2. • Final Accounts is the last step in the accounting
process. Trial Balance is prepared at the end of all
the accounting year to know the balances of all the
accounts & to test the arithmetic accuracy of
accounts. But the basic objective of accounting is to
know about the profit or loss during the previous
year & present financial position. This can be known
only if Trading account and Profit & Loss account and
Balance Sheet are prepared at the end pf year. These
are also known as FINANCIAL STSTEMENTS which are
prepared.
FINAL ACCOUNTS
3. From Trial Balance. Final Accounts include the
preparation of :
1) Trading
2) Profit & Loss account
3) Balance Sheet
as these three statements are prepared to give
the final results of the business, all these are
collectively called as final accounts.
Accounting cycle finally ends with these
statements as shown in next slide:
4. Entry in the books
of
Original Entry
(ORIGINAL
RECORD)
Posting in the
concerned
Ledger account
(CLASSIFICATION)
Balancing of Real
&
Personal accounts
Preparation of
Trial Balance
(CHECKING THE
ACCURACY)
Preparation of
final accounts
(summary)
ACCOUNTING CYCLE
TRANSACTIONS
5. 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.
6. Specimen Proforma of Trading Account
Dr Trading Account of …….. For the year ending……... Cr
Particulars
To Opening Stock
To Purchases
Less: Returns
To Direct
Expenses:
Carriage Inward
Wages
Wages & salaries
Fuel & power
Coal, water & gas
Octroi
Amt. Particulars
By Sales
Less: Returns
By Closing Stock
By Gross Loss c/d*
Amt.
7. Import Duty
Custom Duty
Excise Duty
Consumable Store
Factory Rent, Rates,
and Taxes
Foreman/ Works Manager’s
Salary
Royalty on manufactured
goods
To Gross Profit c/d*
8. 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
on expenses other than on manufacture or purchase
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.
9. Proforma of Profit & Loss Account
Particulars
To Gross Loss b/d
To Establishment
Charges
To Administrative
Charges
To Selling &
Distribution
expenses
To Financial Charges
Amt Particulars
By Gross Profit b/d
By Other Incomes
By Interest rec.
By Comm. Received
Etc.
By Net Loss
(transferred to capital
account)
Amt
11. 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
12. Balance Sheet as on ……………………
Liabilities
Capital
Add: Net Profit
Less: Drawings
Fixed Liabilities:
Long term loan
Public deposits
Current Liabilities:
Unexpired Income
Short Term Loans
Trade Creditors
Bank Overdraft
Amt Assets
Fixed Assets:
Goodwill
Land and Buildings
Plant & Machinery
Motor Vehicles
Furniture
Patents & Trade Marks
Live Stock
Loose Tools
Investments
Amt
15. 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 :-
1) Show on Credit side of the Trading account
2) On asset side of Balance Sheet
16. OUTSTANDING EXPENSES
Those expenses which have been incurred & not yet paid.
Treatment:
Expenses a/c Dr
To outstanding expenses
Two fold effect:
1.Will be shown on debit side of trading &
profit & loss a/c by way of addition to particular expense.
2. Will be shown on liabities side of Balance Sheet.
17. 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:
1.Will be shown in profit & loss a/c by way
deduction from particular expense.
2. Will be shown on asset side of Balance Sheet.
18. 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:
1.Will be shown on credit side of P & L a/c
2. Will be shown on asset side of Balance Sheet
19. 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:
1.Will be shown on credit side of P & L a/c by the
way of deduction from particular income.
2. Will be shown on liabilities side of Balance Sheet.
20. DEPRECIATION
Depreciation is the reduction in the value of fixed
asset due to its use, wear & tear. Treatment:
Depreciation a/c Dr
To Asset a/c
Two fold effect:
1.Is shown on debit side of P & L a/c
2.Is shown on the Asset side of the Balance Sheet
by way of deduction from
value of concerned asset
21. 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.
22. 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.
23. 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:
1.It will be shown on credit side of Profit and Loss
Account.
2.On liabilities side of Balance Sheet by way of
addition to the drawings which are ultimately
deducted from the capital.
24. 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:
1.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).
2.Shown on assets side of Balance Sheet by way of
deduction from Sundry Debtors (deducting further bad
debts if any).
25. LOSS OF STOCK BY FIRE
Loss of stock may occur due to fire.
The position of business may be:
a) All the stock is fully insured.
b) The stock is partly insured.
c) The stock is not insured at all.
26. a) IF THE STOCK IS FULLY INSURED
The whole loss will be claimed from the insurance
company.
Entry:- Insurance Co. A/c Dr.
To Trading A/c
Effect:-
1.It will be shown on credit side of Trading A/c.
2.It is shown on Assets Side of Balance Sheet.
27. b) IF STOCK IS PARTLY INSURED
The loss of stock covered by insurance policy will be
claimed from the insurance company and the rest of
amount will be loss for the business.
