Question

Manoj, Naresh and Om were commerce students. They had opted Computers as a vocational subject while doing their B.Com. They decided to start a computer business after doing their B.Com. They prepared a partnership deed containing the following clauses:

1. Name of the firm will be ‘First Computers.’
2. Capitals: Manoj will contribute 4,00,000 and Naresh and Om 3,00,000 each.
3. Profit Sharing Ratio: Profits will be shared in the ratio of capital contribution.
4. Interest on Capital: Interest on capital will be allowed @7% p.a. It will be allowed only when there is profit.
5. Interest on Drawings: Interest on drawings is to be charged @12% p.a.
6. Salary to a Partner: No partner is entitled to any salary or commission for taking part in the conduct of business.

     They started business on 1st April, 2022, and each partner deposited his share of capital in the bank.Account opened in Firm’s name. On the same date, they purchased 10 computers @ ₹60,000 each and made the payment from the bank.

     They deposited ₹20,000 for the electric connection with the Electricity Board and paid a deposit of ₹1,20,000 with VSNL for Internet and telephone connection.

     They got the Computer Cafe furnished by paying ₹30,000. They also spent ₹5,000 on advertisement.

     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	80,000
Revenue from fees received from students	2,40,000
Revenue on account of Internet facility	2,10,000
Revenue from sale of computer stationery	1,50,000
Wages paid to servant	9,600
Telephone Charges	62,000
Electricity Charges	36,000
Entertainment Expenses	5,500
Maintenance Expenses	6,000
Petty Expenses	4,000

     They withdrew from the bank for their personal use as follows: Manoj ₹50,000, Naresh ₹20,000, and Om ₹10,000.

You are required to:

1. Journalize the above transactions, post them into the ledger accounts, and prepare a trial balance.
2. Prepare a trading and profit & loss account and balance sheet, taking into consideration that a telephone bill of ₹15,000 and an electricity bill of ₹3,000 are yet to be paid.
3. Charge depreciation at the rate of 25% on computers and 15% on furniture.
4. Comment on the efficiency of the business if the gross profit ratio and net profit ratio in similar types of business concerns are 45% and 20%, respectively.
5. They approached the bank for a loan of ₹4,00,000. Compute the ratios that the banker will require before granting the loan.

Answer 1

Journal Entries
Date	Particulars	Debit (₹)	Credit (₹)
2019
Apr. 1	Bank A/c   ...Dr.	10,00,000	-
	To Manoj’s Capital A/c	-	4,00,000
	To Naresh’s Capital A/c	-	3,00,000
	To Om’s Capital A/c	-	3,00,000
	(Being capital introduced by partners)
Apr. 1	Computers A/c   ...Dr.	6,00,000	-
	To Bank A/c	-	6,00,000
	(Being purchase of 10 computers @ ₹60,000 each)
Apr. 1	Electricity Deposit A/c   ...Dr.	20,000	-
	To Bank A/c	-	20,000
	(Being deposit paid for electric connection)
Apr. 1	VSNL Deposit A/c   ...Dr.	1,20,000	-
	To Bank A/c	-	1,20,000
	(Being deposit paid for internet and telephone connection)
Apr. 1	Furniture A/c   ...Dr.	30,000	-
	To Bank A/c	-	30,000
	(Being computer cafe furnished)
Apr. 1	Advertisement Expense A/c   ...Dr.	5,000	-
	To Bank A/c	-	5,000
	(Being advertisement expenses paid)
-	Computer Stationery Purchase A/c   ...Dr.	80,000	-
	To Bank A/c	-	80,000
	(Being purchase of computer stationery)
-	Bank A/c   ...Dr.	2,40,000	-
	To Fees Received A/c	-	2,40,000
	(Being revenue from fees received)
-	Bank A/c   ...Dr.	2,10,000	-
	To Internet Revenue A/c	-	2,10,000
	(Being revenue from internet facility)
-	Bank A/c   ...Dr.	1,50,000	-
	To Sale of Stationery A/c	-	1,50,000
	(Being revenue from sale of computer stationery)
-	Wages Expense A/c   ...Dr.	9,600	-
	To Bank A/c	-	9,600
	(Being wages paid to servant)
-	Telephone Charges A/c   ...Dr.	62,000	-
	To Bank A/c	-	62,000
	(Being telephone charges paid)
-	Electricity Charges A/c   ...Dr.	36,000	-
	To Bank A/c	-	36,000
	(Being electricity charges paid)
-	Entertainment Expenses A/c   ...Dr.	5,500	-
	To Bank A/c	-	5,500
	(Being entertainment expenses paid)
-	Maintenance Expenses A/c   ...Dr.	6,000	-
	To Bank A/c	-	6,000
	(Being maintenance expenses paid)
-	Petty Expenses A/c   ...Dr.	4,000	-
	To Bank A/c	-	4,000
	(Being petty expenses paid)
-	Drawings A/c (Manoj)   ...Dr.	50,000	-
	Drawings A/c (Naresh)   ...Dr.	20,000	-
	Drawings A/c (Om)   ...Dr.	10,000	-
	To Bank A/c	-	80,000
	(Being drawings withdrawn by partners)
2020
Mar. 31	Telephone Expenses A/c   ...Dr.	15,000	-
	To Telephone Creditors A/c	-	15,000
	(Being telephone bill outstanding)
Mar. 31	Electricity Expenses A/c   ...Dr.	3,000	-
	To Electricity Creditors A/c	-	3,000
	(Being electricity bill outstanding)

