FINAL ACCOUNTS

Q.GIVE THE MEANING OF FINAL ACCOUNTS.

The important objectives of accounting are to measure the performance of a business in terms of profit
or loss and to ascertain its financial position. With these objectives in view, financial statements consisting of
income statement and position statement are prepared. Income statement is traditionally known as Trading and
Profit and Loss Account and Position statement is known as Balance Sheet. Both these statements are
collectively called Final Accounts. Thus final accounts of a sole trader usually include:
1. Trading a/c
2. Profit and loss a/c
3. Balance sheet
If the trader manufactures product meant for sale, he may prepare an account called ‘manufacturing
account’ to find out the cost of goods manufactured.

Q.EXPLAIN THE TERM ‘TRADING ACCOUNT’.

Trading account is prepared to know the profitability of ‘goods’ bought or manufactured and
sold by the businessmen.
Trading account is prepared by debiting the account with opening stock, purchases and expenses
directly connected with purchases and production and by crediting the same with sales and closing stock. The
difference between the total of debit side and credit side of the account gives gross profit or gross loss. If credit
side total is more, the difference is ‘gross profit’ and if debit side total is more, the difference is ‘gross loss’.

FORMAT OF TRADING ACCOUNT

Trading account for the year ended -------
Rs. Rs.
To opening stock xxx By sales xxx
To purchases xxx Less: Sales returns xxx xxx
Less: Purchase returns xxx xxx By closing stock xxx
To direct expenses By gross loss c/d* xxx
Carriage inward xxx
Wages xxx
Freight xxx
Import duty xxx
Gas and fuel xxx
Royalty on production xxx
Factory expenses etc xxx
To gross profit c/d*
transferred to
Profit and loss A/c xxx
xxx xxx

Q.WRITE A SHORT NOTES ON PROFIT AND LOSS ACCOUNT.

Profit and loss account is an account prepared to find out the ‘net profit’ earned or ‘net loss’ incurred by
business during an accounting period. It is debited with the operating expenses and losses and credited with
income and profits.
Preparation:
It begins with the ‘gross profit’ or ‘gross loss’ brought down from trading account. The account is
debited with all items of revenue expenses and losses which are not taken in Trading Account and credited with
all incomes and gains of revenue nature. If the total of the credit side is more than the total of debit side, the
difference is ‘profit’. If the total of the debit side exceeds the total of credit side, then the difference is ‘loss’.
The amount of net profit or net loss is transferred to capital account.

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 FORMAT OF PROFIT AND LOSS ACCOUNT
PROFIT AND LOSS ACCOUNT OF ------- FOR THE YEAR ENDED--------
Rs. Rs.
To Gross Loss b/d xxx By Gross profit b/d xxx
To Management Expenses: By Interest received xxx
Office expenses xxx By Discount received xxx
Rent, office and taxes xxx By Commission received xxx
Printing and stationary xxx By Rent from tenants xxx
Postage and telegrams xxx By Income from investments xxx
Telephone charges xxx By Apprenticeship premium xxx
Legal charges xxx By Interest on debentures xxx
Audit fees xxx By Miscellaneous revenue Receipts xxx
Insurance xxx By Net Loss transferred to Capital A/c xxx
General expenses xxx
Office lighting xxx
To Financial Expenses:
Interest on capital xxx
Interest on loans xxx
Discount allowed xxx
Discount on bills xxx
To Selling & Distribution Exp.:
Advertising xxx
Traveller’s salaries xxx
Expenses & commission xxx
Bad debts xxx
Godown rent xxx
Carriage outwards xxx
Agent’s commission xxx
Upkeep of motor vans xxx
Export expenses xxx
To Depreciation & Maintenance
Depreciation xxx
Repairs & Maintenance xxx
To Extraordinary Expenses:
Loss by fire(not covered by insurance) xxx
Cash defalcations xxx
To Net Profit Transferred to Capital A/c
xxx
xxx xxx

