According to annuity method, the purchase of the asset concerned is considered an investment of capital, earning interest at certain rate. The cost of the asset and also interest thereon are written down annually by equal installments until the book value of the asset is reduced to nil or its bread up value at the end of its effective life. The annual charge to be made by way of depreciation is found out from annuity tables.

The annual charge for depreciation will be credited to asset account and debited to depreciation account, while the interest will be debited to asset account and credited to interest account.

Thus depreciation to be charged = lease value × the annuity = Rs. 9,996.55

Balance of lease A/C at the end of the first year will be = 60,000 – 9,996.55 = Rs. 50,003.45

Fixed installment or straight line method depreciates cost evenly throughout the useful life of the fixed asset.

Straight line depreciation is calculated as follows:

Depreciation per annum = (Cost – Residual Value) / Useful Life Where:

Cost includes the initial and any subsequent capital expenditure.

Residual Value is the estimated scrap value at the end of the useful life of the asset. As the residual value is expected to be recovered at the end of an asset’s useful life, there is no need to charge the portion of cost equaling the residual value.

Useful Life is the estimated time period an asset is expected to be used from the time it is available for use to the time of its disposal or termination of use.

Here Cost of the asset as on Jan 1 2007 = Rs. 5,200

Salvage value = Rs. 200

Depreciation/year = (5,200 – 200)/10 = Rs. 500

Depreciation for 3 years = 500 × 3 = Rs. 1,500

So balance of furniture account at the end of third year = 5,200 – 1,500 = Rs. 3,700

Sale of plant and machinery is a capital receipt, not reserve.

Gross profit is a company’s revenue minus its cost of goods sold. Gross profit is a company’s residual profit after selling a product or service and deducting the cost associated with its production and sale.

Cost of goods sold is the direct costs attributable to the production or purchase of the goods sold by a company. It excludes indirect expenses such as distribution costs and sales force cost.

Cost of goods sold in the above case = opening inventory + purchases + carriage inward + wages – goods sent on consignment = 14,500 + 75,995 + 1,700 + 825 – 20,000 = 73,020

Gross profit = sales – cost of goods sold = 93,750 – 73,020 = Rs. 20,730

A Bank reconciliation is a process that explains the difference between the bank balance shown in an organisation’s bank statement, as supplied by the bank, and the corresponding amount shown in the organization’s own accounting records at a particular point in time.

Such differences may occur, for example, because a cheque or a list of cheques issued by the organization has not been presented to the bank, a banking transaction, such as a credit received, or a charge made by the bank, has not yet been recorded in the organisation’s books, or either the bank or the organization itself has made an error.

A Bank reconciliation is a process that explains the difference between the bank balance shown in an organisation’s bank statement, as supplied by the bank, and the corresponding amount shown in the organization’s own accounting records at a particular point in time.

Such differences may occur, for example, because a cheque or a list of cheques issued by the organization has not been presented to the bank, a banking transaction, such as a credit received, or a charge made by the bank, has not yet been recorded in the organisation’s books, or either the bank or the organization itself has made an error.

Machinery is a Capital asset, not to be included in current assets.

We know that Credit sales = closing receivables + cash received from receivables + bad debts + return inwards – opening receivables

Thus cash received from customers = credit sales – closing receivables – bad debts – return inwards + opening receivables

Here Total sales during the year amounted to Rs. 70,000; Cash sales Rs. 10,000; Balance of trade receivables at the end of the year Rs. 25,000.

So credit sales = 70,000 – 10,000 = Rs. 60,000

Cash received from customers = 60,000 – 25,000 = Rs. 35,000

Gross profit is a company’s revenue minus its cost of goods sold. Gross profit is a company’s residual profit after selling a product or service and deducting the cost associated with its production and sale.

Cost of goods sold is the direct costs attributable to the production or purchase of the goods sold by a company. It excludes indirect expenses such as distribution costs and sales force cost.

Cost of goods sold in the above case = opening inventory + purchases – closing inventory = 4,000 + 20,000 – 3,000 = Rs. 21,000

Profit = sales – cost of goods sold = Rs. 30,000 – 21,000 = Rs. 9,000

Capital reserves are credited out of capital profits and not revenue profits. Provisions are charges against profits. P&L A/c balance is revenue in nature.