FINAL ACCOUNTS vis-à-vis Financial Statements
Samir K Mahajan
CLASSIFICATION OF FINAL ACCOUNT
Trial balance proves the arithmetical accuracy of the business transactions, but it is not the end.
The businessman is interested in knowing whether the business has resulted in profit or loss and
what the financial position of the business is at a given period. In short, he wants to know the
profitability and the financial soundness of the business. The trader can ascertain these by
preparing the final accounts. The final accounts are prepared at the end of the year from the trial
balance. Hence the trial balance is said to be the connecting link between the ledger accounts
and the final accounts.
CLASSIFICATION OF FINAL ACCOUNT contd.
The basic objectives of preparing financial statements are :
(a) To present a true and fair view of the financial performance of the business;
(b) To present a true and fair view of the financial position of the business; and
For this purpose, the firm usually prepares the following financial statements:
1. Trading and Profit and Loss Account
2. Balance Sheet
 Trading and Profit and Loss account, also known as Income statement, shows the financial
performance in the form of profit earned or loss sustained by the business.
 Balance Sheet shows financial position in the form of assets, liabilities and capital. These are
prepared on the basis of trial balance and additional information, if any.
TRADING AND PROFIT AND LOSS ACCOUNT
Trading and Profit and Loss account is prepared to determine the profit earned or loss sustained by
the business enterprise during the accounting period.
 It is basically a summary of revenues and expenses of the business and calculates the net figure
termed as profit or loss. Profit is revenue less expenses.
 If expenses are more than revenues, the figure is termed as loss. Trading and Profit and Loss
account summarises the performance for an accounting period.
 It is achieved by transferring the balances of revenues and expenses to the trading and profit and
loss account from the trial balance.
Concept of Gross Profit and Net Profit
Trading and Profit and Loss account is also an account with Debit and Credit sides. It can be
observed that debit balances (representing expenses) and losses are transferred to the debit side of
the Trading and a Profit and Loss account and credit balance (representing revenues/gains) are
transferred to its credit side.
The trading and profit and loss can be seen as combination of two accounts, viz. Trading account and
Profit and Loss account.
 The trading account or the first part ascertains the gross profit and
 profit and loss account or the second part ascertains net profit.
TRADING ACCOUNT
The trading account ascertains the result from basic operational activities of the business. The basic
operational activity involves the manufacturing, purchasing and selling of goods. It is prepared to
ascertain whether the selling of goods and/or rendering of services to customers have proved
profitable for the business or not.
Trading account ascertain gross profit or gross loss.
Gross Profit = Sales less return – (Purchases less return + Direct Expenses)
The gross profit or the gross loss is transferred to profit and loss account.
Trading Account contd.
ITEMS APPEARING IN THE DEBIT SIDE OF TRADING ACCOUNT
o Opening stock: Stock on hand at the beginning of the year is termed as opening stock. The closing
stock of the previous accounting year is brought forward as opening stock of the current
accounting year. In the case of new business, there will not be any opening stock.
o Purchases less returns : Purchases made during the year, includes both cash and credit purchases
of goods. Purchase returns must be deducted from the total purchases to get net purchases.
ITEMS APPEARING IN THE DEBIT SIDE OF TRADING ACCOUNT contd.
Trading Account contd.
Direct Expenses: Direct expenses means all expenses directly connected with the manufacture,
purchase of goods and before bringing them to the point of sale. Some of the direct expenses are:
i.
Wages: It means remuneration paid to workers.
ii. Carriage (Freight or cartage) or carriage inwards: It means the transportation charges paid to
bring the goods from the place of purchase to the place of business.
iii. Octroi Duty: Amount paid to bring the goods within the municipal limits.
iv. Customs duty, dock dues, clearing charges, import duty etc. These expenses are paid to the
Government on the goods imported.
v. Factory rent paid
vi. Other expenses : Fuel, power, lighting charges, oil, grease, waste related to production and
packing expenses
Trading Account contd.
ITEMS APPEARING IN THE CREDIT SIDE OF TRADING ACCOUNT
o Sales less returns: This includes both cash and credit sale made during the year. Net sales is
derived by deducting sales return from the total sales.
o Closing stock: Closing stock is the value of goods which remain in the hands of the trader at the
end of the year. It does not appear in the trial balance. It appears outside the trial balance. (As
it appears outside the trial balance, first it will be recorded in the credit side of the trading
account and then shown in the assets side of the balance sheet).