Balance sheet:
The balance sheet thereafter is defined as a statement summarizing the financial position of a business
on a given data. It summarizes on the one side, the ‘assets of the business’ and the other side, the ‘liabilities of
the business’ includes what the business owes to the proprietor, i.e., capital. It is prepared as on a particular date
and not for a period. The total of asset must be equal to the total of all liabilities
The balance sheet contains two parts i.e.
1. Left hand side i.e. the liabilities.
2. Right hand side i.e. the assets.
Assets.
Assets represent everything which a business owns and has money value. Assets are always shown as
debit balances in the ledger. Assets are classified as follows:
Classification of Assets.
1.Fixed assets-
The assets of a durable nature which are used in business and are acquired and intended to be retained
permanently for the purpose of carrying on the business, such as land, building, machinery and furniture etc.

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Tangible assets-
It refers to those assets which can be seen, touched and have volume such as machinery, land and building etc.
Intangible assets-
These assets do not have physical existence. Goodwill, patents, trade marks and copyrights are examples of
intangible assets.
2. Floating assets or current assets are
Current assets are those which are to be converted into cash within one year or during he normal operating
cycle of the business. Ex- cash, bank stock, sundry debtors, marketable securities and bills receivables.
 Meant to be converted into cash
 Meant for resale
 Likely to undergo change.
3. Liquid assets-
Liquid assets are those which can be readily converted into cash without appreciable loss. Cash in hand
and cash at bank are the examples of such assets.
Other assets which cannot be readily converted into cash or not without appreciable loss, are called non-
liquid assets Ex- stock, stores.
4. Fictitious assets-
Those assets which are not represented by any thing concrete or tangible. Preliminary expenses, debit
balance of profit & loss account are examples of such assets.
5. Contingent assets-
A contingent asset is one, the existence of which depends upon the happening of a certain event which
may or may not take place. Example- Claim for income tax, uncalled share capital of a public limited company.
6. Wasting assets-
The fixed assets which have a limited useful life and which, by nature, depreciate rapidly are termed as
wasting assets .Ex-mines ,oil wells.
Liabilities-
All that the business owes to others are called liabilities. Liabilities are always shown as credit balances in the
ledger. Liabilities are classified as follows:

Classification of liabilities
1.Proprietor’s capital or net worth-
Proprietor’s capital is the original fund with which he entered a business. Net worth means the amount
of capital outstanding on the particular date plus any profits retained in the business.
2. Long-term liabilities-
The liabilities which are repayable after a long period of time are known as long term liabilities. Ex-
debentures, long term loans.
3. Current liabilities-
Liabilities which are repayable within a year are called current liabilities or short term liabilities Ex-
trade creditors, bills payable, outstanding expenses.
4. Contingent liabilities-
Liabilities which have the following features are called contingent liabilities. They are:-
a) Not actual liability at present.
b) Might become a liability in future on condition that the contemplated event occurs.
Ex- Unpaid call amount on investment, liability in respect of pending suit.

Equation of balance sheet:

Capital = Assets-Liabilities
Liabilities = Assets-Capital
Assets = Liabilities + Capital.

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Q.What is adjustment entries?
In order to prepare the final accounts on mercantile system of accountancy, all expenses and incomes
relating to the period whether incurred or not, received or not should be brought into account. For doing this, a
concern is required to pass certain entries at the end of the year to adjust the various items of incomes and
expenses. Such entries are called adjusting entries.
1. Stock at end 11. Bad debts provisions
2. Stock destroyed by fire 12. Interest on Capital
3. Depreciation 13. Interest on drawings
4. Bad debts 14. Provisions for discount on Debtors and Creditors
5. Provision for doubtful debts 15. Transfer to reserve
6. Outstanding expenses 16.Goods drawn for personal use.
7. Income received in advance 17.Goods drawn for personal use.
8. Accrued income 18. Reserve for discount on creditors.
9. Prepaid expenses 19.Provision for doubtful debts.
10. Loss of goods by fire accident 20.goods distributed as free samples.

