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 and2) 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 Entry in the books of Preparation of final accounts Original Entry (summary) (ORIGINAL RECORD) Preparation of Posting in the concerned Trial Balance Ledger account(CHECKING THE (CLASSIFICATION) ACCURACY) 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 Account2) Balance Sheet
Trading AccountTrading account is prepared by tradingconcerns i.e., concerns which purchaseand sell finished goods, to know the grossprofit or gross loss incurred by them frombuying and selling of goods during aparticular period of time. Gross profit orgross loss is the difference between thecost of goods sold and the proceeds oftheir sale. If the sale proceeds exceed thecost 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 By Gross Loss c/d* Expenses: Carriage Inward Wages Wages & salaries Fuel & power Coal, water & gas
Import Duty Custom Duty Excise Duty Consumable Store Factory Rent, Rates, and Taxes Foreman/ Works Manager’s Salary Royalty on manufactured goodsTo Gross Profit c/d*
Profit & Loss AccountFor non-corporate business organisation Profit &Loss account is second part of incomestatement. It is prepared to know the net loss ofbusiness during a particular period. Everybusinessman has to spend on expenses otherthan on manufacture or purchase of goodswhich are called indirect expenses. There canbe other incomes except sales. So gross profitor loss is adjusted keeping in view these indirectexpenses and other incomes to find out netprofit or net loss.
Proforma of Profit & Loss AccountParticulars Amt Particulars AmtTo Gross Loss b/d By Gross Profit b/dTo Establishment By other expensesCharges By Net LossTo Administrative (transferred to capitalCharges account)To Selling &DistributionexpensesTo FinancialCharges
To Depreciation& ProvisionsTo AbnormalLossesTo Net Profit(transferred toCapital 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 Amt Assets AmtCapitalAdd: Net Profit Fixed Assets:Less: Drawings GoodwillFixed Liabilities: Land and BuildingsLong term loan Plant & MachineryPublic deposits Motor VehiclesCurrent Liabilities: FurnitureUnexpired Income Patents & Trade MarksShort Term Loans Live StockTrade Creditors Loose Tools
Bill Payable Current Assets:Outstanding Closing StockExpenses 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 account2) On asset side of Balance Sheet
OUTSTANDING EXPENSESThose expenses which have been incurred & not yet paid.Treatment: Expenses a/c Dr To outstanding expensesTwo fold effect:1.Will be shown on debit side of trading & profit & loss a/c by way of addition toparticular expense.2. Will be shown on liabities side of Balance Sheet.
PREPAID EXPENSESThose expenses which have been paid in advancei.e., whose benefit will be available in future iscalled prepaid expenses. Treatment: Prepaid Expenses a/c Dr To Expenses a/cTwo fold effect:1.Will be shown in profit & loss a/c by waydeduction from particular expense.2. Will be shown on asset side of Balance Sheet.
ACCRUED INCOMEThat income which has been earned but notreceived during the accounting year is calledaccrued income. Treatment: Accrued Income a/c Dr To Income a/cTwo fold effect:1.Will be shown on credit side of P & L a/c2. Will be shown on asset side of Balance Sheet
INCOME RECEIVED IN ADVANCEIncome received but not earned during accountingyear is called income received in advance.Treatment: Income a/c Dr To Income Received in advanceTwo fold effect:1.Will be shown on credit side of P & L a/c by theway of deduction from particular income.2. Will be shown on liabilities side of Balance Sheet.
DEPRECIATIONDepreciation is the reduction in the value of fixedasset due to its use, wear & tear. Treatment: Depreciation a/c Dr To Asset a/cTwo fold effect:1.Is shown on debit side of P & L a/c2.Is shown on the Asset side of the Balance Sheetby way of deduction fromvalue of concerned asset
BAD DEBTSDebts which are definitely irrecoverable are called Bad Debts.Treatment: Bad Debts A/c Dr To Sundry Debtors a/cTwo 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/cTWO FOLD EFFECT :1.It will be shown on debit side of Profit and Loss A/c2.Shown on liabilities side of Balance Sheet by way of addition to the capital.
INTEREST ON DRAWINGSInterest on drawings is charged from proprietor ,as drawings reduce capital.Treatment: Drawings A/c To Interest on Drawings A/cTwo 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 DEBTSIt 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/cTwo 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 DEBTORSIf 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/cTwo-fold effect will be:1.Shown on debit side of Profit and Loss A/c2.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 ONCREDITORSFirm 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/cTwo fold effect will be:1.It is shown on the credit side of Profit &Loss A/c2.Shown on liabilities side of Balance Sheet by way of deduction from sundry creditors.
