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FINAL ACCOUNTS
Final Accounts is the last step in the accounting
process. Trial Balance is prepared at the end of all the accounting year to know the balances of all the accounts & to test the arithmetic accuracy of accounts. But the basic objective of accounting is to know about the profit or loss during the previous year & present financial position. This can be known only if Trading account and Profit & Loss account and Balance Sheet are prepared at the end pf year. These are also known as FINANCIAL STSTEMENTS which are prepared.
From Trial Balance. Final Accounts include the preparation of : 1) Trading and Profit & Loss account and 2) Balance Sheet as these two statements are prepared to give the final results of the business, both of these are collectively called as final accounts. Accounting cycle finally ends with these statements as shown in next slide:
ACCOUNTING CYCLE
TRANSACTIONS
Trading Account
Trading account is prepared by trading concerns i.e., concerns which purchase and sell finished goods, to know the gross profit or gross loss incurred by them from buying and selling of goods during a particular period of time. Gross profit or gross loss is the difference between the cost of goods sold and the proceeds of their sale. If the sale proceeds exceed the cost of goods sold , gross profit is made. Otherwise,gross loss is made.
Import Duty Custom Duty Excise Duty Consumable Store Factory Rent, Rates, and Taxes Foreman/ Works Managers Salary Royalty on manufactured goods To Gross Profit c/d*
To Depreciation & Provisions To Abnormal Losses To Net Profit (transferred to Capital Account)
Balance Sheet
Balance Sheet is a component of financial statements which shows balances of capital, liabilities & assets. All nominal accounts are closed by transferring these to Trading & Profit & Loss Account. Only personal & real accounts are left. Balance Sheet is the final phase in accounting cycle. It is a mirror which reflects the true position of the assets & liabities of the business on a particular date. A statement of financial position of economic unit disclosing as at a given moment of time its assets, liabilities & ownership equities. Eric L. kohler
Balance Sheet as on
Liabilities Capital Add: Net Profit Less: Drawings Fixed Liabilities: Long term loan Public deposits Current Liabilities: Unexpired Income Short Term Loans Trade Creditors Bank Overdraft
Amt
Assets Amt Fixed Assets: Goodwill Land and Buildings Plant & Machinery Motor Vehicles Furniture Patents & Trade Marks Live Stock Loose Tools Investments
Current Assets: Closing Stock Prepaid Expenses Accrued Income Debtors Bill Receivable Cash at Bank Cash in hand
ADJUSTMENTS
CLOSING STOCK The unsold goods lying in store at the end of accounting year. Treatment: Stock a/c Dr. To Trading a/c Two fold effect of adjustment will be :-
OUTSTANDING EXPENSES
Those expenses which have been incurred & not yet paid.
Two fold effect: 1.Will be shown on debit side of trading & profit & loss a/c by way of addition to particular expense. 2. Will be shown on liabities side of Balance Sheet.
PREPAID EXPENSES
Those expenses which have been paid in advance i.e., whose benefit will be available in future is called prepaid expenses. Treatment: Prepaid Expenses a/c Dr To Expenses a/c Two fold effect: 1.Will be shown in profit & loss a/c by way deduction from particular expense. 2. Will be shown on asset side of Balance Sheet.
ACCRUED INCOME
That income which has been earned but not received during the accounting year is called accrued income. Treatment: Accrued Income a/c Dr To Income a/c Two fold effect: 1.Will be shown on credit side of P & L a/c 2. Will be shown on asset side of Balance Sheet
DEPRECIATION
Depreciation is the reduction in the value of fixed asset due to its use, wear & tear. Treatment: Depreciation a/c Dr To Asset a/c Two fold effect: 1.Is shown on debit side of P & L a/c 2.Is shown on the Asset side of the Balance Sheet by way of deduction from value of concerned asset
BAD DEBTS
Debts which are definitely irrecoverable are called Bad Debts. Treatment: Bad Debts A/c Dr To Sundry Debtors a/c Two fold effect: 1. Is shown on debit side of P & L a/c. 2. 2. Is shown on assets side of Balance Sheet by way of deduction from Sundry Debtors.