SPECIMEN
BALANCE SHEET OF -----------
AS AT--------------
Liabilities Amount Assets Amount
Rs. Rs.
Capital xxx Fixed assets:
Add: Net profit xxx Good will xxx
Add: Interest on capital xxx Land & building xxx
xxx Loose tools xxx
Less: Drawings xxx Furniture & fittings xxx
Less: Interest on drawings xxx Vehicles xxx
Less: Loss if any xxx xxx Patents xxx
Trade marks xxx
Long term liabilities: Long term loans(advances) xxx
Loan on mortgage xxx Investments: xxx
Bank loan xxx Current assets:
Current liabilities: Closing stock xxx
Sundry creditors xxx Sundry debtors xxx
Bills payable xxx Bill receivables xxx
Bank overdraft xxx Prepaid expense xxx
Creditors for outstanding expenses xxx Accrued incomes xxx
Income received in advance xxx Cash at bank xxx
Cash in bank xxx
Fictitious assets:
Preliminary expenses xxx
Advertising expenses xxx
Underwriting commission xxx
Discount on issue of shares xxx
Discount on issue of debentures xxx
xxx xxx

PROBLEMS ON TRADING ACCOUNT

Problem.No.20
Following relate to the books of a trader as on 31st March 2021.
Opening Stock Rs.28,000 Purchases Rs.72,000
Sales Returns Rs.4,000 Sales Rs.1,84,000
Purchases Returns Rs.6,000 Wages Rs.8,000
Carriage Inwards Rs.5,000 Power & Fuel Rs.2,800
Manufacturing Expenses Rs.3,200 Closing Stock Rs.15,000
Prepare trading account.

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Problem.No.21
The following are some of the balances extracted from the ledger of Mr.Sundaram as on 31st March 2021.
Prepare a trading account.

Particulars Debit Credit

Rs. Rs.
Stock 1.4.2020 12,500
Purchases 1,00,000
Sales 1,50,000
Returns outwards 5,000
Return inwards 10,000
Salaries 4,400
Wages 7,500
Rent 2,750
Carriage inwards 2,500
Carriage outwards 750
Power, coal, gas 1,000
Stock on 31.3.2021 was valued at Rs.14,000.

PROBLEMS ON TRADING AND PROFIT AND LOSS ACCOUNT

Problem.No.22
Prepare the profit and loss account from the following balances of Mr.Kumar for the year ending 31.03.2021
Office rent Rs.3,000 Discount allowed Rs.600
Discount received Rs.400 Tax, insurance Rs.1,400
Stationery Rs.2,400 Salaries Rs.8,000
Printing expenses Rs.2,200 Traveling expenses Rs.2,600
Advertisement Rs.3,600
Gross profit transferred from the trading account Rs.32,400.

Problem.No.23
Prepare trading and profit and loss account of Sumesh for the year ended 31st March ,2021 from the following
particulars.
Rs. Rs.
Opening stock 8,000
Rent & rates 300
Trade expenses 600
Sales returns 600
Sales 82,000
Purchases 50,000
Purchases returns 300
Carriage inwards 200
Wages 500
Discount allowed 40
Discount received 50
Commission 10
Salaries 2,000
Legal charges 50
Audit fee 60
Bank charges 40
Interest on investments 260
Repairs 260
Postage 50
Closing stock is valued at Rs.1,000.

PREPARATION OF BALANCE SHEET

Problem.No.24
From the following particulars, prepare a balance sheet of Mr.Venugopal as on 31st March 2021.
Capital 40,000 Drawings 4,400

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Debtors 6,400 Creditors 4,200
Cash in hand 360 Cash at bank 7,200
Furniture 3,700 Plant 10,000
Net profit 1,660 General reserve 1,000
Closing stock 14,800

