Financial Accounting Unit 6

Unit 6 Final Accounts – 1

Structure:
6.1 Introduction
Objectives
6.2 Meaning, Objectives and Characteristics of Final Accounts.
6.3 Adjustments before Preparing Final Accounts
Depreciation
Bad debts
Provision for Doubtful Debts
Reserve for Discount on Debtors
Reserve for Discount on Creditors
6.4 Closing Entries
6.5 Summary
6.6 Glossary
6.7 Terminal Questions
6.8 Answers

6.1 Introduction
In the previous unit, you learnt the objectives of Trial Balance, principles
behind the preparation of Trial balance and the methodology to prepare trial
balance. You have been acquainted with different types of errors,
rectification of errors and preparation of suspense account.
In this unit, you will gain information regarding meaning, objectives and
characteristics of final accounts. Final accounts are prepared at the end of
accounting year to know the net profit and financial position of the
organisation. You will also be acquainted with the various adjustments
before preparing final accounts like depreciation, bad debts, provision for
doubtful debts, reserve for discount on debtors and reserve for discount on
creditors. You will also learn about the treatment of various closing entries.
Objectives:
After studying this unit, you should be able to:
 explain the meaning, objectives and characteristics of Final Accounts
 treat the various adjustments before preparing final accounts
 pass various closing entries

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6.2 Meaning, Objectives and Characteristics of Final Accounts

Final accounts are prepared at the end of the year for knowing profit and
financial position which is useful for the management and other the end
users.
Meaning of Final Accounts
Final accounts are the summaries of ledger accounts organized in such a
manner as to show the profit or loss of the business for the accounting year
and the financial position of the business at the end of the accounting year.
After ascertaining the arithmetical accuracy of ledger accounts a business
concern has to proceed to prepare financial statements or final accounts. To
determine the profit or loss of a concern, income statement or trading and
profit and loss a/c is prepared. Balance sheet or statement of financial
position will portray the financial condition of the organization on a particular
date. These two statements are collectively called final accounts.
Final accounts are required to be prepared by every business concern at the
end of accounting year, because they provide valuable accounting
information to all interested key parties such as management, shareholders,
creditors, government, employees, customers etc. They provide a concise
picture of profitability and financial position of the business. They are the
end products of accounting process. They summarize all the accounting
information recorded in the books of original entry and ledger.
Objectives of Final Accounts
A financial statement should reflect true and fair view of the business affairs
of the organization. As these statements are used by various constituents of
the society / regulators, they need to reflect true view of the financial
position of the organization.
Financial statements are required for measuring the performance of the
business which is indicated by gross profit or gross loss. Financial
statements facilitate the comparison of trading results of the current year
with those of the previous year. International Accounting Standards
Committee (IASC) stated that the objective of financial statements is to
provide information about the enterprise that is useful to a wide range of
users in making economic decisions.

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Various stakeholders would like to assess the financial performance of the

enterprise, its ability to generate future cash flows. It is almost impossible to
make sound decision on above matter if one has no access to the financial
statements.
Financial statements act as a summary of all transactions, which have been
taking place in business. The financial statements comprise of the income
statement account, the balance sheet and the cash flow statement.
To be of great value to all stakeholders’ financial information should assist
the users of accounts in assessing the financial performance of an
enterprise, its financial position and also its cash flow position.
Features of Final Accounts
Qualitative characteristics of financial statements include:
 Relevance
 Understandability
 Reliability
 Comparability
 True and Fair View/Fair Presentation

The qualitative characteristics of useful financial reporting identifies the

types of information that are likely to be most useful to users in making
decisions about the reporting entity on the basis of information in its financial
report. The qualitative characteristics apply equally to the financial
information in general purpose financial reports as well as to the financial
information provided in other ways.
Financial information is useful when it is relevant and represents faithfully
what it purports to represent. The usefulness of financial information is
enhanced if it is comparable, verifiable, timely and understandable.
Relevance and faithful representation are the fundamental qualitative
characteristics of useful financial information. Relevant financial information
is capable of making a difference in the decisions made by users. Financial
information is capable of making a difference in decisions if it has predictive
value, confirmatory value, or both. The predictive value and confirmatory
value of financial information are interrelated.

