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Final Accounts

• Final Accounts: The term final accounts

means statements that results finally from
the preparation of accounts showing the
profit earned or loss suffered by the firm
and the financial state of affairs of the firm
at the end of the period concerned.

• The statement showing the profit and loss

position is called the Profit & Loss A/c or
the income statement and the statement
portraying the financial state of affairs is
called the B/s.
• The P&L A/c is worked out in two stages:
In the first stage we work out the gross
profit/loss & in the second stage net
profit or net loss.

The first section is called the Trading a/c

and the subsequent section is the P&L
• Gross Profit : is defined as the excess of sales
revenue over the cost of goods actually sold.
(And it is said to be made when sale proceeds
exceeds the cost of goods sold.)

• GP=Net Sales – Cost of goods sold

Net Sales = Total sales – Sales Return
Cost of GS= Op. Stock + Net Prch +Dir
exp. – Closing Stock.
Trading A/c of ….. for the Yr ended …..

To Opening Stock XX Cr.
By Sales XX
To Purchases XX Less Returns (Outwards) XX XX
Less Returns (Outwards) XX XX By Closing Stock XX
To Direct Expenses
Freight & Carriage XX
Customs & Insurance XX
Wages, Fuel, Water, Gas XX
Factory Expenses XX
Royalty on Production XX XX
To Gross Profit C/d XX
Balancing of Trading A/c

• If total of Cr. side is more than the total of

Dr. side, the excess represents gross pr. &
vice-versa. GP is transferred to the Cr.
Side of P&L A/c.
• While preparing a trading a/c one
important point must be kept in mind that a
closing journal entry is to be made in the
journal proper.
(1) For the items on the Dr. side
Trading A/c Dr
/c To Op St A/c
To Purch A/c (Net)

To Direct Exp A/c


(2) For the items on the Cr. Side

Sales A/c (Net) Dr.
Cl St A/c Dr.
To Trading A/c

(3) For Gross Profit
Trading A/c Dr.

n tr
To P& L A/c

(4) For Gross loss

P& L A/c Dr.
To Trading A/c
Manufacturing A/c

• In case of manufacturing concerns, a

Manufacturing a/c precedes the Trading A/c.
• A manufacturing a/c is prepared in order to know
the cost of production of goods or services
• The debit side of manufacturing a/c includes the
- Cost of Raw materials consumed (Direct MC)
- Op Stock of WIP (Semi finished goods)
- Direct Wages, - Other Direct Expenses
- Indirect Expenses or factory expenses incurred
other than the direct expenses.
Manufacturing A/c for the yr. ended……….

Dr. Cr.
To Opening Stock XX By Closing WIP XX
Raw Materials XX By Sale of Scrap XX
Add Purchases XX By Cost of Production XX
Less Cl St. of Raw Mat XX XX
To Op St of WIP XX
To Carriage inwards XX
To Direct Wages XX
To Direct Expenses XX
To Indirect Expenses
Rent, Electr, Coal, XX
Repairs of Pl, Depr, XX
Other indirect exp XX
Trading P&L A/c for the yr ended….

Dr. Cr.
To OpStock of Finished Goods XX By Sales XX
Add Cost of Prod (Manuf A/c) XX Less Returns (Outwards) XX XX
By Closing Stock of finished Gds XX

To Gross Profit C/d XX

Important Adjustments in Trading A/c & pts. to remember
• Closing Stock: Closing stock appearing in the additional information
will be credited to trading a/c and will be shown as a current asset in
the B/s. If the closing stock is appearing in the T/b, it will not be
credited to trading a/c (because it is already adjusted against
purchases) But it will be shown in the B/s only.
• Closing stock is to be valued at cost or market price which ever is
• Wages Outstanding: At the end of the accounting period, if some
wages are outstanding it will be added to the wages appearing in the
t/b and total amount of wages will be charged to the trading a/c.
Wages outstanding will be shown in the b/s as a liability. However, if
the wages outstanding a/c is appearing in the t/b, no adjustments are
required. It will only be shown in the b/s. Please note that all similar
direct outstanding expenditures will be treated similarly.
4) If there are any prepaid expenses at the end of the accounting period
these should be deducted from the respective expenses a/c and
shown in the b/s as an asset. However if the prepaid expense is
appearing in the t/b no adjustments are required
5) Goods taken by proprietor for personal use should be deducted from
• Abnormal Loss of Stock by Accident etc: The value of the stock lost is to
be debited to abnormal loss a/c and trading a/c is credited. Abnormal
loss a/c is closed by transferring to P&L A/c (P&L a/c dr. & Ab Ls Cr.)

