Meaning Preparation of final account isthe lst stage ofthe accounting cycle. The asic objective of every concert maintaining the book of accounts is to find out the profit or loss in their business atthe end of the vyeat, Every businessman wishes to ascertain the financial position of his business firm as a whole during the patcular period, In onde to achieve the objectives forthe fim itis esentl to prepare final accounts which include Manufacturing and Trading, Profit end Loss Account and Balance Sheet. The determination of profit or loss is done by preparing a Trading Profit and Loss Accodnt, The pups of preparing the Balance Sheet is to know the financial soundness of a concern as a whole curing the particular period. The following procedure and important points to be considered for preparation of Trading, Profit and Loss ‘Account and Balance Sheet, (1) Manufacturing Account Manufacturing Account isthe important part whch is required to preparing Tracing, Profit and Loss ‘Account, Accordingly, in onder to cakulate the Gross Profit or Gross Loss, it is essemil to determine the Cost of Goods Manufactured or Cost of Goods Sold. The main purpose of preparing Manufacturing ‘Account isto ascertain te cos of goods manufactured or cost of goods sold, which is transfered tothe Trading Account, This account is debited with opening sock and al items of costs including purchases related to production and credited with closing balance of work in progress and cost of goods produced transferred to Trading Account. The term “Cost of Goods Sold” refers to cost of raw materials consumed plus direct related expenses, Components of Manufacturing Account ‘The following are the important components tobe considered for preparation of Manafacturing Accounts; (1) Opening Stock of Raw Materials, (2) Purchase of Raw Materials, (3) Purchase Returns, (4) Closing Stock of Raw Materials,(5) Work in Progress (semi-finished goods). (6) Factory Expenses. (1) Opening Stock of Finished Goods. (8) Closing Stock of Finished Goods. (1) Opening Stock: The term Opening Stock refers to stock on hand at the beginning of the year which include raw materials, work-in-progress and finished goods, (2) Purchases: Purchases include both cash and credit purchase of goods. If any purchase is returned, the same will be deducted from gross purchases, (3) Direct Expenses: Direct expenses are chargeable expenses or productive expenses which include factory rent, wages, freight on purchases, manufacturing expenses, factory lighting, heating, fuel, evstoms duty, dock duty and packing expenses. In shor, all those expenses incurred in bringing the raw materials to the factory and converting them’ into finished goods will constitute the direct expenses that are to be shown on the debit side of the trading account, Calculation of Cost of Goods Sold Cost of Goods Sold can be calculated as under : Cost of Goods Sold = Value of Opening Stock + Cost of Purchases + Direct Expenses ~ Value of Closing StockTrac 12, Profit and Loss Account Trading Account and Profit and Loss Account are the two important parts of income statements ‘Trading Account is the first stage in the final account which is prepared to know the trading results of goss profit or loss during a particular period, In other words, itis a summary of the purchases, and sale of a business or production cost of goods sold and the value of sales. The difference between the elements establishes the gross profit or loss which is then carried forward to the profit or loss account for calculation of net profit or net loss. Accordingly, if the sales revenue is higher than the cost of goods sold the difference is known as ‘Gross Profit.’ Similarly, if the sales revenue is less than the cost of goods sold the difference is knawn as ‘Gross Loss.” Specimen Proforma of Trading Account ‘The following Specimen Proforma of a Trading Account which is widely used in practice : TRADING ACCOUNT For the year ended 31"... Particulars ‘Amount Rs. Particulars ‘Amount Rs. “To Opening Stock vee | By Gross Sales ‘To Purchases tee Less : Sales Return Less: Purchase Return Net Sales tee ‘To Direct Expenses : By Closing Stock Carriage Inward see | By Gross Loss e/d see Wages (Transferred to Freight Freight P&LAK) Custom Duty Fuel and Power Factory Expenses Royalty on Production Other Direct Expenses To Gross Profit cid (Transferred to P & L Alc) Balancing figure will be either Gross Profit or Gross Loss Elements of Trading Account (Debit Side) (1) Opening Stock. (2) Purchases and Purchase Returns. 