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Materiality is an entity-specific aspect of relevance based on the nature or

magnitude (or both) of the items to which the information relates in the
context of an individual entity’s financial report.
General purpose financial reports represent economic phenomena in words
and numbers. To be useful, financial information must not only be relevant,
it must also represent faithfully the phenomena it purports to represent. This
fundamental characteristic seeks to maximize the underlying characteristics
of completeness, neutrality and freedom from error. Information must be
both relevant and faithfully represented if it is to be useful.
Comparability, verifiability, timeliness and understandability are qualitative
characteristics that enhance the usefulness of information. Comparability
enables users to identify and understand similarities in, and differences
among, items.
Verifiability helps to assure users that information represents faithfully the
economic phenomena it purports to represent. Verifiability means that
different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a
faithful representation.
Timeliness means that information is available to decision-makers in time to
be capable of influencing their decisions.
Classifying, characterizing and presenting information clearly and concisely
make it understandable. While some phenomena are inherently complex
and cannot be made easy to understand, to exclude such information would
make financial reports incomplete and potentially misleading. Financial
reports are prepared for users who have a reasonable knowledge of
business and economic activities and who review and analyze the
information with diligence.
Enhancing qualitative characteristics should be maximized to the extent
necessary. However, enhancing qualitative characteristics (either
individually or collectively) render information useful if that information is
irrelevant or not represented faithfully.
Cost is a pervasive constraint on the information that can be provided by
general purpose financial reporting. Reporting such information imposes
costs and those costs should be justified by the benefits of reporting that
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information. The IASB assesses costs and benefits in relation to financial

reporting generally, and not solely in relation to individual reporting entities.
The IASB will consider whether different sizes of entities and other factors
justify different reporting requirements in certain situations.
There is always a grave misconception that accounting involves financial
figures only. Financial figures offer little information and may sometimes be
misleading to the users of financial statements. Qualitative information
simplifies and expands on the financial figures to ensure easy
understanding and comparability of results.
The main characteristics are:
1. Relevant financial information: This simply means the information is
able to directly influence the decision making process of the user. To be
relevant, financial information should contain the past as well as present
records and be able to provide a yardstick for the future. Relevance is also
measured in relation to materiality. If an item or event is material, it is
probably relevant to the user of financial statements. In other words, an item
is material if the user would have done something differently if he or she had
not known about the item.
In assessing materiality of financial information it should not only be based
on the financial value but also depends on the nature of the transaction.
There are other items in financial statements which require strict accuracy
as may have a large influence on the operations of the enterprise or may
lead to misconception by users of financial information. Example includes
the directors’ remuneration, because the director’s act as agents of the
shareholders and any slight under statement in their remuneration may
attract an outcry from the shareholders.
2. Understandability: In addition to relevance, the users of financial
statements will be able to make informed and better decision if they can be
able to interpret the contents of financial statements. Understandability is
about communicating an intended meaning. This depends on both the
accountant and the decision maker. Accountants should produce financial
information and present it in a form, which can be easily understood and
interpreted by their intended users. Example, information which is produced
for the loan application at the bank need to elaborate more on the financial

