FINAL ACCOUNTS/ Financial Statements

Financial Statements
To help communicate financial data, the following accounts are prepared:

Trading Account Profit & Loss Account Balance Sheet These accounts provide information relating to an organisations activities during a trading period usually one year.

The Trading Profit and Loss Account

The Trading Profit and Loss Account can be split into two sections:
The Trading Account. The Profit and Loss Account.

The Trading Profit and Loss Account is a historical review of the sales revenue and expenditure of a business for the previous financial year.

The Trading Account

The Trading Account shows the profit, before charging any expenses or overheads like heat, light, wages or telephone bills. This allows the owner to see how healthy the profit is before these expenses are included.

Gross Profit

The Trading Account shows the gross profit (or loss) for the reporting period. The gross profit equals the sales revenue minus the cost of goods sold.

The Trading Account: Items

Sales Purchases Returns Inwards (Sales Returns) Returns Outwards (Purchase Returns) Carriage Inwards Opening Stock Closing Stock

Particulars
Opening stock Purchases Less:- Returns :-Drawings Direct Expenses: Carriage inward Wages Fuel & Power Manf. Expenses Coal, water & gas Foreman/Works Managers salary Royalty on manf. Goods Gross profit c/d(bal)

Amount

Particulars Sales Less: Returns Closing stock Goods Lost by fire (Gross Loss c/d)

Amount

13

The Profit and Loss Account

The Profit and Loss Account is completed after the Trading Account. It shows the net profit after all expenses and overheads have been charged.

The Profit and Loss Account

The Profit and Loss Account starts with the gross profit figure from the Trading Account.

It then lists any items of additional revenue raised by the business, as well as any expenses incurred by the business not directly linked to trading.

Net Profit

The Profit and Loss Account shows the net profit (or loss) for the reporting period.

The net profit equals the gross profit minus all expenses and overheads.

The Profit and Loss Account: Items

Discounts Received Commission Received Profit on the Disposal of Assets Expenses such as:

Wages Carriage Outwards (Dispatch of Goods) Rent Rates Insurance Advertising Bad Debts Allowance Depreciation Stationery

Profit and Loss Account for the period ending on ----Debit Credit
Particulars
Gross loss b/d Selling & Dist Exp : Advertisement Travellers Salary, exp. & commission Bad Debts Administration Expenses Rent, Rates & Taxes Office salaries Printing & Stationary

Amount Particulars Gross Profit b/d Interest Received Discount Received Comm. Received Net Loss c/d

Amount

Net Profit c/d (bal)

19

Appropriation of Profits

The Profit and Loss Account shows how profitable a business has been over a period of time. Partnerships and limited companies produce an extra section in their Profit and Loss Account called the Appropriation Account. This shows how profits or losses are to be shared between different parties.

Balance Sheet
The balance sheet is the financial tool that focuses on the present condition of a business.

The Balance Sheet

The Balance sheet shows the financial position of a company at a particular point in time.
The balance sheet is also referred to as the

statement of financial position or the statement of financial condition.

The left side lists assets the right side lists liabilities and owners equity

Balance Sheet
Shows 3 different things:

Assets (things that the business owns)

Fixed (buildings etc Listed in order of

permanence) Current (can easily be turned into cash e.g. stock)

Liabilities (what it owes to others e.g. creditors, bank)

Current liabilities (creditors due within one year) Long term liabilities (creditors due over 1 year)

Capital (money invested in business by owners to set it up)

Formats of Balance Sheets

Balance sheet formats:

Report format - a classified balance sheet

with assets at the top and liabilities and equity below Account format - a classified balance sheet with assets at the left and liabilities and equity at the right

Regardless of format, balance sheets always contain the same basic information.

Balance Sheet Transactions

The balance sheet is affected by every transaction that an entity encounters. Each transaction has counterbalancing entries that keep total assets equal to total liabilities and owners equity.

The Balance Sheet

STEVENS COMPANY Balance Sheet as on June 30, 2005
Liabilities Owners Equity Hamilton, capital Reserves Secured Loans Unsecured Loans Current liabilities: Wages payable Tax payable Bills Payable Assets

Fixed Assets: Land Plant Equipment Total Fixed Asset Current assets: Bank balance Cash balance Bills Receivable

PROFORMA BALANCE SHEET LIABILITIES ASSETS

SHARE CAPITAL Authorised Issued Subscribed Less:- Calls unpaid Add:- Forfeited shares RESERVES AND SURPLUS SECURED LOANS UNSECURED LOANS:
CURRENT LIABILITIES AND PROVISIONS: A. CURRENT LIABILITIES: a) Acceptances. b) Sundry Creditors c) Subsidiary companies. d) Advance Payments e) Unclaimed dividends f) Other liabilities (if any) g) Interest accrued but not due on loans. B. PROVISIONS a) Provision for taxation. b) Proposed dividends. c) For contingencies.