DEFERRED REVENUE EXPENDITUREThe 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/cThe two fold effect will be:1.It is show on the debit side of Profit &loss A/c2.Shown on assets side by way of deduction from capitalised expenditure.
LOSS OF STOCK BY FIRELoss 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 INSUREDThe whole loss will be claimed from the insurance company.Entry:- Insurance Co. A/c Dr. To Trading A/cEffect:-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/cEffect 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 INSUREDWhole loss will be borne by the firm.Entry:- Profit & Loss A/c Dr. To Trading A/cEffect 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 FUNDReserve 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/cTwo 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 FREESAMPLES.To promote the sale of goods, some of the produced goods are distributed as free samples.Treatment: Advertisement A/c Dr. To Purchase A/cTwo fold effect:1.Its is deducted from purchases .2.It is shown on debit side of P&L A/c
MANAGER’S COMMISSIONTo 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 PayableAfter charging such commissionThis commission in calculated by a formula :-Commission Payable = % of commission * Residual profit 100+Rate of Commission
GOODS ON SALE OR APPROVALBASISSometimes 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 price2.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 50000Fixture & fittings (for 2400 M’s currents A/c 2500office)Stock as on April 1, 2009: Sundry creditors 22300Raw materialsFinished Goods 16300 25400Purchases 93100 Loan at 18% from Indian 20000 BankWages 51300 Sales 250600Other manufacturing 16200 Sale of scrap 3600expensesOffice expenses 18700Sundry expenses 26000Cash at bank 6600Patents 18000Selling expenses 15000
On 31st march ,2010 the stock of raw material was13,300. deprecation provided by M is 15 % on Plant andMachinery and 10% on fixtures & fittings (on bookvalue). Patents have two more years to run and concerna vital production process .Manufactured goods weretransferred to selling department at a value of Rs.2,00,000. The value of finished goods (at transfer price ) onhand on 31st March ,2010 was Rs.30,000; the value ofthe finished goods as on April 1,2009 was at cost to M. Draw the Manufacturing, trading & P&L a/c for 2009-10 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 ,2010To raw material consumed: Rs. By Trading A/c (Transfer) 2,00,000 Opening stock 16,300 Add: Purchases 93,100 1,09400 Less: Closing Stock 13,300 96,100To wages 51,300To Manufacturing Expenses 16,200To Depreciation on Plant &machinery(15% on Rs 60,000) 9,000To Depreciation on Patents(1/3 ofRs.18,000) 6,000 1,78,600Less: Sale of Scrap 3,600Cost of Goods Produced 1,75,000To profit transferred to P&L a/c (12.5% of Transfer Price i.e., Rs.25,000 X 100 ) 25,000 Rs. 2,00,000
To opening stock of finished 25,600 By Sales 2,50,600Goods By Closing Stock Of finished 30,000To value of goods Goodsmanufactured transferred from 2,00,000manufacturing a/cTo gross Profit c/d to profit & 55,200Loss A/c 2,80,600 2,80,000To office Expenses 18,700 By Gross Profit b/d 55,200To Depreciation on fixtures & 240 By Profit transferred from 25,000fittings Manufacturing a/cTo selling expenses 15,000To Interest on Loan from IndianBank(18% on Rs 20000) 3,600To stock reserve (12.5% onRs.30,000 Closing Stock ofFinished Goods) 3,750To Net Profit Transferred to M’sCurrent A/c 38,910
BALANCE SHEET M as on 31st March ,2010Sundry creditors 22,300 Cash at the bank 6,600Loan at 18%from Indian Bank Sundry debtors 26,000 20,000 Closing stock of raw materials 13,300 Closing stock ofAdd: Interest outstanding finished goods 30,000for 1 year @18% 3,600 23,600 Less: Reserve @12.5% to bring goods to cost value 3,750M’s current Account : 26,250Balance as on 1-4-2009 2,500 Patents 18,000Add: Net Profit 38,910 41,410 Less: written off 6,000 50,000 12,000Capital Furniture & fittings 2,400 Less: 10% Depreciation 240 2,160 Plant & Machinery 60,000 Less: 15% Depreciation 9,000 51,000
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