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position of the enterprise which information for the Malawi revenue authority
need to emphasize on profitability.
3. Reliable information: According to IASC’s Conceptual framework, to be
reliable, information must be neutral, that is free from bias. Financial
statements are not neutral, if by the selection or presentation of information,
they influence the making of a decision or judgment in order to achieve a
pre-determined result or income.
In order to be relied upon, the financial information requires the following
attributes:
 Faithful presentation of information.
 Neutrality.
 Substance over form i.e. accounting should be based on financial reality
and not merely on legal form.
 Prudence.
 Completeness.
4. Comparability: Another important character of accounting information is
comparability. Financial statements of the organization must be capable of
being linked with other non-financial information within the enterprise. User
should also be able to compare financial statements of an enterprise
through time in order to assess the trend in performance and financial
position.
In assessing the compatibility of financial information, the enterprise must
also disclose on the accounting policies they have been adopting over the
years. If possible the entity should apply accounting policies consistently to
ensure meaningful comparison of the results over time. The financial
information should be presented together with the corresponding information
of the preceding periods for easy comparison.
5. True and Fair View/Fair Presentation: It must exhibit the true and fair
view of the financial position of the organization.
Self Assessment Questions
1. State True or False: Final accounts are the summaries of ledger
accounts organized in such a manner as to show the profit or loss of
the business for the accounting year.

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2. To determine the ______________, income statement or trading and

profit and loss a/c is prepared.
3. ______________ means that information is available to decision-
makers in time to be capable of influencing their decisions.

6.3 Adjustments before preparing Final Accounts

Trial balance cannot be a complete tool for the preparation of final accounts.
Therefore, for the preparation of final accounts, adjustments are necessary.
Meaning of Adjustments:
Adjustments in final accounts simply mean bringing into record all those
items which have not been included in the trial balance. In other words, they
mean bringing into record certain expenses of the current period which are
incurred but not yet paid, and certain incomes of the current period which
are earned but not yet received, apportionment of the expenses paid during
the current period and incomes received during the current period between
the current period and the next period and bringing into account non-cash
expenses, such as depreciation of fixed assets and interest on capital, non-
cash incomes like appreciation of fixed assets and interest on drawings,
anticipated losses, such as provision for bad debts and provision for
discount on debtors and anticipated gains like provision for discount on
creditors.
Depreciation
Depreciation means fall in the value of an asset. The fall in the value of an
asset is due to various reasons, such as wear and tear, passage of time,
obsolescence (i.e., getting out of date or old-fashioned), etc.
Treatment of Depreciation in Final Accounts:
Depreciation on an asset should be treated in the final accounts as follows:
If the depreciation is given in the trial balance, it means that the value of the
assets has been already reduced. Therefore, it should be shown only on the
debit side of the profit and loss account.
On the other hand, if the depreciation is given as an adjustment, it means
that the value of asset has not been reduced. Therefore, it should be taken
into account both in the Profit and Loss Account and in the Balance Sheet.
In the Profit and Loss Account, it should be shown on the debit side. In the

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Balance Sheet, it should be deducted from the concerned asset on the

assets side.
Problem No.1
On 1-1-2009, the books of Gupta showed a balance of Rs.20,000 in Plant
and Machinery account and Rs.5,000 in Furniture account. The accounts
are closed on 31st December every year. Depreciate plant and machinery by
10% and furniture by 5%. Show the treatment of depreciation in Final
accounts.
Solution:

Profit and loss account for the year ended 31stDecember, 2009
To Depreciation A/c: Rs. Rs. Rs.
On plant & Machinery 2,000
On Furniture 250 2,250

Balance sheet as on 31st December 2009

Assets Rs.
Furniture 5,000
Less: Depreciation 250 4,750

Plant and Machinery 20,000

Less: Depreciation 2,000 18,000

Bad Debts:
Persons who owe us money are called “debtors”. The amounts due to us
from our debtors are called “debts”. Some of the debts due to us may
prove irrecoverable owning to various reasons, such as the insolvency of
the debtors, wilful non-payment from the debtors, etc. Debts which are
definitely proved to be irrecoverable are called “bad debts”.
Treatment of Bad Debts in Final Accounts:
The bad debts should be treated in the final accounts as follows:
If the bad debts are written off during the course of the trading period and if
the bad debts are given in the trial balance, then, the bad debts should
appear only in the profit and loss account on the debit side.

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On the other hand, if the bad debts are written off at the end of the trading
period as an adjustment, then, the bad debt should appear both in the profit
and loss account and in the balance sheet. In the profit and loss account,
the bad debts should be entered on the debit side, because they are loss. In
the balance sheet, the bad debts should be deducted from the sundry
debtors on the assets side, because the amount due from the sundry
debtors will be reduced on account of bad debts.
Problem No.2
Show the treatment of the bad debts in Final accounts after taking into
consideration, the bad debts given in Trial balance and adjustments.

