5. Final Accounts

8/14/2019 5. Final Accounts

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Final Accounts

There are 2 statements in a standard set of final a/c

2. Balance Sheet The what do we have? statement

Shows what the entity owns and owes (the difference beingthe owners residual interest)

3. Income Statement The what did we do? statement

Shows the activity the entity undertook in its normal courseof operations.


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Preparation of Balance Sheet and Profit and

Loss Account

The company has to prepare its balance sheet andprofit & loss account from the books of account

maintained by it. Every Balance Sheet of a company

must give a true and fair view of the state of affairs

of the company as at the end of the financial yearand must be in the prescribed format.


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Final Statements of Accounts

Final accounts prepared at the end of the yearconsists of the profit & loss A/c, Trading &

Manufacturing A/c & Balance Sheet.

All expenses & receipts of revenue nature are

recorded in Manufacturing , Trading & P&L A/C and

all capital expenses & receipts are recorded in the

Balance sheet.


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Capital Expenditure

Capital expenditure is an expenditure intendedto benefit future periods which extends to morethan one year.

This expenditure results in the acquisition of

fixed assets. These assets are used over a period ofyears.

This expenditure also includes an expenditureincurred for putting a new asset to use or forimprovement of an asset, to produce more.

The nature of such expenditure is non-recurring.It is recorded in the Balance sheet.

Examples are, purchase of plant & machinery,land & building etc.


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Revenue Expenditure

Revenue expenditure is incurred for carrying outthe day to day business activities.

Such expenditure may be incurred for maintaining

the fixed assets in the state of working efficiency.

The benefit of such expenditure is for a short

period, i.e. not more than a year. The amount spent

is comparatively small.

This expenditure is of a recurring nature. It is

shown in Trading & P& L A/C.

It includes such items as repairs, depreciation of

fixed assets, discounts, wages, salaries, power etc.


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Capital & Revenue Receipts

Capital receipts are those which do not recur.They are of an unusual nature not arising through

normal activities of business. For example, amount

received on account of issue of share capital,

debentures, loans etc. These are shown in Balancesheet.

Revenue receipts are those items of income

which are received in the ordinary course ofbusiness. For example, cash received on account of

sales, discount received, commission & interest

received, etc. These are shown in P&L A/c


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Deferred Revenue Expenditure

Heavy revenue expenditure may be incurred in one year but

the benefit of it may arise or accrue not in one year only but inthe following two or more years.

These are of a quasi capital nature

Then so much of such expenditure as benefits the current

year may be considered revenue & written off to profit & loss

A/c

The balance is carrying forward as deferred revenue

expenditure I.e. a revenue expenditure which is deferred orpostponed.

That part of expenditure not written off appears in the

balance sheet on asset side.


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Manufacturing Account

A manufacturing account deals only with allcosts & expenses of manufacture. The purpose is to

ascertain the cost of goods manufactured.

It includes all expenses relating to purchase of

raw materials, carriage, freight & all other expenses

incurred to convert raw materials into finished

goods.

It includes Direct material, Direct Wages &

Factory expenses ( indirect expenses).


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* Direct Materials :

Refers to such materials which areincorporated into the physical units of productmanufactured.

* Direct Labour:

Refers to the labour performed in physicalcontact with the product. It is the amount ofwages paid to the workers who are engaged inconverting raw materials into finished goods.


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* Factory overhead- It is an indirect cost whichincludes:

indirect labour (foremen, works manager,

storekeeper) indirect material (factory supplies) depreciation of factory building, plant &machinery insurance on building, machinery, materials water, heat, light etc. used in factory


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Dr. For the year ending Cr.

Particulars Amnt Particulars Amount

To Opening Work in ProgressTo Raw material consumed:

Opening stock

Add: Purchase of Raw

materials

.

Less: Closing stock ofRaw Materials

.

.

..

By Closing Work in progressBy Sale of Scrap

By Cost of production of finished

goods during the period

transferred to Trading A/c

..

.

..


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Trading A/C

The main purpose of preparing Trading accountis to ascertain the gross profit or gross loss. Gross

profit or Gross loss is the difference between the

Sales value & Cost of goods sold.

Cost of goods sold= Opening stock of finished

goods + Purchase of finished goods Closing

stock


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Trading A/C

Trading A/CDr. For the year ending Cr.

Particulars Rs Particulars Rs

To Opening stock of Finished

. GoodsTo Cost of production of finished

. Goods transferred from

.. manufacturing Account

To Purchase of Finished goods

Less: Returns

To Carriage charges on goods. . Purchased

To Gross Profit c/d

xx

xx

xx

xx

Xx

xxxx

By Sales xxx

Less: Returns xxBy Closing stock of finished .

. Goods

By Gross Loss

xxx

xx

xx

xxxx


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Profit & loss A/C

It is prepared to know the Net profit earned orNet loss sustained by the business during the year.

All expenses & losses (those which are not

transferred to the trading A/c) of regular nature, i.e.

the administrative expenses are transferred to the

debit side of this A/c and all gains & incomes are

recorded on the credit side.


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A P&L account contains the following:

Sales :This is the turnover of the business, the main source of

income from sales of products or services. This figure is always net

of taxes as these are payable to the government and do not form

part of the income of the business.

Purchases (stock/inventory): Purchases are the items of stock you

buy in order to sell on to customers. A basic accounting principle is

that income is exactly matched against the cost of generating that

income. In this regard the stock or inventory on hand at the end of

the accounting period is always deducted from the total purchases

cost. These stock items will be used to generate future sales andwill be matched against those sales in the next period.