INTEREST ON CAPITAL
To see whether the business is really earning profit or not ,interest on capital at a certain rate is provided. Treatment : Interest on capital A/c To capital A/c TWO FOLD EFFECT : 1.It will be shown on debit side of Profit and Loss A/c 2.Shown on liabilities side of Balance Sheet by way of addition to the capital.
INTEREST ON DRAWINGS
Interest on drawings is charged from proprietor , as drawings reduce capital. Treatment: Drawings A/c To Interest on Drawings A/c Two fold effect will be: 1.It will be shown on credit side of Profit and Loss Account. 2.On liabilities side of Balance Sheet by way of addition to the drawings which are ultimately deducted from the capital.
a) All the stock is fully insured. b) The stock is partly insured. c) The stock is not insured at all.
Effect:1.It will be shown on credit side of Trading A/c. 2.It is shown on Assets Side of Balance Sheet.
RESERVE FUND
Reserve is created out of profit & Loss A/c and thus is an appropriation of net profit for strengthening the financial position of the business. Treatment : Profit & Loss A/c Dr. To Reserve Fund A/c Two fold effect will be: 1.It is shown on debit side of P&L A/c. 2.It shown on the liabilities side of Balance.
MANAGERS COMMISSION
To increase the profit, manager is given some % age of commission on profits .It can be given at a certain percentage on the net profits but before charging such commission. Treatment: Profit & Loss A/c To Commission Payable After charging such commission This commission in calculated by a formula :Commission Payable = % of commission * Residual profit 100+Rate of Commission
EXAMPLE
Plant &machinery Fixture & fittings (for office) Stock as on April 1, 2009: Raw materials Finished Goods Purchases Wages Other manufacturing expenses Office expenses Sundry expenses Cash at bank Patents Selling expenses
On 31st march ,2010 the stock of raw material was 13,300. deprecation provided by M is 15 % on Plant and Machinery and 10% on fixtures & fittings (on book value). Patents have two more years to run and concern a vital production process .Manufactured goods were transferred to selling department at a value of Rs. 2,00,000. The value of finished goods (at transfer price ) on st March ,2010 was Rs.30,000; the value of hand on 31 the finished goods as on April 1,2009 was at cost to M. Draw the Manufacturing, trading & P&L a/c for 200910 and the Balance Sheet of M as at the end of the year.
MANUFACTURING ,TRADING AND PROFIT AND LOSS ACOOUNT OF M for the year ending 31st March ,2010
To raw material consumed: Rs. Opening stock 16,300 Add: Purchases 93,100 1,09400 Less: Closing Stock 13,300 96,100 To wages To Manufacturing Expenses To Depreciation on Plant & machinery(15% on Rs 60,000) To Depreciation on Patents(1/3 of Rs.18,000) 51,300 16,200 9,000 6,000 1,78,600 3,600 1,75,000 By Trading A/c (Transfer) 2,00,000
Less: Sale of Scrap Cost of Goods Produced To profit transferred to P&L a/c (12.5% of Transfer Price i.e., Rs.25,000 X 100 ) Rs. 2,00,000
25,000 2,00,000
To opening stock of finished Goods To value of goods manufactured transferred from manufacturing a/c To gross Profit c/d to profit & Loss A/c
25,600
2,50,600 30,000
2,00,000 55,200 2,80,600 2,80,000 By Gross Profit b/d By Profit transferred from Manufacturing a/c 55,200 25,000
To office Expenses To Depreciation on fixtures & fittings To selling expenses To Interest on Loan from Indian Bank(18% on Rs 20000) To stock reserve (12.5% on Rs. 30,000 Closing Stock of Finished Goods) To Net Profit Transferred to Ms M Current A/c
23,600
26,250
1,37,310
1,37,310