LATIF KHAN, ARCHITECT

In 1976, Mr Latif Khan retired from service as the chairman of Urban Planning Board of a
State Government in Western India did set himself up as a consulting architect. While his
primary interest was in town planning and building institutional complexes he also advised
some wealthy clients on designing their residential homes. Khan was somewhat allergic to
accounting as he felt that it stifled creative and innovative abilities. However, when he received a
notice from the Income-tax Officer around early July 1982 asking him to submit his tax return
along with the required financial statements, i.e. a profit and loss statement in respect of his
operations as well as a balance sheet as at March 31, 1982, he felt that some attempt had to be
made to put together a set of accounts to satisfy the tax authorities.
He requested Miss Joshi, the young lady who acted as his secretary to collect all the necessary
details relating to billing made, cash received, expenses incurred, assets held and outstanding
amounts due to suppliers and others during the relevant period so that some kind of a financial
statement could be prepared in response to the Income-tax Officer's request. After much effort
on the part of Khan and Miss Joshi, the following data were assembled.
1. His business assets consisted primarily of office furniture and equipment which were
acquired on October 1, 1976. It was decided that these assets should be depreciated at
the rate of 10% per year. The acquisition cost of these assets was Rs 350,000.
2. The office records showed that the following cash had been received during the year
ended March 31, 1982.
Collections relating to bills raised on clients between the
period April 1, 1981 to March 31, 1982
(b) Collections in respect of prior periods' billings
(c) Dividends and interest received from stocks and debentures
(a)

TOTAL

17,50,000
5,95,000
1,19,000
24,64,000

A thorough analysis of the stubs of used cheque books disclosed that the following payments
were made during that period:

Salaries of architects

Expenses
Relating to Expenses
relating
to
Previous Year
Current Year
11,900
10,39,920

Supplies used

57,400

3,45,450

Rent for Office Premises

14,000

1,70,800

Professional association Fees

Shares purchased

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35,000
1,68,000

Amount withdrawn by Khan

for personal expenses
Miscellaneous expenses (Selling,
Advertising & Administration)
Total

5,60,000
5,600

1,20,400

88,900

24,39,570

Khan knew that there were shares and debentures worth Rs 3,500,000 at the beginning
of the accounting period. At his request, Miss Joshi looked up the cash book and found
that the cash balance at the end of the working day on March 31, 1981 was Rs 112,000.
She found that die following bills in respect of expenses relating to the period ending
March 31, 1982 were outstanding on April 1, 1982: Salaries Rs 17500; Rent Rs
16800; Supplies Rs 45150; Miscellaneous Expenses Rs 1750. The inventory of
supplies material as at the end of March 31, 1982 was Rs 70,000.
Khan was rather happy about the fact that while actual billings during the March 31,
1982 period were Rs 20,79,000 the cash received was Rs 24,64,000. However, he was
quite shocked when Miss Joshi informed him that some of the clients, including some of
the very wealthy ones who had consulted him for designing private residential homes,
had refused to pay as they believed that the advice was given on the basis of the
personal friendship which they had with him. They pointedly mentioned that they were
rather shocked to receive bills for professional services and maintained that since there
was no legal contract, they were not liable to pay up the amounts billed. The estimates
of such uncollectible amounts came to Rs 37,800 in respect of billings made during the
period April 1, 1981 to March 31, 1982 and Rs 121,800 in respect of billings pertaining to
prior periods. Khan thought that he would have to be more careful in future before he gave
any professional advice, but in any case, it would not be worthwhile to get involved in
legal proceedings in order to recover all these amounts. He decided that the best course
would be to write off these claims.
When Khan submitted this information to the Income-tax Officer, he was instructed to
provide, without any further delay, a proper balance sheet as on March 31, 1982 and
profit and loss account for the period ended on that date. Khan was rather perplexed by
this request as he was not sure what additional information could possibly be provided to
the Income-tax Officer. However, he knew from his past experience that in the long run it
is advisable to comply with the instructions of Income-Tax officials rather than to raise
questions of logic. He has sought your help for the preparation of the financial statements
on the basis of the information set out above. Consider a tax rate of 40% for your
calculations.

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