Final accounts

final accounts

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2. Financial statement FINAL ACCOUNTS

3. From the balances of various ledger accounts as appearing in the trial balance, we may proceed to prepare the final accounts, viz., Profit and Loss A/ c. for the year ended March 31, 2007 and Balance Sheet as on March 31, 2007. It is to be noted that the balances of all the nominal accounts in the trial balance are posted in the Profit and Loss Account. This account is prepared to ascertain the net results of the business concern, i.e., the net profit or loss the business has earned or incurred during a particular period. The balance of this account represents net profit if the total of the debit side is less than that of the credit side or net loss if the total of the debit side is more than that of the credit side. The amount of net profit or loss is transferred to the Balance Sheet.

4. From Trial Balance. Final Accounts include the preparation of : Trading / Manufacturing account Profit & Loss account Balance Sheet as these three statements are prepared to give the final results of the business, all these are accounts. collectively called as Ac c ou n t i n g c y cle f i nally f i n al ends wi t h these statements as shown in next slide:

5. of Original Entry (ORIGINAL RECORD) Posting in the concerned Ledger account (CL AS S IFIC A TION) Balancing of Real & Personal accounts Preparation of Trial Balance (CHECKING THE ACCURACY) Preparation of final accounts (summary) ACCOUNTING CYCLE TRANSACTIONS Entry in the books

6. Trading Account Trading account is prepared by trading concerns i.e., concerns which purchase and sell finished goods, to know the gross profit or gross loss incurred by them from buying and selling of goods during a particular period of time. Gross profit or gross 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 , gross profit is made. Otherwise,gross loss is made.

7. Trading account Trading account  is a statement which is prepared by a business firm. It shows the gross profit of  business activities  during a specific period. It is a part of the final accounts of the entity. In other words, the trading account gives details of total sales, total purchases and direct expenses relating to purchase and sales. Trading account format for the year contains Particulars, Amount, Dr., Cr., Purchases, Sales, etc. In this  article , we will see the advantages of a Trading account and Trading account format.

8. Trading Account Trading and manufacturing business firms deal in sales and purchases of goods. Therefore, only manufacturing and trading entities prepare the trading account.  Service  providers do not prepare this.

9. Advantages of Preparing Trading Account Format It is a very important statement from the cost point of view of the goods. By preparing the Trading account entities can take the decision for continuing or discontinuing a particular  product . It helps to earn the maximum profit or reduce the losses. With the help of a trading account, Sales tax authorities can easily see the correct purchases and correct sales as per the sales tax return submitted by a business firm. It also helps the Excise authorities to assess the excise duties of business firms. The management decides the price of the product with the help of a trading account, after keeping in mind the market competition.

10. Import Duty Custom Duty Excise Duty Consumable Store Factory Rent, Rates, and Taxes Foreman/ Work er wages Royalty on manufactured goods To Gross Profit c/d*

11. Gross Profit It is the profitability of the goods bought or manufactured, sold by the firm Sales – Cost of Goods sold

12. Sreejith S Fims 2008 Cost of Goods Sold Opening Stock + Purchases - Closing Stock

13. Opening Stock remained unsold stock at the end of previous year. brought into books with the help of opening entry in the first year of a business there will be no opening stock

14. Purchases total purchases i.e. cash plus credit purchases Any return outwards (purchases return) should be deducted out of purchases

15. Buying Expenses All expenses relating to purchase of goods are also debited in the trading account carriage inwards freight, duty, clearing charges, excise duty, import duty, etc

16. Manufacturing Expenses Such expenses are incurred by businessmen to manufacture or to render the goods in saleable condition motive power, gas fuel, stores, royalties, factory expenses, foreman and supervisor’s wages.

17. Sales. Sales mean total sales i.e. cash plus credit sales. If there are any sales returns, these should be deducted from sales.