Trial Balance as on 31st December 2009

Dr Cr
Debtors 1,00,000
Bad debts 10,000

Adjustment: Further bad debt amounted to Rs.2,000.

Solution:
Profit and loss account for the year ended 31st December, 2009
To Bad debts A/c 10,000 Rs. Rs.
Add: Further bad debts 2,000 12,000

Balance sheet as on 31st December 2009

Assets Rs.
Debtors 1,00,000
Less: Further bad
Debts 2,000 98,000

Provision for doubtful debts

In addition to the bad debts, there may be some debts the recovery of which
is doubtful. Such debts are called “doubtful debts”. As doubtful debts are
only expected losses, they should not be considered as losses and charged
to profit and loss account. But a provision should be made out of current
year’s profit for meeting the losses that may arise. The provision made is
known as “provision for doubtful debts”.

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Points to be noted regarding Provision for Doubtful Debts:

As regards the Provision for Doubtful Debts, the following points should be
noted.
a) If there is Old Provision for Doubtful Debts in any particular year, then,
the profit and loss account of the year should be debited and the
provision for doubtful debts account should be credited with the amount
of Provision required at the end of that year.
b) If there is old provision for doubtful debts in any particular year and if the
old provision for doubtful debts is less than the bad debts of that year
and the provision required at the end of that year, then, the profit and
loss account should be debited and the provision for doubtful debts
account be credited with the excess of bad debts and the provision
required at the end of that year over the old provision for doubtful
debts of that year.
c) If there is old provision for doubtful debts in any particular year, and if
the old provision for doubtful debts in any particular year is more than
the amount of bad debts of that year and the provision required at the
end of that year, then, in that year, there will be a surplus in the
provision for doubtful debts account. As there is a surplus in the
provision for doubtful debts account, there should be no entry in that
year for the creation of the provision for doubtful debts account. But
there should be an entry for transferring the surplus in the provision for
doubtful debts account to the profit and loss account. The surplus in the
provision for doubtful debts account should be transferred to the profit
and loss account by debiting the provision for doubtful debts account
and crediting the profit and loss account. The surplus in the provision for
doubtful debts account should be transferred to the profit and loss
account, because the provision for doubtful debts has been created out
of the Profit and Loss Account.
Problem No.3
Following are the extracts from the Trial Balance of a firm. You are required
to show the treatment of provision in the Final accounts
Trial Balance as on 31stDecember 2009
Debtors 8,000
Bad debts 300
Provision for doubtful debts 500

Adjustment: 5% provision for doubtful debts was to be maintained.

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Solution:
Profit and loss account for the year ended 31st December, 2009
To Bad debts A/c 300 Rs. Rs.
Add: New provision 400
700
Less: Old provision 500 200

Balance sheet as on 31st December 2009

Assets Rs.
Debtors 8,000
Less: New provision 400 7,600

It is usual for a business concern to allow cash discount to the debtors who
pay their dues promptly. The cash discount allowed to the debtors is a loss
to the business concern.
If a business concern follows this practice (i.e., the practice of allowing cash
discount to the debtors), then, in respect of the debtors whose accounts
appear in the books of the concern, at the end of the current trading period,
discount will have to be allowed in the subsequent period. But at the end of
the current trading period, the concern cannot know how much cash
discount it will have to allow to its debtors in the subsequent period.
All that is possible for the concern, is to make an estimate of the amount of
discount that will have to be allowed to the debtors in the subsequent period
and provide for that discount out of the current year’s profits. The provision
made for meeting the loss arising on account of the discount that will have
to be allowed to the debtors is known as “Provision for Discount on
Debtors” ( or “Reserve for Discount on Debtors”).
Treatment of Provision for Discount on Debtors in Final Accounts:
The Provision for Discount on Debtors should be dealt with in the Profit and
Loss Account as well as in the Balance Sheet. In the Profit and Loss
Account, the provision for discount on debtors should be treated as follows:
(a) If the total amount of discount allowed to debtors during the year and the
provision for Discount on Debtors required at the end of that year (i.e., New
Provision for Discount on Debtors) is greater than the Provision for Discount