• If the above loss is insured then insurance claim a/c or Ins co. a/c dr. to
Abnormal Loss A/c.

• Till the time money is not received Ins claim will find a place in the asset
side of the b/s. When money is received bank a/c dr and ins claim a/c
cr. (If goods are partially insured, the portion not covered by insurance
is to be charged to P&L a/c)
Accidental Loss A/c Dr (actual loss of stock)
To Trading A/c/ Prch A/c

Insurance Claim A/c Dr. (claim admitted by ins co)

P&L A/c Dr. (claim not admitted)
To Accidental Loss A/c
• Goods sent on approval basis: It is not considered as sale till it is not
approved by the customer/ expiry of the period.
When such a sale is made: entry: customer a/c dr. to sales.
When at the end of the yr. goods are still lying with the customer
awaiting approval: Sales a/c Dr
To Sundry Drs. A/c (To cancel the entry of sales)
(To add to the value of closing stock): Stock with customer’s a/c Dr.
To Trading A/c
In the B/s it will be deducted form sundry drs. At sales price and closing
stock will be increased by cost of such sales.
• Goods in Transit (Stock in Transit) If goods have been purchased but
the same are in transit the cost of goods will be added with the
purchases. The total purchases will be debited to trading a/c. Cost of
goods in transit will be shown in the b/s just like closing stock.
Profit & Loss A/c (Concepts)
• Operating profit: It is the profit made by a business
unit as a result of its principal trading activities.

• It is the excess of operating revenue before taking into

a/c any extraordinary items e.g. loss on sale of asset and
non operating revenues.

• Operating Rev: Sales Rev + Other trade related rev. as

disc received, allowance by suppliers.
• Normal Op exp are often classified into 3 heads: Selling
expenses, Administrative Exp. and financial exp.
• P&L a/c is prepared to ascertain the net profit or net loss
during an accounting period.
• It starts with transferring the G/P or the G/L from the
Trading A/c and is debited with all expenses which does
not find a place in the trading a/c and all losses arising
out of sale of assets and any abnormal losses. The
credit side is used to record all non operating incomes.
• Need for Prparting P& L A/c : besides its main obj.
– It is a link between 2 consecutive b/s
– It shows the earning power of the business
– It makes a distinction between trading and non-trading incomes
and expenses incurred for earning revenue and losses suffered
during the accounting period.
– It is a critical study of the past.
P&L A/c for the yr. ended …..