FIXED ASSETS a) Land , b) Buildings, c) Goodwill, d) Plant and Machinery e) Furniture and fittings f) Patents, trade marks and designs. INVESTMENTS: a) Investments in Government or Trust Securities, in shares, debentures or bonds, b) Immovable Properties. CURRENT ASSETS, LOANS AND ADVANCES: (A) Current Assets: a) Interest accrued on Investments. b) Stores and Spare Parts,c) Loose Tools d) Stock in trade, e) Works in progress. f) Sundry Debtors, g) Cash balance on hand h) Bank balances (B) LOANS AND ADVANCES: a) Advances and loans to subsidiaries. b) Bills of Exchange. c) Advances recoverable in cash or in kind MISCELLANEOUS EXPENDITURE: a) Preliminary expenses. b) Expenses including commission or brokerage on underwriting or subscription of shares or debentures. c) Discount allowed on the issue of shares or debentures.

Interpreting Final Accounts

The following may use the information in published accounts:

Rival companies Investors Lenders Trade Union Representatives Interpreting the data and making comparisons with previous years or other organisations gives an indication of the future success and financial security of an organisation.

Interpreting Final Accounts

Interpretation of Trading Profit & Loss Accounts

Was this years trading result good or bad, compared with last year or with a rival company? Has the Gross Profit improved this year, compared with last year? Are we making efficient use of our stock? Does our Net Profit figure compare favourably with those of other organisations in the same industry?

Interpretation of Balance Sheets

Do we have enough working capital to avoid cash flow problems? Are we making enough use of available trade credit? Is our level of debtors comparable with that of our industry competitors?

1. CLOSING STOCK:

Adjusting Entry Trading A/c

Closing Stock To Trading A/c Shown on the credit side

Dr.

Balance Sheet

Shown on the asset side as Current Asset

2. OUTSTANDING EXPENSES:
Expenses incurred but not paid at the end of the year are called outstanding expenses Adjusting Entry Trading A/c Profit & Loss A/c Balance Sheet Respective Expense A/c Dr. To Outstanding Expense A/c Added to the respective expense on the debit side. Added to the respective expense on the debit side. Shown on the Liability side as Current Liability

3.PREPAID EXPENSES: Prepaid Expenses refer to amount paid in the current accounting year for services to be received in the next accounting year
Adjusting Entry Trading A/c Profit & Loss A/c Balance Sheet Prepaid Expense A/c Dr. To Respective Expense A/c Deducted from the respective expense on the debit side. Deducted from the respective expense on the debit side. Shown on the Asset side as Current Asset

4. ACCRUED INCOME (Income earned but not received) :

If income for the current year is not received during the year, it is termed as accrued income. Adjusting Entry Profit & Loss A/c Accrued Income A/c Dr. To Respective Income A/c Added to the respective Income on the credit side.

Balance Sheet

Shown on the Asset side as Current Asset

5. UNEARNED INCOME (Income received in advance): It refers to income received for the current year against which services are to be provided in the next accounting year

Adjusting Entry Profit & Loss A/c Balance Sheet

Respective Income A/c To Unearned Income A/c

Dr.

Deducted from the respective Income on the credit side. Shown on the Liabilities side as Current Liability.

6. DEPRECIATION on FIXED ASSET: Depreciation is the depreciable cost of a fixed asset allocated to a particular accounting year.

Adjusting Entry

Depreciation A/c Dr. To Asset A/c Profit & Loss A/c Shown on the debit side as separate item. Balance Sheet Shown on the Asset side by way of deduction from the value of the concerned fixed asset.

7. BAD DEBTS: When a business enterprise becomes certain about non-recovery of the amount from debtors, it is treated as Bad Debts and charged to Profit & Loss A/c

Adjusting Entry

Bad Debts A/c To Assets A/c

Dr.

Profit & Loss A/c

Balance Sheet

Shown on the debit side by way of addition to Bad Debts

Shown on the Assets side as deduction from the amount of Sundry Debtors.

