Final Accounts

1
FINAL
ACCOUNTS
WITH
ADJUSTMENTS
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THE LAST STEP IN THE ACCOUNTING PROCESS.
BASIC OBJECTIVE
1. Trading account , Profit & Loss account - to know profit
or loss as a result of operations of business during the
previous year.
2. Balance Sheet - to know the financial position at the
end of the accounting year.
also known as FINANCIAL STATEMENTS.
FINAL ACCOUNTS
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BASIC CONDITION
-Prepared from Trial Balance.
-For this purpose both the sides of Trial Balance
must tally.
-If Trial Balance does not tally, Suspense Account
must be opened for this purpose and put on
the Dr. side or Cr. side(side having short total)
as the case may be.
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Prepared in the following sequence:
1.Trading Account.
2.Profit and Loss Account.
3.Balance Sheet.
-Collectively called - final accounts.
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-Prepared by trading concerns i.e., concerns which
purchase and sell finished goods,
-To know the gross profit /loss.
-Gross profit /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 ,the
result is gross profit .Other wise, there is gross
loss .
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Dr. Cr.
Opening stock
Purchases-Returns
Wages
Wages and Salaries
Carriage inwards
Other direct expenses
Gross profit (trfd. to Profit
and Loss)
Sales-Returns
Closing Stock
Gross Loss(trfd. to Profit
and Loss account)

Prepared to know the net profit/loss of business
during a particular accounting year.
Gross profit or loss is adjusted keeping in view
the indirect expenses like administrative,
selling and distribution and any other expenses
and incomes to find out net profit or net loss.
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Dr. Cr.
To Gross Loss b/d
To Adm.expenses
To Selling & Dist.expenses
To other expenses
To Net Profit
(transferred to Capital
Account)
By Gross Profit b/d
By other Incomes
By Net Loss
(transferred to capital
account)
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-The last of financial statements .
-Shows the financial position of the business at
the end of the accounting year i.e. balances of
capital, liabilities & assets.
-All nominal accounts are closed by transferring
these to Trading & Profit & Loss Account.
- Only personal & real accounts are left for
Balance Sheet.
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Capital
Add: Net Profit
Less: Drawings
Long term Liabilities:
Long term loan
Public deposits
Current Liabilities:
Unexpired Income
Short Term Loans
Trade Creditors
Bank Overdraft
Fixed Assets:
Goodwill
Land and Buildings
Plant & Machinery
Etc.
Loose Tools
Investments
Current Assets:
Closing Stock
Prepaid Expenses
Etc.
Cash at Bank
Cash in hand
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Adjustments:
Transactions occurring after preparing Trial
Balance, that must be considered while
preparing Final Accounts.
GOLDEN RULE :
All the items appearing in the Trial Balance are to
be entered at one place out of these three,
ITEMS IN ADJUSTMENT are to be treated at
two places.
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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
1) Show on Credit side of the Trading account
2) On asset side of Balance Sheet
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OUTSTANDING EXPENSES
Those expenses which have become due but 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 liabilities side of Balance Sheet.
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PREPAID EXPENSES
Those expenses which have been paid in advance .
Treatment: Prepaid Expenses a/c Dr.
To Expenses a/c
Two fold effect:
1. in profit & loss a/c by way of deduction from
particular expense.
2. Will be shown on asset side of Balance Sheet.
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ACCRUED INCOME
That income which has been earned but not received
during the accounting year.
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
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INCOME RECEIVED IN ADVANCE
Income received but not earned during accounting year.
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.
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DEPRECIATION
It 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.
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BAD DEBTS
Debts which are definitely irrecoverable.
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. Is shown on assets side of Balance Sheet by way of
deduction from Sundry Debtors.
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Though, a notional item, interest on capital at a
certain rate is provided.
Treatment :
Interest on capital A/c Dr.
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.
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Interest on drawings is charged from proprietor.
Treatment:
Drawings A/c DR.
To Interest on Drawings A/c
Two fold effect :
1.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.
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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 Dr.
To Provision for Doubtful Debts A/c
Two fold effect:
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).
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Sometimes, 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 Dr.
To Provision for Discount on Debtors
A/c
Two-fold effect :
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.
22

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
DR.
To Profit & Loss A/c
Two fold effect :
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.
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The expenditure done in initial stage but the benefit of
which will also be available in subsequent years.
Treatment: Profit &loss A/c DR.
To advertisement A/c
The two fold effect :
1.It is show on the debit side of Profit &loss A/c.
2.Shown on assets side by way of deduction from that
expenditure.
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Loss of stock may occur due to fire/accident.
There are three different cases:
a) All the stock is fully insured.
b) The stock is partly insured.
c) The stock is not insured at all.
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The whole loss will be claimed from the insurance
company.
Treatment:
Insurance Co. A/c Dr.
To Trading A/c
Two fold effect:
1.It will be shown on credit side of Trading A/c.
2.It is shown on Assets Side of Balance Sheet.
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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.
Treatment: Insurance Claim. A/c Dr.
Profit & Loss A/c Dr.
To Trading A/c
Two fold effect: 1.Credit side of Trading A/c with the
total value of such stock and debit side of P& L A/c
for part of the stock which is not insured.
2. Insurance Claim A/c is shown on asset side of the
Balance sheet which amount is to be realized from
the insurance company.
27www.commerceatease.com

Whole loss will be borne by the firm.
Treatment: Profit & Loss A/c Dr.
To Trading A/c
Two fold effect:
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.
28

Reserve is created out of Profits 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 :
1.It is shown on debit side of P&L A/c.
2.It shown on the liabilities side of Balance.
29

To promote the sale of goods, some of the finished
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.
30

To increase the profit, manager is given some percentage
of commission on profits .It can be given at a certain
percentage on the net profits before charging such
commission or after charging such commission.
Treatment:
Profit & Loss A/c Dr.
To Commission Payable
This commission in calculated by a formula :-
Before charging such commission:
Commission Payable = Net profit *(Rate/100)
After charging such commission
Commission Payable= Net Profit*(Rate/100+Rate).
Entered on Dr. side of P/L a/c and Liability side of B/S.
31

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
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)
Two fold effect:
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.
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Final Accounts

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