FINAL ACCOUNTS

As per accounting cycle the transactions are first recorded in journal, from where they are posted to the relevant ledger account then account is balanced and a trial balance is prepared. After the trial balance final accounts are prepared to achieve the objectives of accountancy
1

FINAL ACCOUNTS
ORGANIZATION
PROFIT MAKING ORGANIZATION Also called Business organization NON-PROFIT MAKING ORGANIZATION Final Account in the form of: Receipt & Payment A/c Income & Expenditure A/c Balance Sheet

MANUFACTURING ORGANIZATION Final Account in the form of: Manufacturing Trading A/c Profit & Loss A/c Balance Sheet

TRADING ORGANIZATION Final Account in the form of: Trading A/c Profit & Loss A/c Balance Sheet
2

FINAL ACCOUNTS
Final accounts are the means of conveying to the management, owners and interested outsiders a concise picture of profitability and financial position of business. It is the end product of accounting process which gives consolidated accounting information of the accounting period, after the accounting period is over. (i) Net result i.e. profit or loss made by the organization during the accounting period. (ii) To know the financial position of the business i.e. assets and liabilities of the business as on given date
3

FINAL ACCOUNTS
Components: - Trading a/c - Profit and loss a/c - Balance sheet

Trading account
Trading account is the first part of final account which is prepared to calculate the gross profit or gross loss of the business concern. The determination of the gross profit/loss is very important because it is essential for the trader to know whether his core activity is efficient in earning or not. Need or Importance's: - To determine the cost of production - To assemble all the direct expenses - To ascertain the performance by Gross profit margin. - To help to calculate the ratio of cost of good 5 sold.

 Usual items on the debit side 1. Opening stock: It is the goods which remain unsold at the end of previous year. 2. Purchase and purchase returns: Purchase means purchase of raw materials or resale goods made during the year. Both cash and credit purchase are taken into consideration but purchase return is deducted from purchase, which gives net purchase. 3. Purchase expenses: All the expenses that are incurred to bring the raw material or goods upto the godown are purchase expenses. 4. Manufacturing expenses: All expenses incurred in factory for manufacturing the goods. Usual items on the CREDIT side 1. Sales and sales return: Sales include both cash and credit sales of trading goods but sales return must be deducted to give net sales. 2. Closing stock: It denotes the value of goods which remain unsold at the end of trading period. It should be valued at cost or market price, whichever is less. 6 3. Good lost by fire, theft

Dr.
To Opening stock To Purchases

Trading A/c

Cr.
By Sales Less: Sales return By Good Loss by Fire, theft etc By closing stock By Gross Loss c/d

To To To To To To To To To To To To

Less: Purchase return Less: Goods drawing Less: Goods used in business

Carriage or carriage inwards Freight inwards Import duty Octroi (Municipal charge) Clearing charge (port charge) wages (Wages and salaries) Factory rent, rates, tax, insurance Depreciation of Factory Motive power Excise duty Royalty, fees etc Gross Profit c/d

Trading A/C
Function: Calculate the gross profit or gross loss.
Gross profit: Net Sales>Cost of sales

Net SalesCost of goods sold Gross profit / Gross loss

Net Sales = Sales Returns inwards Cost of goods sold = Opening stock (Net Purchases +Carriage inwards) + Direct Expenses - Closing stock

Net Purchases = Purchases Returns outwards

Gross loss: Cost of sales>Net sales

8 8

prepare a trading account on 31st December, 2009 of X & Co from the following balances. Rs Stock on 1st January 11,000 Returns outwards Rs 500

Bills receivables
Purchases Wages Insurance Sundry debtors Carriage inwards Commission (Dr.)

4,500
2,800 700 800 800

Salary expenses
Cash in hand Cash at bank Carriage outwards Sales

200
1,000 500 4,750 1,100 1,450 60,000

39,000 Office fixtures

30,000 Factory Rent and taxes

Dep of factory building

1000

Dep of Office building

500

Motive power
Interest on Bank Loan Stationary

200
700 450

Royalty
Bills payable Creditors

300
3,000 19,650

Returns inwards Closing Stock

1,300 10,000

Capital

17,900
9

Profit and loss account

Profit and loss account is the second part of final account. After the preparation of Trading a/c the next step is to prepare profit and loss a/c with a view to ascertain net profit or net loss during the accounting period. Need or Importances: - To determine the net profit or net loss - To determine the ratios of indirect 10 expenses and net profit

