Website: civilstap22@gmail.

com Contact us: 7889296332

ACCOUNTING AND AUDITING

Website: civilstap22@gmail.com Contact us: 7889296332

FINANCIAL STATEMENTS OF:

1. Sole Proprietorship
2. Manufacturing Concern

SOLE PROPREITORSHIP
Financial Statements are the systematically organized summary of all the ledger account heads presented in such
a manner that it gives detailed information about the financial position and the performance of the enterprise. As
seen above, through categorization of Financial Statements into Income & Position Statement, the profit or loss is
measured at two levels:
(a) Gross Profit or Gross Loss
(b) Net Profit or Net Loss
The profit or loss of the enterprise is obtained through the preparation of Income Statement i.e Trading and Profit
& Loss A/c
The financial position of the business enterprise is judged by measuring the assets, liabilities and capital of the
enterprise and the same is communicated to the users of financial statements. Financial position of the enterprise
can be known through the preparation of the Position Statement i.e Balance Sheet.
Comparison between Income Statement and Position Statement

Income Statement Position statement

Profit or loss is disclosed in the Income Statement It exhibits assets and liabilities of the business as at
prepared at the close of the financial year the close of the financial year.

Income Statement is sub-divided into following two Apart from balance sheet, to judge financial
parts for a non-manufacturing concern: position of the business, sometimes additional
statements are also prepared like cash flow
(i) Trading account; and statement, value added statement etc. which is
(ii) Profit and Loss account not mandatory for non- corporate entities. These
additional statements are prepared for the better
understanding of the financial position of the
business.
Income Statement discloses net profit or net loss of Position statement discloses the assets and
the business after adjusting from the income earned liabilities position as on a particular date.
during the year, all the expenditures of the business
incurred in that year.

PREPARATION OF FINAL ACCOUNTS

The principal function of final accounts (Trading Account, Profit and Loss Account and the Balance Sheet) is to
exhibit truly and fairly the profitability and the financial position of the business to which they relate. In order that
these may be properly drawn up, it is essential that a proper record of transactions entered into by the business
during a particular accounting period should be maintained. The BASIC PRINCIPLES in regard to accumulation of
accounting period data are:
(i) a distinction should be made between capital and revenue receipts and payments;
 Website: civilstap22@gmail.com Contact us: 7889296332

(ii) also income and expenses relating to a period of account should be separated from those of another
period.
(iii) different items of income and expenditure should be accumulated under significant heads so as to
disclose the sources from which capital has been procured and the nature of liabilities, which are
outstanding for payment.
Having regard to these basic principles, the various matters to which attention should be paid for determining the
different aspects of transactions, a record of which should be kept, and the different heads of account under which
various items of income and expenditure should be accumulated, are stated below:
1. Distinction between personal and business income
2. Distinction between capital and revenue expenditure
3. All material information to be disclosed
4. Record only current period transactions
5. Only transactions completed before close of accounts should be given effect
Inter-relationship of the two statements
One of the points to be remembered is that of total expenditure incurred some type of expenditure appears in
the Profit and Loss Account and some in the Balance Sheet. Consider few examples,

1. Salaries paid is shown on the Dr. side of Profit and Loss Account but outstanding salaries is shown on liabilities
side of Balance Sheet and is added to Salaries.

Profit & Loss A/c

Particulars Amount Particulars Amount

` `
To Salaries 25,000
26,500
Add: Outstanding 1,500
Salaries

Balance Sheet

Liabilities Amount Assets Amount

` `
Outstanding Salaries 1,500

Matching Principle:

This principle demands that expenses incurred to earn the revenue should be properly matched. This means the
following:

(a)If a certain revenue and income is entered in the Trading / Profit and Loss Account all the expenses relating to
it, whether or not payment has been actually made, should be debited to the Trading /Profit and Loss Account.
Website: civilstap22@gmail.com Contact us: 7889296332

This is why at the end of the year an entry is passed to bring into account the outstanding expenses. That is also
the reason why the opening inventory of goods is debited to the Trading Account since the relevant sale is credited
in the same account.

(b)If some expense has been incurred but against it sale will take place in the next year or income will be received
next year, the expense should not be debited to the current year’s Profit and Loss Account but should be carried
forward as an asset and shown in the Balance Sheet. It will be debited to the Profit and Loss Account only when
the relevant income will also be credited. The same reason applies to depreciation of assets also. The part of the
cost which is used to earn current year revenue is debited in same year.

(c)if an income or revenue is received in the current year but the work against it has to be done and the cost in
respect of it has to be incurred next year, i.e. income received in advance the income or the revenue is considered
to be of next year. It should be shown in the Balance Sheet on the liabilities side as “income received in advance”
and should be credited to the Profit and Loss Account of the next year. E.g. Newspapers or magazines usually
receive subscriptions in advance for a year. The part of subscription that covers copies to be supplied in the next
year is treated as income received in advance.