Trading Account contd.
ITEMS APPEARING IN THE CREDIT SIDE OF TRADING ACCOUNT contd.
BALANCING OF TRADING ACCOUNT
The difference between the two sides of the Trading Account, indicates either Gross Profit or
Gross Loss. If the credit side total is more, the difference represents Gross Profit. On the other
hand, if the total of the debit side is more, the difference represents Gross Loss.
o The Gross Profit or Gross Loss is transferred to Profit & Loss Account.
Format of Trading Account
Dr
Trading Account for the year ending 31st March ………….
Cr
Particulars (expenses /loss)
Rs
Rs
To Opening Stock
To Stock:
Raw materials
Work in progress
Semi-finished goods
Finished goods
To Purchases
Less: Returns outward or purchase return
Less: goods taken away by proprietor
Less: goods given as free samples
Less goods: given as charity
To direct wages or manufacturing wages
To Freight or carriage inwards or purchase carriage
To octroi duty or local taxes
To import duties, customs,
To Clearing charge, landing charges, Dock duties
To power (factory)
To fuels
To coal, gas, water
To heating, lighting
To manufacturing expenses
To packing expenses
to assembling expenses
To royalty
To gross profit c/d
(Transferred to P&L A/C)
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Rs
Particulars (revenue/gains)
Rs
XXX
By Sales
Less: Returns inwards
By Closing stock
By Gross Loss c/d
(Transferred to P&L A/C)
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
xxx
xxx
CLOSING ENTRIES OF TRADING ACCOUNT
Like ledger accounts, trading account will be closed by transferring the gross profit or gross loss to the profit and loss
account.
If gross profit
Date
2013
January 1
Particular
Debit
Amount (Rs)
L.F.
Trading A/c
Dr
To profit and loss account
(Gross Profit transferred to Profit and loss A/c)
Credit
Amount (Rs)
xxx
xxx
If gross loss
Date
2013
January 1
Particular
Profit and loss A/c
Dr
To Trading A/C
(Gross Loss transferred to Profit and loss A/c)
L.F.
Debit
Amount (Rs)
Credit
Amount (Rs)
xxx
xxx
PROFIT AND LOSS ACCOUNT
After calculating the gross profit or gross loss the next step is to prepare the profit and loss account. To earn
net profit a trader has to incur many expenses apart from those spent for purchases and manufacturing of
goods. If such expenses are less than gross profit, the result will be net profit. When total of all these
expenses are more than gross profit the result will be net loss.
The aim of profit and loss account is to ascertain the net profit earned or net loss suffered during a particular
period.
Net Profit = Gross profit + Other incomes – Indirect Expenses
PROFIT AND LOSS ACCOUNT contd.
ITEMS APPEARING IN THE DEBIT SIDE 0F PROFIT AND LOSS ACCOUNT
Those expenses which are chargeable to the normal activities of the business are recorded in the debit side
of profit and loss account. They are termed as indirect expenses which include:
 Office and Administrative Expenses :Expenses incurred for the functioning of an office such as office
salaries, office rent, godown rent, municipal rates and taxes office lighting, printing and stationery,
postages, telephone charges office.
 Repairs and Maintenance Expenses :Expenses relates to the maintenance of assets such deprecation,
repairs and small renewals/ replacements relating to plant and machinery, furniture, fixtures, fittings,
etc
 Financial Expenses :Expenses incurred on borrowings – interest paid on loan, Bad debts,
 Selling and Distribution Expenses :All expenses relating to sales and distribution of goods such as:
advertising, travelling expenses, salesmen salary, commission paid to salesmen, discount allowed,
repacking charges etc.
PROFIT AND LOSS ACCOUNT contd.
ITEMS APPEARING IN THE CREDIT SIDE 0F PROFIT AND LOSS ACCOUNT contd.
Besides the gross profit, other gains and incomes of the business are shown on the credit side. The
following are some of the incomes and gains.
o
o
o
o
o
Dividend received on investment
Interest received on fixed deposits.
Discount earned.
Commission earned.
