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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Manufacturing Account
* 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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Manufacturing Account
* 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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Manufacturing Account
Manufacturing Account
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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Closing entries for preparing Profit & Loss
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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Closing entries for preparing Profit & Loss
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