Final Accounts

Final Accounts
• The final accounts are the accounts which are prepared at the
end stage of an accounting year.

• This account highlights both the financial position and profits

of a business, which can be used by any investors or internal
bodies for various reasons.
Three Account
1. Trading Account (Purchase, Sales, opening & Closing Stock,
Direct expenses)
2. Profit & Loss Account
3. Balance Sheet- Position statement
 Financial Statement
• Financial statements are the main source of financial
information for most decision makers. 

• Financial statements are reports prepared by a company’s

management to present the financial performance and
position at a point in time.
• A general-purpose set of financial statements usually includes
a balance sheet, income statements, statement of owner’s
equity, and statement of cash flows. Which includes

• Balance sheet- Position statement

• Income statement (Trading Account, P & L Account)
• Cash flow statement.
 1-Trading Account
• Objective:- To find out gross profit/ Loss

• This includes Purchase and sales+ Stock +

Direct Expenses
Trading Account
Cost of Goods Sold
Cost of goods sold (COGS) & Gross Profit

• Cost of goods sold (COGS)= Value of

Opening Stock + Cost of Purchases + Direct
Expenses- Value of Closing Stock

• Net Sale- COGS= Gross Profit

• Direct Expenses: Related to Cost of sales +

Manufacturing goods / products
• Profit = Income- Expense

Sales (Revenue)/Top Line XXXX

Less: Sales Return XXX
Net Sale XXXX
Less: Direct Expenses XXXX
Gross Profit XXXX
Add: Indirect Incomes XXXX
Less: Indirect Expenses XXXX
Net Profit / Bottom Line XXXX

Sale= Cost of sale+ Gross Profit

Less: Cost of Goods Sold (Direct Expenses)
Gross Profit
COGS include direct material and direct labor expenses that go into
the production of each good or service that is sold.
 COGS
• Direct Material
• Direct Labour
• Direct Expenses

• Carriage inward
Trading Account
 Profit & Loss Account
• To find out Net Profit or Net loss / Bottom line of
Business
• Profit and loss account is prepared to ascertain the net
profit or net loss of the business for an accounting period.

Credit side
• The amount of gross profit is shown on the credit side.
All incomes and gains are shown on the credit side.

Debit Side
• Indirect expenses, operating expenses and losses are
shown on the debit side.
 Trading and Profit & Loss Account
Together

• Together called as ‘Income Statement’

 Items in trading account
1-Stock

The term ‘stock’ includes goods lying unsold on a particular date.

• The stock may be of two types:
– Opening stock
– Closing stock
• Opening stock refers to the closing stock of unsold goods at the
end of previous accounting period which has been brought
forward in the current accounting period.

2-Purchases
Purchases refer to those goods which have been bought for resale.
It includes both cash and credit purchases of goods.
 Opening stock & Closing Stock
• Opening stock:- Unsold goods in previous
financial years.

• Closing stock:-Unsold goods in current

financial years. Treated as current asset of
current financial year
 Direct Expenses
• Carriage Inward: Carriage paid for bringing the goods to the
godown.
• Freight – Shipman charges
• Wages: Wages incurred in a business is direct, when it is
incurred on manufacturing or merchandise or on making it
saleable.
• Fuel, Power and Lighting Expenses
• Octroi: When goods are purchased within municipality limits,
generally octroi duty has to be paid on it. It is debited to Trading
Account.
• Packing Charges
• Manufacturing Expenses
 Illustration
Prepare the Trading Account for the year ending 31st March, 2006.
Wages (Debit)
Purchases (Debit) 42,500 5,000

Op. Stock (Debit)

Mfg. expenses (Debit) 1,950 10,000

Sales returns
Sales (Credit) 67,500 (Subtract from 50
sales)
Carriage inwards Purchases returns
100 200
(Debit) (Less: Purchase)
Freight and duty
5,000    
(Debit)
Stores consumed
200    
(Debit)
Power
(Debit) 300    
The value of stock unsold is Rs. 12,000.
 Answer
Dr Cr
Particular Amount Particular Amount
To Opening Stock 10,000 By Sales 67,500
Less: Sales return 50
To Purchase 42,500 67,450
Less: P..R 200 42, 300
By Closing Stock 12,000
To Mfg. expenses By gross loss xxxx
To Carriage inwards
Freight and duty
Stores consumed
Power
Wages
14,600
To gross Profit

79,450 79,450
 Items Profit and Loss Account
• Profit and Loss Account measures net income by matching
revenues and expenses according to the accounting principles. Net
income is the difference between total revenues and total expenses.