Dr. Cr.
To Salaries By GP B/d
To Office Rent Rates and Taxes By Discount Received
To Printing and Stationery By Commission Received
To Telephone etc By Bank Interest Received
To Postage, Courier By Rent on Property lent out
To Insurance By Dividend from Shares
To Audit Fees By Profit on Sale of Assets
To Legal Charges
To Electricity Charges
To Repairs & Renewals
To Depreciation on (Of Bld, furn, equip)
To Advertisement
To Advertisement
To Godown Rent
To Carriage outwards
To Bad Debts
To Provision for Doubtful Debts
To Selling Commission
To Bank Charges
To Interest on loan
To Discount allowed
To loss on sale of assets
To loss by fire/ accident etc
To Net Profit (Transferred to Capital a/c)
Balance Sheet
• Definition: A balance sheet is a list of assets and liabilities of a
business at some specific point of time. It shows the financial
position of the business.
• The main function of a balance sheet is to summarize the various
assets and liabilities of the business in a properly classified and
arranged manner and there by facilitate the determination of the
financial position of the concern. It also acts as the basis for
calculating the liquidity and the solvency position of the concern.
• Limitations: 1) A conventional B/s cannot reflect the true value of
assets (as they are shown at historical cost – dep.) and as such
there is no relationship with Mkt.val. 2) It includes such assets which
has no market value like: preliminary exp, debenture disc etc. Such
assets unduly increase the total assets. 3) It does not reflect values
of certain factors as skill, loyalty etc. 4) Value of a major of current
assets depends on some estimates so it cannot reflect the true
financial position.
Balance Sheet of abc co. as at……
Liability Asset
Current Liabilities: Current Assets
Creditors Cash in Hand
Bills Payable Cash at Bank
Bank O/d Debtors/ Sundry Debtors/ Book Drs.
Outstanding Expenses Debts
Income received in advance Stock/ Inventory
Short term Loans Goods sent on Consignment
Fixed Liabilities (LTL) Bills Receivable
Loan Short term or Trade Investments
Mortgage Prepaid Expenses
Debentures Accrued Income
Sales Tax Collected/ VAT
contd… Contd….
Liability contd…. Asset
Capital Investments (Long Term Loans / Loans
Add: Net Profit Fixed Assets :
Add: Interest on capital L&B/ Freehold Premises
Add: Interst/sal/comm payable to Machinery/ P&M / Equipment
Less: Drawings Tools & Equipment or Loose Tools
Less: Interest on drawings Furniture & Fixtures
Less: Net Loss (if any) Fixtures & Fittings
Less: Income Tax Vehicle
Reserves & Funds Livestock
Gen Reserve Goodwill, Patents, TradeMark
Reserve Fund
Contingency Rsv (Msc Exp: Adv Exp; Disc on issue of Sh/d)
PF/ Employees Comp Fund etc.
Capital & Revenue Expenditure
• Capital Expenditure: Is the money spent on buying fixed
assets or adding to their value. These assets are
expected to provide benefits to the business for more
than one accounting period. Eg. Purchase of Land or
cost of extension of existing building.
• Characteristics of Capital Exp:
1) Amount involved is generally large
2) The benefit accruing from such exp is available
for more than 1 accounting period.
3) The exp is of non-recurring nature
4) It may result in an increase in the val of an asset
already possessed.
• Revenue Expenditure: Revenue expenditure is the
money spent on running the business on a day-to-day
basis. Eg. Salaries paid to employees, misc. exp etc.
Therefore revenue exp is incurred to carry on the normal
course of business and to maintain the fixed assets in
good condition. Since a revenue expenditure is of benefit
for the current accounting period only it is debited to an
exp. a/c transferable to Tr./P&L A/c.

• Characteristics of Revenue Exp:

1) Amount involved is relatively small
2) The benefit accruing from such exp is available
for only 1 accounting period.
3) The exp is of recurring nature
4) It is incurred in pursuance of trading activities.
Besides the main differences the following are
worth noting:
It is debited to an asset a/c It is debited to an expense a/c
It is a real a/c It is a nominal a/c
It does not affect the profit of an a/c period It directly affects the profit
It may be incurred before or after the It is always incurred after the
commencement of the business commencement of the business.
It is incurred for the purpose of acquiring Exp for day to day conduction of the bsns.
long term assets
If the exp is incurred to improve the present Expenditure on consumable items. Eg. Raw
condition of an existing asset that mat, stationery.
enhances its value.
If it increases the earning cap of the bsns. Exp incurred in maintaining FA
Wages paid for erecting a mch/bld
Preliminary exp incurred before commn of
Adjustme Journal Entry Adjustment in Adjustment in
nts. Trading P&L A/c Balance Sheet
Closing St Closing Stock A/c Dr Posted at the credit side Shown at the asset
of trading a/c side
Depreciation To TradingA/c
Depreciation A/c Dr Posted at the debit side Shown as deducted
To Asset A/c of the P&L A/c from concerned asset
Outstanding Expenses A/c Dr. Added to the concerned Shown at the liabilities
Exp. exp at the debit side of side
To Outs. Exp A/c Tr/P&L A/c
Prepaid Prepaid Exp A/c Dr Deducted from the Shown at the asset
Expenses To Exp. A/c concerned exp at the side
debit side of P&L A/c
Accrued Accrued Inc A/c Dr Added to the concerned Shown at the asset
Income To Income A/c exp at the credit side of side
P&L A/c
Un earned Income A/c Dr Deducted from the Shown at the liabilities
Income To un earned Inc. concerned inc at the side
credit side of P&L A/c
Adjustme Journal Entry Adjustment in Adjustment in
nts. Trading P&L A/c Balance Sheet