18. Closing Stock It is the value of stock lying unsold in the godown or shop on the last date of accounting period.

19. Prepare a Trading Account Opening Stock Purchases Carriage Inwards Wages Sales Returns inwards Return outwards Closing Stock 1000 00 6720 00 30 50 1 1 0000 10 00 7 200 20 00

20. To opening stock 1,00,000 By Sales 1100000 -1,00,000(return) 10,00,000 To Purchases 6,72,000 -72,000(return) 6,00,000 By closing stock 2,00,000 To carriage inward 32000 To Wages 50,000 To Gross Profit 418000 12,00,000 12,00,000

21. Sales- 605000 Return inward (sales return)- 4000 Return outward (Purchase return)- 3000 Wages-(labour) 60,000 Import duty- 6000 Factory lightning- 1500 Purchases-3,03000 stock- opening-30,000 Salaries-12000 (official employees) Carriage-22000 Motive power- 50,000 Office light- 500 Closing- 25000

22. Trading account of……for the year ended 31 st march 2020 Particulars (Exp) Amt Particulars (income) Amt To opening stock 30,000 By Sales 605000 -4000 601000 To Purchases 303000 -3000 3,00,000 By closing stock 25000 Wages 60,000 Import duty 6000 Factory light 1500 Carriage 22000 Motive power 50,000 To gross profit transferred to p& l a/c 156500 626000 626000

23. Profit & Loss Account For non-corporate business organisation Profit & Loss account is second part of income statement. It is prepared to know the net loss of business during a particular period. Every businessman has to spend o n e xpens e s othe r than o n manu f a c tu r e o r pu r chase of goods which are called indirect expenses. There can be other incomes except sales. So gross profit or loss is adjusted keeping in view these indirect expenses and other incomes to find out net profit or net loss.

24. Indirect Expenses Selling and distribution expenses Administrative Expenses Financial Expenses Maintenance, depreciations and Provisions etc .

25. Selling and Distribution Exp a) Salesmen's salary and commission (b) Commission to agents (c) Freight & carriage on sales (d) Sales tax (e) Bad debts (f) Advertising (g) Packing expenses (h) Export duty.. etc Sreejith S Fims 2008

26. Administrative Expenses . • • • • • • • • • • • Sreejith S Fims 2008 Office salaries Insurance Legal expenses Trade expenses Rates & taxes Audit fees Insurance Rent Printing and stationery Postage and telegrams Bank charges… etc

27. Financial Expenses (a) Discount allowed (b) Interest on Capital (c) Interest on loan (d) Discount Charges on bill discounted

28. M ain t en a n ce , d epr e ci a t i o n s a n d Provisions etc (a) Repairs (b) Depreciation on assets (c) Provision or reserve for doubtful debts (d) Reserve for discount on debtors. Sreejith S Fims 2008

29. Proforma of Profit & Loss Account Amt

30. Sreejith S Fims 2008 Prepare a Profit and Loss Account • • • • • • • • • S a l a r i e s 110000 Legal Charges 25000 Consultancy fee 32000 Audit Fee 1000 Discount Received 18000 Electricity 17000 G r o s s p r o f i t 420000 P o s t ag e & T e l eg r a m 12000 St a ti o n a ry 27000 Depreciation 65000 Discount Allowed 19000 Bad debts 17000 Interest 70000

31. To salaries 110000 By G r o s s p r o f i t 420000 To legal charges 25000 B y Dis. Received 18000 Consultancy fee 32000 To Audit Fee 1000 Electricity 17000 P o s t ag e & T e l eg r a m 12000 St a ti o n a ry 27000 Depreciation 65000 Discount Allowed 19000 Bad debts 17000 Interest 70000 To net profit 43000 438000 438000

32. Prepare a trading account of M/s Prime Products from the following particulars pertaining to the year 2016-17. Opening stock 50,000 Purchases 1,10,000 Return inwards 5,000 Sales 3,00,000 Return outwards 7,000 Factory rent 30,000 Wages 40,000

33. Prepare a trading account of M/s Anjali from the following information related to March 31, 2017. Opening stock 60,000 Purchases 3, 00,000 Sales 7, 50,000 Purchases return 18,000 Sales return 30,000 Carriage on purchases 12,000 Carriage on sales 15,000 Factory rent 18,000 Office rent 18,000 Dock and Clearing charges 48,000 Freight and Octroi 6,500 Coal, Gas and Water 10,000