• Items in P& L Accounts:- Indirect expenses and Indirect incomes

Items in Debit side P& L A/c

• Selling and Distribution Expenses
• Management Expenses
• Maintenance Expenses
• Financial Expenses
• Abnormal Losses
Items in Credit side P& L A/c
• Other Income
• Non-trading Income
• Abnormal Gains
 Expenses (P&L-Dr)
• Salary
• Rent paid
• Interest paid
• Fee payment
• Repairs and maintenance
• Telephone
• Insurance
• Commission paid
• Advertisement
• Loss on sale 
 Indirect Income/ Revenue account (P&L-
Cr)

• Rent received
• Commission received
• Interest Received
• Profit on sale of land
• Investment income
• Service revenue (Apprentice training)
 P& L Account

  Rs.   Rs.
Gross Profit (Credit) 51,000 Discount (Dr.)-Expense- 500
(Dr)
Carriage Outward 2,500 Apprentice Premium 1,500
(Debit) (Cr.)
Salaries (Dr) 5,500 Printing & Stationary 250
(Dr)
Rent(Dr) 1,100 Rates & Taxes(Dr) 350

Fire Insurance 900 Travelling Expenses 200

Premium (Dr)
(Dr)
Bad Debts 2,100 Sundry Trade Expenses 300
(Dr) (Dr)
Commission Received 1,000 Discount allowed by 800
(Cr) Creditors (Cr)
 Answer
Particular Rs. Particular Rs.
To Carriage Outward 2,500 By Gross Profit b/d 51,000
To Salaries 5,500 1,500
By Apprentice Premium
To Rent 1,100 800
By Discount by Credtrs
     
By Commission
To Fire Insurance 900 1,000
Premium
To Bad Debts 2,100  
To Discount 500  
To Printing & Stationary 250  
To Rent & Taxes 350  
To Travelling Expenses 200  
To Sundry Trade 300  
Expenses
To Net Profit transferred 40,600  
to Capital A/c
  54,300   54,300
 Balance Sheet
• Balance sheet is a statement showing the assets and liabilities of a
business on a particular date.
• Two side:- Asset and Liability

• It reveals the financial position of a business. Hence it is also

known as position statement.

• Balance Sheet as a tabular Statement of Summary of Balances

(Debit and Credits).
• In balance sheet both Asset side and Liability side should be equal.

• The Balance Sheet is also described as a statement showing the

sources of funds and application of capital or funds.

• Two types of B/S:- Vertical and Horizontal

Horizontal Balance Sheet
 Balance Sheet Structure
Liabilities Rs. Assets Rs.
Capital   Goodwill  
Add Net Profit Land
Add Interest Building
Less Drawings Plant and machinery
Reserves Fixtures and fittings
Long term Loans Investments
Current Liabilities Current Assets
Outstanding expenses Stock in trade (CS)
Sundry creditors Bills receivable
Short term loans Sundry debtors
Bills payable Cash at bank
Cash in hand
 Vertical Form of Balance Sheet
• Source of Fund (Liabilities)
• Application of Fund (Assets)
Vertical Form of Balance Sheet
 Items in Balance Sheet
• Fixed Assets
• Current Assets
• Intangible asset
• Fictitious Assets:-
• Fictitious assets are the deferred revenue expenditure
as well as intangible assets.
• They appear on the asset side simply because of a debit
balance in a particular account not yet written off.
E.g. provision for discount on creditors
 Fictitious Asset
• The meaning of the word “fictitious” which means “not true” or
“fake”. 
• Fictitious assets are expenses & losses which for some reason
are not written off during the accounting period of their
incidence. They are not assets at all, however, they are shown
as assets in the financial statements only for the time being.
Examples of Fictitious Assets
• Promotional expenses of a business
• Preliminary expenses
• Discount allowed on issue of shares
• Loss incurred on issue of debentures
 Liabilities
• Long Term Liabilities

• Current Liabilities

• Contingent Liabilities
 Current Liabilities
• Current liabilities, also known as short-term liabilities, are debts or obligations that need
to be paid within a year. 

• Current liabilities should be closely watched by management to make sure that the
company possesses enough liquidity from current assets to guarantee that the debts or
obligations can be met.