 Usual items on the debit side 1. Gross loss: Transferred from Trading a/c. 2. Office and Administrative expenses: All expenses related to office and administrative. 3. Selling and Distribution expenses: It includes the expenses arise due to the sales promotion and distribution of final product. 4. Other items: Other expenses not treated in above heads but they are necessarily post in p/l a/c Usual items on the Credit side 1. Gross profit: Transferred from trading a/c. 2. Revenue received: This includes the income received in any course of business transactions. 11

Dr.
To To To To To To To To To To To To To To To To To To To

salaries or salaries & wages Office rent/lighting/insurance Printing and stationary legal charges/audit fees Postage and telegram depreciation of office building Interest on loan/ Bank charges discount allowed Salesman salaries/ Commission Advertisement/Free samples Bad debts Traveling expenses Carriage outward Repairs and renewals manager commission provision for taxation provision for debts Loss on sale of fixed assets Net profit c/d

Profit & Loss A/c

By Gross Profit b/d By Commission received By Discount received By Rent received By Bad debts recovered By Transfer fees By Interest received By Dividend received By Profit on sale of fixed asset By Sale of scrap By Miscellaneous income By Net loss c/d

Cr.

12

Profit and loss A/C

Functions: calculate the net profit / net loss.
Net profit: Gross profit+Income>Expenses

Gross profitOther incomeExpensesNet profit / Net loss

Net loss: Expenses>Gross profit+Income

Other income= rental income + commission income+

Expenses=rent and rates+commission +electricity+

13

prepare a Profit & Loss account on 31st December, 2009 of X & Co from the following balances. Rs Stock on 1st January Bills receivables 11,000 Dep. of delivery van 4,500 2,800 700 200 800 800 Salary expenses Gross Profit Cash at bank Factory Rent and taxes Carriage outwards Sales Rs 500 200

Purchases
Travelling expenses Insurance of Factory Discount (Cr) Carriage inwards Commission (Dr.)

39,000 Office fixtures

1,000
20,000 4,750 1,100 1,450 60,000

Dep of factory building

1000

Dep of Office building

500

Motive power
Interest on Bank Loan Printing & Stationary Commission received

200
700 450 300

Postage
Bills payable Creditors Capital

300
3,000 19,650 17,900 14

Closing Stock

10,000

Office Rent

2,000

Balance sheet
Balance sheet, the last part or third part of final account, is the accounting statement prepared from accounting balance at a given date in order to show the financial position of the organisation. A balance sheet shows the assets and liabilities grouped properly classified and arrange in a specific manner. Need or Importances: - To shows the financial position of organisation - To test the liquidity position - To know the solvency position - To insists the assets and liabilities management
15

Liabilities

Balance Sheet

Assets

Share holder's Fund Share capital Reserve & surplus P/L a/c Retained earning Sinking fund Long Term Liabilities Debentures Bonds Bank loan Mortgage loan Secured loan Current Liabilities Bank overdraft Creditors Bills payable Outstanding expenses Provision for taxation Proposed dividend Advance income

Fixed Assets Land and Building/Plant and Machinery Furniture and fixture/ Motor vehicles Long term investment Goodwill/Patent/Trade mark/Copyright Current Assets Debtors /Account receivable Stock/Inventory Marketable securities Loans and Advance Cash & Bank Prepaid and Accrued income Short term investment Fictitious Assets P/L a/c (Dr.) Preliminary expenses Advertisement expenses 16

prepare a Balance Sheet on 31st December, 2009 of X & Co from the following balances.

Prepaid rent
Bills receivables Purchases Travelling expenses Advance Commission

Rs 1,000
4,500 2,800 700 800 800

Rs Machinery Salary expenses Cash in Hand Cash at bank Carriage outwards Sales 50,000 200 1,000 2,000 5,000

39,000 Office fixtures

Net Profit (P/L a/c)

Carriage inwards Commission (Dr.)

10,000 Factory Rent and taxes

1,100
1,450 60,000

Dep of factory building Reserve & surplus

Bank Loan Printing & Stationary

1000 3,000
450

Good will Postage

Creditors

500 300
3,000 5,000
17

20,000 Bank Overdraft

Commission received

300

Share Capital

prepare a trading and profit and loss account and balance sheet on 31st December, 2009 of XYZ Co from the following balances. Rs Stock on 1st January Bills receivables Purchases Wages Insurance 11,000 4,500 39,000 2,800 700 Returns outwards Office expenses Office fixtures Cash in hand Cash at bank Rs 500 200 1,000 500 4,750

Sundry debtors
Carriage inwards

30,000
800

Tent and taxes

Carriage outwards

1,100
1,450

Commission (Dr.)
Interest (Dr) Stationary Returns inwards

800
700 450 1,300

Sales
Bills payable Creditors Capital

60,000
3,000 19,650 17,900

Additional Information: Closing Stock is Rs. 8000.