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A P&L account contains the following:

Sales related expenditure : These costs are those that

are directly incurred in the process of making a sale to a

customer. They include items such as sales commission,

promotional costs and courier charges.

Overheads :Lastly there are the overheads of the

business. These are the costs incurred on the rest of the

business that is not directly involved with the selling

process. Examples of overhead costs are: admin staffsalaries, lighting and heating, office stationery, computer

maintenance and legal and accountancy fees.


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Profit & loss A/C

Profit and Loss Account

Dr. For the year ending Cr

Particulars Amount Particulars Amount

To Gross Loss b/d

To Salaries

To Rent

To Printing & stationary

To Commission

To Advertisement

To Bad DebtsTo Discount

To Misc. expenses

To Depreciation

To Preliminary expenses w/o

To Net Profit

..

By Gross Profit b/d

By Discount received

By Interest received

By Net Loss


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Closing entries for preparing Profit & Loss

A/c

For transfer for items of expenses, losses, etc.,

appearing in the debit side of the Trial Balance

Profit and Loss A/c Dr

To Salaries

To Rent

To Commission

To Advertisement

To Bad Debts

To Discount

To Printing and Stationary


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A/c

For transfer for items of incomes, gains, etc., appearing

in the credit side of the Trial Balance

Interest Account Dr

Dividend Account Dr

Discount Account Dr

To Profit and Loss Account


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A/c

For transfer of Net Profit

Profit and Loss account Dr

To Capital Account(s)

For Transfer of Net Loss

Capital Account(s) Dr

To Profit and Loss account


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Ex: From the following balances, taken from the Trial

Balance of Mr. X, prepare a Trading and Profit and Loss

Account for the year ending 31st Dec. 2007

The closing stock on 31st

Dec. 2007 is Rs 5000

Particulars Dr. (Rs) Cr. (Rs)

Stock on 1.1.2007

Purchase

Sale

Returns (purchase and sale)Carriage

Cartage

Rent

Interest received

Salaries

General ExpensesDiscount

Insurance

2000

20000

20001000

1000

1000

2000

1000

500

30000

1000

2000

500


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Trading and Profit & Loss Account

(For the year ending 31st Dec. 2007)

Dr. Cr.

Particulars Amount Particulars Amount

To Opening Stock

To Purchases 20000

Less Returns 1000

To Carriage

To CartageTo Gross Profit

To Rent

To Salaries

To General ExpensesTo Insurance

To Net Profit

2000

19000

1000

100010000

33000

1000

2000

1000500

8000

12500

By Sales 30000

Less Returns 2000

By Closing Stock

By Gross Profit b/d

By Interest

By Discount

28000

5000

33000

10000

2000

500

12500


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Profit & Loss Account

A Profit and Loss Account shows the

following information for a business over a

period of time (norm. one yr)

Sales Revenue earned by the business

Costs of Production that the business has paid

Profit earned by the business


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Profit & Loss Account

Sales

Less Cost of Sales

X

x

= Gross Profit x

Less Expenses / Overheads x

=Net Profit x


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Calculating Cost Of Sales

Purchases X

+ Opening Stock X

- Closing Stock X

= Cost of Sales X


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Balance Sheet

All the Real a/c, Personal A/c, capital A/c,outstanding liabilities, outstanding income, etc &

the balance in the P&L A/c are recorded in the

Balance sheet.

Balance sheet is considered as a statement

showing the financial position of the business as on

a particular day.


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Classification of assets

Fixed Assets: Are of a permanent nature & not meant forresale. E.g. Land, Plant, Machinery, Building, Equipment, etc.

Current Assets: These are held temporarily & are meant forresale. They change form from time to time. Cash in hand may beused for purchasing the goods which will be in stock. Stock may

be sold on credit which becomes debtors.Thus, Cash in hand, Cash with bank, Debtors, Bills receivablesare all current or circulating assets.

Fictitious Assets: These assets cannot be converted into cash.These assets are not represented by anything concrete. E.g.

preliminary expenditure, discount on issue of shares &debentures etc.

Intangible Assets: Those assets which can not be seen ortouched. Ex: Goodwill, patents, trademarks etc


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Classification of Liabilities

Fixed liabilities: are those which are redeemedafter a long period of time. Long term loans &capital are the examples of such liabilities.

Current liabilities: are those liabilities which areto be paid in the near future, usually within a year.

E.g. Sundry creditors, Bank overdraft, Outstandingexpenses & bills payable.

Contingent liability: are not actual liabilities, butthey may become so on the happening of certainevents. If the expected event does not occur, noliability will arise.


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Balance Sheet

(as on 31st Dec./ March )

Liabilities Amnt. Assets Amnt.

Capital (Less Drawings)

Profit and loss A/c

Reserves

Long term loans

DebenturesSundry creditors

Bills payable

Bank overdraft

Outstanding expenses

Land and building

Plant and machinery

Patents

Preliminary expenses

Sundry debtorsBills receivable

Closing stock:

Raw materials

Work in progress

Cash in hand

Cash at Bank

f f


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From the following balances, prepare a Trading and Profit and

Loss Account and a Balance Sheet.

Opening Stock 1250

Sales 11800

Depreciation 667

Commission (cr) 211

Insurance 380

Carriage 300

Furniture 670

Printing charges 481

Carriage outward 200

Capital 9228

Creditors 1780 Bills payable 541

Bad debts 180

Plant and machinery

6230

Returns outward 1380

Cash in hand 895

Salaries 750

Debtors 1905

Discount (dr) 328

Bills receivable 2730

Wages 1589

Return inwards 1659

Bank overdraft 4000 Purchases 8679

Petty cash in hand 47

The value of closing stock was Rs 3700

Documents

5. Final Accounts