Final Accounts

Receipts & Expenditure

Adjustment & Closing Entries
Final Accounts of Manufacturing Concerns

Name: Vidhi. Valji. Patel

FYBcom – F

Roll No: HFBC678

Subject: Accountancy & Financial Management -I

 1.1. Receipts & Expenditure
(A) Receipts are the earning of the company and through it revenue is generated. Not all
the receipts contribute towards the profit and loss in business. Receipts can be
categorized as:
1. Revenue receipts
2. Capital receipts

1. Revenue Receipts:
 Revenue receipts are generated from the operational activities of the business.
 It affects the profit and loss of the business.
 Revenue receipts are recurring in nature.
 It is the amount received from the sale of normal day to day products or services of
the company
 Affect the Income Statement of the company.
 Through revenue receipts distribution of profit is done.
 It includes Sale of products of business
 Revenue receipts are one of the sources for creating reserves.
Examples-
a) Money received for services provided to customers
b) Rent received
c) Discount received from suppliers, vendors or creditors
d) Dividend received
e) Interest earned
f) Commission received
g) Bad-debts recovered (if any)
h) Revenue earned by the sale of scrap material or waste

2. Capital Receipts:
 Capital receipts are generated from the financial activities.
 It has no impact on the profit and loss of a business.
 Capital receipts are non-recurring in nature.
 Capital receipts result from any loan, disinvestment, insurance claim etc.
 Capital receipts affect the Balance sheet.
 Profit distribution is not available through capital receipts.
 It includes the sale of fixed or financial assets. 
 Capital receipts cannot be used for creating reserve funds in the business.

Examples-
a) Cash received from the sale of fixed assets
b) Amount received from Shareholders and debenture holders
 c) Insurance claim received on account of machinery damaged completely by fire is a
capital receipt.
d) Amount received from IDBI as a medium term loan for augmenting working capital
e) Capital invested in the business by a new partner.

(B) Expenditure refers to payments made or liabilities incurred in exchange for goods or
services. In accounting terms, expenditure increases the value of assets or reduces a
liability. In accounting terminology, there are two types of expenditure that a business
can incur:
1. Revenue Expenditure 
2. Capital Expenditure

1. Revenue expenditure:
Revenue expenditure is short term in nature and it includes normal day to day expenditure
that takes place during the operational activities of a business and expenses that are incurred
during the repair and maintenance cost of a revenue-generating assets. These are recurring in
nature as it covers all the expenses related to repainting, renewal and regular maintenance of
the fixed assets which is being used for generating revenues.

Examples-
a) General and administrative expenses
b) Repairs and maintenance 
c) Amount spent for replacement of any worn out part of a machine is revenue expense
since it is a part of its maintenance cost.
d) Amount paid for removal of Inventory to a new site is revenue expenditure as this is
neither bringing enduring benefit nor enhancing the value of the asset.
e) Amount paid as rent, salaries, etc.

2. Capital Expenditure:
Capital expenditure is incurred to avail the long term (more than 1 year) assets in the
business. In general, we can say capital expenditures are for fixed assets that impact the
productivity in the long run. As it is for the long run, so it is charged gradually through the
depreciation method.

Examples-
a) A capital expenditure is the money companies use to purchase, upgrade, or extend the
life of an asset.
b) Capital expenditures are a long-term investment, meaning the assets purchased have a
useful life of one year or more.
c) Types of capital expenditures can include purchases of property, equipment, land,
computers, furniture, and software.
d) Expenditure incurred to obtain license is a pre-operative expense which is capitalised.
 e) Legal fee paid to acquire any property is a part of the cost of that property. It is
incurred to possess the ownership right of the property and hence a capital
expenditure.

1.2. Adjustment &Closing Entries

(A) Closing Entries:

A closing entry is a journal entry made at the end of accounting periods that involves
shifting data from temporary accounts on the income statement to permanent accounts on
the balance sheet.

Examples-

1. Closing purchases returns account:

Purchases returns A/c Dr.

To Purchases A/c

2. Closing sales returns account:

Sales A/c Dr.
To Sales returns A/c

3. Closing opening stock and direct expenses:

Trading A/c Dr.

To Opening stock A/c
To Purchases A/c
To Carriage inwards A/c
To Wages A/c

4. Closing sales and closing stock:

Sales A/c Dr.

Closing stock A/c Dr.
To Trading A/c

5. Closing indirect expenses and losses:

Profit and loss A/c Dr.

