/c     ...Dr.		1,000	-
	Electricity Exp. A/c     ...Dr.		800	-
	To Outstanding Expenses A/c		-	7,800
	(Amount due for expenses)
March 31	Stock of Stationery A/c     ...Dr.		600	-
	To Stationery A/c		-	600
	(Stock of Stationery at the end of the year)
March 31	Closing Stock A/c     ...Dr.		3,50,000	-
	To Trading A/c		-	3,50,000
	(Stock of Refrigerators at the end of the year)
March 31	Depreciation A/c     ...Dr.		1,70,000	-
	To Office Equipments A/c		-	40,000
	To Furniture A/c		-	30,000
	To Building A/c		-	1,00,000
	(Depreciation Charged on different assets)
March 31	Profit and Loss A/c     ...Dr.		6,80,000	-
	To Profit and Loss Appropriation A/c		-	6,80,000
	(The transfer of Profit to Profit and Loss Appropriation Account)
March 31	Manish’s Capital A/c     ...Dr.		5,500	-
	Naveen’s Capital A/c     ...Dr.		5,200	-
	Sachin’s Capital A/c     ...Dr.		2,000	-
	To Interest on Drawings A/c		-	12,700
	(Interest on partners’ drawings)
March 31	Interest on Drawings A/c     ...Dr.		12,700	-
	To Profit & Loss Appropriation A/c		-	12,700
	(The transfer of interest on drawings to Profit & Loss Appropriation Account)
March 31	Profit and Loss Appropriation A/c     ...Dr.		6,92,700	-
	To Manish’s Capital A/c		-	2,77,080
	To Naveen’s Capital A/c		-	2,77,080
	To Sachin’s Capital A/c		-	1,38,540

Notes:

1. Interest in Manish’s Drawings:
   Since he has withdrawn at the end of every month, interest on the whole amount will be calculated for 5.5 months:
   `1,20,000xx10/100xx5.5/12= "₹"5,500`
2. Interest in Naveen’s Drawings:
   Since he has withdrawn at the beginning of every month, interest on the whole amount will be calculated for 6.5 months:
   `96,000xx10/100xx6.5/12= "₹"5,200`
3. Interest in Sachin’s Drawings:
   As the date of the drawings is not given, interest will be calculated for an average period of 6 months:
   `40,000xx10/1006/12= "₹"2,000`

LEDGER ACCOUNTS:

BANK ACCOUNT
Date	Particulars	Amount (₹)	Date	Particulars	Amount (₹)
2022			2022
April 1	To Manish’s Capital A/c	12,00,000	April 1	By Building A/c	25,00,000
	To Naveen’s Capital A/c	12,00,000	April 1	By Office Equipments A/c	2,00,000
	To Sachin’s Capital A/c	6,00,000	April 1	By Furniture A/c	1,50,000
2023			2023
March 31	To Sales A/c	24,60,000	March 31	By Purchases A/c	16,90,000
			March 31	By Salaries A/c	66,000
			March 31	By Advertisement Expenses A/c	9,400
			March 31	By Telephone Expenses A/c	10,200
			March 31	By Electricity Expenses A/c	7,600
			March 31	By Printing and Stationery A/c	3,600
			March 31	By Insurance Premium A/c	4,000
			March 31	By Sundry Expenses	22,000
			March 31	By Manish’s Drawings	1,20,000
				By Naveen’s Drawings	96,000
				By Sachin’s Drawings	40,000
			March 31	By Balance c/d	5,41,200
		54,60,000			54,60,000

 

MANISH’S CAPITAL ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2022
March 31	To Drawings A/c		1,20,000	April 1	By Bank A/c		12,00,000
March 31	To Balance c/d		10,80,000
			12,00,000				12,00,000

 

NAVEEN’S CAPITAL ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2022
March 31	To Drawings A/c		96,000	April 1	By Bank A/c		12,00,000
March 31	To Balance c/d		11,04,000
			12,00,000				12,00,000

 

SACHIN’S CAPITAL ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2022
March 31	To Drawings A/c		40,000	April 1	By Bank A/c		6,00,000
March 31	To Balance c/d		5,60,000
			6,00,000				6,00,000

 

BUILDING ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2022				2023
April 1	To Bank A/c		25,00,000	March 31	By Depreciation A/c		l,00,000
				March 31	By Balance c/d		24,00,000
			25,00,000				25,00,000

