Page 196 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 13. Creation of Reserve: The term reserve is most commonly used to describe any part of
shareholders’ equity, except for basic share capital.
Equity reserves are created from several possible sources:
(a) Reserves created from shareholders’ contributions, the most common examples of
which are:
 Legal reserve fund: It is required in many legislations and it must be paid as a
percentage of share capital

 Share premium: amount paid by shareholders for shares in excess of their
nominal value
(b) Reserves created from profit, especially retained earnings, i.e. accumulated
accounting profits. However, profits may be distributed also to other types of
reserves, for example:
 Legal reserve fund from profit: many legislations require creation of the fund
as a percentage of profits

 Remuneration reserve: will be used later to pay bonuses to employees or
management.
 Translation reserve: arises during consolidation of entities with different
reporting currencies
Reserve is the profit achieved by a company where a certain amount of it is put back into
the business which can help the business in their rainy days.
14. Sales Tax: Sales tax is the tax paid by a business concern to the government on the sales
made by it. In can be deducted from sales. Alternatively, it can be treated as selling
expense and can be entered on the debit side of the profit & loss account.
15. Income tax and life insurance premium: These are personal expenses of the proprietor and
should be treated as drawings. Since these are drawings they should be deducted from
capital on the liabilities side of the balance sheet.

Illustration 17: From the following trial balance of Mr. Nagaraj prepare the final accounts.
Trial balance as on March 31, 2011
Ledger Accounts Debit Credit
( ) ( )
Land and Buildings 50,000
Purchases 1,10,000
Stock 40,000
Returns 1,500 2,500
Wages 10,000
Salaries 9,000
Office expenses 2,400
Carriage inwards 1,200
Carriage outwards 2,000
Discounts 750 1,200
Bad debts 1,200
Sales 2,05,000
Capital account 1,30,000
Insurance 1,500
Contd...
Commission 1,500
Plant and Machinery 50,000
Furniture and Fixtures 10,000
190 LOVELY PROFESSIONAL UNIVERSITY
Bills Receivable 20,000
Sundry debtors and creditors 40,000 25,000
Cash in hand 1,500
Cash at bank 4,500
Office equipment 12,000
Bills payable 2,350
Total 3,67,550 3,67,550