FINAL ACCOUNT
• Financial statement or final account refer to such statements
which reports the profitability and financial position of the
business ate the end of accounting period.
• The term financial statement includes two basic statement
which are as under:
i. Income statement ( Trading and Profit and Loss account)
which shows the results of business operations during an
accounting period.
ii. Statement of financial position or Balance sheet which show
financial position of an enterprise at a specified point of time.
Objectives of financial statement of final
accounts
• To present a true and fair view of the financial
performance (profit/loss) of the business.
• To present a true and fair view of the financial
position (assets/liabilities) of the business.
Users of financial statement
• Management: the financial statements help the management in assessing
the profitability of various activities and various departments
• Investors: they can assess the short term and long term financial soundness
and earning capacity of the business with the help of financial statements.
• Short term creditors and long term creditors: on the basis of financial
statements they assess whether the enterprise will be able to pay their
debts when they fall due and may decide to extend, maintain or restrict the
credit allowed to enterprise.
• Government: they use the financial statements to study the profit margins
of various industries to announce or withdraw various concessions.
• Employees and trade union: on the basis of financial statements they can
judge as to how much bonus and increase in their wages from the profit of
their organization.
• Taxation authorities: they use the financial statements for the purpose of
assessment of income tax, sales tax etc.
INCOME STATEMENT
• It is divided into two parts:
The first part is called Trading Account. It
shows the gross profit or loss
The second part is called Profit or loss
account. It shows the net profit or net loss.
TRADING ACCOUNT
• Trading account is prepared for calculating the gross profit or
gross loss arising or incurred as a result of the trading activities
of a business.
• It is prepared to show the result of manufacturing, buying and
selling of goods.
• If Dr > Cr = Gross loss
if Cr > Dr = Gross Profit
According to J.C Batliboi,” The trading account shows the result
of buying and selling of goods. In preparing this account, the
general establishment charges are ignored and only the
transactions in goods are included.
NEED AND IMPORTANCE OF TRADING ACCOUNT
• It provides information about gross profit and gross
loss.
• It provides information about the direct expenses
• Comparison of closing stock with those of the
previous year.
• It provides safety against possible losses.
Preparation of Trading Account
Trading account is a nominal account and all expenses which relate to either
purchase of goods are written on the Dr. side of the Trading account.
Items written on the Dr. side of the trading account:
• Opening stock: the stock of goods remaining unsold at the end of the
previous year is termed as opening stock. Opening stock will include the
following:
Opening stock of Raw material
Opening stock of Semi-finished goods
Opening stock of finished goods
• Purchase and purchase return: Purchase returns will be shown as a
deduction from purchases on the debit side of the trading accounting.
Purchases include cash as well as credit purchase.
• Direct expenses: All expense incurred in purchasing the goods, bringing
them to the godown and manufacture of goods are called direct expenses.
Direct expenses include the following:
Wages
Carriage or carriage inwards or freight
Manufacturing expenses
Dock charges
Import duty or custom duty
Octroi: This is levied by the municipal committee when the goods enter
the city and debited to Trading account.
Royalty: This is the amount paid to owner of a mine or patent for using his
right or patent.
Items written on the Credit side of the Trading Account:
• Sales and sales return: Both cash as well as credit side will be included in
sales. Sales return will be deducted out of sales on the credit side of the
trading account.
• Closing stock: Closing stock is the value of goods remaining at the end of
the accounting period. It includes closing stock of raw materials, work
progress (where manufacturing account is not separately pr+epared) and
finished stock.
Format of Trading Account
Particulars Amount Particulars Amount
To opening stock xxx By sales
To purchase Less: Sales return or return
Less: purchase return or inward
return outward By closing stock
To wages By gross loss
To wages & salaries transferred to P & L A/c
To direct expenses (Balancing figure)
To carriage or carriage inward
or carriage on purchase
To Gas, fuel or power
To freight, octroi and cartage
To manufacturing expenses or
productive expenses
To factory expense:
Factory lighting
Factory rent
To dock charges and clearing
charges
To import duty or custom
duty
To gross profit
Transferred to P&L a/c
(Balancing figure)
Illustration: Prepare a trading account for the year ended 31st
March 2012 from the following business:
Opening stock Rs 2, 00,000
Purchases Rs 10, 00, 000
Sales Rs 25, 00,000
Freight and octroi Rs 32, 500
Wages Rs 1, 50, 000
Factory lighting Rs 54, 000
Coal, gas and water Rs 11, 000
Purchase return Rs 60, 000
Sales return Rs 1, 00, 000
Carriage on purchase Rs 40, 000
Carriage on sales Rs 50, 000
Factory rent Rs 60, 000
Office rent Rs 37, 5000
Import rent Rs 1, 60, 000
Trading A/C
for the year ending 31st March 2012
Particulars Amount Particulars Amount
To opening stock 2, 00, 000 By sales 25, 00, 000
To purchase 10, 00, 000 Less: sales return 1, 00, 000 24,00,000
Less: Purchase 60,000 9, 40, 000
Return By closing stock 3, 00, 000
To freight and octroi 32, 500
To wages 1, 50, 000
To factory lighting 54, 000
To coal, gas, water 11, 000
To carriage on purchase 40, 000
To factory rent 60, 000
To import duty 1, 60, 000
To gross profit transferred to 10, 52, 000
profit & loss a/c
27,00,000 27,00,000
PROFIT AND LOSS ACCOUNT
• A businessman is more interested in knowing the net
profit earned or net loss incurred during the year.
