FINAL ACCOUNTS

OBJECTIVE

• Identify the nature of different accounts and placing them into

financial statements
 CONCEPT OF FINAL ACCOUNTS

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.
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
 USEFULNESS OF FINAL ACCOUNTS

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.
 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.
ELEMENTS OF FINANCIAL STATEMENTS

ELEMENTS

Relating to Relating to
Measurement of Measurement of
Financial Position Profit

Asset Liability Equity Income Expenses

ASSETS

An item of property owned by a person or company,

regarded as having value and available to meet debts,
commitments, or legacies
LIABILITIES

The state of being legally responsible for something.

OR

A thing for which someone is responsible, especially an

amount of money owed.
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

INCOME

Money received, especially on a regular basis, for

work or through investments.
EXPENSES

The cost incurred in or required for something.

OR

The costs incurred in the performance of one's job

or a specific task.
 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...........
 Particular Amount Particulars Amount
Rs. Rs.
To Opening Stock By Sales
To Purchases Less: Sales Returns
Less: Purchase Returns or
or Returns inwards
Returns outward By Closing Stock
To Wages By Gross loss
To Wages & Salaries (if any) transferred to
To Direct Expenses Profit and Loss A/c
To Carriage, or (Balancing Figure)
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
 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.
 Profit and Loss a/c of ............
For the year ending.........
Particular
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
Amount Particulars Amount
Rs. Rs.
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
 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
FORMAT OF BALANCE SHEET
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

Less: Depreciation XXX

Interest on drawings XXX 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

PLACEMENT OF VARIOUS ITEMS IN
FINAL ACCOUNTS
 Items to be adjusted in final accounts

(a) CLOSING STOCK (b) OUTSTANDING

EXPENSES
(c) PREPAID EXPENSES (d) ACCURED INCOMES
(e) INCOME RECEIVED (f) INTEREST ON
IN ADVANCE CAPITAL
(g) INTEREST ON (h) INTEREST ON LOAN
DRAWINGS
(i) INTEREST ON (j) DEPRECIATION
INVESTMENT
(k) BAD DEBTS (l) PROVISION OF BAD
AND DOUBTFUL DEBTS
(m) PROVISION FOR (n) PROVISION FOR
DISCOUNT ON DISCOUNT ON
DEBTORS CREDITORS
 (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.
 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

 (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.

 (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.

 (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

 (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.

 (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.
 (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.
 (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.
 (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.
 (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.
 (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.
 (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.
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).
 (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.
 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).
 (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.
 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.
PARTICULARS DEBIT CREDIT

MACHINERY 40000
CASH AT BANK 10000
CASH IN HAND 5000
WAGES 10000
PURCHASES 80000
STOCK (01.04.2015) 60000
SUNDRY DEBTORS 40000
BILLS RECEIVABLE 29000
RENT 5500 1000
DRAWINGS 5000
COMMISSION RECEIVED 3000
GENERAL EXPENSES 12000
SALARIES 7500
DISCOUNT RECEIVED 4000
CAPITAL 100000
SALES 120000
BANK LOAN 40000
SUNDRY CREDITORS 40000
PURCHASE RETURNS 5000
SALES RETURNS 4000
INVESTMENT 5000
313000 313000
 ADJUSTMENTS:

(1)CLOSING STOCK RS. 80000 (2) COMMISSION RECEIVED IN

ADVANCE RS. 1000
(3) RENT NOT YET RECEIVED (4)WAGES YET TO BE PAID
RS. 1000 RS.500
(5) SALARIES PAID IN (6)INTEREST ON CAPITAL AT
ADVANCE RS. 500 6% TO BE PROVIDED
(7) INTEREST ON DRAWING @ (8) INTEREST ON BANK LOAN
5% Rs. 300
(9) DEPRECIATION ON (10) INTEREST ON
MACHINERY @ 10% p.a. ADJUSTMENTS @ 5%
(11) WRITE OFF BAD DEBTS (12) MAKE PROVISION FOR
RS.800 BAD AND DOUBTFUL DEBTS @
5% ON SUNDRY DEBTORS
(13) PROVIDE 2% DISCOUNT ON (14) PROVIDE 5% DISCOUNT ON
DEBTORS CREDITORS