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on Debtors already existing (i.e., Old Provision for Discount on Debtors), the
difference will appear on the debit side of the Profit and Loss Account.
(b) On the other hand, if the old provision for discount on debtors is greater
than the total amount of discount allowed to debtors during the year and the
new provision for discount on debtors, then the difference will appear on the
credit side of the profit and loss account.
In the balance sheet, the provision for discount on debtors should be treated
as follows:
The new provision for discount on debtors should be deducted from sundry
debtors on the Asset side.
Problem No. 4
Following are the extracts from the Trial Balance of a firm. You are required
to show the treatment of provision in the Final accounts

Trial Balance as on 31stDecember 2009

Debtors 50,000
Bad debts 3,000
Discount 2,000

Adjustments:
i) Create a provision for bad debts @ 10% on debtors
ii) Create a provision for discount on debtors @ 5% on debtors
iii) Additional discount given to the debtors Rs.1,000
Solution:
Profit and loss account for the year ended 31st December, 2009
To Bad debts A/c 3,000 Rs. Rs.
Add: Provision for bad
debts 4,900 7,900

To Discount 2,000
Add: Addl discount 1,000
Add: Prov for discount 2,205 5,205

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Balance Sheet as on 31st December 2009

Assets Rs.
Debtors 50,000
Less:
Addl Discount 1,000
49,000
Less:
Prov for bad Debts 4,900
44,100
Less: Prov for Discount 2,205 41,895

Working Notes:
Provision for bad debts:
10% on Rs.49,000 = Rs.4,900
Provision for discount:
Rs.49,000 – Rs.4,900 = Rs.44,100
5% on Rs. 44,100 = Rs.2,205
Reserve for discount on creditors
A trader can expect to get some cash discount from the creditors whose
accounts appear in his books at the end of the current year, when the
creditors are paid promptly in the subsequent year. This expected discount
should be taken into account in the current year’s accounts, even though it
will be received in the next year, because it relates to the creditors of the
current year. For the purpose of recording the expected discount from the
creditors, the trader creates a “Provision for discount on creditors”. The
provision for discount on creditors is calculated at a certain percentage on
the sundry creditors. The provision for discount on creditors is created by
debiting the Provision for Discount on Creditors Account and crediting the
Profit and Loss Account with the required amount of provision.
Treatment of Provision for Discount on Creditors in Final Accounts:
The Provision for Discount on Creditors should be dealt with in the Profit
and Loss Account and in the Balance Sheet.
In the Profit and Loss Account, the Provision for Discount on Creditors
should be treated as follows:
(a) If the discount received from creditors during the year and the Provision
for Discount on Creditors required at the end of that year (i.e., New

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Provision for Discount on Creditors) is greater than the Provision for

Discount on Creditors already existing (i.e., Old Provision for Discount on
Creditors), then, the difference will appear on the credit side of the Profit and
Loss Account.
(b) On the other hand, if the Old Provision for Discount on Creditors is
greater than the total amount of discount received from creditors during the
year and the New Provision for Discount on Creditors, then, the difference
will appear on the debit side of the Profit and Loss Account.
In the Balance Sheet, the Provision for Discount on Creditors should be
treated as follows:
The New Provision for Discount on Creditors (i.e., the Provision for Discount
on Creditors required at the end of the year) should be deducted from the
Sundry Creditors on the liabilities side.
Problem No.5
Following are the extracts from the Trial Balance of a firm. You are required
to show the treatment of provision in the Final accounts

