FINAL ACCOUNTS

Prof. Sarbesh Mishra,

NICMAR, Hyderabad.
 BACK DROP

Every businessman is interested to know two facts

Whether the company has earned profit or loss

Determined by Trading, Profit & Loss Account.

What is the financial position of the firm Judged

by preparing Balance Sheet.

These two statements together are termed as Final

Accounts.
Trading and Profit & Loss
A/C
This gives a final summary of such
accounts which affect the profit or loss
position of the business.
The account is prepared in two parts
(i) Trading Account
(ii) Profit and Loss Account
TRADING ACCOUNT

Gives an overall result of trading i.e.

Purchasing and selling of goods.

It explains whether purchasing of goods

and selling them has proved to be
profitable for the business or not.
Contd.

It takes in to account cost of goods sold

and the value for which they have been
sold away.

Incase sales value is higher, there will be

a profit. Profit is termed as Gross Profit.
Equation for Preparing
Trading A/C
1. Gross Profit = Sales Cost of goods sold
2. Cost of Goods Sold = Opening Stock +
Purchases + Direct Expenses Closing Stock
3. Therefore, Gross Profit = Sales (Opening
Stock + Purchases + Direct Expenses
Closing Stock)
4. Or Gross Profit = (Sales + Closing Stock)
(Opening Stock + Purchases + Direct
Expenses)
Direct Expenses

The term direct expenses includes those

which have been incurred in purchasing the
goods, bringing them to business premises
and making them fit for sale.

Examples: Carriage, Octroi, Import Duty,

Expenses for seasoning the goods etc.
Important Point Regarding
Trading A/C
1. Stock The term stock includes goods lying
unsold on a particular date.
Opening Stock Goods lying unsold with the
businessman in the beginning of the A.Y and
is shown in the debit side of Trading A/C.
Closing Stock Goods lying unsold with the
businessman at the end of the A.Y & is
shown on the credit side of the Trading A/C.
Valuation of Closing Stock

Closing stock is valued on the basis of Cost

or market price whichever is less.

This valuation is done because of the

accounting Convention of Conservatism,
according to which expected losses are to be
taken in to account but not expected profit.
Purchases

The term Purchases includes both cash and

credit purchases of goods.
Term Goods means items purchased for
resale.
The amount of purchase will be the net
purchase made by proprietor.
Purchases will be taken in to trading account
after deducting purchase returns from gross
purchases made during the A.Y.
Sales

The term sales includes both cash and credit

sales.
Net sales = Gross sales made Sales Returns
Sale of assets like Plant & Machinery, Land &
Building, or any such assets which were
purchased for using in the business and not for
sale, should be excluded from sales to be taken
to the trading account.
Wages

The amount of wage is taken as direct

expense and is debited to the trading
account.
If the trial balance shows Wages & Salaries
then itll be charged to Trading Account & if it
is Salaries & Wages then itll be charged to
Profit & Loss Account.
Other Expenses

Customs and import duty In case the goods

have been imported from outside the
country, it is chargeable to Trading A/C.
Freight, Carriage and cartage These
charges are levied on purchase of goods.
Freight In / Cartage In / Carriage In are
taken in to debit side of Trading A/C.
Royalty Direct expense and charged to
Trading A/C.
Contd.

Gas, electricity, water, fuel etc. All

expenses are direct expenses and charged to
the Trading A/C.
Packing Materials Packing material used for
packing goods purchased bringing them to
the shop or convert them in to saleable state
are direct expenses and chargeable to
Trading Account.