FINAL ACCOUNTS

The most important function of an accounting system is to provide information about the
profitability of the business. A sole trader furnishes a Trading and Profit and loss Account
which depicts the result of the business transactions of the sole trader. Along with the Trading
and Profit and Loss Account he also prepares a Balance Sheet which shows the financial
position of the business.

Steps in the Process of Finalization of Accounts

A. For Trading Concerns:

1. Trading Account.

2. Profit and Loss Account.

3. Balance Sheet.

B. For Manufacturing and Trading Concerns:

1. Manufacturing Account.

2. Trading Account.

3. Profit and Loss Account

. 4. Balance Sheet.

Trading Account:

Purchases and sales of goods during a particular period. The purpose is to find out the gross
profit or gross loss which is key indicator of business efficiency.

The following items will appear in the debit side of the Trading Account:

(i) Opening Stock: In case of trading concern, the opening stock means the finished
goods only. The amount of opening stock should be taken from Trial Balance.
(ii) Purchases: Purchases made during the year. It includes cash as well as credit
purchase. Items that also form part of purchase is purchase return, goods
withdrawn by the proprietor, goods distributed as free sample etc.
(iii) Direct expenses: Expenses which are incurred from the time of purchase. These
expenses includes freight inward, octroi, wages etc.
(iv) Gross profit: If the credit side of trading A/c is greater than debit side of trading
A/c gross profit will arise.
The following items will appear in the credit side of Trading Account:

(i) Sales Revenue: The sales revenue denotes income earned from the main business
activity or activities.
(ii) Closing Stocks: In case of trading business, there will be closing stocks of finished
goods only.
(iii) Gross Loss: When debit side of trading account is greater than credit side of
trading account, gross loss will appear.

Profit and Loss Account: Expenses and Income of Companies brought together.

The following items will appear in the debit side of the Profit & Loss A/c:

(i) Other Expenses: All expenses which are not directly related to main business
activity will be reflected in the P & L component. These are mainly the
Administrative, Selling and distribution expenses. Examples are salary to office
staff, salesmen commission, insurance, legal charges, audit fees, advertising, free
samples, bad debts etc. It will also include items like loss on sale of fixed assets,
interest and provisions.

(ii) Abnormal Losses: All abnormal losses are charged against Profit & Loss Account.
It includes stock destroyed by fire, goods lost in transit etc.

The following items will appear in the credit side of Profit & Loss A/c:

(i) Revenue Incomes: These incomes arise in the ordinary course of business, which
includes commission received, discount received etc.
(ii) Other Incomes: The business will generate incomes other than from its main activity.
These are purely incidental. It will include items like interest received, dividend.

Balance Sheet: Liabilities and Asset of Company.

Horizontal format of Balance Sheet is also used by the business other than company

A. Liabilities

(a) Capital: This indicates the initial amount the owner or owners of the business contributed.

(b) Reserves and Surplus: The business is a going concern and will keep making profit or loss
year by year.

(c) Long Term or Non-Current Liabilities: These are obligations which are to be settled over
a longer period of time say 5-10 years. Long term loan are called as “Secured Loan” also.

(d) Short Term or Current Liabilities: A liability shall be less than 12 months

Current liabilities comprise of :

(i) Sundry Creditors - Amounts payable to suppliers against purchase of goods with in
30-180 days.
(ii) Advances from customers – At times customer may pay advance i.e. before they get
delivery of goods.
(iii) Outstanding Expenses: These represent services procured but not paid for. These are
usually settled within 30–60 days e.g. phone bill of Sept is normally paid in Oct.
(iv) Bills Payable: There are times when suppliers do not give clean credit. These are
called as bills payable or notes payable.
(v) Bank Overdrafts: This is a short term obligation.

B. Assets: Assets are broadly classified into fixed assets and current assets.

(a) Fixed Assets: The fixed assets could be in tangible form such as buildings, machinery,
vehicles, computers etc, whereas some could be in intangible form viz. patents, trademarks,
goodwill etc. The fixed assets are subject to wear and tear which is called as depreciation. In
the balance sheet, fixed assets are always shown as “original cost less depreciation”.