 

OFFICE EQUIPMENT ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2022				2023
April 1	To Bank A/c		2,00,000	March 31	By Depreciation A/c		40,000
				March 31	By Balance c/d		1,60,000
			2,00,000				2,00,000

 

FURNITURE ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2022				2023
April 1	To Bank A/c		1,50,000	March 31	By Depreciation A/c		30,000
				March 31	By Balance c/d		1,20,000
			1,50,000				1,50,000

 

PURCHASES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		16,90,000	March 31	By Trading A/c		18,30,000
March 31	To Creditors A/c		1,40,000
			18,30,000				18,30,000

 

SALES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Trading A/c		24,60,000	March 31	By Bank A/c		24,60,000

 

SALARIES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		66,000	March 31	By P& L A/c		72,000
March 31	To Outstanding Exp. A/c		6,000
			72,000				72,000

 

ADVERTISING EXP. ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		9,400	March 31	By P& L A/c		9,400
			9,400				9,400

 

TELEPHONE EXP. ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		10,200	March 31	By P& L A/c		11,200
March 31	To Outstanding Exp. A/c		1,000
			11,200				11,200

 

ELECTRICITY EXPENSES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		7,600	March 31	By Profit & Loss A/c		8,400
March 31	To Outstanding Exp. A/c		800
			8,400				8,400

 

PRINTING AND STATIONERY ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		3,600	March 31	By Stock of Stationery		600
				March 31	By Profit & Loss A/c		3,000
			3,600				3,600

 

INSURANCE PREMIUM ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		4,000	March 31	By P& L A/c		4,000
			4,000				4,000

 

SUNDRY EXPENSES ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		22,000	March 31	By P& L A/c		22,000
			22,000				22,000

 

MANISH’S DRAWINGS 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 Capital A/c		1,20,000
			1,20,000				1,20,000

 

NAVEEN’S DRAWINGS ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		96,000	March 31	By Capital A/c		96,000
			96,000				96,000

 

SACHIN’S DRAWINGS ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Bank A/c		40,000	March 31	By Capital A/c		40,000
			40,000				40,000

 

CREDITORS ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Balance c/d		1,40,000	March 31	By Purchases A/c		1,40,000
			1,40,000				1,40,000

 

OUTSTANDING EXP. ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Balance c/d		7,800	March 31	By Salaries		6,000
				March 31	By Telephone Exp.		1,000
				March 31	By Electricity Exp.		800
			7,800				7,800

 

STOCK OF STATIONERY ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Stationery A/c		600	March 31	By Balance c/d		600
			600				600

 

CLOSING STOCK ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Trading A/c		3,50,000	March 31	By Balance c/d		3,50,000
			3,50,000				3,50,000

 

OUTSTANDING EXP. ACCOUNT
Date	Particulars	L.F.	Amount (₹)	Date	Particulars	L.F.	Amount (₹)
2023				2023
March 31	To Office Equipments A/c		40,000	March 31	By P& L A/c		1,70,000
March 31	To Furniture A/c		30,000
March 31	To Building A/c		1,00,000
			1,70,000				1,70,000

 

TRIAL BALANCE as at 31st March, 2023
Dr.			Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
Bank Balance	5,41,000	Manish’s Capital A/c	12,00,000
Building	24,00,000	Naveen’s Capital A/c	12,00,000
Office Equipments	1,60,000	Sachin’s Capital A/c	6,00,000
Purchases (₹16,90,000 + ₹1,40,000 for the month of March 2023)	18,30,000	Creditors (for purchases for the month of March 2023)	1,40,000
Furniture	1,20,000	Sales	24,60,000
Salaries	72,000	Outstanding Expenses	7,800
Advertisement Exp.	9,400
Telephone Exp.	11,200
Electricity Exp.	8,400
Printing and Stationery	3,000
Insurance Premium	4,000
Sundry Expenses	22,000
Manish’s Drawings	1,20,000
Naveen’s Drawings	96,000
Sachin’s Drawings	40,000
Stock of Stationery	600
Depreciation	1,70,000
	56,07,800		56,07,800

 