PROBLEMS ON TRADING AND PROFIT AND LOSS ACCOUNT WITH BALANCE SHEET
Problem.No.25
Given below is the trial balance of Shri.Hari Prakash. Prepare trading, profit and loss account and balance sheet
as on 31st March 2022.
Particulars Dr. (Rs) Cr. (Rs)
Stock as on 1.4.2021 50,000 2,90,000
Sales
Sales returns 10,000
Purchases 2,45,000
Purchase returns 5,000
Carriage inwards 4,000
Carriage outwards 6,000
Wages 12,000
Salaries 18,000
Printing and stationary 900
Discount allowed 900
Discount received 600
Depreciation 3,000
Buildings 2.08,100
Trade expenses 5,600
Capital 2,72,900
Bills receivables 20,000
Bills payable 15,000
5,83,500 5,83,500
Closing stock on 31.3.2022 Rs.65,000
Problem.No.26
From the following balances of Sachin, Prepare a Trading A/c, Profit and Loss A/c and Balance Sheet as on 31 st
March 2021.
Credit Balances: Rs. Debit Balances: Rs.
Capital 36,000 Bad debts 287
Creditors 8,720 Interest 1,295
Bills payable 2,527 Insurance 417
Sales 78,182 Machinery 10,000
Loan 12,000 Stock(1-4-2020) 9,945
Debit Balances: Purchases 62,092
Debtors 3,885 Wages 4,300
Salaries 4,000 Building 23,780
Discount 2,000 Furniture 16,155
Postage 273
Problem.No.27
The following balances were extracted from the books of Dravid on 31 st March 2021.
Rs. Rs.
Capital 50,000 Creditors 5,000
Drawings 4,000 Bad debts 1,100
General Expenses 5,000 Loan 15,760
Buildings 22,000 Sales 1,30,720
Machinery 18,680 Purchases 94,000
Stock 32,400 Motor Car 4,000
Power 4,480 Reserve Fund (Cr.) 1,800
Taxes and Insurance 2,630 Commission (Cr.) 2,640
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Wages 14,400 Car Expenses 3,600
Debtors 12,560 Bills Payable 6,700
Bank Overdraft 6,600 Cash 160
Charity 210
Stock on 31st March 2021 was valued at Rs.47,000. Prepare the final Accounts for the year ended on 31st march
2021
Problem.No.28
Prepare a Trading and Profit & Loss A/c for the year ended 31st March 2021 and a Balance Sheet as on that
Date from the following Trial Balance of Mr.Ganguly
Rs Rs.
Drawings 45,000 Capital 1,60,000
Goodwill 90,000 Bills Payable 35,000
Buildings 60,000 Creditors 70,000
Machinery 40,000 Purchase Returns 2,650
Bills Receivable 6,000 Sales 2,18,000
Opening Stock 40,000
Purchases 51,000
Wages 26,000
Carriage Outwards 500
Carriage Inwards 1,000
Salaries 35,000
Rent 3,000
Discount 1,100
Repairs 2,300
Bank 25,000
Cash 1,600
Debtors 45,000
Bad debts 1,200
Sales Returns 2,000
Furniture 6,000
Advertisements 3,500
General Expenses 450
4,85,650 4,85,650
Adjustments:
1. Closing Stock was Rs.35,000
2. Depreciate Machinery and furniture by 10%
3. Outstanding wages Rs.1,500
4. Prepaid advertisement Rs.500
5. Create 5% on debtors for bad debts as provision.