Rent Received
PROFIT AND LOSS ACCOUNT contd.
ITEMS APPEARING IN THE CREDIT SIDE 0F PROFIT AND LOSS ACCOUNT contd.
BALANCING 0F PROFIT AND LOSS ACCOUNT
The difference between the two sides of profit and loss account indicates either net profit or net loss. If the
total on the credit side is more the difference is called net profit. On the other hand if the total of debit
side is more the difference represents net loss. The net profit or net loss is transferred to capital account.
Dr
Profit and Loss Account for the year ended 31 March, …….
Particulars (expenses /loss)
Rs
Particulars (revenue/gains)
Rs
To Trading A/c (Gross loss)
xxx
By Trading A/c (Gross profit)
xxx
To Salaries
xxx
By Commission earned
xxx
To rents and rates
xxx
By Rent received
xxx
To stationaries
xxx
By Interest received
xxx
To postage expenses
xxx
By Discount received
xxx
To insurance
xxx
By Net Loss(Transferred to Capital A/c)
xxx
To repairs
xxx
To trading expenses
xxx
To office dues
xxx
To interest paid
xxx
To bank charges
xxx
To sundry expenses
xxx
To Commission paid
xxx
To Discount allowed
xxx
To Advertisement
xxx
To Carriage outwards
xxx
To Travelling expenses
xxx
To Distribution expenses
xxx
To Repacking charges
xxx
Bad debts
xxx
Depreciation
xxx
To Net Profit (transferred capital A/C)
xxx
xxx
Cr
xxx
CLOSING ENTRIES OF 0F PROFIT AND LOSS ACCOUNT
Like ledger accounts, trading account will be closed by transferring the gross profit or gross loss to the profit and loss
account.
If net profit
Date
2013
January 1
Particular
L.F.
Profit and Loss A/c
To Capital A/C
(Net Profit transferred to Capital A/C )
Debit
Amount (Rs)
Credit
Amount (Rs)
Dr
xxx
xxx
If net loss
Date
2013
January 1
Particular
Capital A/c
To Profit and Loss A/C
(Net loss transferred to capital A/C)
L.F.
Debit
Amount (Rs)
Credit
Amount (Rs)
Dr
xxx
xxx
CLOSING ENTRIES OF 0F PROFIT AND LOSS ACCOUNT
Like ledger accounts, trading account will be closed by transferring the gross profit or gross loss to the profit and loss
account.
If net profit
Date
2013
January 1
Particular
L.F.
Profit and Loss A/c
To Capital A/C
(Net Profit transferred to Capital A/C )
Debit
Amount (Rs)
Credit
Amount (Rs)
Dr
xxx
xxx
If net loss
Date
2013
January 1
Particular
Capital A/c
To Profit and Loss A/C
(Net loss transferred to capital A/C)
L.F.
Debit
Amount (Rs)
Credit
Amount (Rs)
Dr
xxx
xxx
PROFIT AND LOSS ACCOUNT contd.
Operating profit
It is the profit earned through the normal operations and activities of the business. Operating
profit is the excess of operating revenue over operating expenses.
While calculating operating profit, the incomes and expenses of a purely financial nature are
not taken into account.
Thus, operating profit is profit before interest and tax (EBIT). Similarly, abnormal items such
as loss by fire, etc. are also not taken into account. It is calculated as follows
Operating profit = Net Profit + Non-Operating Expenses – Non-Operating Incomes
Dr
Rs
Purchase
Sales
Returns inward
Opening stock
Freight outward
Carriage inward
Salaries and wages
Rents and taxes
Ravelling expenses
Discount
Commission
Bank A/C
Trade creditors
Sundry debtors
Capital A/C
Drawing A/C
Cr
Rs
Illustration1: Prepare a trading account from the
following trial balance of Tuli Hotel as on 31 march,
2013
15750
Closing stock was estimated at Rs. 12,000
21000
600
13000
65
50
572
226
187
115
108
6647
N.B.
