UNIT-V

FINAL ACCOUNTS- COMPUTERIZATION OF ACCOUNTING

SYSTEM

FINAL ACCOUNTS

In every business, the business man is interested in knowing whether the business has
resulted in profit or loss and what the financial position of the business is at a given time. In
brief, he wants to know (i)The profitability of the business and (ii) The soundness of the
business.
The trader can ascertain this by preparing the final accounts. The final accounts are
prepared from the trial balance. Hence the trial balance is said to be the link between the ledger
accounts and the final accounts. The final accounts of a firm can be divided into two stages. The
first stage is preparing the trading and profit and loss account and the second stage is preparing
the balance sheet.

TRADING ACCOUNT
The first step in the preparation of final account is the preparation of trading account. The
main purpose of preparing the trading account is to ascertain gross profit or gross loss as a result
of buying and selling the goods.
Trading account of MR……………………. for the year ended ……………………
Dr Cr
Particulars Amount Particulars Amount

To opening stock Xxxx By sales xxxx

To purchases xxxx Less: returns xxx Xxxx
Less: returns xx Xxxx By closing stock Xxxx

To carriage inwards Xxxx

To wages Xxxx
To freight Xxxx
To customs duty, octroi Xxxx

To gas, fuel, coal,

Water Xxxx

To factory expenses Xxxx

To other man. Expenses Xxxx
To productive expenses Xxxx
To gross profit c/d Xxxx

Xxxx Xxxx

Finally, a ledger may be defined as a summary statement of all the transactions relating to a
person , asset, expense or income which have taken place during a given period of time. The up-
to-date state of any account can be easily known by referring to the ledger.
PROFIT AND LOSS ACCOUNT
The business man is always interested in knowing his net income or net profit.Net profit
represents the excess of gross profit plus the other revenue incomes over administrative, sales,
Financial and other expenses. The debit side of profit and loss account shows the expenses and
the credit side the incomes. If the total of the credit side is more, it will be the net profit. And if
the debit side is more, it will be net loss.

PROFIT AND LOSS A/C OF MR…………………….FOR THE YEAR ENDED…………

PARTICULARS AMOUNT PARTICULARS AMO
UNT
TO office salaries Xxxxxx By gross profit b/d Xxxxx
TO rent,rates,taxes Xxxxx ByInterest received Xxxxx
TO Printing and stationery Xxxxx ByDiscount received Xxxx
TO Legal charges ByCommission received Xxxxx
Audit fee Xxxx ByIncome from
TO Insurance Xxxx investments
TO General expenses Xxxx ByDividend on shares Xxxx
TO Advertisements Xxxxx ByMiscellaneous Xxxx
TO Bad debts Xxxx Byinvestments
TO Carriage outwards Xxxx Rent received Xxxx
TO Repairs Xxxx By Interest On Drawings
TO Depreciation Xxxxx ByNet Loss Xxxx
TO interest paid Xxxxx (transferred to capital a/c)
TO Interest on capital Xxxxx
TO Interest on loans Xxxx
TO Discount allowed Xxxxx
TO Commission Xxxxx
TO Net profit------- Xxxxx
(transferred to capital a/c)
xxxxxx Xxxxx
BALANCE SHEET

The second point of final accounts is the preparation of balance sheet. It is prepared often in the
trading and profit, loss accounts have been compiled and closed. A balance sheet may be
considered as a statement of the financial position of the concern at a given date.

DEFINITION: A balance sheet is an item wise list of assets, liabilities and proprietorship of a
business at a certain state.

J.R.botliboi: A balance sheet is a statement with a view to measure exact financial position of a
business at a particular date.