(b) Investments: These are funds invested outside the business on a temporary basis

(c) Current Assets: An asset that is Current and realised within 12 months. (

(i) Stocks: This includes stock of raw material, semi-finished goods or WIP, and finished
goods.

(ii) Debtors: They represent customer balances which are not paid. The bad debts or a
provision for bad debt is reduced from debtors and net figure is shown in balance sheet.

(iii) Bills receivables: At the end of accounting period, the bills accepted but not yet paid
are shown as bills receivables.
(iv) Cash in Hand: Cash at all locations is physically counted and verified with the book
balance.
(v) Cash at Bank: Dealing through banks is quite common.
(vi) Prepaid Expenses: They represent payments made against which services are
expected to be received in a very short period.
(vii) Advances to suppliers: When amounts are paid to suppliers in advance and goods or
services are not received till the balance sheet date, they are to be shown as current
assets.

Trading Account for the year ended

Particulars (Dr.) Amount Particulars (Cr.) Amount

Opening Stock: Sales
Finished goods Less : Sales return
Purchases Closing stock
Less : Purchase returns Finished goods
Gross Profit Gross Loss
(transferred to P & L A/c) (transferred to P & L A/c)
Total Total

Profit and Loss Account for the year ended

Particulars (Dr.) Amount Particulars (Cr.) Amount
Gross Loss Gross Profit
(transferred from Trading A/c) (transferred from Trading A/c)
Administrative expenses Other Income
Office salaries Interest received
Communication Commission received
Travel & Conveyance Profit on sale of assets
Office rent Rent received
Depreciation of office assets Net loss
Audit fees
Insurance
Repairs & maintenance
Selling & Distribution expenses
Advertising
Salesmen commission
Delivery van expenses/Depreciation
on delivery vans/Bad debts
Financial expenses
Bank charges
Interest on loans
Loss on sale of assets
Net profit
Total Total

Balance Sheet for the year ended

Capital & Liabilities (Cr.) Amount Assets (Dr.) Amount
Capital Fixed Assets:
(separate figures are shown for Land less depreciation
each owner) Building less depreciation
Long term Liabilities: Plant and Machinery
Loans from banks or financial less depreciation
Institutions Vehicles less depreciation
Current Liabilities: Computer systems less depreciation
Sundry creditors Office equipments less depreciation
Bills payable Current Assets:
Advances from customers Stocks
Outstanding expenses Sundry debtors less provisions
Bills receivables
Cash in hand
Cash at bank
 Prepaid expenses
Advances to suppliers
Total Total

Items that appear in Trading, P&L and B/S

Item Treatment Where

Carriage inward P & L A/c Dr
Freight outward P & L A/c Dr
Bad debts P & L A/c Dr
Provision for outstanding rent P & L A/c Dr
Return inwards or sales returns Trading A/c Cr less from sales
Discount earned P & L A/c Cr
Depreciation on delivery van P & L A/c Dr
Printing and stationery P & L A/c Dr
Sales Trading A/c Cr
Repairs to machinery Trading A/c Dr
Maintenance of office building P & L A/c Dr
Purchase returns or return outwards Trading A/c Dr less from purchases
Closing stock of WIP Trading A/c Cr
Opening stock of finished goods Trading A/c Dr
Interest received P & L A/c Cr
Commission paid P & L A/c Cr
Telephone P & L A/c Dr
Travel & conveyance P & L A/c Dr
Wages Trading A/c Dr
Salaries to office staff P & L A/c Dr
Depreciation on office car P & L A/c Dr
Power & fuel Trading A/c Dr
Insurance P & L A/c Dr
Audit fees P & L A/c Dr

1. As per Schedule III of Companies Act 2013, prepare financial statement for Gillette India Pvt Ltd.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Plant and Machinery 1,00,000 Sales 3,50,000
Land and Building 2,00,000 Purchase 2,00,000
Sales Return 10,000 Opening Stock 30,000
Purchase Return 10,000 Debtors 50,000
Creditors 20,000 Cash in Hand 10,000
Wages 20,000 Salaries 10,000
General Expenses 10,000 Dividend Received 20,000
Capital 3,00,000 Selling Expenses 20,000
Rent 30,000 Insurance 10,000
Adjustments
a) Closing Stock is Rs. 4,00,000.
 b) Provide depreciation for Plant and Machinery, Land and Building is 10% .
c) 5% provision for Debtors.
d) Wages outstanding Rs 1,000, Salaries prepaid Rs. 2,000 and Accrued Dividend is 3,000 .
e) Due to accident goods lost for Rs 50,000, recovered from insurance Rs. 40,000.
f) Interest on Capital 10%.