Trial Balance as on 31stDecember 2009

Creditors
Reserve for discount on creditors 400 30,000
Discount 300

Adjustments:
i) Create a reserve for discount on creditors @2%
Solution:
Profit and Loss account for the year ended 31st December, 2009
By Discount 300 Rs.
Add: New reserve for
Discount 600 900
Less: Old reserve for
Discount 400
500

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Balance Sheet as on 31st December 2009

Liabilities Assets Rs.
Creditors 30,000
Less: New prov 600 29,400

Self Assessment Questions

4. ___________ in final accounts simply mean bringing into record all
those items which have not been included in the trial balance.
5. The provision made for meeting the loss arising on account of the
discount that will have to be allowed to the debtors is known
as____________.
6. State True or False: Persons who owe us money are called “creditors”.

Activity 1:
Visit a trading or a manufacturing concern and enquire about the how
records are maintained and balance sheet is extracted.

6.4 Closing Entries

The opening stock, purchases, purchases returns, direct expenses, sales,
sales returns and closing stock forms the basis of trading account and the
indirect expenses and non-trading incomes form the basis of the profit and
loss account. The journal entries necessary for transferring all the above
items (except closing stock) to the trading account or to the profit and loss
account are called closing entries. These entries are called closing entries,
because they serve to close these accounts.
Principle of a Closing entry:
The basic principle of a closing entry is that the account to be closed should
be credited, if it has a debit balance and the account to which it is
transferred should be debited. On the other hand, if the account to be closed
has a credit balance, it should be debited and the account to which it is
transferred should be credited.

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Various closing entries:

The various closing entries passed in connection with the preparation of the
trading account and the profit and loss accounts are as follows:
1. For closing the purchases returns account:
Purchases Returns Account Dr.
To Purchases Account
2. For closing the sales returns account:
Sales Account Dr.
To Sales Returns Account
3. For closing the accounts of opening stock, purchases and various
direct expenses:
Trading Account Dr.
To Opening Stock Account
To Purchases Account
To Individual Direct expense Account
4. For closing sales Account
Sales Account Dr.
To Trading Account
5. For closing the trading Account
(a) If the trading account shows a credit balance, i.e., gross profit:
Trading Account Dr.
To Profit and loss Account

(b) If the trading account shows a debit balance, i.e., gross loss:
Profit and loss Account Dr.
Trading Account
6. For closing the accounts of all non-trading incomes and gains:
Individual Non-Trading Income Account Dr.
To Profit and loss Account
For closing the profit and loss Account
(a) If the profit and loss account shows net profit or credit balance:
Profit and loss Account Dr.
To Capital Account

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(b) If the profit and loss account shows net loss or debit balance:
Capital Account
To Profit and loss Account
Problem No.1
From the following details, pass the necessary closing entries.
Stock on 1-1-2003 4,000 Freight 800
Purchases 15,000 Factory rent 1,000
Bad debts 500 Office rent 2,400
Sales 30,000 General expenses 500
Returns to suppliers 2,000 Heating and lighting 700
Returns from customers 1,000 Discount allowed 300
Wages and salaries 5,000 Discount received 400
Carriage on purchases 1,000 Commission (Cr.) 500
Cartage on sales 200 Insurance 200
Depreciation on Machinery 1,000 Closing stock 6,000

Solution:
Closing Entries
Date Particulars L.F. Dr. Cr.
Purchases Returns Account Dr. 2,000
To Purchases Account 2,000
(Being the purchases returns account
closed by transfer to purchases
account)
1,000
Sales Account Dr. 1,000
To Sales Returns Account
(Being the sales returns account closed
by transfer to sales account)
25,500
Trading Account Dr. 4,000
To Opening Stock Account 13,000
To Purchases Account 1,000
To Carriage on purchases Account 800
To Freight Account 5,000
To Wages and Salaries Account 1,000