Thus, Balance sheet is defined as a statement which sets out the assets and liabilities of a
business firm and which serves to as certain the financial position of the same on any particular
date. On the left-hand side of this statement, the liabilities and the capital are shown. On the
right-hand side all the assets are shown. Therefore, the two sides of the balance sheet should be
equal. Otherwise, there is an error somewhere.
BALANCESHEET OF ………………………… AS ON …………………………………….
Liabilities Amount Assets Amount

Long term liabilities Fixed Assets

Capital xxxxxx Furniture and fittings Xxxx
Add: Plants & machinery Xxxx
Net Profit xxxx Land & buildings Xxxx
------- Patents Xxxx
Xxxxx Copyrights Xxxx
Less: Drawings xxx Trade marks Xxxx
-------- Goodwill Xxxx
xxxx Motor car Xxxx
Less: Interest on Current Assets
Drawings xxxx Cash in hand Xxxx
--------- Cash at bank Xxxx
Xxxx Bills receivable Xxxx
Add: Interest on Debtors Xxxx
Capital xxx Closing stock Xxxx
-------- Investments Xxxx
Xxxxxx Prepaid expenses Xxxx
Less:Net Loss xxx Accrued incomes Xxxx
---------------- Xxxxx
Debentures Xxxx
Reserves & Surplus Xxxx
Loan from Bank Xxxx
Current Liabilities
Creditors Xxxx
Bills payable Xxxx
Bank overdraft Xxxx
Outstanding expenses Xxxx
Income received in advance Xxxx

XXXX XXXX
Advantages: The following are the advantages of final balance .
1. It helps in checking the arithmetical accuracy of books of accounts.
2. It helps in the preparation of financial statements.
3. It helps in detecting errors.
4. It serves as an instrument for carrying out the job of rectification of entries.
5. It is possible to find out the balances of various accounts at one place.
FINAL ACCOUNTS -- ADJUSTMENTS

We know that business is a going concern. It has to be carried on indefinitely. At the end of
every accounting year. The trader prepares the trading and profit and loss account and balance
sheet. While preparing these financial statements, sometimes the trader may come across certain
problems .The expenses of the current year may be still payable or the expenses of the next year
have been prepaid during the current year. In the same way, the income of the current year still
receivable and the income of the next year have been received during the current year. Without
these adjustments, the profit figures arrived at or the financial position of the concern may not be
correct. As such these adjustments are to be made while preparing the final accounts.

The adjustments to be made to final accounts will be given under the Trial Balance. While
making the adjustment in the final accounts, the student should remember that “every adjustment
is to be made in the final accounts twice i.e. once in trading, profit and loss account and later in
balance sheet generally”. The following are some of the important adjustments to be made at the
time of preparing of final accounts:-

1. CLOSING STOCK :-

(i)If closing stock is given in Trail Balance: It should be shown only in the balance sheet “Assets
Side”.
(ii)If closing stock is given as adjustment :
1. First, it should be posted at the credit side of “Trading Account”.
2. Next, shown at the asset side of the “Balance Sheet”.
3.
2.OUTSTANDING EXPENSES :-

(i)If outstanding expenses given in Trail Balance: It should be only on the liability side of
Balance Sheet.
(ii)If outstanding expenses given as adjustment :
 1. First, it should be added to the concerned expense at the
debit side of profit and loss account or Trading Account.
2. Next, it should be added at the liabilities side of the
Balance Sheet.

3.PREAPID EXPENSES :-

(i)If prepaid expenses given in Trial Balance: It should be shown only in assets side of the
Balance Sheet.
(ii)If prepaid expense given as adjustment :

1. First, it should be deducted from the concerned expenses at the debit side of profit and
loss account or Trading Account.
2. Next, it should be shown at the assets side of the Balance Sheet.

4.INCOME EARNED BUT NOT RECEIVED [OR] OUTSTANDING INCOME [OR]

ACCURED INCOME :-

(i)If incomes given in Trial Balance: It should be shown only on the assets side of the Balance
Sheet.

(ii)If incomes outstanding given as adjustment:

1. First, it should be added to the concerned income at the credit side of profit and loss
account.
2. Next, it should be shown at the assets side of the Balance sheet.

5. INCOME RECEIVED IN ADVANCE: UNEARNED INCOME:-

(i)If unearned incomes given in Trail Balance : It should be shown only on the liabilities side of
the Balance Sheet.
(ii)If unearned income given as adjustment :
1. First, it should be deducted from the concerned income in the credit side of the profit and
loss account.
2. Secondly, it should be shown in the liabilities side of the
Balance Sheet.

