Note on Funds Flow Statement- Adjustments 1/2

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  • Things to remember

Adjustments of Fund Flow Statement

While preparing ledgers, it is important to identify the inflow or outflow of funds on account of non-current account. They are as follows:

  • Opening balance (given in opening balance sheet)
  • Closing balance (given in closing balance sheet)
  • Additional information (if given)

Some important adjustments required are:

Adjustment related to fixed assets

If given any additional information on fixed assets, fixed assets account must be opened to find the hidden information. They can be opened as a gross concept or net concept, varying on the available information.

Dr. Tangible Fixed assets a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Balance b/d

To Cash (Purchase)

xxx

xxx

By Cash (Sales)

By Depreciation(if)

By Balance c/d

xxx

xxx

xxx

xxx

xxx


Dr. Fixed assets a/c (without depreciation) Cr.

Particulars

Rs.

Particulars

Rs.

To Balance b/d

To Cash (Purchase)

To Adjusted P/L a/c (Gain on sale)

xxx

xxx

xxx

By Cash (Sales)

By Adjusted P/L a/c (Loss on sale)

By Balance c/d

xxx

xxx

xxx

xxx

xxx


Dr. Adjusted Profit or Loss a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Net profit

To Loss on sale of fixed assets

xxx

xxx

By Gain on a sale of fixed assets (if)

xxx

xxx

xxx


Funds Flow statement

Sources of fund

Rs.

Uses of fund

Rs.

Sales on fixed assets

xxx

Purchases of fixed assets

xxx

xxx

xxx

Alternatively,

Sale of fixed assets = Opening balance – Closing balance + profit on sale or (– loss on sale)
= Decrease as per balance sheet + Profit on sale or (– loss on sale)

Purchase of fixed assets = Closing balance - Opening balance + Cost of sold part
= Increase as per balance sheet + Cost of sold part


Illustration:

Assets

2072 (in Rs.)

2073 (in Rs.)

Furniture

Plant & machinery

55,000

90,000

85,000

1,20,000

Additional information:

  • Furniture costing Rs. 25,000 was sold for Rs. 20,000.

Required: Ledger accounts


Solution:

Dr. Furniture a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Opening bal. b/d

To Cash bal.

55,000

55,000

By Sales

By Adjusted P/L a/c (Loss on sale)

By Closing bal. c/d

20,000

5,000

85,000

1,10,000

1,10,000


Dr. Plant & Machinery a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Opening bal. b/d

To Cash bal.

90,000

30,000

By Closing bal. c/d

1,20,000

1,20,000

1,20,000

Alternatively,

Purchase of furniture = Closing balance - Opening balance + Cost of sold part
= Increase as per balance sheet + Cost of sold part
= Rs. (85,000 – 55,000) + Rs. 25,000
= Rs. 55,000

Purchase of plant = Closing balance - Opening balance + Cost of sold part
= Increase as per balance sheet + Cost of sold part
= Rs. (1,20,000 – 90,000) + Rs. 0
= Rs. 30,000

Adjustment related to depreciation

The gradual decrease in the value of fixed assets due to their continuous use or permanent use is called depreciation. It is treated as an expense and debited in the P/L a/c. Following are the ways how depreciation affects the Balance sheet:

1. Net cost method:
Under this method, the depreciation charged during the year is debited in P/L account. Its specimen of fixed asset account is shown below:

Dr. Fixed assets a/c (Net) Cr.

Particulars

Rs.

Particulars

Rs.

To Balance b/d

To Cash (Purchase)

To Adjusted P/L a/c (Gain on sale)

xxx

xxx

xxx

By Depreciation (Adj. P/L Dr.)

By Cash (Sales)

By Adjusted P/L a/c (Loss on sale)

By Balance c/d

xxx

xxx

xxx

xxx

xxx

xxx



2. Gross cost method:
Under this method, a separate depreciation account appears either in the liabilities side or on the assets side (in the form of a deduction) of Balance sheet.


Dr. Fixed assets a/c (Gross) Cr.

Particulars

Rs.

Particulars

Rs.

To Balance b/d

To Cash (Purchase)

To Adjusted P/L a/c (Gain on sale)

xxx

xxx

xxx

By Acc. Dep. of sold part (Adj. P/L Dr.)

By Cash (Sales)

By Adjusted P/L a/c (Loss on sale)

By Balance c/d

xxx

xxx

xxx

xxx

xxx

xxx

Notes:

  • If accumulated depreciation is given in the balance sheet or in additional information, the depreciation charged for the year is not credited in assets a/c. Only the accumulated depreciation of the sold part or lost part is credited. The depreciation for the year is credited in accumulated depreciation account.
  • In the absence of accumulated depreciation, in both balance sheet and in additional information, the accumulated depreciation of the sold part or lost part is not taken into account. Only the depreciation for the year is credited to assets account.

Dr. Accumulated Depreciation a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Fixed assets a/c

To Balance c/d (Closing bal.)

xxx

xxx

By Balance b/d (Opening bal.)

By Adj. P/L a/c(Dep. for the year)

xxx

xxx

xxx

xxx

Dr. Adjusted P/L a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Net profit

To Depreciation on fixed assets

To Loss on sale of fixed assets

xxx

xxx

xxx

By Gain on sale of fixed assets (if)

xxx

xxx

xxx


Funds Flow statement

Sources of fund

Rs.

Uses of fund

Rs.

Sales on fixed assets

xxx

Purchases of fixed assets

xxx

xxx

xxx

Alternatively,

Purchase of assets = Gross difference as per balance sheet + Cost of sold part


Illustration:

Assets

2072 (in Rs.)

2073 (in Rs.)

Plant & machinery, at net value

2,00,000

3,50,000

Additional information:

  • During the year, accumulated depreciation at the beginning and at the end of the year is Rs. 60,000 and Rs. 1,10,000 respectively.
  • During the year, plant and machinery costing Rs. 1,00,000 was sold for Rs. 1,40,000.

Required: Plant & Machinery a/c


Solution:

Dr. Accumulated Depreciation a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Balance c/d

1,10,000

By P/L a/c (Dep. charged during the year)

By Balance b/d

50,000

60,000

1,10,000

1,10,000

Dr. Plant & machinery a/c Cr.

Particulars

Rs.

Particulars

Rs.

To Opening bal. b/d

To P/L a/c (Gain on sale)

To Cash bal.

2,00,000

40,000

2,60,000

By P/L a/c (dep. for the year)

By Cash (Sales)

By Closing bal. c/d

50,000

1,00,000

3,50,000

5,00,000

5,00,000

Note: Since, the opening and closing balance of accumulated amount do not appear in the balance sheet, the value of the asset given in the balance sheet is at net cost method (book value).

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu

  1. While preparing ledgers, it is important to identify the inflow or outflow of funds on account of non-current account. 
  2. The gradual decrease in the value of fixed assets, due to their continuous use or permanent use is called depreciation.
  3. Under Gross Cost Method, a separate depreciation account appears either in the liabilities side or in the assets side (in the form of deduction) of Balance sheet.
  4. If given any additional information on fixed assets, fixed assets account must be opened to find the hidden information.
.

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