18

The rules to prepare the Final Account:

Debit Assets Drawings Credit Balance Sheet

Liabilities Capital

Trading A/c

Expenses/Loss

Income/ Gains

Profit & Loss A/c

19

The rules to prepare the Final Account

A/C Head
Assets Capital

Trial Balance
Dr side Cr Side

Final A/c
Balance Sheet-Assets Side

Liabilities Cr Side
Expenses Dr Side /Loss

Balance Sheet-Liabilities Side

Balance Sheet-Liabilities Side Direct Expenses- Trading A/c Dr side

Indirect Expenses- Profit & Loss A/c Dr side

Direct Income like sales Trading A/c Cr side Other Income Profit & Loss A/c Cr 20 side

Income/G Cr side ains

Some Exceptions
A/C Head Drawing Trial Final A/c Balance Dr side Balance Sheet-Assets Side or Drawing can be deducted from Capital in Liabilities side

Return Cr Side Return outward (purchase return) should Outward be deducted from Purchase in Trading A/c Return Inward Dr Side Return inward (Sales return) should be deducted from Sales in Trading A/c
21

Adjustments for Final Accounts

22

Prepayments and Accruals

Expenses and revenues are not always paid or received on time. Cash paid and received in a year should not be entered directly into the profit and loss account of that year. Adjustment should be made.

23

 Prepaid expenses
those to be used in the following period but have been paid for in advance.

Accrued expenses
those which have been used up in the current year, but have not yet been paid for.

Prepaid income
those to be earned in the following period but have been received in advance.

Accrued income
those which have been earned in the current period but have not yet been received.
24

Prepaid Expenses
Those Expenses to be used in the following period but
have been paid for in advance. Following transaction is given below: Trial Balance as on 31st Dec, 2009

Particulars Rent

Debit

Credit

Transferred Profit & Loss a/c

Dr. 3000 Cr.

15000

Adjustment : Rent includes Rs 3000 of 1st Quarter, 2010.

Adjustment journal entries: Prepaid Rent expenses a/c To Rent expenses a/c
Treatment Adjustment entries: Balance sheet Current Assets Profit & Loss a/c: Rent expense: Less: Prepaid rent

3000

Prepaid rent expenses 3000 15000 3000 1200025

Accrued Expenses:Outstanding/Due
those which have been used up in the current year, but
have not yet been paid for. Following transaction is given below: Trial Balance as on 31st Dec, 2009

Particulars Rent

Debit

Credit

Transferred Profit & Loss a/c

Dr. 1000 Cr.

11000

Adjustment : Rent Accrued Rs 1000 on 31st Dec, 2009.

Adjustment journal entries: Rent expenses a/c To Accrued Rent a/c
Treatment Adjustment entries: Balance sheet Current Liabilities Profit & Loss a/c : Rent expense: Add: Accrued rent

1000
1000 1200026

Accrued rent 11000 1000

 Those income to be earned in the following period but

have been received in advance. Following transaction is given below: Trial Balance as on 31st Dec, 2009

Prepaid Income:Advance Income

Particulars Service fees

Debit

Credit 1200

Transferred Profit & Loss a/c

Dr. 200 Cr.

Adjustment : Service fees earned to the extent of 1000.

Adjustment journal entries: Service fees a/c To Advance income a/c
Treatment Adjustment entries: Balance sheet Current Liabilities Profit & Loss a/c : Service fees: Less: Advance

200
Advance income 200 1000
27

1200 200

Accrued income
Those income which have been earned in the current
period but have not yet been received. Following transaction is given below: Trial Balance as on 31st Dec, 2009

Particulars

Debit Credit

Transferred

Interest 2500 Profit & Loss a/c Income : Interest income accrued Rs 500 on31st Dec,2009 Adjustment
Adjustment journal entries: Accrued interest income a/c To Interest income a/c
Treatment Adjustment entries: Balance sheet Current Assets Profit & Loss a/c : Interest income: Add: Accrued income

Dr. 500

Cr.

500

Accrued interest income 500 2500 500 3000 28

Other Adjustments:Depreciation
Depreciation is the Gradual reduction of Fixed Assets
because of wear & tear i.e. Continious use Following transaction is given below: Trial Balance as on 31st Dec, 2009

Particulars Machinery

Debit Credit

Transferred

5000 Balance Sheet 0 Adjustment : Depreciation for the year @10%p.a

Adjustment journal entries: Depreciation a/c To Machinery a/c
Treatment Adjustment entries: Profit & Loss a/c Expenses Balance sheet : Fixed Assets: Machinery Less: Depreciation

Dr. 5000

Cr.