To Office expenses A/c
To Administrative expenses A/c
To Selling Expenses A/c
To Distribution expenses A/c
 To Financial expenses A/c
To Depreciation A/c

6. Closing the indirect incomes:

Discount earned A/c Dr.

Commission earned A/c Dr.
Other indirect incomes A/c Dr.
To Profit and loss A/c

(B) Adjustment Entries:

An adjusting journal entry is an entry in a company's general ledger that occurs at the end of
an accounting period to record any unrecognized income or expenses for the period. When a
transaction is started in one accounting period and ended in a later period, an adjusting
journal entry is required to properly account for the transaction. Adjusting journal entries can
also refer to financial reporting that corrects a mistake made previously in the accounting
period.

1. Closing Stock:

Closing stock A/c Dr.

To Trading A/c

2. Outstanding expenses:

Expense A/c Dr.

To Outstanding expense A/c

3. Pre received incomes:

Income A/c Dr.

To Pre received income A/c

4. Prepaid expense:

Prepaid expense A/c Dr.

To expense A/c

5. Income outstanding:

Accrued income A/c Dr.

To Income A/c

6. Goods distributed as free samples:

 Advertisement A/c Dr.
To Purchase A/c

7. Interest on capital:

Interest on capital A/c Dr.

To Capital A/c

1.3. Final Accounts of a Manufacturing Concern

Manufacturing account prepared in a case where goods are manufactured by the firm itself.
Manufacturing accounts represent cost of production. Cost of production then transferred to
Trading account where other traded goods also treated in a same manner as Trading account.

Purpose of manufacturing account:

1. It shows the total cost of manufacturing the finished products and sets out in detail ,
with appropriate classifications, the constituent elements of such cost. It is therefore
debited with the cost of materials, manufacturing wages and expenses incurred
directly or indirectly on manufacture.
2. It provides details of factory cost and facilitates reconciliation of financial books with
cost records and also serves as a basis of comparison of manufacturing operations
from year to year.
3. It can be used for many other purposes. For instance, if the output is carried to the
Trading Account at market prices, it discloses the profit and loss on manufacture.
Similarly, it may also be used to fix the amount of production of profit sharing bonus
when such schemes are in force.

Important Point Related to Manufacturing Account:

Apart from the points discussed under the section of Trading account, there are a few
additional important points that need to be discuss here −

 Raw Material − Raw material is used to produce products and there may be opening
stock, purchases, and closing stock of Raw material. Raw material is the main and
basic material to produce items.
 Work-in-Progress − Work-in-progress means the products, which are still partially
finished, but they are important parts of the opening and closing stock. To know the
correct value of the cost of production, it is necessary to calculate the correct cost of
it.
 Finished Product − Finished product is the final product, which is manufactured by
the concerned business and transferred to trading account for sale.
 Raw Material Consumed (RMC) − It is calculated as:

RMC = Opening Stock of Raw Material + Purchases - Closing Stock

  Cost of Production − Cost of production is the balancing figure of Manufacturing
account as per the format given below.

Format of Manufacturing Account

Manufacturing Account
(For the year ending……….)

Particulars Amount Particulars Amount

To Opening Stock of Work-in- By Closing Stock of Work-in-

XX XX
Progress Progress

To Raw Material Consumed XX By Scrap Sale XX

To Wages XXX By Cost of Production XXX

To Factory overhead xx (Balancing figure)

Power or fuel xx

Dep. Of Plant xx

Rent- Factory xx

Other Factory Exp. xx xxx

Total XXXX Total XXXX

Format of Trading Account

Trading Account
(For the period ending…..)

Particulars Amount Particulars Amount

To Opening Stock XX By Sales XX

To Purchases XX By Closing Stock XX

To Direct Expenses XX By Gross Loss c/d XXX

To Gross Profit c/d XXX

Total XXXX Total XXXX

 Format of Profit & Loss Account

Profit & Loss Account

(For the period ending ………..)

Particulars Amount Particulars Amount

To Salaries XX By Gross Profit b/d XX

To Rent XX

To Office Expenses XX By Bank Interest received XX

To Bank charges XX By Discount XX

To Bank Interest XX By Commission Income XX

By Net Loss transfer to Balance

To Electricity Expenses XX XX
sheet

To Staff Welfare Expenses XX

To Audit Fees XX

To Repair & Renewal XX

To Commission XX

To Sundry Expenses XX

To Depreciation XX

To Net Profit transfer to Balance

XX
sheet

Total XXXX Total XXXX

 
 Format of Balance Sheet