6.DEPRECIATION:-
(i)If Depreciation given in Trail Balance: It should be shown only on the debit side of the profit
and loss account.

(ii)If Depreciation given as adjustment

1. First, it should be shown on the debit side of the profit and loss account.
2. Secondly, it should be deduced from the concerned asset in the Balance sheet assets side.

7.INTEREST ON LOAN [OR] CAPITAL :-

(i)If interest on loan (or) capital given in Trail balance :It should be shown only on debit side
of the profit and loss account.
(ii)If interest on loan (or)capital given as adjustment :

1. First, it should be shown on debit side of the profit and loss account.
2. Secondly, it should added to the loan or capital in
the liabilities side of the Balance Sheet.

8.BAD DEBTS:-

(i)If bad debts given in Trail balance :It should be shown on the debit side of the profit and loss
account.

(ii)If bad debts given as adjustment:

1. First, it should be shown on the debit side of the profit and loss account.
2. Secondly, it should be deducted from debtors in the assets side of the Balance Sheet.
9.INTEREST ON DRAWINGS :-

(i)If interest on drawings given in Trail balance: It should be shown on the credit side of the
profit and loss account.

(ii)If interest on drawings given as adjustments :

1. First, it should be shown on the credit side of the profit and loss account.
2. Secondly, it should be deducted from capital on liabilities
side of the Balance Sheet.

10.INTEREST ON INVESTMENTS :-

(i)If interest on the investments given in Trail balance :It should be shown on the credit side of
the profit and loss account.

(ii)If interest on investments given as adjustments :

1. First, it should be shown on the credit side of the profit and loss account.
2. Secondly, it should be added to the investments on assets side of the Balance Sheet.
Definition of Manual Accounting
Manual Accounting, as the name signifies, is the paper-based accounting system, in which
journal and ledger registers, vouchers, account books are used to store, classify and analyse
financial transactions of an organization. It is often used by small businessmen, such as sole
proprietors, shopkeepers, etc. to maintain the record of the business transactions, due to lower
cost.

One of the advantages of the manual accounting system is its easy accessibility. It is
also characterized by confidentiality, which makes the sensitive information hacking free.
Nevertheless, manual accounts can only be prepared correctly if the accountant possesses good
knowledge of bookkeeping and accounting.

Moreover, human error, such as incorrect recording of the transaction, the omission of the
transaction, figure transposition and so forth, is likely to occur while the preparation of manual
accounts which cannot be ignored.

Definition of Computerized Accounting

Computerized Accounting can be described as the accounting system that uses the computer
system and pre-packaged, customised or tailored accounting software, to keep a record of
financial transactions and generate financial statements, for analysis.

Computerized Accounting system relies on the concept of a database. The accounting database is
systematically maintained, with active interface wherein accounting application programs and
reporting system are used. The two primary essentials are:

• Accounting framework: The framework comprises of principles and grouping structure

for maintaining records.
• Operating procedure: There is a proper procedure for operating the system so as to store
and process the data.

Further, it requires front-end interface, back-end database, database processing and reporting
system to store data in a database-oriented application.

The merits of computerized accounting rely on its speed, accuracy, reliability, legibility, up-to-
date information and reports etc.

Features of Computerized Accounting System:

1. It leads to quick preparation of accounts and makes available the accounting statements and
records on time.
2. It ensures control over accounting work and records.
Errors and mistakes would be at minimum in computerized accounting.
4. Maintenance of uniform accounting statements and records is possible.
5. Easy access and reference of accounting information is possible.
6. Flexibility in maintaining accounts is possible.
It involves less clerical work and is very neat and more accurate.
8. It adapts to the current and future needs of the business.
9. It generates real-time comprehensive MIS reports and ensures access to complete and critical
information instantly.

Difference Between Manual and Computerized Accounting

In accounting, the financial transactions are recorded, processed and presented to generate
financial statements, that is useful to the readers, in making decisions. Traditionally, accounting
is done manually, by a trained accountant, with the use of registers, account books, vouchers etc.
But with the emerging technology, nowadays, computerized accounting is in vogue, due to its
accuracy, convenience and speed.