3) Direct Expenses. (4) Gross Profit is the excess value of sales over the cost of Sales. Elements of Trading Account (Credit Side) (2) Sales: The term sales refers to the total of sales of goods which include both cash sales and credit sales during the particular period. Q) Sales Return: If any goods returned from the customers will be deducted from the total sales. (3) Closing Stock: Closing Stock refers to the goods remaining unsold at the end of the particular period. The closing stock may be raw materials, work-in-progress and finished goods. Generally closing stock does not appear in the Trial Balance. Therefore, the closing stock is not brought into the books ofaccounts but itis credited to Trading Account and also recorded in the assets side of the Balance Sheet. ‘The value of closing stock is ascertained by means of stock taking and the value is brought in the books by means of an adiusting entry as Closing Stock Account Dr. tee To Trading Account ee ‘The closing stock is valved at cost price or market price whichever is les, Gross Loss: Gross Loss refers to excess of cost of sales over the sales revenue Equation of Trading Account ‘The purpose of preparing the Trading Account is to calculate the Gross Profit or Gross Loss of @ concern during a particular period. The following equations are highly useful for determination of Gross Profit or Gross Loss . Calculation of Gross Profit or Loss Gross Profit = Sales ~ Cost of Sales Sales = Cost of Sales + Gross Profit (or) Sales Stock in the beginning + Purchases + Direct Expenses = Stock at the end + Gross Profit (or) ‘Stock in the beginning + Purchases + Direct Expenses + Gross Profit = Sales + Stock at the endPROFIT AND LOSS ACCOUNT “The determination of Gross Profit or Gross Loss is done by preparation of Trading Account. But it does not reveal the Net Profit or Net Loss of a concern during the particular period. This is the second part of the income statement ard is called as Profit and Loss Account. The purpose of preparing the profit and Toss account to calculate the Net Profit or Net Loss of a concern, Net profit refers to the surplus which remains after deducting related trading expenses from the Gross Profit. The wading expenses refer 10 inclusive of office and administrative expenses, selling and distribution expenses. In other words, all ‘operating expenses such as office and administrative expenses, selling and distribution expenses and non- ‘operating expenses are shown on the debit side and all operating and non operating gains and incomes are shown on the credit side of the Profit and Loss Account. The difference of two sides is either Net Profit or [Net Loss. Accordingly, when total of all operating and non-operating expenses is more than the Gross Profit and other non-operating incomes, te difference isthe Net Profit and in the reverse cat itis known as Net Loss. This Net Profit or Net Loss is transferred to the Capital Account of Balance Sheet. Specimen Proforma of a Profit and Loss Account The following Specimen Proforma which is used for preparation of Trading, Profit and Loss ‘Account.Trading, Profit and Loss Account for the year ending 31* Dee Particulars [Amount Rs. | Particulars “Amount Rs. ‘To Opening Stock ] wow | By Sales wee ‘To Purchases Less : Sales Returns Less: Purchases Returns se* | By Closing Stock To Carriage Inwards, see | By Gross Loss od tee ‘To Wages To Gross Profit od To Gross Loss b/d By Gross Profit bd ee To Office & Administrative By Non-Operating Incomes = ee Expenses : Interest Received Office Salaries | Discount Received Office Rent and Rates Dividend Received Printing and Stationery Income from Investment ‘Telephone Charges Interest on Debenture Legal Charges | ‘Any other incomes ‘Audit fees | General Expenses By Net Loss e/d wee To Selling Expenses : see (Transferred to Capital ‘Advertisement Account) Discount Allowed Commission Salesmen Salaries Godown Rent Carriage Outward ‘Agent Commission ‘Teaveling Expenses ‘To Distibution Expenses : | ase Depreciation on Vehicle Upkeep of Motor Van Travelers’ Salaries Repairs and Mainterance | ‘To Non-Operating Expenses : tee Discount on Issue of Shares Preliminary Expenses To Net Profit fd } see (Transferred to Capital Ao) ee Components appearing on Debit Side of the P & L Alc ‘Those expenses incurred during the manufacturing process of conversion of raw materials into finished goods will be