Final Accounts

Name of Institution

There are three following stages of preparing final accounts of a trading concern: 2. Trading Account 3. Profit and Loss Account 4. Balance Sheet Manufacturing concerns prepare Manufacturing Account also before preparing Trading Account
1

Trading Account

Name of Institution

Gross profit or Gross loss is ascertained by preparing Trading A/c. Cost of goods sold = opening stock+ Net purchases+ Direct expensesClosing stock Importance and purpose of preparing Trading A/c: • Ascertaining gross profit or gross loss • Ascertaining ratio of direct expenses to gross profit • Calculation of gross profit ratio • Comparison of stock with the stock of previous year • Comparing the actual performance with the desired performance • Comparing the actual performance with the previous performance

2

Profit and Loss Account

Name of Institution

This account gives the overall profit or loss made or suffered during a particular period. Importance: • Knowledge of net profit or net loss • Calculation of expenses ratio to sales • Comparison of actual performance with the desired performance • Maintaining provision and reserves • Determining future line of action

3

Manufacturing Account
This account gives the cost of the goods manufactured by a manufacturer during a particular period. Dr Manufacturing A/c
Particulars
To work in process (opening) To Raw Material consumed: Opening stock Add: purchase of raw material Less: closing stock of raw material To factory overheads

Name of Institution

Cr

Amount

Particulars
By work in process (closing) By sale of scrap

Amount

By cost of production transferred to trading A/c

4

Balance sheet

Name of Institution

‘A balance sheet is a mirror which reflects the true position of assets and liabilities on a particular date.’ Assets = Liabilities + Capital Characteristics: • Balance sheet is a statement • Prepared on a specified date • It is a statement of assets and liabilities • Knowledge about the nature of assets and liabilities • Knowledge of financial position • Assets and Liabilities tally each other
5

Objectives:
• • • • • •

Name of Institution

To assess the financial position of the firm Knowledge of proprietary ratio Protection against possible losses Calculation of financial ratios Calculation of working capital Knowledge regarding sources and application of funds
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While preparing final accounts, at the end of every accounting period, we come across certain problems. The accountant may come to know of certain adjustments to be Name of Institution made in the books of accounts to give a true picture of the state of affairs of the business after closing the books of accounts. These adjustments generally relate to the following: Adjustment I. Closing stock If appears in Trial Balance Cr. Side of trading a/c (i) If appears in Adjustment Cr. Side of trading A/c (ii) Asset side of Balance sheet (i) Dr. side of P/L a/c (ii) Reduce the value of concerned asset in balance sheet (i) Cr. Side of P/L a/c (ii) Increase the value of concerned asset in balance sheet (i) Added to concerned expense at the debit side of Trading or P/L a/c (ii) Liability side of 7 Balance Sheet

II.

Depreciation

Dr. side of P/L a/c

III.

Appreciation

Cr. Side of P/L a/c

IV.

Outstanding Expenses

Liability side only in Balance Sheet

Adjustment V. Prepaid expenses

If appears in Trial Balance Asset side of Balance Sheet

If appears in Adjustment (i) Name of Institution Deduce from concerned expenses at the debit side of Trading or P/L a/c (ii) Asset side of Balance Sheet (i) Added to the concerned income at the credit side of P/L a/c (ii) Asset side of Balance Sheet (i) Deduct from the concerned income at the credit side of P/L a/c (ii) Shown at liabilities side of Balance Sheet. (i) Dr. side of P/L a/c (ii) Increase amount of capital at the 8 liabilities side of

VI.

Outstanding or Accrued income

Asset side of Balance sheet

VII.

Unearned Income

Shown at the liabilities side of Balance Sheet

VIII. Interest on capital

Debit side of the P/L a/c

Adjustment IX. Interest on drawings

If appears in Trial Balance Credit side of P/L a/c

If appears in Adjustment (i) NameSide of P/L a/c Cr. of Institution (ii) Deduct from capital at liabilities side of Balance Sheet. (i) Debit side of P/L a/c (BORROWED) (iii) Added to loan A/c at liability side of Balance sheet. (ADVANCED) (v) Credit side of P/L a/c (vi) Added to lon A/c at asset side of Balance Sheet. (i) Credit side of P/L a/c (ii) Added to the value of investment, shown at the asset side of Balance Sheet (i) Debit side of P/L a/c (ii) Deducted from debtors at the Asset side of Balance 9 Sheet

X.

Interest on loan

(BORROWED) Debit side of P/L a/c (ADVANCED) Credit side of P/L a/c

XI.

Interest or dividend on investment

Credit side of P/L a/c

XII.

Bad Debts

Debit side of P/L a/c

Adjustment XIII. Provision for bad debt (i)

If appears in Trial Balance Shown at Cr. Side of P/L a/c or (iii) Deducted from total of bad debts, further bad debts at debit side of P/l a/c Or (iii) Liability side in Balance Sheet Debit side of P/L a/c

If appears in Adjustment (i) Name of Institution Shown at liability side of Balance sheet Or Deducted from sundry debtors at the asst side of Balance (i) sheet side of P/L a/c Debit (ii) Deducted fromP/L a/c (ii) Debit side of debtors at the asset side of balance sheet

XIV. Provision for discount on debtors

XV.