Problem.No.29
On 31st March 2022, the following Trial Balance was extracted from the books of Chandran:
Dr. (Rs) Cr. (Rs)
Capital -- 50,000
Plant & Machinery 80,000 --
Sales -- 1,77,000
Purchases 60,000 --
Returns 1,000 750
Opening Stock 30,000 --
Discounts 350 800
Bank Charges 75 --
Sundry Debtors 45,000 --
Sundry Creditors -- 25,000
Salaries 6,800 --
Manufacturing wages 10,000 --
Carriage Inwards 750 --
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 Carriage Outwards 1,200 --
Bad debts provision -- 525
Rent, Rates and taxes 10,000 --
Advertisement 2,000 --
Cash in hand 900 --
Cash at Bank 6,000 --
2,54,075 2,54,075
You are asked to prepare the final accounts for the year ended 31st March 2022 and the Balance Sheet as on that
date. The following adjustments are required.
1. Closing Stock Rs.35,000
2. Depreciation of plant at 6%
3. Bad debts provision to be adjusted to Rs.500
4. Interest on Capital to be allowed at 10% p.a.
5. 2.5% of the profit is to be carried to Reserve fund.
Problem.No.30
Edward’s books show the following balances. Prepare his trading and Profit & Loss A/c for the year ended 31st
March 2022 and a balance sheet as at that date:
Rs. Rs.
Drawings 5,000 Capital 1,08,850
Bills Receivable 4,500 Loan at 6% p.a. 20,000
Land & buildings 37,770 Sales 3,50,000
Sundry Debtors 62,000 Interest on investments 5,640
Wages and Salaries 40,970 Sundry Creditors 59,000
Return Inwards 2,780 Commission received 630
Purchases 2,56,590 Return outwards 6,430
Postage & telegrams 5,620
Stock on 1.4.21 89,680
Printing & Stationary 880
Traveling expenses 12,000
Interest on loan paid 300
Petty Cash 70
Bank Balance 8,800
Repairs 3,620
Commission 470
Furniture 500
Investments 19,000
5,50,550 5,50,550
Adjustments:
1. Closing Stock was Rs.1,28,960 on 31.3.2022
2. Commission received but not earned Rs.130
3. Traveling expenses were overdrawn by the employees to the extent of Rs.2,000
4. Create a 5% Reserve on sundry debtors and allow 2% discount on Debtors and creditors.
5. Interest on loan due for 9 months.
6. 1/4th of wages and salaries should be charged to trading Account.
Problem.No.31
Prepare Trading and Profit and Loss A/c and Balance Sheet of Chandru as at 31st March 2022 from the
following Trial balance and additional information.
Rs. Rs.
Drawings 10,000 Sales 5,20,000
Opening Stock 1,00,000 Purchase Returns 2,400
Purchases 2,50,000 Discount 500
Bills Receivable 26,400 Sundry creditors 60,000
Sales Returns 4,000 Provision for doubtful debts 3,500
Discount 600 Capital 1,42,800
Carriage outwards 1,000
Salaries 20,000
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 Insurance 2,400
Rent 6,000
Sundry Debtors 90,000
Income tax 1,800
Cash and Bank 10,000
Furniture and fittings 10,000
Bad debts 4,000
Plant and machinery 1,60,000
Freight and duty 3,000
Wages 30,000
7,29,200 7,29,200
Adjustments:
1. Stock on 31st March 2022 was valued at Rs.1,20,000
2. The provision for bad debts is to maintained at 5% on sundry debtors
3. Total bad debts to be written off were Rs.6,400
4. Outstanding liabilities were as under:
Salaries Rs.4,000 and wages Rs.6,000
5. Rent & insurance paid during the year were for 15 and 18 months respectively.
6. Depreciate: Furniture & fittings by 5% and plant & machinery by 10%.
7. Goods costing Rs.1,000 were taken by the proprietor for his own use and have been included in the
drawings of Rs.10,000.

Problem.No.32
From the following particulars taken from Mr.Krishnan’s books, prepare Trading and Profit & Loss Account
for the year ending 31st March 2021 and the Balance Sheet as on that date.
Particulars Debit (Rs.) Credit (Rs.)
Land and buildings 47,000
Cash 2,300
Debtors 3,800
Sales 94,500
Bills receivable 1,200
Purchases 16,800
Wages 23,900
Creditors 5,200
Salaries 16,500
Sales returns 400
Tools 500
Discount received 200
Opening stock (1.4.2020) 6,500
Plant 35,000
Patents 12,000
Furniture 4,700
Traveling Expenses 8,500
Salesman’s Commissions 1,300
Carriage inwards 400
Re-Packing Expenses 600
Advertising 1,800
Bank 5,600
Loan 42,400
Trucks 18,500
Capital 65,000
2,07,300 2,07,300
Adjustments: Provide for 15% depreciation on plant. Write off patents by a third. An amount of Rs.850 was
due to workers. An over payment of Rs.200 was made to the salesman towards commission. Closing stock
was valued at Rs.3,700.

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