treated as direct expenses which are recorded in the debit side of Trading Account. Any expenditure incurred subsequent to that will be known as indirect expenses to be shown in the debit side of the Profit and Loss Account. The indirect expenses may be classified into: (1) Operating Expenses and (2) Non-Operating Expenses. (1) Operating Expenses: It refers to those expenses as the day-to-day expenses of operating a business include office & administrative expenses, selling and distribution expenses,(2) Non-Operating Expenses: Those expenses incurred other than operating expenses. Non- Operating expenses which are related to a financial nature. For example, interest payment on loans and overdrafts, loss on sale of fixed assets, writing off fictitious assets such as preliminary expenses, under writing commission ete. Components appearing on Credit Side of P&L Ale ‘The following are the components as shown on the Credit Side : (1) Gross Profit brought down from Trading Account (2) Operating Income: It refers to income earned from the operation of the business excluding Gross Profit and Non-Operating incomes. (3) Non-Operating Income: Non-Operating incomes refer to other than operating income, For example, interest on investment of outside business, profit on sale of fixed assets and dividend received etc. BALANCE SHEET According to AICPC (The American Institute of Certified Public Accountants) defines Balance Sheet as a tabular Statement of Summary of Balances (Debit and Credits) carried forward after an actual and constructive closing of books of accounts and kept according to principles of accounting. The purpose of preparing balance sheet is to know the true and fair view of the status of the business as a going concern during a particular period. The balance sheet is one of the important statement which is used to owners or investors to measure the financial soundness of the concern as a whole, A statement is prepared to show the list of liabilities and capital of eredit balances of the business on the left hand side and list of assets and other debit balances are recorded on the right hand side is known as “Balance Sheet.” The Balance Sheet is also described as a statement showing the sources of funds and application of, capital or funds. In other words, liability side shows the sources from where the funds for the business were obtained and the assets side shows how the funds or capital were utilized in the business, Accordingly, it describes that all the assets owned by the concern and all the liabilities and claims it owes to owners and outsiders. Specimen Form of Balance Sheet Companies Act 1956 has prescribed a particular form for showing assets and liabilities in the Balance Sheet for companies registered under this Act. Thete is no presesibed form of Balance Sheet for a sole trader and partnership firm, However, the assets and liabilities can be arranged in the Balance Sheet into (@) In the Order of Liquidity (b) In the Order of Performance (a) In the Order of Liquidity: When assets and liabilities are arranged according to their order of liquidity and ability 10 meet its short-term obligations, such an arrangement of order is called “Liquidity Order.” The Specimen form of Balance Sheet arranged in the Order of Liquidity is given below :Balance Sheet (1) as on... Liabilities “Amount Re Ants “Amowat Re ‘Current Liabilities : soe | Current Assets : wee Sundry Creditors Cash in Hand Bills Payable Cash at Bank Bank Overdraft Sundry Debtors Outstanding Expenses Short Term Investments Long-Term Liabilite we Stock in Trade ‘Loan from Bank Bills Receivable Loan from Mortgage Prepaid Expenses Debenture Acerued Incomes Any other Long Term Fixed Assets : tee ‘Total Liabilities ue Plant and Machinery Capital Account : He Fumiture & Fixtures ‘Add : Net Profit Buildings ‘Add : Interest on Capital Loose Tools Lest : Drawings Motor Cars Reserves and Surplus : s+ | Intangible Assets : tee General Reserve Gooawitt Reserve for Contingency Patents Reserve for Sinking Fund Copy Rights ‘Trade Marks Fletitions Assets: wee Preliminary Expenses Advertisement Mise. Expenses (b) In the order of Performance: This method is commonly used by the companies. The specimen form of Balance Sheet arranged in the order of Performance is given below : Balance Sheet (1) as on... Liabilities “Amount Rs. Assets ‘Amount Rs (Conert Liahitities se [Current Anes ee Fixed Liabilities see | Fixed Asses tee Long-Term Liabilities see | Fictitious