Provision for discount on creditors

Credit side of profit and loss A/c

(i) Credit side of P/L a/c (ii) Deducted from creditors at the liability side of Balance Sheet

10

The following is the trial balance of Mr. Kapur on 31st March Name of Institution 1993:
Debit Credit Cash in hand Rs. 1080 Cash at bank 5260 Purchases 81350 Sales 197560 Returns 1360 1000 Wages 20960 Fuel and power 9460 Carriage on sales 6400 Carriage on purchases 4080 Stock (1-4-92) 11520 Buildings 60000 Freehold land 20000 Machinery 40000 Salaries 30000 Patents 15000 General expenses 6000 Insurance 1200 Capital 1,42,000 Drawings 10,490 Sundry debtors 29000 Sundry creditors 12600 ____________________________________________________________________________ 353160 353160

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Name of Institution

Taking into account the following adjustments, prepare Trading and P&L A/c and the Balance Sheet: • Stock on hand on 31st March1993 is Rs. 13600 • Machinery is to be depreciated at the rate of 10% and the patents at the rate of 20% • Salaries for the month of March 1993 amount to Rs.3000 were unpaid • Insurance includes a premium of 170 for next year • Wages include a sum of Rs.4000,spent on the erection of cycle shed for employees and customers • A provision for bad and doubtful debts is to be created to the extent of 5% on sundry debtors
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The following is the trial balance of Sri Om as on 31st March, 1999. You are requested to prepare the trading and Profit and Loss A/c for the year ended 31st March1999 and Balance Name of Institution sheet as on that date after making the necessary adjustments: Particulars
Sundry debtors Sundry creditors Outstanding expenses Wages Carriage outwards Carriage Inwards General Expenses Cash Discounts Bad debts Motor car Printing and stationery Furniture and fittings Advertisement Insurance Salesmen’s commission Postage and telephone Salaries Rates and taxes Drawings Capital Account Purchases Sales Stock on 1.4.99 Cash at Bank Cash in hand

Debit ( Rs.)
500000

Credit (Rs.)
200000

55000 100000 110000 50000 70000 20000 10000 240000 15000 110000 85000 45000 87500 57500 160000 25000 20000 14,43,000 1550000 19,87,500 2,50000 60000 10500
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Name of Institution

The following adjustments are to be made: 1. Stock on 31st March 1999 was valued at Rs.7,25,000 2. A provision for bad and doubtful debts is to be created to the extent of 5% on sundry debtors 3. Depreciate: Furniture and fittings by 10% Motor car by 20% 7. Shri Om had withdrawn goods worth Rs.25000 during the year 8. Sales include goods worth Rs.75000 sent out to Shanti& co. on approval and remaining unsold. The cost of the goods was Rs.50000 9. The salesmen are entitled to a commission of 5% on total sales 10. Debtors include Rs.25000 bad debts 8. Purchases include purchase of furniture worth Rs.50000

14

Depreciation

Name of Institution

“Loss in the value and utility of assets due to their constant use and expiry of time is termed as depreciation”
Features of depreciation: • Depreciation is the loss in the value of assets • Loss should be gradual and constant • Depreciation is the exhaustion of the effective life of business • It is a normal feature • Maintenance of assets is not depreciation • It is continuing decrease in the value of assets • It is the allocation of cost of assets to the period of its life
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Causes for depreciation:
      By constant use By expiry of time By obsolescence By depletion Permanent fall in price By accidents

Name of Institution

Importance or need for providing depreciation :  For determination of net profit or loss  For showing assets at fair prices and true value in the balance sheet  Provision for funds in the replacement of assets  Ascertaining accurate cost of production  Distribution of dividend out of profit only  Avoiding over payment of income tax
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Methods of providing depreciation:
 Fixed installment method  Diminishing balance method  Annuity method  Depreciation fund method  Insurance policy method  Revaluation method  Depletion method  Machine hour rate method  Sum of years digit method  Replacement method

Name of Institution

17

Straight line method/ Fixed installment method

Name of Institution

Q1. On 1st July 1993, Raj & co. purchased machinery worth Rs.40000. On 1st July, 1995 they buy additional machinery worth Rs.10000. On 30thJune 1996 half of the machinery purchased on July 1993 is sold for Rs.9500. The company writes off 10% on the original cost. The accounts are closed every year on 31st December. Show the machinery account for four years .
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Name of Institution

Machinery A/c Dr.              Cr.

Date   1st july 1993

Particulars  

J.F.  

Amount  

  Date   

To bank A/c 

 

40000  

Particulars J.F.      By depreciation (on 40000 for six    Dec 31 1993 months)  

Amount  

2000 

 

 

 

 

  Dec31 

 By bal c/d

 

 38000

 

 

 

40000 

  

 

 

40000 

19

Diminishing or written down value method:

Name of Institution

A manufacturing concern whose books are closed on 31st Dec purchased machinery for Rs.50000 on 1-1-90. Additional machinery was acquired for Rs.10000 on 1-7-91 and for Rs.16061 on 11-94. Certain machinery purchased for Rs.10000 on 1-1-90 was sold for Rs.5000 on 30-6-93. Give the machinery account for 5 years. Depreciation is written off at 10% per annum on written down value.
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Reserves

Name of Institution

American Institute of Accounting views “ The use of the term reserve be limited to indicate that an undivided art of the asset is being held or retained for general or specific reserve” Reserves may be classified as under: d) 5. 6. 7. 8. General reserve or revenue reserve Reserve for development fund Capital reserve Secret reserve Sinking fund

b) Specific reserve (Provision) 1.Provision for bad debts 2. Reserve for discount on debtors 3. Reserve for discount on creditors 4.Provision for a taxation
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