34. Particulars Amt Particulars Amt To opening stock 60,000 By sales 7,50,000 ( return)-30,000 7,20,000 To purchases 3,00,000 -18000 2,82,000 To carriage on purchases 12000 To factory rent 18000 To dock clearing charges 48000 To freight charges 6500 To coal, water, gas charges 10,000 To Gross profit transferred to P7 L a/c 2,83,500 720,000 7,20,000

35. From the following information, prepare a profit and loss account for the year ending March 31, 2017. Gross profit 60,000 Rent 5,000 Salary 15,000 Commission paid 7,000 Interest paid on loan 5,000 Advertising 4,000 Discount received 3,000 Printing and stationery 2,000 Legal charges 5,000 Bad debts 1,000 Depreciation 2,000 Interest received 4,000 Loss by fire 3,000

36. Balance Sheet Balance Sheet is a component of financial statements which shows balances of capital, liabilities & assets. All nominal accounts are closed by transferring these to Trading & Profit & Loss Account. Only personal & real accounts are left. Balance Sheet is the final phase in accounting cycle. It is a ‘mirror’ which reflects the true position of the assets & liabities of the business on a particular date. “A statement of financial position of economic unit disclosing as at a given moment of time its assets, liabilities & ownership equities. Eric L.kohler

37. Balance Sheet as on …………………… Amt Assets Fixed Assets: Amt

38. Bill Payable Outstanding Expenses Current Assets: Closing Stock Prepaid Expens e s Accru e d Income Debtors Bill Receivable Cash at Bank Cash in hand

39. ADJUSTMENTS 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 of adjustment will be :- Show on Credit side of the Trading account On asset side of Balance Sheet

40. OUTSTANDING EXPENSES Those expenses which have been incurred & not yet paid. Treatment: Expenses a/c Dr To outstanding expenses Two fold effect: Will be shown on debit side of trading & profit & loss a/c by way of addition to particular expense. Will be shown on liabities side of Balance Sheet.

41. PREPAID EXPENSES Those expenses which have been paid in advance i.e., whose benefit will be available in future is called prepaid expenses. Treatment: Prepaid Expenses a/c Dr To Expenses a/c Two fold effect: Will be shown in profit & loss a/c by way deduction from particular expense . Will be shown on asset side of Balance Sheet .

42. ACCRUED INCOME That income which has been earned but not received during the accounting year is called accrued income. Treatment: Accrued Income a/c Dr To Income a/c Two fold effect: Will be shown on credit side of P & L a/c Will be shown on asset side of Balance Sheet

43. UNEARNED INCOME Income received but not earned during accounting year is called income received in advance. Treatment: Income a/c Dr To Income Received in advance Two fold effect: Will be shown on credit side of P & L a/c by the way of deduction from particular income. Will be shown on liabilities side of Balance Sheet.

44. By G/P XXXX By Rent 5000 -3000(Advance Rent) 2000

45. DEPRECIATION Dep r ecia t io n i s t h e r ed u ct i on i n t h e v alue of fi x ed asset due to its use, wear & tear. Treatment: Depreciation a/c Dr To Asset a/c Two fold effect: Is shown on debit side of P & L a/c Is shown on the Asset side of the Balance Sheet by way of deduction from value of concerned asset

46. BAD DEBTS Debts which are definitely irrecoverable are called Bad Debts. 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. 2. Is shown on assets side of Balance Sheet by way of deduction from Sundry Debtors .

47. INTEREST ON CAPITAL To see whether the business is really earning profit or not ,interest on capital at a certain rate is provided. Treatment : Interest on capital A/c 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.

48. INTEREST ON DRAWINGS Interest on drawings is charged from proprietor ,as drawings reduce capital. Treatment: Drawings A/c To Interest on Drawings A/c Two fold effect will be: It will be shown on credit side of Profit and Loss Account. On liabilities side of Balance Sheet by way of addition to the drawings which are ultimately deducted from the capital.

49. PROVISION FOR DOUBTFUL DEBTS 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 To Provision for Doubtful Debts A/c Two effected accounts will be: 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). Shown on assets side of Balance Sheet by way of deduction from Sundry Debtors (deducting further bad debts if any).