Both manual and computerized system is based on the same principles, conventions and concept
of accounting. However, they differ only in their mechanism, in the sense that manual
accounting uses pen and paper, to record transactions, whereas computerized accounting makes
use of computers and internet, to enter transactions electronically.

In this article, you can find the substantial differences between manual and computerized
accounting.
BASIS FOR COMPUTERIZED
MANUAL ACCOUNTING
COMPARISON ACCOUNTING

Manual Accounting is a Computerized Accounting is an

system of accounting that uses accounting system that uses an
Meaning physical registers and account accounting software, for recording
books, for keeping financial financial transactions
records. electronically.

Recording is possible through Data content is recorded in

Recording
book of original entry. customized database.

Only data input is required, the

All the calculation is
Calculation calculations are performed by
performed manually.
computer system.

Speed Slow Comparatively faster.

It is made for rectification of It cannot be made for rectification

Adjusting entries
errors. of errors.

Entries of transactions can be

Backup Not possible
saved and backed up

Instant trial balance is provided on

Trial Balance Prepared when necessary.
daily basis.

Financial It is prepared at the end of the

It is provided at the click of button.
Statement period, or quarter.

Computerized Accounting System: Advantages and Disadvantages

The main advantages of using a computer accounting program are as follows:
1.Better Quality Work:
The accounts prepared with the use of computers are usually uniform, neat, accurate, and more
legible than manual job.
2. Lower Operating Costs:
Computer is a labor and time saving devise. Hence, the volume of job handled with the help of
computers results in economy and lower operating costs.
3. Improved Efficiency:
Computer brings speed and accuracy in preparing the records and accounts and thus, increases
the efficiency of employees.
4.Facilitates Better Control:
From the management point of view, greater control is possible and more information may be
available with the use of computer in accounting. It ensures efficient performance in accounting
work.
5. Greater Accuracy:
Computerized accounting ensures accuracy in accounting records and statements. It prevents
clerical errors and omissions.
6. Relieve Monotony:
Computerized accounting reduces the monotony of doing repetitive accounting jobs, which are
tiresome and time consuming.
7. Facilitates Standardization:
Computerized accounting facilitates standardization of accounting routines and procedures.
Therefore, standardization in accounting is ensured.
8. Faster Processing:
Computers require far less time than human beings in performing a particular task. Therefore,
accounting data is processed faster using a computerized accounting system.
9. Accurate Information:
There is less space for error because only one account entry is needed for each transaction unlike
repeated posting of the same accounting data in manual system.

10. Reliability:
Computer systems are immune to boredom, tiredness or fatigue. Therefore, these can perform
repetitive functions effectively and are highly reliable as compared to human beings.
11. Easy Availability of Information:
The data can be made available to different users at the same time. This is called data sharing.
12.Up-to-date Information:
Account balances will always be up to date since the records are automatically updated as and
when accounting data is entered or stored.
13.Efficiency:
The computer based accounting system ensures better use of time and resources.
14. Storage and Retrieval:
Computer based systems require a fractional amount of physical space as compared to the books
of accounts in the form of journals, ledgers and accounting registers.
15. Works as a Motivator:
Employees using computer systems feel more valued as they are trained and specialized for the
job.
16. Automated Document Production:
Accounting reports like cash book, trial balance and financial statements are generated
automatically and are easily accessible just by a click of mouse.
17. MIS Reports:
It is easier to monitor and control the business using the real time management information
reports generated by the computerized information systems.
Limitations of Computerized Accounting Systems:
The main limitations of Computerized systems are being dependent upon the operating
environment they work in.
1.Reduction of Manpower:
The introduction of computers in accounting work reduces the number of employees in an
organization. Thus, it leads to greater amount of unemployment.