• A profit and loss account is an account into which all
gains and losses are collected, in order to ascertain
the excess of gains over the losses or vice-versa.
NEED AND IMPORTANCE OF PROFIT AND LOSS A/C
• To ascertain the Net profit or Net loss
• Comparison with previous years’ profits
• Control on Expenses
• Helpful in the preparation of Balance Seet
Preparation of Profit & loss Account
Profit and Loss Account is a nominal account and as such, all the expenses
and losses are shown on its debit and all the incomes and gains are shown
on its credit side.
Items written on the Dr. side of Profit & Loss Account:
• Gross loss
• Office and Administrative Expenses: such as salary of office employees,
office rent, lighting, postage, printing, legal charges, audit fees etc.
• Selling & distribution expenses: such as advertisement charges,
commission, carriage outwards, bad-debts, packing charges etc.
• Miscellaneous expenses: such as interest on loan, interest on capital,
repair charges, depreciation, charity etc.
Items written on the Cr. Side of Profit & Loss Account:
• Gross profit
• Other incomes & gains: all items of incomes and gains are
shown on the credit side of the profit & loss account, such as
income from investments, rent received, discount received,
commission earned, interest received, dividend received etc.
Format of profit & loss account
Particulars Amount Particulars Amount
To gross loss b/d By gross profit b/d
(Transferred from trading (transferred from trading a/c)
account) By rent from tenant
Office expense: By rent (Cr.)
To salaries By discount received or
To salaries & wages discount (Cr.)
To rent, rates and taxes By commission received
To printing & stationery By interest on investments
To postage & telegram By dividend on shares
To lighting By bad debts recovered
To insurance premium By profit on sale of assets
To telephone charges By income from other sources
To legal charges By miscellaneous receipts
To audit fees By net loss
To travelling expenses (transferred to capital a/c)
To establishment expenses
To trade expenses
To General expense
To carriage outwards or
carriage on sales
To advertisement
To commission
To brokerage
To bad debts
To export duty
To packing charges
To delivery van
To stable expenses
To discount
To repairs
To depreciation
To interest (Dr.)
To bank charges
To entertainment expenses
To conveyance expenses
To donation & charity
To loss on sale of assets
To Net profit
(Transferred to capital a/c)
Illustration: from the following particulars, prepare a profit & loss a/c for the
year ending 31st March, 2012:
Gross profit Rs 10, 52,000 Discount allowed Rs 15, 000
Trade expenses Rs 10, 000 Lighting Rs 3,900
Carriage on sales Rs 50, 000 Commission received Rs 4,200
Office salaries Rs 79,000 Bad debts Rs 6,000
Postage and Telegram Rs 3,6000 Discount Cr. Rs 3,000
Office rent Rs 37,500 Interest on loan Rs 11,000
Legal charges Rs 2,000 Stable expenses Rs 7,000
Audit fee Rs 8,000 Export duty Rs 11,500
Donation Rs 5,500 Miscellaneous receipts Rs 2,500
Sundry expenses Rs 1,800 Unproductive expenses Rs 20,500
Selling expenses Rs 26,600 Travelling expenses Rs 12,500
Profit & loss Account
for the year ending on 31st March 2012
Particulars Amount Particulars amount
To trade expense 10,000 By gross profit 10,52,500
To carriage on sales 50,000 By commission received 4,200
To office salaries 79,000 By discount 3,000
To postage & telegram 3,600 By miscellaneous receipts 2,500
To office rent 37,500
To legal charges 2,000
To audit fee 8,000
To donation 5,500
To sundry expenses 1,800
To selling expenses 26,600
To discount allowed 15,000
To lighting 3,900
To bad debt 6,000
To interest on loan 11,000
To stable expenses 7,000
To export duty 11,500
To unproductive expenses 20,500
To travelling expenses 12,500
To net profit (transferred to 7,50,800
capital account)
10,62,200 10,62,200
BALANCE SHEET
• After ascertaining the net profit or loss of the
business enterprise, the businessman would also like
to know the exact financial position of his business.
