2. 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.
3. 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:
4. 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
5. Types of Financial Statement
Final accounts or financial statements can
be divided in two parts:-
1) Trading and Profit & Loss Account
2) Balance Sheet
6. 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.
7. 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 ……….
8. 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
9. 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*
10. 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.
11. Proforma of Profit & Loss Account
Particulars Amt Particulars Amt
To Gross Loss b/d By Gross Profit b/d
To Establishment By other expenses
Charges By Net Loss
To Administrative (transferred to capital
Charges account)
To Selling &
Distribution
expenses
To Financial
Charges
13. 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
14. Balance Sheet as on ……………………
Liabilities Amt Assets Amt
Capital
Add: Net Profit Fixed Assets:
Less: Drawings Goodwill
Fixed Liabilities: Land and Buildings
Long term loan Plant & Machinery
Public deposits Motor Vehicles
Current Liabilities: Furniture
Unexpired Income Patents & Trade Marks
Short Term Loans Live Stock
Trade Creditors Loose Tools
15. Bill Payable Current Assets:
Outstanding Closing Stock
Expenses Prepaid
Expenses
Accrued
Income
Debtors
Bill Receivable
Cash at Bank
Cash in hand
16.
17. 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
18. 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.
19. 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.
20. 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
21. 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.
22. 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
23. 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.
24. 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.
25. 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.
26. 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).
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.
32. 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.
33. 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
34. 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.
35. 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
36. 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
37. 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.
38. EXAMPLE
M gives the following trial balance as on 31st March ,2010
Dr. Cr.
Plant &machinery 60000 capital 50000
Fixture & fittings (for 2400 M’s currents A/c 2500
office)
Stock as on April 1, 2009: Sundry creditors 22300
Raw materials
Finished Goods 16300
25400
Purchases 93100 Loan at 18% from Indian 20000
Bank
Wages 51300 Sales 250600
Other manufacturing 16200 Sale of scrap 3600
expenses
Office expenses 18700
Sundry expenses 26000
Cash at bank 6600
Patents 18000
Selling expenses 15000
39. 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 2009-
10 and the Balance Sheet of M as at the end of the year.
40. MANUFACTURING ,TRADING AND PROFIT AND LOSS ACOOUNT
OF M
for the year ending 31st March ,2010
To 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
96,100
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
1,78,600
Less: Sale of Scrap 3,600
Cost of Goods Produced 1,75,000
To 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
41. To opening stock of finished 25,600 By Sales 2,50,600
Goods By Closing Stock Of finished 30,000
To value of goods Goods
manufactured transferred from 2,00,000
manufacturing a/c
To gross Profit c/d to profit &
55,200
Loss A/c
2,80,600 2,80,000
To office Expenses
18,700 By Gross Profit b/d 55,200
To Depreciation on fixtures &
240 By Profit transferred from 25,000
fittings
Manufacturing a/c
To selling expenses 15,000
To Interest on Loan from Indian
Bank(18% on Rs 20000) 3,600
To stock reserve (12.5% on
Rs.30,000 Closing Stock of
Finished Goods) 3,750
To Net Profit Transferred to M’s
Current A/c
38,910
42. BALANCE SHEET M
as on 31st March ,2010
Sundry creditors 22,300 Cash at the bank 6,600
Loan at 18%from Indian Bank Sundry debtors 26,000
20,000 Closing stock of raw materials 13,300
Closing stock of
Add: Interest outstanding finished goods 30,000
for 1 year @18% 3,600 23,600 Less: Reserve @12.5% to
bring goods to cost value 3,750
M’s current Account : 26,250
Balance as on 1-4-2009 2,500 Patents 18,000
Add: Net Profit 38,910 41,410 Less: written off 6,000
50,000 12,000
Capital Furniture & fittings 2,400
Less: 10% Depreciation 240
2,160
Plant & Machinery 60,000
Less: 15% Depreciation 9,000
51,000