TRADING & PROFIT AND LOSS ACCOUNT for the year ended 31st March, 2023
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Purchases		18,30,000	By Sales	24,60,000
To Gross Profit transferred to P& L A/c		9,80,000	By Closing Stock (of Refrigerators)	3,50,000
		28,10,000		28,10,000
To Salaries	66,000		By Gross Profit b/d	9,80,000
Add: Outstanding (66,000 ÷ 11)	6,000	72,000
To Advertisement Exp.		9,400
To Telephone Exp.	10,200
Add: Outstanding	1,000	11,200
To Electricity Exp.	7,600
Add: Outstanding	800	8,400
To Printing and Stationery	3,600
Less: Closing stock of stationery	600	3,000
To Insurance Premium		4,000
To Sundry Expenses		22,000
To Depreciation on:
Building	1,00,000
Office Equipments	40,000
Furniture	30,000	1,70,000
To Net Profit transferred to Profit & Loss Appropriation A/c		6,80,000
		9,80,000		9,80,000

 

TRADING & PROFIT AND LOSS ACCOUNT for the year ended 31st March, 2023
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
To Profit Transferred to:			By Profit & Loss A/c (Net Profit)		6,80,000
Manish’s Capital A/c	2,77,080		By Interest on Drawings:
Naveen’s Capital A/c	2,77,080		Manish	5,500
Sachin’s Capital A/c	1,38,540	6,92,700	Naveen	5,200
			Sachin	2,000	12,700
		6,92,700			6,92,700

 

PARTNERS’ CAPITAL ACCOUNTS (After Appropriations) as at 31st March, 2023
Particulars	Manish (₹)	Naveen (₹)	Sachin (₹)	Particulars	Manish (₹)	Naveen (₹)	Sachin (₹)
To Interest on Drawings	5,500	5,200	2,000	By Balance b/d (Net after drawings)	10,80,000	11,04,000	5,60,000
To Balance c/d	13,51,580	13,75,880	6,96,540	By Profit & Loss Appropriation A/c	2,77,080	2,77,080	1,38,540
	13,57,080	13,81,080	6,98,540		13,57,080	13,81,080	6,98,540

 

BALANCE SHEET as at 31st March, 2023
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)	Amount (₹)
Creditors		1,40,000	Bank balance		5,41,200
Outstanding Expenses for:			Stock of Refrigerators		3,50,000
Salaries		6,000	Stock of Stationery		600
Telephone Exp.		1,000	Office Equipments	2,00,000
Electricity Exp.		800	Less: Depreciation	40,000	1,60,000
Capitals:			Furniture	1,50,000
Manish	13,51,580		Less: Depreciation	30,000	1,20,000
Naveen	13,75,880		Building	25,00,000
Sachin	6,96,540	34,24,000	Less: Depreciation	1,00,000	24,00,000
		35,71,800			35,71,800

(1) Short-term Financial Position:

1. `"Current Ratio"="Current Assets"/"Current Liabilities"`
   `=(8,91,800)/(1,47,800)`
   = 6.03:1
2. `"Quick Ratio"="Quick Assets"/"Current Liabilities"`
   `=(5,41,200)/(1,47,800)`
   = 3.66:1
3. Comments: The short-term financial position of the business is sound because its current ratio is higher than the ideal ratio of 2:1. Similarly, the quick ratio is also higher than the ideal ratio of 1:1. Hence, L.G. Ltd. may extend the credit facility.

(2) Profitability:

1. `"G.P. Ratio"="G.P."/"Net Sales"xx100`
   `=(9,80,000)/(24,60,000)xx100`
   = 39.84%
2. `"N.P. Ratio"="N.P."/"Net Sales"xx100`
   `=(6,80,000)/(24,60,000)xx100`
   = 27.64%
3. `"Return on Capital Employed"="N.P."/"Capital employed"xx100`
   `=(6,80,000)/(34,24,000)xx100`
   = 19.86%
4. Comments: These ratios indicate that the profitability in terms of sales and profitability in terms of capital employed is quite good.

PRESENTATION OF INFORMATION:

Sales	24,60,000	100%	Cumulative Percentages
Cost of Purchases (Purchases Less Closing Stock)	14,80,000	60.16%	60.16%
Office & Selling Exp.	1,30,000	5.29%	65.45%
Depreciation	1,70,000	6.91%	72.36%
Net Profit	6,80,000	27.64%	100.00%
	24,60,000	100.00%

BAR DIAGRAM:

PIE CHART:

DEPICTION OF RATIOS:

(1)

(2)