3. CONCEPT OF FINALACCOUNTS
Final accounts give an idea about the profitability and
financial position of a business to its management, owners,
and other interested parties.
All business transactions are first recorded in a journal. They
are then transferred to a ledger and balanced. These final
tallies are prepared for a specific period.
4. Basically, ‘Financial Statement’ includes two basic
statements:
Balance Sheet(Position Statement) - showing financial
position of the company
Trading and Profit & Loss account(Income Statement) –
showing the financial performance of business operations
5. USEFULNESS OF FINALACCOUNTS
The information contained in these statements is used by
the management, present and potential investors,
lenders, short-term creditors, employees customers,
governments and their agencies to satisfy some of their
different needs for information.
6. Owners and managers use financial statements to
make important long-term business decisions.
Prospective investors use financial statements to
perform financial analysis, which is a key component in
making investment decisions.
A lending institution will examine the financial
health of a person or organization and use the financial
statement to decide whether or not to lend funds.
7. ELEMENTS OF FINANCIAL STATEMENTS
ELEMENTS
Relating to
Measurement of
Financial Position
Asset Liability Equity
Relating to
Measurement of
Profit
Income Expenses
8. ASSETS
An item of property owned by a person or company,
regarded as having value and available to meet debts,
commitments, or legacies
9. LIABILITIES
The state of being legally responsible for something.
OR
A thing for which someone is responsible, especially an
amount of money owed.
10. EQUITIES
The value of an asset less the value of all liabilities on
that asset.
The definition of equity can be represented with the
accounting equation:
Equity = Assets - Liabilities
12. EXPENSES
The cost incurred in or required for something.
OR
The costs incurred in the performance of one's job
or a specific task.
13. FORMAT OF TRADING ACCOUNT
In the heading of the Trading Account the words ‘For the
year ended……’ are used. Because it discloses the position
of the business for the full accounting year and not at a
particular point of time.
For example:
Trading Account a/c of ..........
For the year ending...........
14. Particular Amount Particulars Amount
Rs. Rs.
To Opening Stock
To Purchases
Less: Purchase Returns
or
Returns outward
To Wages
To Wages & Salaries
To Direct Expenses
To Carriage, or
To Carriage inwards, or
To Carriage on Purchase
To Gas, Fuel and Power
To Freight, octroi and cartage
To Manufacturing Expenses, or
Productive Expenses
To Factory Expenses, such as:
Factory Lighting
Factory Rent etc.
To Dock Charges and
Clearing charges
To Import Duty or Custom duty
To Royalty
To Gross Profit
Transferred to P & L A/c
(Balancing Figures
By Sales
Less: Sales Returns
or
Returns inwards
By Closing Stock
By Gross loss
(if any) transferred to
Profit and Loss A/c
(Balancing Figure)
15. FORMAT OF PROFIT AND LOSS ACCOUNT
1. Those expenses which are not related to the business
are not written in the Profit and Loss Account such as
(i) Domestic and household expenses of the
proprietor,
(ii) Income-Tax,
(iii) Life Insurance Premium etc. These expenses are
known as Drawings and deducted from Capital at the
liabilities side of the Balance Sheet.
16. Particular Amount Particulars Amount
Rs. Rs.
To Gross Loss b/d (if any)
(Transferred from
Trading A/c)
Office Expenses:
To Salaries
To Salaries & Wages
To Rent, Rates & Taxes
To Printing & Stationery
To Postage & Telegram
To Lighting
To Insurance Premium
To Telephone Charges
To Legal Charges
To Audit Fees
To Travelling Expenses
To Establishment Expenses
To Trade Expenses
To General Expenses
By Gross Profit b/d
(Transferred from Trading
A/c)
By Rent from Tenant
By Rent (Cr.)
By Discount received
or discount (Cr.)
By Commission Received
By Interest on Investments
By Dividend on Shares
By Bad-Debts Recovered
By apprentice Premium*
By Profit on sale of Assets
By Income from other
Sources
By Miscellaneous Receipts
By Net Loss (if any)
Transferred to Capital
A/c
Profit and Loss a/c of ............
For the year ending.........
17. Particulars Amount Particulars Amount
Rs. Rs.
Selling and Distribution
Expenses:
To Carriage Outwards, or
Carriage on Sales
To Advertisement
To Commission
To Brokerage
To Bad-debts
To Export Duty
Packing charges
To Delivery Van Expenses
To Stable Expenses
Miscellaneous
Expenses:
To Discount
To Repairs
To Depreciation
To Interest (Dr.)
