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Preparation of Final Accounts

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Final Accounts of a Company

A company needs to prepare its final accounts to ascertain the profit earned or loss suffered during the year and also the financial position of a business at the end of the year. For this purpose the company is preparing Final Accounts which is also known as Financial Statements. These include the following: 1. Trading Account 2. Profit and loss Account 3. Balance Sheet Trading Account: Trading Account is prepared to know the gross profit or gross loss arising or incurred as a result of the trading activities of a business. In other words, it is prepared to show the result of buying and selling of goods. The Trading Account shows the results of buying and selling of goods. In preparing this account, the general establishment charges are ignored and only the transactions in goods are included

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Need and Importance of Trading Account: It provides information about Gross Profit and Loss It provides information about the direct expenses Comparison of closing stock with those of previous year It provide safety against possible losses Preparation of Trading Account: Items written on the Dr. Side of Trading Account: Opening Stock Purchases and Purchases Return Direct Expenses, which includes Wages, Carriage inwards, Manufacturing expenses, Dock Charges, Import Duty, Excise Duty, Octroi, Royalty Items written on the Cr. Side of Trading Account: Sales and Sales Return Closing Stock

Form of Trading Account Trading A/c (For the year ended..) Particulars To Opening Stock To Purchases Less Purchase Return To wages To Wages & Salaries To Direct Expenses To Carriage To Carriage inwards To Gas, Fuel, and Power To Freight, Octroi and Cartage To Manufacturing Expenses To Factory Expenses To Dock Charges To Import Duty To Excise Duty To Royalty To Gross Profit (Transferred to P&L A/c) (Balancing Figure) Amount Particulars

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Amount

By Sales Less: Sales Return By Closing Stock By Gross Loss (Transferred to P&L A/c) (Balancing Figure)

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Prepare a Trading Account for the year ended 31 Dec 1993 from the following Balances:
Opening Stock Purchases Sales Freight and Octroi Wages Factory Lighting Coal, Gas and Water Purchase Return Sales Return Carriage on Purchase Carriage on Sales Factory Rent Office Rent Import Duty Closing Stock is valued at Rs. 60, 000 40, 000 2, 00, 000 5, 00, 000 6, 500 30, 000 10, 800 2, 200 12, 000 20, 000 8, 000 10, 000 12, 000 7, 500 32, 000

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Profit and Loss Account:

Trading account only discloses the gross profit earned as a result of buying and selling the goods. However, a businessman has to incur a number of expenses which are not taken to trading account. Hence a businessman is more interested in knowing the net profit earned or net loss incurred during the year. As such, a profit or loss account is prepared which contains all the items of losses and gains pertaining to the accounting period.

Form of Profit and Loss Account Profit and loss A/c (For the year ended..) Particulars To Gross Loss b/d (Transferred from Trading A/c) Office Expenses: To Salaries To Salaries and Wages To Rent, Rates & Taxes To Printing and Stationery To Postage & Telegram To Lighting To Insurance Premium To Telephone Charges To Legal Charges, Audit Fees To Traveling, Establishment Exp Selling and Distribution Exp. To Carriage Outwards To Advertisement, commission To Brokerage, Bad-Debts TO Export Duty, Packing Charges Miscellaneous Expenses: To Discount, Sales tax To Repairs, Depreciation, interest Exp To Bank Charges, Entertainment Exp To Conveyance Expenses Amount Particulars By Gross Profit b/d (Transferred from Trading A/c) By Rent from Tenants By Discount Received By Commission Received By interest on Investment By Dividend Received By Bad-Debts Recovered By profit on sale of assets By Net Loss (if any) (Transfd to Capital A/c)

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Amount

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Balance Sheet

The balance sheet (also called statement of financial position or statement of financial condition) is a snapshot of the financial status of an organization at a point in time.

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Need and Importance of Balance Sheet:

Ascertain the true financial position of a company Help in ascertaining the nature and cost of various assets of the business Help in determining the nature and amount of various liabilities of the business Gives information about amount of capital at year end and addition and deduction during the year Helps in finding whether the firm is solvent or insolvent Helps in preparing the opening entries at the beginning of the next year

Classification of Liabilities
Fixed or long-term liabilities Current or short-term liabilities Contingent Liabilities

Classification of Assets:
Fixed Assets Current Assets Liquid Assets Fictitious or Nominal Assets Wasting Assets Tangible and Intangible Assets

Liabilities Current Liabilities: Bank Overdraft Bills Payable Sundry Creditors Outstanding Expenses Unearned income Fixed Liabilities: Long Term loan Reserves Capital: Add : Net Profit Less : Drawings Less : Income Tax Less : Life insurance Premium

Form of Balance Sheet BALANCE SHEET (as on or as at..) Amount Assets

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Amount

Current Assets Cash in Hand Cash at Bank Bills Receivable Short term investment Sundry Debtors Closing Stock Prepaid Expenses Accrued Income Fixed Assets Furniture Loose Tools Motor Vehicle Long Term investments Plant and Machinery Land and Buildings Patents Goodwill