8. PROVISION FOR BAD AND DOUBTFUL DEBTS: As the exact amount of bad debts cannot be calculated at the time of sale, a provision for bad and doubtful debts may be created in the year of sale and charged to P&L A/c of this year.

Adjusting Entry Profit & Loss A/c

Profit & Loss A/c Dr. To Provision for Bad Debts A/c Shown on the debit side as separate item Shown on the Assets side by way of deduction from the amount of Sundry Debtors (net of additional bad debts)

Balance Sheet

9. PROVISION FOR DISCOUNT ON DEBTORS:

Provision for discount on debtors is created to take care of discount to be allowed to debtors for prompt payment. But before calculating provision for discount, provision for doubtful debts is deducted from debtors.

Adjusting Entry Profit & Loss A/c Balance Sheet

Profit & Loss A/c Dr. To Provision for Discount on Debtors Shown on the debit side as separate item Shown on the Assets side by way of deduction from the amount of Sundry Debtors (net of additional bad debts & Provision for Bad and Doubtful Debts)

10. PROVISION FOR DISCOUNT ON CREDITORS: Although Provision for discount on creditors is against the principle of conservatism but it is an accepted accounting practice
Adjusting Entry Profit & Loss A/c Balance Sheet Provision for Discount on Creditors A/c To Profit & Loss A/c Shown on the CREDIT side as separate item Shown on the Liabilities side by way of deduction from the amount of Sundry Creditors Dr.

11.INTEREST ON CAPITAL: To calculate true profit for the year, interest on capital invested by the owner of business is provided in the books and treated as business expense.
Adjusting Entry Profit & Loss A/c Balance Sheet Interest on Capital A/c To Capital A/c Dr.

Shown on the DEBIT side as separate item Shown on the Liabilities side by way of addition to the capital.

12.INTEREST ON DRAWINGS: Cash, goods or any other asset withdrawn by the owner for his personal use is termed as drawings. Sometimes interest on drawings is calculated by the business enterprise and treated as business income.
Adjusting Entry Profit & Loss A/c Capital A/c To Interest on Drawings A/c Dr.

Shown on the CREDIT side as separate item

Balance Sheet

Shown on the Liabilities side by way of deduction from the capital.

13.MANAGERS COMMISSION ON PROFIT: (i) Commission on Profits Before Charging Such Commission:
Rate of Commission 100 (ii) Commission on Profits After Charging Such Commission: Profit before Commission X Rate of Commission 100 + Rate Adjusting Entry Profit & Loss A/c Managers Commission To Outstanding Commission A/c Dr. Profit before Commission X

Shown on the CREDIT side as separate item

Balance Sheet

Shown on the Liabilities side as Current Liability.

14. ABNORMAL LOSS OF STOCK: Sometimes loss of goods takes place due to fire, theft, earthquakes, etc.
Trading A/c Total value of abnormal loss of stock (whether or not recovered) is shown on the credit side of the Trading A/c Total value of irrecovered loss of stock is shown on the debit side as separate item. The amount due from the insurance company is shown on the asset side as a Current Asset.

Profit & Loss A/c Balance Sheet

15. GOODS SENT ON SALE OR APPROVAL BASIS : Generally, goods supplied on approval are recorded as sales. But this cannot be treated as sales until the express or implied consent of the buyer is obtained.
Adjusting Entry Sales A/c Dr. To Debtors A/c (with sale price of goods sold on approval basis) Stock A/c Dr. To Trading A/c (with cost of goods sold on approval basis) Shown as a deduction from Sales (with sale price) Added to the Closing Stock on credit side. Shown on the Assets side by way of deduction from the Debtors. (with sale price) Shown on the Assets side by way of addition to the Closing Stock. (with cost price)

Trading A/c Balance Sheet

Illustration 2: Trial Balance of M/s Pandit Bros. as at 31st March,2007 was as follows:
Rs. Rs.