2700
4380
4300
200
43700
43700
Closing stock derived from trial balance must be shown
in income statement (CR)
Closing stock unless derived from trial balance must be
shown in both income statement (CR) and balance sheet
(asset/Dr)
Illustration1:
Trading Account of Tuli Hotel
for the year ended 31st March, 2014
Dr
Expenses/Losses
To Opening stock
To Purchase
To carriage Inward
To Gross Profit transferred to P/L A/C
Cr
Amount
Rs
Revenue/Gain
13000 By Sales
15750
Less: Returns
50 By Closing stock
3600
32400
21000
600
Amount
Rs
20400
12000
32400
Illustration2: Prepare a profit and loss account from the following information
Particulars
Carriage on purchases
Carriage on sales
Duty on export
lighting
Water and electricity
advertisement
Rs
2000
1000
2020
1050
2120
100
Particulars
Salaries – factory’s manager
Office manger
Gross profit
Rent received
Rent paid
Commission (CR)
Rs
2200
1500
15200
1500
500
1200
Illustration2:
Profit and Loss Account
Dr
Expenses/Losses
To carriage on sales
To duty on export
To lighting
To water and electricity
To advertisement
To salaries –office
To Rent paid
To Net Profit transferred to P/L A/C
Cr
Amount
Rs
Revenue/Gain
1000 By gross profit
2020 By rent received
1050 By Commission
2120
100
1500
500
9610
17900
Amount
Rs
15200
1500
1200
17900
Name Account
Illustration3: Prepare a Trading
Account and Profit & Loss
account from the following
trial balance of Tali and Sons as
on 31 March, 2002
Adjustment: Stock on 31st March, 2002
was valued at Rs. 1300
Tali’s capital
Tali’s drawings
Purchase and sale
Sales and purchase return
Stock (1-4-2001)
Wages
Building
Freight and carriage
Trade expenses
Advertisement
Interest
Taxes and insurance
Debtors and creditors
Bills receivables and bills payables
Cash at bank
Cash in hand
Salaries
Dr
Rs
Cr
Rs
29000
760
8900
280
1200
800
2200
2000
200
240
15000
450
350
130
6500
1500
1200
190
800
46700
1200
700
46700
Illustration3:
Trading and Profit and Loss Account of Tali and Sons
for the year ended 31st March, 2002
Dr
Cr
Expenses/Losses
To Stock (1-4-2001)
To Purchase
Less: Return
To wage
To freight and carriage
To Gross profit c/d
Amount
Rs
1200 By Sales
8900
450
Revenue/Gain
15200
8450 Less: Return 280
800 By Closing stock
2000
3770
16220
To trade expenses
To Advertisement
To taxes and insurance
To salaries
To Net profit transferred to Capital A/C
Amount
Rs
14920
1300
16220
200 By Goss profit b/d
240 By Interest
130
800
2750
3770
350
4120
4120
BALANCE SHEET contd.
Liabilities and Capital
Fixed Liabilities
Loans
Debentures
Mortgages
Balance Sheet
Amount(Rs)
Assets
Fixed Assets
Lands
Building
Plants & machines
Fixtures & filings
Capital / Owner’s Equity
Investments
Reserves and Surpluses
Current Assets
Cash in hand & bank
Stock of inventories
Sundry debtors
Receivables
Prepaid expenses
Accrued income
Current Liabilities
Short term loans
sundry creditors
Bills payable
Outstanding expenses
Amount(Rs)
BALANCE SHEET
Balance sheet is defined as ‘a statement which sets out the assets and liabilities of a business firm and which serves to
ascertain the financial position of the same on any particular date’. This forms the second part of the final accounts. It is
a statement showing the financial position of a business. Balance sheet is prepared by taking up all personal accounts
and real accounts (assets and properties) together with the net result obtained from profit and loss account. On the left
hand side of the statement, the liabilities and capital are shown. On the right hand side, all the assets are shown.
Balance sheet is not an account but it is a statement prepared from the ledger balances. So we should not prefix the
accounts with the words ‘To’ and ‘By’.
BALANCE SHEET
The need for preparing a Balance sheet is as follows:
i. To know the nature and value of assets of the business
ii. To ascertain the total liabilities of the business.
iii. To know the position of owner’s equity.
FORMAT OF BALANCE SHEET
The Balance sheet of a business concern can be presented in the following two forms
i. Horizontal form or the Account form
ii. Vertical form or Report form
Horizontal form of Balance Sheet:
The right hand side of the balance sheet is asset side and the left hand side is liabilities side. All accounts having
debit balance will appear in the asset side and all those having credit balance will appear in the liability side.