2. High Cost:
A small firm cannot install a computer accounting system because of its high installation and
maintenance cost. To be more economical there should be large volume of work. If the system is
not used to its full capacity, then it would be highly uneconomical
3. Require Special Skills:
Computer system calls for highly specialized operators. The availability of such skilled
personnel is very scarce and very costly
4. Other Problems:
Frequent repair and power failure may affect the accounting work very much. Computers are
prone to viruses. Often time’s people will assume the computer is doing things correctly and
problems will go unchecked for long period of time.
5. Heavy Cost of Installation:
Computer hardware needs replacing and software needs to be updated from time to time with the
availability of newer versions.
6. Cost of Training:
To ensure effective and efficient use of computerized system of accounting, newer versions of
hardware and software are introduced. This requires special training and cost is incurred to train
the staff personnel as specialists.
7. Fear of Unemployment:
Reflects the feelings of the staff on the introduction of computerized accounting system. The
staff fears redundancy and show less interest in computers.
8. Disruption in Work:
When computerized system is introduced, there might be loss in the work time and certain
changes in the working environment.
9. System Failure:
The danger of a system crashing due to some failure in hardware can lead to subsequent loss of
work. This occurs when no back-up is retained.
10. Time Consuming:
In order to avoid loss of work at the time of system failure, there is a need for providing backup
arrangements which is a time consuming process.
11. Unanticipated Errors not Known:
Unlike human beings, computers do not have the capability to judge or detect unanticipated
errors in the system.
12. Breaches of Security:
The danger of viruses and hacking into the system from outside creates a strong need for security
of system. Similarly, the person who has created the specific program can easily defraud by
tempering with the original records.
13. Health Dangers:
Extensive use of computers may lead to many health problems such as eyestrain, muscular
complaints, backache etc. resultantly reducing working efficiency as well as increasing medical
expenditure.
Advantages of a Manual Accounting System/Traditional Accounting System
1. System Errors
One major advantage of a traditional accounting information system is avoiding data system
errors and file corruption. Most users don’t fully understand how computer systems store data
which is why opening the wrong file or encountering errors can ruin current data accountants
need to properly perform their job functions. With a traditional accounting system, a single file is
used for each account eliminating any confusion users might have with a system that offers
similar versions of the data.
2. Error Improvement
When it comes to a traditional accounting vs modern accounting system, a traditional accounting
system offers the ability for double-entry, which provides a way for users to eliminate data entry
errors. With a traditional accounting system, each transaction is entered as a debit, as well as a
credit in two separate accounts. This not only helps users eliminate data entry errors but also
helps companies save time and money against devastating business mistakes.
3. Always Available
Another huge benefit of a traditional accounting system is that when the power or internet goes
out, this won’t prevent users from accessing and working on account data. For any company that
needs to be able to access their account data, no matter what’s going on with the local power or
internet, a traditional accounting system will fit their needs best.
Disadvantages of a Manual/Traditional Accounting System
1. Data Entry Errors
While a traditional accounting system seeks to improve data entry errors with its multiple entry
processes, data entry errors are still much more likely with a manual system. With a traditional
accounting system, users are forced to enter data twice which is labor-intensive and time-
consuming. With an automated accounting system, though, users do not need to spend so much
time entering data and the system can help them find and eliminate errors before they become a
major issue for the company.
2. Loss of Hard Copies
Every business knows that it’s important to keep a hard copy of all important data, in case a
system error occurs and all data is deleted from the system. With a traditional accounting
information system, companies must keep a physical copy of the data, which can easily be stolen
or destroyed in a fire or flood. With an automated accounting system, though, users can store
hard copies of their data in the cloud which cuts down on time and cost of having to store
physical copies off-site in destruction-free facilities.
3. Cost
A major disadvantage of a traditional accounting system is how expensive it can be. Completing
accounting tasks with a traditional accounting system takes lots of time and is labor-intensive.
An automated accounting system not only saves users time that could be spent on making the
business more successful but also saves the company money. While a traditional accounting
system is less expensive as far as up-front cost is concerned, in the long run, an automated
accounting system is much less expensive and time-consuming while at the same time being
much safer to store critical business data.
Conclusion
As the number of business transactions increases, it is difficult to manage accounts manually, as
it takes a lot of time to update a single transaction in all the accounts that it affects. In
computerized accounting, a number of limitations of the manual accounting have been removed.
Whenever the transactions occur, the entry is made and it is updated automatically in all the
accounts that it affects, in the computerized accounting.