S.No Adjustment Amount Posting

1 Closing Stock Closing Stock 400000 Trading A/c (Cr) Given in Adjustment
Closing Stock 400000 B/S Current Assets (Dr) Given in Adjustment

2 Wages Wages 20000 Given in Problem

(+) Outstanding 1000 Liability - Current Liability (Cr) Given in Adjustment
Wages
Wage 21000 P&L A/c (Dr.)

2 Prepaid Salary Salary 10000 Given in Problem

(-) Prepaid Salary 2000 Asset - Current Asset (Dr) Given in Adjustment
Salary 8000 P&L A/c (Dr)

3 Accrued Dividend Dividend Received 20000 Given in Problem

(+) Accrued Dividend 3000 Asset - Current Asset (Dr) Given in Adjustment
Dividend received 23000 P&L A/c (Cr)

4 Depreciation Land & Building 200000 Given in Problem

10% of Depreciation 20000 P&L A/c (Dr) Given in Adjustment
Land & Building 180000 Asset - Fixed Asset (Dr)

4 Depreciation Plant & Machinery 100000 Given in Problem

(-)10% Depreciation 10000 P&L A/c (Dr) Given in Adjustment
Plant & Machinery 90000 Asset - Fixed Asset (Dr)

5 Provision for Bad Debtors 50000 Given in Problem

Debts
(-) Provision for Bad 5000 P&L A/c (Dr) Given in Adjustment
Debts
Debtors 45000 Asset - Current Asset (Dr)

6 Interest on Capital Capital 300000 Given in Problem

(+) 10% Interest on 30000 P&L A/c (Dr) Given in Adjustment
Capital
330000 Liability - Capital (Cr)

7 Accidental Loss Accidental Loss 50000 Trading A/c (Cr) Given in Adjustment
(-)Insurance Claim 40000 Asset - CA - (Dr) Given in Adjustment
Loss on Goods 10000 P&L A/c (Dr) Difference is Loss
Trading a/c
Particulars Dr. Amount Particulars Cr. Amount
To Open Stock 30000 By Sales 3,50,000
To Purchase 2,00,000 (-) Sales Return (10000) 340000
(-) Purchase Returns (10000) 190000 By Accidental Loss 50000
To Wages 21000 By Closing Stock 400000
To Gross Profit 5,49,000
(Balancing Figure (B/f))
Total 790000 Total 790000
Profit & Loss a/c

Particulars Dr. Amount Particulars Cr. Amount

To Rent 30,000 By Gross Profit 7,49,000
To Salaries 8,000 BY Dividend Received 23,000
To Selling Expenses 20,000
To Insurance 10,000
To General Expenses 10,000
To Loss on Sale of Goods 10,000
To Interest on Capital 30,000
To Depreciation
Land & Building 20,000
Plant & Machinery 10,000
To Provision for Debtors 5,000
To Net Profit 4,19,000
Total 7,72,000 Total 7,72,000
Balance Sheet

Liabilities Cr. Amount Asset Dr. Amount

Share Capital Fixed Asset
Capital 3,30,000 Plant and Machinery 1,80,000
Profit 4,19,000 Land and Building 90,000
Reserves & Surplus Current Asset
Current Liabilities Debtors 45,000
Creditors 20,000 Cash in Hand 10,000
Outstanding Wages 1,000 Closing Stock 4,00,000
Salaries Prepaid 2,000
Accrued Dividend 3,000
Insurance Claim 40,000
Total 7,70,000 Total 7,70,000

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