TRADING ACCOUNT
At the end of the year, as has been seen above, it is necessary to ascertain the net profit or the net loss. For this
purpose, it is first necessary to know the gross profit or gross loss. Gross Profit is the difference between the selling
price and the cost of the goods sold. For a trading firm, the cost of goods sold can be ascertained by adjusting the
cost of goods still on hand at the end of the year against the purchases.
REFER PPT FOR FORMAT OF TRADING ACCOUNT
Points to Remember:-
1. The opening inventory and purchases are written on the debit side.
2. Sales and the closing inventory are entered on the credit side.
3. If there are any direct expenses then they should also be written on the debit side of the Trading account.
4. If the balance of credit side is more, the difference is written on the debit side as gross profit. This amount
will also be carried forward to the Profit and Loss Account on the credit side.
5. In case of gross loss, i.e., when the debit side of the Trading Account exceeds the credit side, the amount
will be written on the credit side of the Trading Account and transferred to the debit side of the Profit and
Loss Account.
PROFIT AND LOSS ACCOUNT

The Profit and Loss Account starts with gross profit on the credit side. If there is gross loss, it will be written on the
debit side. After that all those expenses and losses, which have not been entered in the Trading Account, will be
written on the debit side of Profit and Loss Account. Incomes and gains, other than sales, will be written on the
credit side.

If we understand word ‘expenses’ properly, there should be no difficulty in distinguishing between items that will
be debited to the Profit and Loss Account and those that will be shown as Assets in the balance sheet. Further, it
Website: civilstap22@gmail.com Contact us: 7889296332

may be noted that the expenses which are personal in nature will not be charged to Profit and Loss A/c. Only those
revenue expenses and losses which are related to the current year, are debited to Profit and Loss Account.

CERTAIN ADJUSTMENTS AND THEIR TREATMENTS

Abnormal loss of Inventory by accident or fire : Sometimes loss of goods occurs due to fire, theft, etc. If due to
accident or fire, a portion of Inventory is damaged, the value of loss is first to be ascertained. Thereafter, Abnormal
Loss Account is to be debited and Purchase Account or Trading Account is to be credited.

Loss by Fire Account Debit

To Purchases/Trading Account

Insurance Company’s A/c (Insurance Claim) Debit.

Profit & Loss A/c Debit
To Loss by Fire A/c

FINAL ACCOUNTS OF MANUFACTURING ENTITIES

DIFFERENCE BETWEEN TRADING AND MANUFACTURING ACCOUNT

(a) Trading account shows Gross Profit while Manufacturing Account shows cost of goods sold which includes
direct expenses.
(b) Manufacturing account deals with the raw material, and work in progress while the trading account would
deal with finished goods only.

PUROSE OF MANUFACTURING ACCOUNT

1. It shows the total cost of Manufacturing
2. It provides details of factory cost
3. It provides the basis to set the Marker Price/ Cost of production

MANUFACTURING COST

+ Raw Material Consumed .…..….

+ Direct Manufacturing Wages ………
+ Direct Manufacturing Expenses ………
Website: civilstap22@gmail.com Contact us: 7889296332

+ Direct Manufacturing Cost ………

+ Indirect Manufacturing expenses or
+ Manufacturing Overhead ………
Total Manufacturing Cost

Raw Material Consumed = Opening inventory of Raw Materials + Purchases – Closing inventory of Raw Materials

Manufacturing costs are classified into :

Raw Material consumed is arrived at after adjustment of opening and closing Inventory of raw
materials:

INDIRECT MANUFACTURING EXPENSES OR OVERHEAD EXPENSES

These are also called Manufacturing overhead, Production overhead, Works overhead, etc.

Overhead defined as total cost of indirect material, indirect wages and indirect expenses.
Overhead = Indirect Material + Indirect Wages + Indirect Expenses

(a) Indirect material means materials which cannot be linked directly with the units produced, for example, stores
consumed for repair and maintenance work, small tools, fuel and lubricating oil, etc.
(b) Indirect wages are those which cannot be directly linked to the units produced, for example, wages for
maintenance works, holding pay, etc.
(c) Indirect expenses are those which cannot be directly linked to the units produced, for example, training
expenses, depreciation of plant and machinery, depreciation of factory shed, insurance premium for plant and
machinery, factory shed, etc.
MANUFACTURING ACCOUNT

Manufacturing Account

Particulars Units Amount Particulars Units Amount

` `
To Raw Material By By-products at net
Consumed: Opening …. realizable value By Closing
inventory ….. …… Work-in- Process
Add: Purchases ….. …… By Trading A/c
Less: Closing Cost of production
inventory To Direct …… ……
Wages
To Direct .….
expenses: …..
Prime cost …..
To Factory .….
overheads: .…. …….
…….
Royalty
Hire charges .……
To Indirect expenses:
Website: civilstap22@gmail.com Contact us: 7889296332

Repairs &
Maintenance
Depreciation
Factory cost
To Opening Work-in-
process