Examples:-
• Accounts payable
• Interest payable
• Income taxes payable
• Bills payable
• Bank account overdrafts
• Accrued expenses
• Short-term loans
• Creditors
• Bills Payable
• Outstanding expenses /Accrued expenses
 Long Term Liabilities
• Company has to pay back after one year. Not due immediately.
• If companies are unable to repay their long-term liabilities as
they become due, then the company will face a solvency crisis.
Examples
• Long term capital (Equity, preference share)
• Borrowed Capital
• Bond
• Mortgage payable
• Long term loans
 Long term liabilities
Capital (Liabilities)
• Equity shares- voting power, Return is not fixed
(Dividend)
• Preference share- wont have any kind of voting
power, Return will be fixed (Dividend).
• Debenture share- Interest,
Loan- Interest
• Long term loans from banks as well as other
financial institutions
 Surplus meaning
• Firm's surplus comes from an increase in retained
earnings. This increases the company's total
shareholders' equity. 
• Another part of the surplus comes from other
sources. These might include increasing the value
of fixed assets, the sale of stock at a premium, or
the lowering of the par value on common stock.
These other sources are often called capital
surplus and placed on the balance sheet.
 Particulars
Illustration
Rs.  Particulars Rs.

Stock on April, 1 (T-D) 500 Commission (Cr.)- (P&L-Cr) 200

Bill Receivable-(B-CA) 2,250 Returns Outwards (T- 250

Deduct from purchase)
Purchases (T-D) 19,500 Trade Expenses-(P&L-D) 100
Wages (T-D) 1,400 Office Fixtures 500
Insurance (P&L-D) 550 Cash in Hand 250
Sundry Debtors (B-CA) 15,000 Cash at Bank 2,375
Carriage Inwards (T-D) 400 Rent & Taxes 550

Commission (Dr).-(P&L-D) 400 Carriage Outwards 725

Interest on Capital (P&L-D) 350 Sales 25,000

Stationary (P&L-D) 225 Bills Payable 1,500

Returns Inwards (T-Deduct 650 Creditors 9,825
from Sales)
    Capital 8,950
The closing stock was valued at Rs.12,500.
 ADJUSTMENTS (Two Fold Effect)
Items Treatments
Closing Stock 1-Closing stock is shown on the credit side
of Trading account.
2-At same value it will be shown as an
asset in the balance sheet.

Outstanding Expenses 1-The amount of outstanding rent will be

(Eg: Outstanding rent) added to the rent on the debit side of
Profit and Loss Account.

2-Outstanding rent will be shown on the

liability side of the Balance Sheet.

Prepaid Expenses 1-Profit and Loss Account by way of

(Expense of this year has been paid in deduction from the said expense.
last year).
2-Current Asset in the Balance Sheet
Items Treatments
1-Credit side of Profit and Loss account by
way of deduction from the income.
Income Received in Advance 2-Liabilities side of the Balance Sheet as
income received in advance.

Accrued Income 1-P& L-credit side by way of adding with

(Income earned but not received) respective item.
(Receivable income)
2-Banalce sheet Asset side

Depreciation 1-P & L- Debit side

2- Balance sheet asset side by way of

deduction from the value of concerned
asset.

Interest on Capital 1-P & L- Debit side

(Gain to businessman, loss to business) 2-Balance sheet-addition to Capital

Bad Debts 1-P &L –Debit side

(Irrecoverable debt) 2-Balance sheet-Deduct from debtors
Items Treatments
1-P &L –Debit side
Provisions for Doubtful Debts 2-Balance sheet-Deduct from debtors

Provision for Discount on Debtors 1-P &L –Debit side

2-Balance sheet-Deduct from debtors

Interest on drawings 1-P & L- Credit

2-Balance sheet-Liability- Deduct from

Capital
Or add to drawings.

Goods distributed as sample at the time 1-Trading account deduct from the
of purchasing purchase

2-P & L Debit side

 Drawings and Interest on drawings
B/L
Capital 100000
Less: Drawings 10000
Add: Interest on drawings
(10%) 1000 89,000

Prepaid expense:- in advance we are paying

Advanced income:- Income received in advance
 Provision and Reserve
Provision :-
– Provisions are made to meet specific liability or contingency, e.g. a provision
for doubtful debts.
– To provide for a future expected liability.
– Presence of profit is not necessary for provision
– It is compulsory as per GAAP
– They are made by debiting P&L Account.
Reserve:-
– Reserves are made to strengthen the financial position of a  business and meet
unknown liabilities & losses.
– Reserves means to retain a part of profit for future use.
– Profit must be present for the creation of reserves, except for some special
reserves.
– It is optional except for some reserves whose creation is obligatory.
– They can be used to distribute dividends to shareholders.
– They are made by debiting P&L Appropriation Account.