Cash Bank Wages Salaries Furniture Rent of Building Debtors Bad Debts Purchases Adjustments:

1,000 Capital 5,000 Sales 8,000 Creditors 25,000 15,000 13,000 15,500 4,500 75,000 1,62,000

22,000 1,25,000 15,000

1,62,000

1. Rent of building for one month was paid in advance 2. Closing Stock as on March 31, 2007 amounted to Rs.10,000/-

3. Wages Outstanding amounted to Rs.500/4. Salaries included Rs.5,000/- paid in advance to an employee 5. Furniture to be depreciated @ 10%. 6. Debtors included bad debts Rs.2,500/-

Prepare Trading and Profit and loss A/c and Balance Sheet

Illustration 3: From the following Trial Balance of Mr. Ram, prepare a Trading and Profit and Loss A/c for the year ending on 31st March, 2006 and a Balance Sheet as on that date: Dr. Trial Balance Cr.
Rs. Rs.

Plant & Machinery Office Furniture Stock (1.4.2005) Motor Van Debtors Cash in Hand Cash at Bank Wages (factory) Wages (office) Purchases Bills Receivable Sales Return Drawings Rent

51,000 2,600 48,000 12,000 45,000 400 6,500 1,50,000 14,000 2,13,500 7,200 9,300 6,000 6,000

Capital Creditors Sales Bills Payable Purchase Return Provision for Bad Debts Discount Received

41,000 52,000 4,80,000 5,600 5,500 2,500 3,700

Illustration 3 contd..

Lightning Telephone Insurance Advertisement General Expenses Bad Debts Discount Allowed

800 1,350 300 6,350 1,000 2,500 6,500 5,90,300 5,90,300

The following adjustments are to be made: (a) Stock on 31st March,2006 was valued at Rs.52,000/(b) Rent due but not paid Rs.2,000/(c) Lightning due but not paid Rs.300/(d) Insurance Paid in advance Rs.100/(e) Depreciate Plant & Machinery @ 331/3%; Office Furniture @ 10%; Motor Van @ 331/3%

(f) The Provision for Bad Debts has to be increased to Rs.3,000/(g) The Provision for Discount on Debtors and Discount on Creditors is to be made @ 2.5% (G.P. Rs.1,16,700/-; N.P. Rs.57,890/-; B/S Total Rs.1,51,490/-)

Illustration 4: From the following information prepare Final Accounts:

Trial Balance as on 31st March,2006

Purchases (Adjusted) Wages Rent of Building Insurance and rates (including premium of Rs.150 p.a. paid up to 30-9-2006) Stock (31-3-2006) Cash Loose Tools Plant Debtors Sundry Expenses 1,49,600 10,450 4,200 200 Sales Capital Commission Creditors 1,60,000 37,550 450 15,000

20,625 925 2,000 17,000 3,000 5,000 2,13,000 2,13,000

Illustration 4 contd.
Adjustments: 1. Loose Tools were valued at Rs.1,600/- on 31-3-2006 2. Depreciate Plant by 10% 3. Manager is entitled to a commission of 10% of net profits after charging such commission. 4. One-third of the building was occupied by the employees who reside in the business building. Treat the value of the perquisite as wages. 5. Wages include Rs.500/- for installation of a plant on 1-10-2005. 6. Loss of stock by fire on 20-3-2006 amounted to Rs.10,000/- and 100% claim was admitted by the Insurance Company.

(G.P. Rs.9,050/-; N.L. Rs.575/-; B/S Total Rs.51,975/-)

Illustration 5: The following is the Trial Balance extracted from the books of Akhilesh as on 30th September, 2007: Particulars Dr. (Rs.) Cr. (Rs.)
Capital A/c Plant and Machinery Furniture Purchases and Sales Returns Opening Stock Discount Sundry Debtors / Creditors Salaries Manufacturing Wages Carriage Outwards Provision for Doubtful Debts Rent, rates and Taxes Advertisements Cash ---78,000 2,000 60,000 1,000 30,000 425 45,000 7,550 10,000 1,200 ---10,000 2,000 6,900 2,54,075 1,00,000 ------1,27,000 750 ---800 25,000 ---------525 ---------2,54,075

Prepare Trading & Profit and Loss A/c for the year ended on 30th September,2007 and a Balance Sheet as on that date after taking into account the following adjustments:
1. Closing Stock was Valued at Rs.34,220/2. Provision for Doubtful Debts is to be kept at Rs.500/3. Depreciate Plant & Machinery @ 10% 4. The proprietor has taken goods worth Rs.5,000/- for personal use and additionally distributed goods worth Rs.1,000/- as samples. 5. Purchase of furniture Rs.920/- has been passed through Purchases Book. (G.P. Rs.67,890; N.P. Rs.38,740/-, B/S Total Rs.1,58,740/-)