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To Factory Rent Account 700

To Heating and Lighting Account
(Being the above items closed by
transfer to Trading Account)
29,000
Sales Account Dr. 29,000
To Trading Account
(Being the sales account closed by
transfer to Trading Account)
9,500
Trading Account Dr. 9,500
To Profit and loss Account
(Being the gross profit transferred from
Trading account to profit and loss
account)
5,100
Profit and loss account Dr. 2,400
To Rent Account 500
To General expenses Account 200
To Insurance Account 1,000
To Depreciation Account 200
To Cartage on sales Account 500
To Bad debts Account 300
To Discount allowed Account
(Being the above items closed by
transfer to profit and loss account)

Discount Received Account Dr. 400

Commission Received Account Dr. 900
To Profit and loss Account 500
(Being the above items closed by
transfer to profit and loss account)
Profit and loss Account Dr.
To Capital Account 5,300
(Being the net profit transferred to 5,300
Capital Account)

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Self Assessment Questions

7. State True or False: The basic principle of a closing entry is that the
account to be closed should be credited, if it has a debit balance and
the account to which it is transferred should be debited.
8. For closing the sales returns account _____________account should
be debited and ______________ account should be credited.
9. For closing sales Account, entry will be ______________.

Activity 2:
Find how to read a balance sheet and measure the performance of the
business.

6.5 Summary
Let us recapitulate the important concepts discussed in this unit
 Final accounts are the summaries of ledger accounts organized in such
a manner as to show the profit or loss of the business for the accounting
year and the financial position of the business at the end of the
accounting year.
 Financial statements are required for measuring the performance of the
business which is indicated by gross profit or gross loss. Financial
statements facilitate the comparison of trading results of the current year
with those of the previous year.
 Adjustments in final accounts simply mean bringing into record all those
items which have not been included in the trial balance.
 The basic principle of a closing entry is that the account to be closed
should be credited, if it has a debit balance, and the account to which it
is transferred should be debited.

6.6 Glossary
1) Financial statements: Statements prepared at the end of the year to
know the net Profit and financial position.
2) Timeliness: means that information is available to decision-makers in
time to be capable of influencing their decisions.
3) Adjustments: in final accounts simply mean bringing into record all
those items which have not been included in the trial balance.

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4) Direct expenses: Expenses incurred directly in connection with the

production.

6.7 Terminal Questions

1. Explain the objectives of Final Accounts.
2. What are the characteristics of Final Accounts?
3. What do you mean by Adjustments? Explain.
4. How to treat the depreciation in Final Accounts?
5. What are closing entries? Explain.

6.8 Answers
Self Assessment Questions
1. True
2. Profit or loss
3. Timeliness
4. Adjustments
5. Provision for discount on debtors
6. False
7. True
8. Sales and sales returns
9. Sales Account should be debited and Trading Account should be
credited.

Terminal Questions
1. Financial statements are required for measuring the performance of the
business which is indicated by gross profit or gross loss. For more
details, refer section 6.3.
2. Qualitative characteristics of financial statements include relevance,
understand-ability, reliability, comparability and fair presentation. For
more details, refer section 6.3.
3. Adjustments in final accounts simply mean bringing into record all those
items which have not been included in the trial balance. For more details
refer section 6.3.
4. If the depreciation is given in the trial balance, it means that the value of
the assets has been already reduced. Therefore, it should be shown
Manipal University Jaipur B1520 Page No.: 122
Financial Accounting Unit 6

only on the debit side of the profit and loss account. For more details
refer section 6.3.
5. The opening stock, purchases, purchases returns, direct expenses,
sales, sales returns and closing form the basis of trading account and
the indirect expenses and non-trading incomes form the basis of the
profit and loss account. The journal entries necessary for transferring all
the above items (except closing stock) to the trading account or to the
profit and loss account are called closing entries. These entries are
called closing entries, because they serve to close these accounts. For
more details refer section 6.4.

References:
 R. L. Gupta, Radhaswamy (2010). Financial Accounting. S. Chand and
Company.
 Maheshwari S. N and S. K. Maheshwari, (2009), Advanced
Accountancy, Vikas Publishing House.
 M. C. Shukla (2010). Advanced Accountancy. S. Chand and Company.

Manipal University Jaipur B1520 Page No.: 123