5000

Depreciation on Machinery 500 50000 5000

29

45000

Adjustments: Fictitious Assets write off

Like Depreciation, Fictitious (Intangible) Assets decrease
year to year called written off Following transaction is given below: Trial Balance as on 31st Dec, 2009

Particulars Goodwill

Debit Credit 1000

Transferred Balance Sheet

Dr. 200 Cr.

Adjustment : 1/5 th Goodwill is write off.

Adjustment journal entries: Goodwill write off a/c To Goodwill a/c
Treatment Adjustment entries: Profit & Loss a/c Expenses

200

Goodwill write off 200 1000 200

30

Balance sheet : Fixed Assets: Goodwill Less: goodwill write off

800

 A Part of Debtors who failed to pay the due

amount Following transaction is given below: Particulars Trial Debit Credit 31st Dec, 2009 Balance as on Transferred
Bad debts Debtors 1000 8000 Profit & Loss a/c Balance Sheet

Other Adjustments:Bad Debts

Adjustment : Bad debts amounting 500. Adjustment journal entries: Dr. Bad debts a/c 500 To Debtors a/c
Treatment Adjustment entries: Profit & Loss a/c : Expenses :
Bad debts: Add: new bad debts: Balance sheet : Current Assets: Debtors Less: new bad debts

Cr.
500
1000 500 8000 500 1500
31 7500

Following transaction is given below: Trial Balance as on 31st Dec, 2009

Particulars Bad debts Debtors Debit 1000 8000 Credit Transferred Profit & Loss a/c Balance Sheet

Adj: Bad Debts & Provision for bad debts

Adjustment : Bad debts amounting 500.& Provision for bad debts @2%
Treatment Adjustment entries: Profit & Loss a/c : Expenses : Bad debts: Add: new bad debts: Add: new provision: (8000-500) @2%
Balance sheet : Current Assets: Debtors Less: new bad debts Less: new provision 1000 500 150 8000 500 150
32

1650

7350

Following transaction is given below: Trial Balance as on 31st Dec, 2009

Particulars Debit Provision for tax Credit 5000

Adjustments: Provision for Tax

Transferred Balance sheet (CL)

Adjustment : Provision for tax amounting Rs 3000. Adjustment journal entries: Dr. Cr. Provision for tax exps a/c 3000 To Provision for tax a/c 3000
Treatment Adjustment entries: Profit & Loss a/c : Expenses : provision fro tax : Balance sheet : Current Liabilities : Provision fro tax Add: new Provision
3000 5000 3000
33

8000

Following transaction is given below:

Adjustments: Good Lost by fire, theft etc

Adjustment : Good Lost by fire Rs 3000, And Insurance Company admitted the claim of Rs 2000 only.
Adjustment journal entries: Good Lost by theft a/c Insurance Claim A/c To purchased a/c Dr. 1000 2000 Cr.

3000

Treatment Adjustment entries: Trading A/c : Cr side (either deduction from purchase in Dr side) By Good Lost 3000 Profit & Loss a/c : (Actual Loss) To Loss on fire, theft : Balance sheet : Current Assets : Insurance Claim 1000 2000
34

Prepare a trading and profit and loss account and balance sheet on 31st December, 2009 of XYZ Co from the following balances.
Trial Balance As on 31st December, 2009 of XYZ Co from the following balances.

35

Particulars Stock at beginning Bad Debts Purchases Wages

Rs (Dr)

Particulars

Rs (Cr) 600 51,500 10,000

8,000 Returns outwards 500 Sales Revenue 30,000 Bank Loan 1,000 10% Debenture

15,000
5,000
20,000

Furniture & Fixture

Sundry debtors Carriage inwards Commission Interest Cash & bank Stationary expenses Returns inwards Preliminary expense Plant & Machinery Rent, and taxes

18,000 Creditors
12,500 Capital 200 Provision for Tax 800 Rent Received 1,000 Profit & Loss a/c 4,000 Proposed Divided 1,500 Transfer fees 500 Discount 1,000 Reserve & Surplus 40,000 Total 600

2,000 1,000
6,000 3,000 400 500

5,000
120,000
36

Additional Information: 1. Closing Stock is Rs. 8000. 2. Depreciation for furniture @ 20%. On Plant & Machinery @ 10% 3. Outstanding wages Rs 500 4. Unearned rent is Rs 200 5. 2/5 of the preliminary expenses is written off. 6. Further bad debts Rs 1500 And provision for bad debts @ 2%.

37