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Amity Business School


B.C.A-III Semester Accounting & Financial Management Module II Final Account Ms Rajni Sinha

Trial Balance-Meaning

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Trial balance is a statement which shows debit balances and credit balances of all accounts in the ledger. Since, every debit should have a corresponding credit as per the rules of double entry system, the total of the debit balances and credit balances should tally (agree). In case, there is a difference, one has to check the correctness of the balances brought forward from the respective accounts. Trial balance can be prepared in any date provided accounts are balanced.

Advantages
The advantages of the trial balance are:-

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i.

It helps to ascertain the arithmetical accuracy of the book-keeping work done during the period.

ii. It supplies in one place ready reference of all the balances of the ledger accounts. iii. If any error is found out by preparing a trial balance, the same can be rectified before preparing final accounts. iv. It is the basis on which final accounts are prepared.
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Objectives

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To check arithmetical accuracy. To facilitate preparation of financial statements. To detect errors & to rectify the same.

Limitations

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Not a conclusive proof of accuracy of books of accounts. Final accounts may not represent true picture when trial balance is not correct.

Methods of preparing trial balance

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Totals method- According to this method, the total amount of the debit side of the ledger accounts and the total amount of the credit side of the ledger accounts are recorded.

Net Balance method- the debit & credit balances are shown in the respective accounts. Most common method. In this method, only the balances of an account either debit or credit, as the case may be, are recorded against their respective accounts.

PREPARATION OF A TRIAL BALANCE


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Steps in Preparing Trial Balance

Prepare the trial balance in a two-column journal. Heading should be written on top of the page. The heading shows the name of the business on the first line. Trial balance on the second line, and the date on the third line. Each line of the heading must be centered on the page. Write the title of each open account on the Account Titles column. If the account has a debit balance, write the balance in the debit column of the trial balance. If it has a credit balance, write the balance on the credit amount column. All the account titles in the trial balance are written with the same margin from the left side of the page, that is, credit account titles should not be indented. Add each amount column to prove that the two totals are equal. If the two totals are equal, draw lines under the totals.

Format
Trial Balance (as on )

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S. No.

Particulars

Debit Credit (in Rs.) (in Rs.)

FINAL ACCOUNTS

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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 of year. These are also known as FINANCIAL STSTEMENTS which are prepared.

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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.

ACCOUNTING CYCLE TRANSACTIONS


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Preparation of final accounts (summary)

Entry in the books of Original Entry (ORIGINAL RECORD)

Preparation of Trial Balance (CHECKING THE ACCURACY)

Posting in the concerned Ledger account (CLASSIFICATION)

Balancing of Real & Personal accounts

Types of Financial Statement

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Final accounts or financial statements can be divided in two parts:1) 2) Trading and Profit & Loss Account Balance Sheet

Trading Account

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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.

Ascertainment of Cost of Goods Sold


Opening Stock Add: Purchases Less: Purchase Return Goods Available for Sales Add: Direct Expenses Less: Closing Stock Cost of Goods Sold

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. .
. . . .

Specimen Proforma of Trading Account


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Dr Trading Account of .. For the year ending... Cr Particulars Amt. Particulars Amt. To Opening Stock To Purchases Less: Returns To Direct Expenses: Carriage Inward Wages Wages & salaries Fuel & power Coal, water & gas By Sales Less: Returns By Closing Stock By Gross Loss c/d*

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To Import Duty To Custom Duty To Excise Duty To Consumable Store To Factory Rent, Rates, and Taxes

To Foreman/ Works Managers


Salary To Royalty on manufactured goods To Gross Profit c/d*

Profit & Loss Account


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For non-corporate business organization Profit & Loss account is second part of income statement. It is prepared to know the net loss of business during a particular period. Every businessman has to spend on expenses other than on manufacture or purchase of goods which are called indirect expenses. There can be other incomes except sales. So gross profit or loss is adjusted keeping in view these indirect expenses and other incomes to find out net profit or net loss.

Proforma of Profit & Loss Account


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Particulars

Amt

Particulars

Amt

To Gross Loss b/d To Establishment Charges To Administrative Charges To Selling & Distribution expenses To Financial Charges

By Gross Profit b/d By other expenses By Net Loss (transferred to capital account)

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To Depreciation & Provisions To Abnormal Losses To Net Profit (transferred to Capital Account)

Balance Sheet
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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 & liabilities 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

Amt

Assets

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Amt

Capital Add: Net Profit Less: Drawings Fixed Liabilities: Long term loan Public deposits Current Liabilities: Unexpired Income Short Term Loans Trade Creditors Bank Overdraft

Fixed Assets: Goodwill Land and Buildings Plant & Machinery Motor Vehicles Furniture Patents & Trade Marks Live Stock Loose Tools Investments

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Bill Payable Outstanding Expenses

Current Assets: Closing Stock Prepaid Expenses Accrued Income Debtors Bill Receivable Cash at Bank Cash in hand

WHAT IS AN ADJUSTMENT ??

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The Trial Balance is a statement of ledger account balances as on a particular date (instance). Final Accounting is done towards the end of the accounting period. The trial balance that we consider in the preparation of final accounts is the one that is prepared towards the end of the accounting period i.e. on the last day of the accounting period. There might be a number of accounting transactions which might not have been taken into consideration by the time the Trial Balance has been prepared. The transactions which have not yet been journalized, appended to the trial balance are what we call adjustments.

ADJUSTMENTS
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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 :1) Show on Credit side of the Trading account 2) On asset side of Balance Sheet

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OUTSTANDING EXPENSES Those expenses which have been incurred & not yet paid.

Treatment: Expenses a/c Dr To outstanding expenses

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 liabilities side of Balance Sheet.

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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.

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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

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INCOME RECEIVED IN ADVANCE Income received but not earned during accounting year is called income received in advance. Treatment: Income a/c Dr To Income Received in advance

Two fold effect:


1.Will be shown on credit side of P & L a/c by the way of deduction from particular income.

2. Will be shown on liabilities side of Balance Sheet.

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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

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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. Is shown on assets side of Balance Sheet by way of deduction from Sundry Debtors.

INTEREST ON CAPITAL
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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
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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.

PROVISION FOR DOUBTFUL DEBTS


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It is a provision created to cover any possible loss on account of bad-debts likely to occur in future. Treatment: Profit and Loss A/c To Provision for Doubtful Debts A/c Two effected accounts will be: 1.On debit side of Profit and Loss A/c or by way of addition to Bad Debts. (Old provision for doubtful debts at the beginning of the year will be deducted). 2.Shown on assets side of Balance Sheet by way of deduction from Sundry Debtors (deducting further bad debts if any).

PROVISION FOR DISCOUNT ON DEBTORS


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If sales are made by the merchant on condition that if the amount of sales is paid within a certain period , he will allow a certain percentage of discount . Treatment : Profit and Loss A/c To Provision for Discount on Debtors A/c Two-fold effect will be: 1.Shown on debit side of Profit and Loss A/c 2.Shown by way of deduction from Sundry Debtors (after deduction of further bad debts and provision for doubtful debts) on assets side of Balance Sheet.

RESERVE FOR DISCOUNT ON Name of Institution CREDITORS


Firm may have chance to receive discount on last date of accounting year, if the payment is made within the scheduled period .These are anticipated profit and therefore this account is made. Treatment: Reserve for Discount on Creditors A/c To Profit & Loss A/c Two fold effect will be: 1.It is shown on the credit side of Profit &Loss A/c 2.Shown on liabilities side of Balance Sheet by way of deduction from sundry creditors.

DEFERRED REVENUE EXPENDITURE


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The expenditure done in initial stage but the benefit of which will also be available in subsequent years is called deferred revenue expenditure. Treatment: Profit &loss A/c To advertisement A/c The two fold effect will be: 1.It is show on the debit side of Profit &loss A/c 2.Shown on assets side by way of deduction from capitalized expenditure.

LOSS OF STOCK BY FIRE


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Loss of stock may occur due to fire. The position of business may be: a) All the stock is fully insured. b) The stock is partly insured. c) The stock is not insured at all.

a) IF THE STOCK IS FULLY INSURED


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The whole loss will be claimed from the insurance company. Entry:Insurance Co. A/c Dr. To Trading A/c

Effect:1.It will be shown on credit side of Trading A/c. 2.It is shown on Assets Side of Balance Sheet.

b) IF STOCK IS PARTLY INSURED


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The loss of stock covered by insurance policy will be claimed from the insurance company and the rest of amount will be loss for the business. Entry : Insurance Co. A/c Dr. Profit & Loss A/c Dr. To Trading A/c Effect of this entry: 1.Shown on credit side of Trading A/c with the value of stock & shown on debit side of P& L A/c for that part of the stock which is not insured. 2.Loss of stock Fire is shown on asset side of the Balance sheet which amount is to be realized from the insurance company.

c) IF STOCK IS NOT INSURED Name of Institution


Whole loss will be borne by the firm. Entry:- Profit & Loss A/c Dr. To Trading A/c

Effect of this entry :1.It is shown on the credit side of Trading A/c. 2.It is shown on the debit side of P&L A/c

RESERVE FUND
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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.

GOOD DISTRIBUTED AS FREE SAMPLES.


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To promote the sale of goods, some of the produced goods are distributed as free samples. Treatment: Advertisement A/c Dr. To Purchase A/c Two fold effect: 1.Its is deducted from purchases . 2.It is shown on debit side of P&L A/c

MANAGERS COMMISSION
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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

GOODS ON SALE OR APPROVAL BASIS


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Sometimes goods are sold to customers on approval basis. If they approve, it will become sale. If such goods are lying with customers on last day of the accounting year and these can be yet returned , it should be treated as stock lying with customers. Treatment : 1. Sales A/c Dr. To debtors A/c (with sales price) 2. Stock A/c Dr. To trading A/c ( at cost Price of goods) Effects :1.Shown on the credit side of trading account by way of deduction from sales at sales price and added at closing stock at cost price 2.Shown on assets side as deduction from sundry debtors (sale price )and stock at cost on the assets side of balance sheet.

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