To Bank Charges
To Entertainment Expenses
To Conveyance Expenses
To Donation and Charity
To Loss on Sale of Assets
To Net Profit:
Transferred to Capital A/c
19. Liabilities Rs Rs Assets Rs Rs
Capital XXX Sundry debtors XXX
Add: Net Profit (or) XXX Less: Bad debts written off XXX
Less: Net Loss XXX XXX Less: Provision for Bad & doubtful debts XXX
Less: Provision for discount on debtors XXX XXX
Less: Drawings XXX Land and Buildings XXX
Interest on drawings XXX XXX
Less: Depreciation
XXX
XXX
Plant & Machinery XXX
Less: Depreciation XXX XXX
Furniture XXX
Less: Depreciation XXX XXX
Goodwill XXX
Less: Written off XXX XXX
Cash in Hand XXX
Cash at Bank XXX
Closing stock XXX
Prepaid expenses XXX
Accrued Commission XXX
21. (a) CLOSING STOCK (b) OUTSTANDING
EXPENSES
(c) PREPAID EXPENSES (d) ACCURED INCOMES
(e) INCOME RECEIVED
IN ADVANCE
(f) INTEREST ON
CAPITAL
(g) INTEREST ON
DRAWINGS
(h) INTEREST ON LOAN
(i) INTEREST ON
INVESTMENT
(j) DEPRECIATION
(k) BAD DEBTS (l) PROVISION OF BAD
AND DOUBTFUL DEBTS
(m) PROVISION FOR
DISCOUNT ON
DEBTORS
(n) PROVISION FOR
DISCOUNT ON
CREDITORS
Items to be adjusted in final accounts
22. (a) Closing Stock
The unsold goods in stock at the end of the accounting
period. This is to be valued at cost or market price
whichever is lower.
23. Value of closing stock will appear
(a) When closing stock appears outside the trial balance
i) on the credit side of trading account and
ii) on the assets side of balance sheet.
(b) When closing stock appears inside the trial balance
i) on the assets side of balance sheet
24. (b) Outstanding Expenses
Expenses which have been incurred but not yet paid
during the accounting period for which the final
accounts are being prepared.
Outstanding expenses will be shown
i) on the debit side of Profit and Loss account by way
of additions to the particular expenses and
ii) on the liabilities side of the Balance Sheet.
25. (c) Prepaid Expenses
Expenses which have been paid in advance are called as
prepaid (unexpired) expenses.
Prepaid expenses will be shown
i) on the debit side of the Profit and Loss account by
way of deduction from the particular expenses and
ii) on the assets side of the Balance Sheet.
26. (d) Accrued Incomes or Outstanding Incomes
Income which has been earned but not received during
the accounting period is called as accrued income.
Accrued income will be shown
i) on the credit side of Profit and Loss account by
way of addition to particular income and
ii) on the assets side of the Balance Sheet
27. (e) Incomes Received in Advance
Income received during a particular accounting period
for the work to be done in future period.
Incomes received in advance will be shown
i) on the credit side of the Profit and Loss account by
way of deducting from the particular income and
ii) on the liabilities side of the Balance sheet.
28. (f) Interest on Capital
In order to see whether the business is really earning
profit or not, it is desirable to charge interest on capital
at a certain rate.
Interest on capital will be shown
i) on the debit side of Profit and Loss account and
ii) on the liabilities side of the Balance Sheet by way of
addition to the capital.
29. (g) Interest on Drawings
Amount withdrawn by the owner for his personal use is
drawings. When interest on capital is allowed, then
interest on drawings is charged from the owner.
Interest on drawings is an income for the business and will
reduce the capital of the owner.
Interest on drawings will be shown
i) on the credit side of Profit and Loss account and
ii) on the liabilities side of the Balance Sheet by way of
addition to the drawings which are ultimately
deducted from the capital.
30. (h) Interest on Loan (Outstanding)
Borrowings from banks, financial institutions and
outsiders for business are called loans. Amount payable
towards interest on loan is an expense for the business.
Interest on loan outstanding will be shown
i) on the debit side of the Profit and Loss account by
way of addition to the appropriate interest account and
ii) on the liability side of the Balance sheet by way of
addition to the particular loan account.
31. (i) Interest on Investment
Interest receivable on investments is an income for the
business.
Accrued interest on investments (outstanding interest
receivable) will be shown
i) On the credit side of the Profit and Loss account by
way of addition to the appropriate interest account
and
ii) On the assets side of the balance sheet by way of
addition to the investments account.