Entry : Insurance Co. A/c Dr.
Profit & Loss A/c Dr.
To Trading A/c
Effect of this entry:
1.Shown on credit side of Trading A/c with the value of stock
& shown on debit side of P& L A/c for that part of the
stock which is not insured.
2.Loss of stock Fire is shown on asset side of the Balance
sheet which amount is to be realised from the insurance
company.
28. c) IF STOCK IS NOT INSURED
Whole loss will be borne by the firm.
Entry:- Profit & Loss A/c Dr.
To Trading A/c
Effect of this entry :-
1.It is shown on the credit side of Trading A/c.
2.It is shown on the debit side of P&L A/c
29. RESERVE FUND
Reserve is created out of profit & Loss A/c and thus is
an appropriation of net profit for strengthening the
financial position of the business.
Treatment :
Profit & Loss A/c Dr.
To Reserve Fund A/c
Two fold effect will be:
1.It is shown on debit side of P&L A/c.
2.It shown on the liabilities side of Balance.
30. MANAGER’S COMMISSION
To increase the profit, manager is given some % age of
commission on profits .It can be given at a certain
percentage on the net profits but before charging such
commission.
Treatment:
Profit & Loss A/c
To Commission Payable
After charging such commission
This commission in calculated by a formula :-
Commission Payable = % of commission * Residual profit
100+Rate of Commission
31. EXAMPLE
M gives the following trial balance as on 31st March ,2010
Dr. Cr.
Plant &machinery 60000 capital 50000
Fixture & fittings (for office) 2400 M’s currents A/c 2500
Stock as on April 1, 2009:
Raw materials
Finished Goods 16300
25400
Sundry creditors 22300
Purchases 93100 Loan at 18% from Indian
Bank
20000
Wages 51300 Sales 250600
Other manufacturing
expenses
16200 Sale of scrap 3600
Office expenses 18700
Sundry expenses 26000
Cash at bank 6600
Patents 18000
Selling expenses 15000
32. 1. On 31st march ,2010 the stock of raw material was 13,300.
2.Deprecation provided by M is 15 % on Plant and
Machinery and 10% on fixtures & fittings (on book value).
3.Patents have two more years to run and concern a vital
production process .
4.Manufactured goods were transferred to selling
department at a value of Rs. 2,00,000.
The value of finished goods (at transfer price ) on hand
on 31st March ,2010 was Rs.30,000; the value of the
finished goods as on April 1,2009 was at cost to M.
Draw the Manufacturing, trading & P&L a/c for 2009-10
and the Balance Sheet of M as at the end of the year.
33. MANUFACTURING ,TRADING AND PROFIT AND LOSS ACOOUNT OF M
for the year ending 31st March ,2010
To raw material consumed: Rs.
Opening stock 16,300
Add: Purchases 93,100
1,09400
Less: Closing Stock 13,300
96,100
By Trading A/c (Transfer) 2,00,000
To wages 51,300
To Manufacturing Expenses 16,200
To Depreciation on Plant &
machinery(15% on Rs 60,000) 9,000
To Depreciation on Patents(1/3 of
Rs.18,000) 6,000
Less: Sale of Scrap
1,78,600
3,600
Cost of Goods Produced 1,75,000
To profit transferred to
P&L a/c (12.5% of Transfer Price
i.e., Rs.25,000 X 100 )
Rs. 2,00,000
25,000
34. To opening stock of finished
Goods
To value of goods
manufactured transferred from
manufacturing a/c
To gross Profit c/d to profit &
Loss A/c
To office Expenses
To Depreciation on fixtures &
fittings
To selling expenses
To Interest on Loan from
Indian Bank(18% on Rs 20000)
To stock reserve (12.5% on
Rs.30,000 Closing Stock of
Finished Goods)
To Net Profit Transferred to M’s
Current A/c
25,600
2,00,000
55,200
2,80,600
18,700
240
15,000
3,600
3,750
38,910
80,200
By Sales
By Closing Stock Of finished
Goods
By Gross Profit b/d
By Profit transferred from
Manufacturing a/c
2,50,600
30,000
2,80,000
55,200
25,000
80,200
35. BALANCE SHEET M
as on 31st March ,2010
Sundry creditors
Loan at 18%from Indian Bank
20,000
Add: Interest outstanding
for 1 year @18% 3,600
M’s current Account :
Balance as on 1-4-2009 2,500
Add: Net Profit 38,910
Capital
22,300
23,600
41,410
50,000
1,37,310
Cash at the bank
Sundry debtors
Closing stock of raw materials
Closing stock of
finished goods 30,000
Less: Reserve @12.5% to
bring goods to cost value 3,750
Patents 18,000
Less: written off 6,000
Furniture & fittings 2,400
Less: 10% Depreciation 240
Plant & Machinery 60,000
Less: 15% Depreciation 9,000
6,600
26,000
13,300
26,250
12,000
2,160
51,000
1,37,310
