final accounts vis-à-vis financial statements · pdf file09/07/2017 ·...

FINAL ACCOUNTS vis-à-vis Financial Statements

Samir K Mahajan

CLASSIFICATION OF FINAL ACCOUNT

Trial balance proves the arithmetical accuracy of the business transactions, but it is not the end.The businessman is interested in knowing whether the business has resulted in profit or loss andwhat the financial position of the business is at a given period. In short, he wants to know theprofitability and the financial soundness of the business. The trader can ascertain these bypreparing the final accounts. The final accounts are prepared at the end of the year from the trialbalance. Hence the trial balance is said to be the connecting link between the ledger accountsand the final accounts.

CLASSIFICATION OF FINAL ACCOUNT contd.

The basic objectives of preparing financial statements are :(a) To present a true and fair view of the financial performance of the business;(b) To present a true and fair view of the financial position of the business; and

For this purpose, the firm usually prepares the following financial statements:1. Trading and Profit and Loss Account2. Balance Sheet

Trading and Profit and Loss account, also known as Income statement, shows the financialperformance in the form of profit earned or loss sustained by the business.

Balance Sheet shows financial position in the form of assets, liabilities and capital. These areprepared on the basis of trial balance and additional information, if any.

TRADING AND PROFIT AND LOSS ACCOUNT

Trading and Profit and Loss account is prepared to determine the profitearned or loss sustained by the business enterprise during the accountingperiod.

It is basically a summary of revenues and expenses of the business andcalculates the net figure termed as profit or loss. Profit is revenue lessexpenses.

If expenses are more than revenues, the figure is termed as loss. Trading andProfit and Loss account summarises the performance for an accountingperiod.

It is achieved by transferring the balances of revenues and expenses to thetrading and profit and loss account from the trial balance.

Concept of Gross Profit and Net Profit

Trading and Profit and Loss account is also an account with Debit and Creditsides. It can be observed that debit balances (representing expenses) andlosses are transferred to the debit side of the Trading and a Profit and Lossaccount and credit balance (representing revenues/gains) are transferred to itscredit side.

The trading and profit and loss can be seen as combination of two accounts,viz. Trading account and Profit and Loss account.

The trading account or the first part ascertains the gross profit and

TRADING ACCOUNT

The trading account ascertains the result from basic operational activities ofthe business. The basic operational activity involves the manufacturing,purchasing and selling of goods. It is prepared to ascertain whether the sellingof goods and/or rendering of services to customers have proved profitable forthe business or not.

Trading account ascertain gross profit or gross loss.

Gross Profit = Sales – (Purchases + Direct Expenses)

The gross profit or the gross loss is transferred to profit and loss account.

ITEMS APPEARING IN THE DEBIT SIDE OF TRADING ACCOUNT

o Opening stock: Stock on hand at the beginning of the year is termed asopening stock. The closing stock of the previous accounting year is broughtforward as opening stock of the current accounting year. In the case of newbusiness, there will not be any opening stock.

o Purchases less returns : Purchases made during the year, includes both cashand credit purchases of goods. Purchase returns must be deducted from thetotal purchases to get net purchases.

Trading Account contd.

ITEMS APPEARING IN THE DEBIT SIDE OF TRADING ACCOUNT contd.

Direct Expenses: Direct expenses means all expenses directly connected with the manufacture, purchase of goods and bringing them to the point of sale. Some of the direct expenses are:i. Wages: It means remuneration paid to workers.ii. Carriage (Freight or cartage) or carriage inwards: It means thetransportation charges paid to bring the goods from the place of purchase tothe place of business.iii. Octroi Duty: Amount paid to bring the goods within the municipal limits.iv. Customs duty, dock dues, clearing charges, import duty etc. These expensesare paid to the Government on the goods imported.v. Factory rent paidvi. Other expenses : , Fuel, power, lighting charges, oil, grease, waste relatedto production and packing expenses


ITEMS APPEARING IN THE CREDIT SIDE OF TRADING ACCOUNT

o Sales less returns: This includes both cash and credit sale made during theyear. Net sales is derived by deducting sales return from the total sales.

o Closing stock: Closing stock is the value of goods which remain in thehands of the trader at the end of the year. It does not appear in the trialbalance. It appears outside the trial balance.

o (As it appears outside the trial balance, first it will be recorded in thecredit side of the trading account and then shown in the assets side of thebalance sheet).


ITEMS APPEARING IN THE CREDIT SIDE OF TRADING ACCOUNT contd.

BALANCING OF TRADING ACCOUNT

The difference between the two sides of the Trading Account, indicateseither Gross Profit or Gross Loss. If the credit side total is more, thedifference represents Gross Profit. On the other hand, if the total of thedebit side is more, the difference represents Gross Loss.

o The Gross Profit or Gross Loss is transferred to Profit & Loss Account.


Format of Trading Account

Dr Trading Account for the year ending 31st March …………. Cr

Particulars (expenses /loss) Rs Rs Particulars (revenue/gains) Rs Rs

To Opening StockTo Stock:Raw materialsWork in progressSemi-finished goodsFinished goods

XXXXXXXXXXXX

XXX

XXX

By SalesLess: Returns inwardsBy Closing stockBy Gross Loss c/d(Transferred to P&L A/C)

XXXXXX XXX

XXXXXX

To PurchasesLess: Returns outward or purchase returnLess: goods taken away by proprietor

Less: goods given as free samplesLess goods: given as charityTo direct wages or manufacturing wagesTo Freight or carriage inwards or purchase carriageTo octroi duty or local taxes

To import duties, customs,To Clearing charge, landing charges, Dock dutiesTo power (factory)To fuelsTo coal, gas, water

To heating, lightingTo manufacturing expensesTo packing expensesto assembling expensesTo royalty

To gross profit c/d(Transferred to P&L A/C)

XXXXXX

XXXXXX XXX

XXXXXXXXX

XXXXXXXXXXXXXXX

XXXXXXXXXXXXXXX

XXX

xxx xxx

If gross profit

Date Particular L.F. Debit Amount (Rs)

Credit Amount (Rs)

2013January 1

Trading A/c Dr

To profit and loss account

(Gross Profit transferred to Profit and loss A/c)

xxx

xxx

CLOSING ENTRIES OF TRADING ACCOUNT

Like ledger accounts, trading account will be closed by transferring the gross profit or gross loss to the profit and loss account.

If gross loss


Credit Amount (Rs)

2013

January 1

Profit and loss A/c Dr

To Trading A/C

(Gross Loss transferred to Profit and loss A/c)

xxx

xxx

PROFIT AND LOSS ACCOUNT

After calculating the gross profit or gross loss the next step is to prepare theprofit and loss account. To earn net profit a trader has to incur many expensesapart from those spent for purchases and manufacturing of goods. If suchexpenses are less than gross profit, the result will be net profit. When total ofall these expenses are more than gross profit the result will be net loss.

The aim of profit and loss account is to ascertain the net profit earned or netloss suffered during a particular period.

Net Profit = Gross profit + Other incomes – Indirect Expenses

ITEMS APPEARING IN THE DEBIT SIDE 0F PROFIT AND LOSS ACCOUNT

Those expenses which are chargeable to the normal activities of thebusiness are recorded in the debit side of profit and loss account. They aretermed as indirect expenses which include:

Office and Administrative Expenses :Expenses incurred for the functioningof an office such as office salaries, office rent, godown rent, municipal ratesand taxes office lighting, printing and stationery, postages, telephonecharges office.

Repairs and Maintenance Expenses :Expenses relates to the maintenance ofassets such deprecation, repairs and small renewals/ replacements relatingto plant and machinery, furniture, fixtures, fittings, etc

PROFIT AND LOSS ACCOUNT contd.

ITEMS APPEARING IN THE DEBIT SIDE 0F PROFIT AND LOSS ACCOUNT contd.

Financial Expenses :Expenses incurred on borrowings – interest paid on loan,Bad debts,

o Selling and Distribution Expenses :All expenses relating to sales anddistribution of goods such as: advertising, travelling expenses, salesmensalary, commission paid to salesmen, discount allowed, repacking chargesetc.


ITEMS APPEARING IN THE CREDIT SIDE 0F PROFIT AND LOSS ACCOUNT contd.

Besides the gross profit, other gains and incomes of the business are shown on the credit side. Thefollowing are some of the incomes and gains.o Dividend received on investmento Interest received on fixed deposits.o Discount earned.o Commission earned.o Rent Received


ITEMS APPEARING IN THE CREDIT SIDE 0F PROFIT AND LOSS ACCOUNT contd.

BALANCING 0F PROFIT AND LOSS ACCOUNT

The difference between the two sides of profit and loss account indicates either net profit or net loss. If thetotal on the credit side is more the difference is called net profit. On the other hand if the total of debitside is more the difference represents net loss. The net profit or net loss is transferred to capital account.


Dr Profit and Loss Account for the year ended 31 March, ……. Cr

Particulars (expenses /loss) Rs Particulars (revenue/gains) Rs

To Trading A/c (Gross loss) xxx By Trading A/c (Gross profit) xxx

To Salaries xxx By Commission earned xxx

To rents and rates xxx By Rent received xxx

To stationaries xxx By Interest received xxx

To postage expenses xxx By Discount received xxx

To insurance xxx By Net Loss(Transferred to Capital A/c) xxx

To repairs xxx

To trading expenses xxx

To office dues xxx

To interest paid xxx

To bank charges xxx

To sundry expenses xxx

To Commission paid xxx

To Discount allowed xxx

To Advertisement xxx

To Carriage outwards xxx

To Travelling expenses xxx

To Distribution expenses xxx

To Repacking charges xxx

Bad debts xxx

Depreciation xxx

To Net Profit (transferred capital A/C) xxx

xxx xxx


It is the profit earned through the normal operations and activities of the business. Operating

profit is the excess of operating revenue over operating expenses. While calculating operating

profit, the incomes and expenses of a purely financial nature are not taken into account. Thus,

operating profit is profit before interest and tax (EBIT). Similarly, abnormal items such as loss

by fire, etc. are also not taken into account. It is calculated as follows:Operating profit = Net Profit + Non-Operating Expenses – Non Operating Incomes

If net profit


Credit Amount (Rs)

2013January 1

Profit and Loss A/c Dr

To Capital A/C

(Net Profit transferred to Capital A/C )

xxx

xxx

CLOSING ENTRIES OF 0F PROFIT AND LOSS ACCOUNT

Like ledger accounts, trading account will be closed by transferring the gross profit or gross loss to the profit and loss account.

If net loss


Credit Amount (Rs)

2013

January 1

Capital A/c Dr

To Profit and Loss A/C

(Net loss transferred to capital A/C)

xxx

xxx

Illustration1: Prepare a trading account from thefollowing trial balance of Tuli Hotel as on 31 march,2013

DrRs

CrRs

Purchase SalesReturns inward Opening stock Freight outwardCarriage inwardSalaries and wagesRents and taxesRavelling expensesDiscount CommissionBank A/CTrade creditorsSundry debtorsCapital A/CDrawing A/C

15750

60013000

6550

572226187115108

6647

4380

200

21000

2700

4300

43700 43700

Closing stock was estimated at Rs. 12,000

Illustration1:

Trading Account of Tuli Hotel for the year ended 31st March, 2014

Dr Cr

Expenses/Losses Amount Rs

Revenue/Gain Amount Rs

To Opening stock To PurchaseTo carriage Inward To Gross Profit transferred to P/L A/C

1300015750

503600

By Sales 21000Less: Returns 600

By Closing stock 2040012000

32400 32400

Illustration2: Prepare a profit and loss account from the following information

Particulars Rs Particulars Rs

Carriage on purchases Carriage on salesDuty on exportWater and electricityadvertisement

20001000202010502120

100

Salaries – factory’s manager Office manger Gross profitRent receivedRent paidCommission (CR)

22001500

152001500

5001200

Illustration2:

Profit and Loss Account

Dr Cr



To carriage on salesTo duty on exportTo lightingTo water and electricityTo advertisementTo salaries –officeTo Rent paidTo Net Profit transferred to P/L A/C

1000202010502120

1001500

5009610

By gross profit By rent received By Commission

1520015001200

17900 17900

Illustration3: Prepare a TradingAccount and Profit & Lossaccount from the followingtrial balance of Tali and Sons ason 31 March, 2002

Name Account DrRs

CrRs

Tali’s capitalTali’s drawings Purchase and sale Sales and purchase returnStock (1-4-2001) WagesBuildingFreight and carriage Trade expensesAdvertisementInterestTaxes and insurance Debtors and creditorsBills receivables and bills payables Cash at bankCash in handSalaries

7608900

2801200

80022002000

200240

130650015001200

190800

29000

15000450

350

1200700

46700 46700Adjustment: Stock on 31st March, 2002was valued at Rs. 1300

Illustration3:Trading and Profit and Loss Account of Tali and Sons

for the year ended 31st March, 2002

Dr Cr



To Stock (1-4-2001)To Purchase 8900Less: Return 450To wageTo freight and carriageTo Gross profit c/d

To trade expenses To AdvertisementTo taxes and insuranceTo salariesTo Net profit transferred to Capital A/C

1200

8450800

20003770

By Sales 15200

Less: Return 280By Closing stock

149201300

16220 16220

200240130800

2750

By Goss profit b/dBy Interest

3770350

4120 4120

Illustration 4 : Prepare aTrading Account and Profit &Loss account from thefollowing trial balance of MrRam on 31 March, 20014 andbalance sheet on that date.

Name Account DrRs

CrRs

Drawings and capital Plant and machineriesDebtor and creditorsPurchase and salesReturnsWagesCash in handCash at bankSalariesRepairsStockRentManufacturing expensesBills receivablesBills payablesBad debtsCarriage Furniture'sIncome tax

200008000070000

1100001000040000

50001000030000

80004500010000

700012000

50009000

1500010000

199000

50000222000

7000

20000

496000 496000

Adjustment: Closing Stock wasvalued at Rs. 50000

Illustration 4:Trading and Profit and Loss Account of Mr Ram

for the year ended 31st March, 2002

Dr Cr



To Opening StockTo Purchase 110000Less: Return 7000To Manufacturing Expenses To carriage To wage To Gross profit c/d

To salaries To Repairs To Rent To bad debts To Net Profit transferred to Capital A/C

45000

10300070009000

4000056000

By SalesLess: Return By Closing stock

152001500

50000

260000 260000

300008000

1000050003000

By Goss profit b/d 56000

56000 56000

Illustration4:Balance Sheet of Mr Mr Ram as on 31st March, 2002

Liabilities Amount Rs

Assets Amount Rs

Capital 199000Add: Net Profit 3000

202000Less: Drawings 2000

182000Less : Income tax 10000

Sundry creditorsBills Payables

1720005000020000

Plant and machineriesFurnitureBills receivablesSundry DebtorsClosing Stock Cash at bankCash in hand

800001500012000

70005000010000

5000

242000 242000

BALANCE SHEET contd.

Balance Sheet

Liabilities and Capital Amount(Rs) Assets Amount(Rs)

Fixed Liabilities

Loans

Debentures

Mortgages

Fixed Assets

Lands

Building

Plants & machines

Fixtures & filings

Capital / Owner’s Equity Investments

Reserves and Surpluses

Current Liabilities

Short term loans

sundry creditors

Bills payable

Outstanding expenses

Current Assets

Cash in hand & bank

Stock of inventories

Sundry debtors

Receivables

Prepaid expenses

Accrued income

BALANCE SHEET

Balance sheet is defined as ‘a statement which sets out the assets and liabilities of a business firm and which serves toascertain the financial position of the same on any particular date’. This forms the second part of the final accounts. It isa statement showing the financial position of a business. Balance sheet is prepared by taking up all personal accountsand real accounts (assets and properties) together with the net result obtained from profit and loss account. On the lefthand side of the statement, the liabilities and capital are shown. On the right hand side, all the assets are shown.Balance sheet is not an account but it is a statement prepared from the ledger balances. So we should not prefix theaccounts with the words ‘To’ and ‘By’.

BALANCE SHEET

The need for preparing a Balance sheet is as follows:i. To know the nature and value of assets of the businessii. To ascertain the total liabilities of the business.iii. To know the position of owner’s equity.

FORMAT OF BALANCE SHEET

The Balance sheet of a business concern can be presented in the following two formsi. Horizontal form or the Account formii. Vertical form or Report form

Horizontal form of Balance Sheet:The right hand side of the balance sheet is asset side and the left hand side is liabilities side. All accounts having debit balance will appear in the asset side and all those having credit balance will appear in the liability side.

LiabilitiesThe amount which a business owes to others is liabilities. Credit balance of personal and real accounts togetherwith the capital account are liabilities.

Long Term Liabilities: Liabilities which are repayable after a long period of time are known as Long TermLiabilities. For example, capital, long term loans etc.

Drawings : Amount withdrawn by the proprietor is termed as drawings and has the effect of reducing the balance on his capital account. Therefore, the drawings account is closed by transferring its balance to his capital account. However it is shown by way of deduction from capital in the balance

Current Liabilities: Current liabilities are those which are repayable within a year. For example, creditors forgoods purchased, short term loans etc.

Contingent liabilities: It is an anticipated liability which may or may not arise in future. For example, liabilityarising for bills discounted. Contingent liabilities will not appear in the balance sheet. But shown as foot note


AssetsThe properties and assets owned the business are assets. Debit balance of personal and real accounts together with thecapital account are assets.

Fixed Assets :Fixed assets are acquired for long term use in business. They are not meant for business transaction rather

are used to produce goods or service. Fixed assets includes, Lands, buildings, Machines and plants, Furniture's, fixtures,

fittings, Livestock

Current Assets : Currents assets / floating assets/circulating assets includes cash and other resources or assets which are

reasonably expected to be realised in cash, sold or consumed during normal operation of business.

Investments: Investments represent the funds invested in government securities, shares of a company, etc. They are shown at cost price. If, on the date of preparation the balance sheet, the market price of investments is lower than the cost price, a footnote to that effect may be appended to the balance sheet.

Intangible Assets : These are such assets which cannot be seen or touched. sGoodwill, Patents, Trademarks are some of the examples of intangible assets.


Assets contd.

Current assets are most liquid assets meaning that they are either in cash or going to be converted into cash. Current

assets change their value constantly. Current assets include Cash in hand and bank, Stock of inventories of raw materials,

finished and semi-finished goods, Sundry debtors/book debt/buyers of goods on credit that have not paid yet to the

firm, account/ Bill receivables (bills drawn by the firm to buyers on credit and buyers have accepted.), prepaid expenses,

Accrued income

Investments: Investment includes purchase of in shares and debentures of other firms.


final accounts vis-à-vis financial statements · pdf file09/07/2017 ·...

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