Ledger Accounts:

(1)

Dr.	Manoj’s Capital Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	4,00,000	By Drawings	50,000
		By Balance c/d	3,50,000
	4,00,000		4,00,000

(2)

Dr.	Naresh’s Capital Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	3,00,000	By Drawings	20,000
		By Balance c/d	2,80,000
	3,00,000		3,00,000

(3)

Dr.	Om’s Capital Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Balance b/d	3,00,000	By Drawings	20,000
		By Balance c/d	2,80,000
	3,00,000		3,00,000

(4)

Dr.	Bank Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Capital A/c	10,00,000	By Computers A/c	6,00,000
To Fees Received	2,40,000	By Electricity Deposit	20,000
To Internet Revenue	2,10,000	By VSNL Deposit	1,20,000
To Sale of Stationery	1,50,000	By Furniture A/c	30,000
		By Advertisement Expense	5,000
		By Purchase of Stationery	80,000
		By Wages Expense	9,600
		By Telephone Charges	62,000
		By Electricity Charges	36,000
		By Entertainment Expenses	5,500
		By Maintenance Expenses	6,000
		By Petty Expenses	4,000
		By Drawings	80,000
		By Balance c/d (closing bank balance)	1,61,900

(5)

Dr.	Computers Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Bank A/c	6,00,000	By Depreciation A/c (25%)	1,50,000
		By Balance c/d	1,50,000
	6,00,000		6,00,000

(6)

Dr.	Furniture Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Bank A/c	30,000	By Depreciation A/c (15%)	4,500
		By Balance c/d	25,500
	30,000		30,000

(7)

Trial Balance as on 31st March 2020
Particulars	Debit (₹)	Credit (₹)
Computers (Net)	4,50,000
Furniture (Net)	25,500
Electricity Deposit	20,000
VSNL Deposit	1,20,000
Advertisement Expense	5,000
Wages Expense	80,000
Telephone Charges	9,600
Electricity Charges	62,000
Entertainment Expenses	36,000
Maintenance Expenses	5,500
Maintenance Expenses	6,000
Petty Expenses	4,000
Drawings	80,000
Bank Balance	1,61,900
Fees Received		2,40,000
Internet Revenue		2,10,000
Sale of Stationery		1,50,000
Telephone Creditors		15,000
Electricity Creditors		3,000
Manoj’s Capital		3,50,000
Naresh’s Capital		2,80,000
Om’s Capital		2,90,000
Depreciation		1,54,500
Total	9,45,100	9,45,100

(8) Trading and Profit & Loss Account for the year ended 31^st March 2020:

Dr.	Trading Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Opening Stock	-	By Sales (Stationery)	1,50,000
To Purchases (Stationery)	80,000	By Closing Stock (assumed 0)	0
To Gross Profit c/d (balancing figure)	70,000
Total	1,50,000	Total	1,50,000

(9) 

Dr.	Profit & Loss Account		Cr.
Particulars	Amount (₹)	Particulars	Amount (₹)
To Advertisement Expense	5,000	By Gross Profit b/d	1,50,000
To Wages Expense	9,600	By Fees Received	2,40,000
To Telephone Charges (62,000 + 15,000)	77,000	By Internet Revenue	2,10,000
To Electricity Charges (36,000 + 3,000)	39,000
To Entertainment Expenses	5,500
To Maintenance Expenses	6,000
To Petty Expenses	4,000
To Depreciation	1,54,500
To Interest on Capital (7% on total capital ₹10,00,000)	70,000
To Interest on Drawings (Manoj ₹50,000, Naresh ₹20,000, Om ₹10,000 at 12%)	9,600
To Net Loss c/d (balancing figure)	1,04,200
Total	4,80,400	Total	4,80,400

(10)

Balance Sheet as on 31st March 2020
Liabilities	Amount (₹)	Assets	Amount (₹)
Capitals: Manoj	3,50,000	Computers (Net)	4,50,000
Capitals: Naresh	2,80,000	Furniture (Net)	25,500
Capitals: Om	2,90,000	Electricity Deposit	20,000
Telephone Creditors	15,000	VSNL Deposit	1,20,000
Electricity Creditors	3,000	Bank Balance	1,61,900
Net Loss	1,04,200
Total	10,24,200	Total	10,24,200

(11) Depreciation Calculation:

• Computers: 25% on ₹6,00,000 = ₹1,50,000
• Furniture: 15% on ₹30,000 = ₹4,500

(12) Gross Profit Ratio and Net Profit Ratio:

• Gross Profit = ₹70,000
• Net Loss = ₹1,04,200 (Net Profit is negative)
• Sales = ₹1,50,000 (stationery) + ₹2,40,000 (fees) + ₹2,10,000 (internet) = ₹6,00,000

Gross Profit Ratio = `"Gross Profit"/"Sales"xx100`

= `(70,000)/(6,00,000)xx100`

∴ Gross Profit Ratio = 11.67%

Net Profit Ratio = `"Net Profit"/"Sales"xx100`

= `(-1,04,200)/(6,00,000)xx100`

∴ Net Profit Ratio = −17.37%

Note: Both ratios are significantly below the industry averages (45% Gross Profit Ratio and 20% Net Profit Ratio), indicating poor business efficiency and profitability.

(13) Ratios for Bank Loan Assessment:

1. Current Assets = Bank Balance + Electricity Deposit + VSNL Deposit 
   = ₹1,61,900 + ₹20,000 + ₹1,20,000 
   = ₹3,01,900
2. Current Liabilities = Telephone Creditors + Electricity Creditors
   = ₹15,000 + ₹3,000
   = ₹18,000
3. Current Ratio = `"Current Assets"/"Current Liabilities"`
   = `(3,01,900)/(18,000)` ≈ 16.77 : 1 (Very strong liquidity)
4. Debt-Equity Ratio = `"Total Debt"/"Total Equity"`
   Debt = Current Liabilities = ₹18,000 (no long-term debt mentioned)
   Equity = Capitals − Net Loss
   = (₹3,50,000 + ₹2,80,000 + ₹2,90,000) − ₹1,04,200
   = ₹8,15,800
   ∴ Debt-Equity Ratio = `(18,000)/(8,15,800)` ≈ 0.022 : 1 (Very low debt)
5. Proprietary Ratio = `"Proprietor’s Funds" / "Total Assets"`
   Proprietor’s Funds = Capitals − Net Loss
   = (₹3,50,000 + ₹2,80,000 + ₹2,90,000) − ₹1,04,200
   = ₹8,15,800
   Total Assets = ₹10,42,200
   ∴ Proprietary Ratio = `(8,15,800)/(10,42,200)` ≈ 0.783 or 78.3%