BALANCE SHEET contd.
Liabilities
The amount which a business owes to others is liabilities. Credit balance of personal and real accounts together
with the capital account are liabilities.
Long Term Liabilities: Liabilities which are repayable after a long period of time are known as Long Term
Liabilities. For example, capital, long term loans etc.
Drawings : Amount withdrawn by the proprietor is termed as drawings and has the effect of reducing the
balance on his capital account. Therefore, the drawings account is closed by transferring its balance to his capital
account. However it is shown by way of deduction from capital in the balance
Current Liabilities: Current liabilities are those which are repayable within a year. For example, creditors for
goods purchased, short term loans etc.
Contingent liabilities: It is an anticipated liability which may or may not arise in future. For example, liability
arising for bills discounted. Contingent liabilities will not appear in the balance sheet. But shown as foot note
BALANCE SHEET contd.
Assets
The properties and assets owned the business are assets. Debit balance of personal and real accounts together with the
capital account are assets.
Fixed Assets :Fixed assets are acquired for long term use in business. They are not meant for business transaction rather
are used to produce goods or service. Fixed assets includes, Lands, buildings, Machines and plants, Furniture's, fixtures,
fittings, Livestock
Current Assets : Currents assets / floating assets/circulating assets includes cash and other resources or assets which are
reasonably expected to be realised in cash, sold or consumed during normal operation of business.
Investments: Investments represent the funds invested in government securities, shares of a company, etc. They are
shown at cost price. If, on the date of preparation the balance sheet, the market price of investments is lower than the
cost price, a footnote to that effect may be appended to the balance sheet.
Intangible Assets: These are such assets which cannot be seen or touched. Goodwill, Patents, Trademarks are some of
the examples of intangible assets.
BALANCE SHEET contd.
Assets contd.
Current assets are most liquid assets meaning that they are either in cash or going to be converted into cash. Current
assets change their value constantly. Current assets include Cash in hand and bank, Stock of inventories of raw materials,
finished and semi-finished goods, Sundry debtors/book debt/buyers of goods on credit that have not paid yet to the
firm, account/ Bill receivables (bills drawn by the firm to buyers on credit and buyers have accepted.), prepaid expenses,
Accrued income
Investments: Investment includes purchase of in shares and debentures of other firms.
Illustration 4 : Prepare a
Trading Account and Profit &
Loss account
from the
following trial balance of Mr
Ram on 31 March, 20014 and
balance sheet on that date.
Adjustment: Closing Stock
valued at Rs. 50000
was
Name Account
Drawings and capital
Plant and machineries
Debtor and creditors
Purchase and sales
Returns
Wages
Cash in hand
Cash at bank
Salaries
Repairs
Stock
Rent
Manufacturing expenses
Bills receivables
Bills payables
Bad debts
Carriage inward
Furniture's
Dr
Rs
Cr
Rs
3000
80000
70000
110000
10000
40000
5000
10000
30000
8000
45000
10000
7000
12000
172000
50000
220000
7000
20000
5000
9000
15000
Illustration 4:
Trading and Profit and Loss Account of Mr Ram
for the year ended 31st March, 2002
Dr
Expenses/Losses
To Opening Stock
To Purchase
110000
Less: Return
7000
To Manufacturing Expenses
To carriage inward
To wage
To Gross profit c/d
Cr
Amount
Rs
Revenue/Gain
45000 By Sales
Less: Return
103000
7000 By Closing stock
9000
40000
56000
260000
To salaries
To Repairs
To Rent
To bad debts
To Net Profit transferred to Capital A/C
220000
10000
Amount
Rs
210000
50000
260000
30000 By Goss profit b/d
8000
10000
5000
3000
56000
56000
56000
Illustration4:
Balance Sheet of Mr Mr Ram
as on 31st March, 2002
Liabilities
Capital
Add: Net Profit
Less: Drawings
Sundry creditors
Bills Payables
Amount
Rs
172000
3000
175000
3000
Assets
Plant and machineries
Furniture
Bills receivables
172000 Sundry Debtors
Closing Stock
Cash at bank
50000 Cash in hand
20000
242000
Amount
Rs
80000
15000
12000
70000
50000
10000
5000
242000