Q.Mrs. Devi does not maintain double entry books. From the following details for the year ended 31.3.2023, prepare the Trading and Profit and Loss Account and the Balance Sheet as on that date. Opening Statement of Affairs (1.4.2022): Cash at Bank ₹12,000; Stock ₹35,000; Debtors ₹25,000; Machinery ₹50,000; Creditors ₹18,000. During the year: Additional Capital introduced (in cash) ₹20,000; Drawings in cash ₹22,000; Drawings in goods (at cost) ₹3,000; Credit Sales ₹1,90,000; Credit Purchases ₹1,20,000; Cash Sales ₹30,000; Cash Purchases ₹10,000; Cash received from Debtors ₹1,70,000; Cash paid to Creditors ₹1,00,000; Business Expenses paid ₹40,000. Balances as on 31.3.2023: Closing Stock ₹38,000; Closing Debtors ₹42,000; Closing Creditors ₹35,000. Depreciate Machinery by 10% p.a.

Here credit sales and credit purchases are already given directly, so the Conversion Method mainly involves computing net purchases after drawings-in-goods and then assembling the Trading, P&L, and Balance Sheet. …

Step 1: Opening Capital as on 1.4.2022

Opening Capital = (12,000 + 35,000 + 25,000 + 50,000) − 18,000 = 1,22,000 − 18,000 = ₹1,04,000

Step 2: Cash/Bank Summary for the year

Closing Bank balance = 2,32,000 − (10,000 + 1,00,000 + 40,000 + 22,000) = 2,32,000 − 1,72,000 = ₹60,000

Step 3: Total Purchases and Net Purchases

Total Purchases = Cash Purchases + Credit Purchases = 10,000 + 1,20,000 = ₹1,30,000

Less: Goods withdrawn for personal use (Drawings in goods, at cost) = ₹3,000

Net Purchases (for Trading Account) = 1,30,000 − 3,000 = ₹1,27,000

Step 4: Trading Account for the year ended 31.3.2023

Step 5: Profit and Loss Account for the year ended 31.3.2023

An alternative way to handle drawings in goods is to debit the Drawings account (not the Purchases account) with ₹3,000 and credit Purchases directly in the Trading Account — the net effect on both Gross Profit and Capital is identical either way, as long a …

The most common error is forgetting to deduct the ₹3,000 of drawings in goods from purchases (which overstates cost of goods sold and understates gross profit) while simultaneously forgetting to add it to total d …