32. (j) Depreciation
Depreciation is the reduction in the value of fixed assets
due to its use or obsolescence. Generally, depreciation is
charged at some percentage on the value of fixed asset.
Depreciation will be shown
i) on the debit side of Profit and Loss account and
ii) on the assets side of the Balance Sheet by way of
deduction from the value of concerned asset.
33. (k) Bad Debts
Debts which cannot be recovered are called bad debts.
It is a loss for the business.
Bad debts will be shown
i) on the debit side of Profit and Loss account and
ii) on the assets side of the Balance Sheet by way of
deduction from sundry debtors.
34. (l) Provision for Bad and Doubtful Debts
Every business suffers a percentage of bad debts over and
above the debts definitely known as irrecoverable and
written off as Bad (Bad debts written off).
If Sundry debtors figure is to be shown correctly in the
Balance sheet provision for bad and doubtful debts must
be adjusted.
This Provision for bad and doubtful debts is generally
provided at a certain percentage on Debtors, based on past
experience.
35. While preparing final accounts, the bad debts written off
given in adjustment is first deducted from the Sundry
debtors then on the balance amount (Sundry debtors –
Bad debt written off) provision for bad and
doubtful debts calculated.
Provision for bad and doubtful debts will be shown
i) on the debit side of Profit and Loss Account and
ii) on the assets side of the Balance sheet by way of
deduction from Sundry debtors (after Bad debts
written off if any).
36. (m) Provision for Discount on Debtors
To motivate the debtors to make prompt payments, cash
discount may be allowed to them.
After providing provision for bad and doubtful debts, the
remaining debtors are called as good debtors. They may pay
their dues in time and avail themselves of the cash discount
permissible.
So a provision for discount on good debtors at a certain
percentage may have to be created.
37. Provision for discount on debtors will be shown
i) on the debit side of Profit and Loss account and
ii) on the asset side of the Balance sheet by way of
deduction from Sundry debtors (after deducting
bad debts written off and provision for bad and
doubtful debts).
38. (n) Provision for Discount on Creditors
Similar to cash discount allowed to debtors, the firm
may have a chance to receive the cash discount from
the creditors for prompt payment. Provision for
discount on Creditors is calculated at a certain
percentage on Sundry Creditors.
Provision for discount on creditors will be shown
i) on the credit side of Profit and Loss account and
ii) on the liabilities side of the Balance sheet by way
of deduction from Sundry creditors.
39. PROBLEM SOLVING WITH 14 ADJUSTMENTS
The following trial balance is extracted from books of ABC
Ltd. on 31.03.2016
Prepare Trading and Profit and Loss account for the ended
31.03.2016 and Balance Sheet as on that date after giving
effect to above adjustments.
40. PARTICULARS DEBIT CREDIT
MACHINERY
CASH AT BANK
CASH IN HAND
WAGES
PURCHASES
STOCK (01.04.2015)
SUNDRY DEBTORS
BILLS RECEIVABLE
RENT
DRAWINGS
COMMISSION RECEIVED
GENERAL EXPENSES
SALARIES
DISCOUNT RECEIVED
CAPITAL
SALES
BANK LOAN
SUNDRY CREDITORS
PURCHASE RETURNS
SALES RETURNS
INVESTMENT
40000
10000
5000
10000
80000
60000
40000
29000
5500
5000
12000
7500
4000
5000
1000
3000
4000
100000
120000
40000
40000
5000
313000 313000
41. (1)CLOSING STOCK RS. 80000 (2) COMMISSION RECEIVED IN
ADVANCE RS. 1000
(3) RENT NOT YET RECEIVED
RS. 1000
(4)WAGES YET TO BE PAID
RS.500
(5) SALARIES PAID IN
ADVANCE RS. 500
(6)INTEREST ON CAPITAL AT
6% TO BE PROVIDED
(7) INTEREST ON DRAWING @
5%
(8) INTEREST ON BANK LOAN
Rs. 300
(9) DEPRECIATION ON
MACHINERY @ 10% p.a.
(10) INTEREST ON
ADJUSTMENTS @ 5%
(11) WRITE OFF BAD DEBTS
RS.800
(12) MAKE PROVISION FOR
BAD AND DOUBTFUL DEBTS @
5% ON SUNDRY DEBTORS
(13) PROVIDE 2% DISCOUNT ON
DEBTORS
(14) PROVIDE 5% DISCOUNT ON
CREDITORS
ADJUSTMENTS: