FINAL
ACCOUNTS
With
adjustments
,
1
FINAL ACCOUNTS
• Final Accounts is the last step in the accounting
process. Trial Balance is prepared at the end of
all the accounting year to know the balances of
all the accounts & to test the arithmetic accuracy
of accounts. But the basic objective of
accounting is to know about the profit or loss
during the previous year & present financial
position. This can be known only if Trading
account and Profit & Loss account and Balance
Sheet are prepared at the end pf year. These are
also known as FINANCIAL STSTEMENTS which
are prepared.
From Trial Balance. Final Accounts include
the preparation of :
1) Trading and Profit & Loss account and
2) Balance Sheet
as these two statements are prepared to
give the final results of the business, both
of these are collectively called as final
accounts. Accounting cycle finally ends
with these statements as shown in next
slide:
ACCOUNTING CYCLE
TRANSACTIONS
Preparation of final accounts
(summary)
Preparation of
Trial Balance
(CHECKING THE
ACCURACY)
Entry in the books of
Original Entry
(ORIGINAL RECORD)
Posting in the concerned
Ledger account
(CLASSIFICATION)
Balancing of Real &
Personal accounts
Types of Financial Statement
Final accounts or financial statements can
be divided in two parts:-
1) Trading and Profit & Loss Account
2) Balance Sheet
Trading Account
Trading account is prepared by trading
concerns i.e., concerns which purchase
and sell finished goods, to know the gross
profit or gross loss incurred by them from
buying and selling of goods during a
particular period of time. Gross profit or
gross loss is the difference between the
cost of goods sold and the proceeds of
their sale. If the sale proceeds exceed the
cost of goods sold , gross profit is made.
Otherwise,gross loss is made.
Ascertainment of Cost of Goods Sold
Opening Stock
Add: Purchases
Less: Purchase Return
……….
…….
……. ………
Goods Available for Sales
……….
Add: Direct Expenses
……….
Less: Closing Stock
……….
Cost of Goods Sold
……….
Specimen Proforma of Trading Account
Dr
Trading Account of …….. For the year ending……... Cr
Particulars
Amt.
Particulars
Amt.
To Opening Stock
By Sales
To Purchases
Less: Returns
Less: Returns
By Closing Stock
To Direct
Expenses:
By Gross Loss c/d*
Carriage Inward
Wages
Wages & salaries
Fuel & power
Coal, water & gas
Octroi
Import Duty
Custom Duty
Excise Duty
Consumable Store
Factory Rent, Rates,
and Taxes
Foreman/ Works Manager’s
Salary
Royalty on manufactured
goods
To Gross Profit c/d*
Profit & Loss Account
For non-corporate business organisation Profit &
Loss account is second part of income
statement. It is prepared to know the net loss of
business during a particular period. Every
businessman has to spend on expenses other
than on manufacture or purchase of goods
which are called indirect expenses. There can be
other incomes except sales. So gross profit or
loss is adjusted keeping in view these indirect
expenses and other incomes to find out net
profit or net loss.
Proforma of Profit & Loss Account
Particulars
Amt
To Gross Loss b/d
To Establishment
Charges
To Administrative
Charges
To Selling &
Distribution
expenses
To Financial Charges
Particulars
Amt
By Gross Profit b/d
By other expenses
By Net Loss
(transferred to capital
account)
To Depreciation
& Provisions
To Abnormal
Losses
To Net Profit
(transferred to
Capital Account)
Balance Sheet
Balance Sheet is a component of financial
statements which shows balances of capital,
liabilities & assets. All nominal accounts are
closed by transferring these to Trading & Profit
& Loss Account. Only personal & real accounts
are left.
Balance Sheet is the final phase in accounting
cycle. It is a ‘mirror’ which reflects the true
position of the assets & liabities of the business
on a particular date.
“A statement of financial position of economic
unit disclosing as at a given moment of time its
assets, liabilities & ownership equities. Eric
L.kohler
Balance Sheet as on ……………………
Liabilities
Capital
Add: Net Profit
Less: Drawings
Fixed Liabilities:
Long term loan
Public deposits
Current Liabilities:
Unexpired Income
Short Term Loans
Trade Creditors
Bank Overdraft
Amt
Assets
Amt
Fixed Assets:
Goodwill
Land and Buildings
Plant & Machinery
Motor Vehicles
Furniture
Patents & Trade Marks
Live Stock
Loose Tools
Investments
Bill Payable
Outstanding
Expenses
Current Assets:
Closing Stock
Prepaid
Expenses
Accrued
Income
Debtors
Bill Receivable
Cash at Bank
Cash in hand
ADJUSTMENTS
CLOSING STOCK
The unsold goods lying in store at the
end of accounting year. Treatment:
Stock a/c Dr.
To Trading a/c
Two fold effect of adjustment will be :-
1) Show on Credit side of the Trading
account
2) On asset side of Balance Sheet
OUTSTANDING EXPENSES
Those expenses which have been incurred & not yet paid.
Treatment:
Expenses a/c Dr
To outstanding expenses
Two fold effect:
1.Will be shown on debit side of trading &
profit & loss a/c by way of addition to particular expense.
2. Will be shown on liabities side of Balance Sheet.
PREPAID EXPENSES
Those expenses which have been paid in advance
i.e., whose benefit will be available in future is
called prepaid expenses. Treatment:
Prepaid Expenses a/c Dr
To Expenses a/c
Two fold effect:
1.Will be shown in profit & loss a/c by way
deduction from particular expense.
2. Will be shown on asset side of Balance Sheet.
ACCRUED INCOME
That income which has been earned but not
received during the accounting year is called
accrued income. Treatment:
Accrued Income a/c Dr
To Income a/c
Two fold effect:
1.Will be shown on credit side of P & L a/c
2. Will be shown on asset side of Balance Sheet
INCOME RECEIVED IN ADVANCE
Income received but not earned during accounting
year is called income received in advance.
Treatment:
Income a/c Dr
To Income Received in advance
Two fold effect:
1.Will be shown on credit side of P & L a/c by the
way of deduction from particular income.
2. Will be shown on liabilities side of Balance Sheet.
DEPRECIATION
Depreciation is the reduction in the value of fixed
asset due to its use, wear & tear. Treatment:
Depreciation a/c Dr
To Asset a/c
Two fold effect:
1.Is shown on debit side of P & L a/c
2.Is shown on the Asset side of the Balance Sheet
by way of
deduction from
value of concerned asset
BAD DEBTS
Debts which are definitely irrecoverable are called
Bad Debts.
Treatment:
Bad Debts A/c Dr
To Sundry Debtors a/c
Two fold effect:
1. Is shown on debit side of P & L a/c.
2. 2. Is shown on assets side of Balance Sheet by
way of deduction from Sundry Debtors.
INTEREST ON CAPITAL
To see whether the business is really earning
profit or not ,interest on capital at a certain
rate is provided. Treatment :
Interest on capital A/c
To capital A/c
TWO FOLD EFFECT :
1.It will be shown on debit side of Profit and Loss
A/c
2.Shown on liabilities side of Balance Sheet by
way of addition to the capital.
INTEREST ON DRAWINGS
Interest on drawings is charged from proprietor
,as drawings reduce capital.
Treatment:
Drawings A/c
To Interest on Drawings A/c
Two fold effect will be:
1.It will be shown on credit side of Profit and
Loss Account.
2.On liabilities side of Balance Sheet by way of
addition to the drawings which are ultimately
deducted from the capital.
PROVISION FOR DOUBTFUL DEBTS
It is a provision created to cover any possible loss on
account of bad-debts likely to occur in future.
Treatment:
Profit and Loss A/c
To Provision for Doubtful Debts A/c
Two effected accounts will be:
1.On debit side of Profit and Loss A/c or by way of
addition to Bad Debts. (Old provision for doubtful
debts at the beginning of the year will be deducted).
2.Shown on assets side of Balance Sheet by way of
deduction from Sundry Debtors (deducting further
bad debts if any).
PROVISION FOR DISCOUNT ON DEBTORS
If sales are made by the merchant on condition that if
the amount of sales is paid within a certain period , he
will allow a certain percentage of discount .
Treatment :
Profit and Loss A/c
To Provision for Discount on Debtors A/c
Two-fold effect will be:
1.Shown on debit side of Profit and Loss A/c
2.Shown by way of deduction from Sundry Debtors
(after deduction of further bad debts and provision for
doubtful debts) on assets side of Balance Sheet.
RESERVE FOR DISCOUNT ON
CREDITORS
Firm may have chance to receive discount on last
date of accounting year, if the payment is made
within the scheduled period .These are
anticipated profit and therefore this account is
made.
Treatment:
Reserve for Discount on Creditors A/c
To Profit & Loss A/c
Two fold effect will be:
1.It is shown on the credit side of Profit &Loss A/c
2.Shown on liabilities side of Balance Sheet by way
of deduction from sundry creditors.
DEFERRED REVENUE EXPENDITURE
The expenditure done in initial stage but the benefit of
which will also be available in subsequent years is
called deferred revenue expenditure.
Treatment:
Profit &loss A/c
To advertisement A/c
The two fold effect will be:
1.It is show on the debit side of Profit &loss A/c
2.Shown on assets side by way of deduction from
capitalised expenditure.
LOSS OF STOCK BY FIRE
Loss of stock may occur due to fire.
The position of business may be:
a) All the stock is fully insured.
b) The stock is partly insured.
c) The stock is not insured at all.
a) IF THE STOCK IS FULLY INSURED
The whole loss will be claimed from the insurance
company.
Entry:-
Insurance Co. A/c Dr.
To Trading A/c
Effect:1.It will be shown on credit side of Trading A/c.
2.It is shown on Assets Side of Balance Sheet.
b) IF STOCK IS PARTLY INSURED
The loss of stock covered by insurance policy will be
claimed from the insurance company and the rest of
amount will be loss for the business.
Entry : Insurance Co. A/c Dr.
Profit & Loss A/c Dr.
To Trading A/c
Effect of this entry:
1.Shown on credit side of Trading A/c with the value of
stock & shown on debit side of P& L A/c for that part
of the stock which is not insured.
2.Loss of stock Fire is shown on asset side of the
Balance sheet which amount is to be realised from
the insurance company.
c) IF STOCK IS NOT INSURED
Whole loss will be borne by the firm.
Entry:- Profit & Loss A/c Dr.
To Trading A/c
Effect of this entry :1.It is shown on the credit side of Trading A/c.
2.It is shown on the debit side of P&L A/c
RESERVE FUND
Reserve is created out of profit & Loss A/c and
thus is an appropriation of net profit for
strengthening the financial position of the
business.
Treatment :
Profit & Loss A/c Dr.
To Reserve Fund A/c
Two fold effect will be:
1.It is shown on debit side of P&L A/c.
2.It shown on the liabilities side of Balance.
GOOD DISTRIBUTED AS FREE SAMPLES.
To promote the sale of goods, some of the
produced goods are distributed as free
samples.
Treatment:
Advertisement A/c Dr.
To Purchase A/c
Two fold effect:
1.Its is deducted from purchases .
2.It is shown on debit side of P&L A/c
MANAGER’S COMMISSION
To increase the profit, manager is given some % age of
commission on profits .It can be given at a certain
percentage on the net profits but before charging
such commission.
Treatment:
Profit & Loss A/c
To Commission Payable
After charging such commission
This commission in calculated by a formula :Commission Payable = % of commission * Residual
profit
100+Rate of Commission
GOODS ON SALE OR APPROVAL BASIS
Sometimes goods are sold to customers on approval basis. If they
approve, it will become sale. If such goods are lying with
customers on last day of the accounting year and these can be
yet returned , it should be treated as stock lying with
customers.
Treatment :
1.
Sales A/c Dr.
To debtors A/c
(with sales price)
2.
Stock A/c Dr.
To trading A/c ( at cost Price of goods)
Effects :1.Shown on the credit side of trading account by way of deduction
from sales at sales price and added at closing stock at cost
price
2.Shown on assets side as deduction from sundry debtors (sale
price )and stock at cost on the assets side of balance sheet.
EXAMPLE
M gives the following trial balance as on 31st March ,2010
Dr.
Cr.
Plant &machinery
60000
capital
50000
Fixture & fittings (for office)
2400
M’s currents A/c
2500
Sundry creditors
22300
Stock as on April 1, 2009:
Raw materials
Finished Goods
16300
25400
Purchases
93100
Loan at 18% from Indian
Bank
20000
Wages
51300
Sales
250600
Other manufacturing
expenses
16200
Sale of scrap
3600
Office expenses
18700
Sundry expenses
26000
Cash at bank
6600
Patents
18000
Selling expenses
15000
On 31st march ,2010 the stock of raw material was
13,300. deprecation provided by M is 15 % on Plant and
Machinery and 10% on fixtures & fittings (on book
value). Patents have two more years to run and concern
a vital production process .Manufactured goods were
transferred to selling department at a value of Rs.
2,00,000.
The value of finished goods (at transfer price ) on
hand on 31st March ,2010 was Rs.30,000; the value of
the finished goods as on April 1,2009 was at cost to M.
Draw the Manufacturing, trading & P&L a/c for 200910 and the Balance Sheet of M as at the end of the year.
MANUFACTURING ,TRADING AND PROFIT AND LOSS ACOOUNT OF M
for the year ending 31st March ,2010
To raw material consumed: Rs.
Opening stock
16,300
Add: Purchases
93,100
1,09400
Less: Closing Stock
13,300
By Trading A/c (Transfer)
96,100
To wages
51,300
To Manufacturing Expenses
16,200
To Depreciation on Plant &
machinery(15% on Rs 60,000)
9,000
To Depreciation on Patents(1/3 of
Rs.18,000)
6,000
Less: Sale of Scrap
Cost of Goods Produced
To profit transferred to
P&L a/c (12.5% of Transfer Price
i.e., Rs.25,000 X 100 )
Rs. 2,00,000
1,78,600
3,600
1,75,000
25,000
2,00,000
To opening stock of finished
Goods
To value of goods
manufactured transferred from
manufacturing a/c
To gross Profit c/d to profit &
Loss A/c
25,600
By Sales
By Closing Stock Of finished
Goods
2,00,000
55,200
2,80,600
To office Expenses
To Depreciation on fixtures &
fittings
To selling expenses
To Interest on Loan from
Indian Bank(18% on Rs 20000)
To stock reserve (12.5% on
Rs.30,000 Closing Stock of
Finished Goods)
To Net Profit Transferred to M’s
Current A/c
2,50,600
30,000
2,80,000
18,700
By Gross Profit b/d
55,200
240
15,000
By Profit transferred from
Manufacturing a/c
25,000
3,600
3,750
38,910
80,200
80,200
BALANCE SHEET M
as on 31st March ,2010
Sundry creditors
Loan at 18%from Indian Bank
20,000
Add: Interest outstanding
for 1 year @18%
3,600
22,300
23,600
M’s current Account :
Balance as on 1-4-2009 2,500
Add: Net Profit
38,910
Capital
Cash at the bank
Sundry debtors
Closing stock of raw materials
Closing stock of
finished goods
30,000
Less: Reserve @12.5% to
bring goods to cost value
3,750
6,600
26,000
13,300
26,250
41,410
50,000
Patents
Less: written off
18,000
6,000
12,000
Furniture & fittings
Less: 10% Depreciation
2,400
240
2,160
Plant & Machinery
Less: 15% Depreciation
60,000
9,000
51,000
1,37,310
1,37,310