Assets ee Capital, Reserves and Surplos 2% | Any other Investmens ee Classification of Assets and Liabilities I. Assets Business assets are resources or items of values owned by the business and which are utilized in the normal course of business operations to produce goods for sale in order to yield a profit. The assets are grouped into: (1) Fixed Assets (2) Current Assets or Floating Assets @) Fictitious Assets @) Liquid Assets (5) Contingent Assets(1) Fixed Assets : This class of assets include those of a tangible nature having a specific value and Which are not consumed during the normal course of business and trade but provide the means for producing saleable goods or providing services. Components of Fixed Assets (2) Goodwitt (2) Land and Buildings (3) Plant and Machinery (4) Furniture and Fixtures (5) Patents and Copy Rights (6) Livestock (1) Leaseholds (8) Long-term Investments ©) Vehicles @) Current Assets or Floating Assets : The assets of a business of a transitory nature which are used for resale or conversion into a cash during the course of business operation. In other words, those assets which ake easily converted into cash in normal course of business during the shorter period say, less than one year are treated as current or floating assets. ‘Components of Current Assets (1) Cash in hand @) Cash at Bank G) Inventories : Stock of raw materials Stock of work-in-progress Stock of finished goods. (A) Sundry Debtors (5) _ Bills Receivable (6) Short-Term Marketable Securities (Short-Term Investments (8) Prepaid Expenses @) Fictitious Assets : Fictitious Assets refer to any deferred charges. They are really not assets. Preliminary expenses, Share issue expenses, discount on issue of shares and debentures, and debit balance Of profit and loss account etc, are the important components of fictitious assets. (4) Contingent Assets : It refers to a right to property which may come into existence on the happening of some future event. For example, a right to obtain for shares in another company on favourable terms, a right to sue for infringement of patents and copy rights etc. (5) Liquid Assets : Liquid Assets which are immediately converted into cash. In other words, these assets are easily encashable in the normal course of business. Cash in hand, Cash st bank, Bills Receivable,Sundry debtors, Marketable Securities, Short-term investments etc. are the important components of liquid assets. While measuring Liquid Assets, Stock of raw materials, work-in-progress, finished goods and prepaid expenses are excluded from the components of Current assets. IL, Liabilities According to Accounting Principles Board, define liabilities as an economic obligations of an enterprise that are recognized and measured in conforming with generally accepted accounting principles. ‘The liabilities are classified into : (1) Non-Current Liabilities (2) Capital G) Current Liabilities (1) Non-Current Liabilities: Non-Current Liabilities otherwise known as Long-Term Liabilities Liabilities which are become due for payment beyond a period of one year say, five to ten years, are treated as Long-Term Liabilities. The following are the examples of ‘Non-Current Liabilities: (@) Long-Term Debit. (b) Debenture. (©) Long-Term Loan from Bank. (@) Long-Term Loan from Financial Institutions. (@) Long-Term Loan raised by Issue of Public Deposits. (O) Long-Term Debt raised by Issve of Securities. (2) Capital: Capital refers to the value of assets owned by a business and which are used during the ‘course of business operations to generate additional Capital or Wealth. It is also known as Owner's Equity ‘or Net Worth. When a business first comes into existence the initial capital may be provided by the proprietor. The initial influx of capital will normally be in the form of cash which need to be converted into plant and machinery, building and stock of materials prior to commencing operations. Thus. capital is equal to the total assets (3) Current Liabilities: Any amount owing by the business which are currently due for payment are referred to as current liabilities. In other words, these liabilities which are paid within one year are treated as current liabilities. The following are the components of current liabilities : (Q) Bills Payable, ) Sundry Creditors (3) Short-Term Bank Loans. (4) Dividend Payable. (S) Provision for Taxes Payable. (©) Short-Term Bank Overdraft. ) Trade Lis (8) Outstanding Expenses. jes and Accrued Expenses.