• According to A. Palmer, “ A Balance sheet is a
statement at a particular date showing on side the
trader’s property and possessions and on the other
hand.”
Need and importance of preparing a Balance sheet
• The main purpose of preparing a Balance sheet is to ascertain the true
financial position of the business at a particular point of time.
• It helps in ascertaining the nature and cost of various assets of the
business such as the amount of closing stock, amount owing from
Debtors, amount of Fictitious assets etc
• It helps in determining the nature and amount of various liabilities of the
business.
• It gives information about the exact amount of capital at the end of the
year and the addition or deduction made it in the current year.
• It helps in finding out whether the firm is solvent or not
• It helps in preparing the opening entries at the beginning of he next year.
CLASSIFICATION OF ASSETS
• Fixed Assets: are those assets which are acquired for continuous use and last for
many years such as land & building, plant & machinery, motor vehicles, furniture
etc.
• Current assets: are those which are either in the form of cash or can be easily
converted into cash within one year of the date of Balance sheet.
• Liquid assets: are those which are in the form of cash or can be quickly converted
into cash such as cash, bills receivable, short term investment, debtors etc.
• Fictitious assets: are the assets which cannot be realized in cash or no further
benefit can be derived from these assets.
• Wasting assets: are the assets which are exhausted or consumed over a period of
time such as mines and oil-wells.
• Tangible assets: are those assets which have a physical existence or which can be
seen and felt plant machinery, building, furniture, stock etc.
• Intangible assets: are those assets which do not have any physical existence or
which cannot be seen or felt such as goodwill, trade marks, patents etc.
CLASSIFICATION OF LIABILITIES
• Fixed or long term liabilities: Those liabilities which are to be repaid after
one year or more are termed as long term liabilities. These includepublic
deposits, long term loans, Debentures etc.
• Current or short-term liabilities: Those liabilities which are expected to be
paid within one year of the date of the Balance Sheet are termed as
current or short term liabilities. These include Bank overdraft, creditors,
Bill payable, outstanding expenses etc.
• Contingent liabilities: These are the liabilities which will become payable
only on the happening of some specific event, otherwise not.
Format of Balance Sheet
Liabilities Amount Assets Amount
Current Liabilities: Current Assets:
Bank overdraft Cash at hand
Bills Payable Cash at Bank
Creditors Bills receivable
Outstanding expenses Short term investments
Unearned income Debtors
Creditor for outstanding exp. Closing stock
Income received in advance Prepaid expense
Fixed Liabilities: Accrued Income
Long term loans Long term Investment
Loan on mortgage Fixed assets:
Bank loan Furniture
Capital: Loose tools
Add: Net Profit or Net loss Motor vehicles
Less: Drawings Plant & machinery
Less: Income tax Patents
Less: Life insurance premium goodwill
Preliminary expenses
Advertisement expenses
Underwriting commission
Discount on issue of shares
Discount on issue of
debentures
Illustration: From the following balances of Siya Ram, Prepare a Balance Sheet
as at 31st March, 2012:
Plant & machinery Rs 8, 00, 000
Land & building Rs 6, 00, 000
Furniture Rs 1, 50, 000
Cash in Hand Rs 20, 000
Bank Overdraft Rs 1, 80, 000
Debtors Rs 3, 20, 000
Creditors Rs 2, 40, 000
B/R Rs 1, 00, 000
B/P Rs 60, 000
Closing stock Rs 4, 00, 000
Investment (short term) Rs 80, 000
Capital Rs 15, 00, 000
Drawing Rs 1, 30, 000
Net profit Rs 6, 20, 000
BALANCE SHEET
AS AT 31st march 2012
Liabilities Amount Assets Amount
Bank overdraft 1, 80,000 Cash in hand 20,000
B/P 60,000 B/R 1,00,000
Creditors 2,40,000 Investments(short term) 80,000
Capital 15, 00,000 Debtors 3,20,000
Add: Net profit 6, 20,000 Closing stock 4,00,000
21,20,000 Furniture 1,50,000
Less: Drawings 1,30,000 19,90,000 Plant & machinery 8,00,000
Land & building 6,00,000
24,70,000 24,70,000
ADJUSTMENTS
On preparing Trading and profit and Loss
Account, adjustments are necessary when
accrual basis of accounting is followed. The
following are the items for which adjustments
are usually required.
