Accounting , CPT Chapter 6

CA PRATHAP SS
INTRODUCTION

Preparation of Final Accounts is

the last phase of the Accounting
Process.
INTRODUCTION
The process of accounting starts from
Transaction
then entered in Journal
then it is posted in Ledger
and Summarized in Trial Balance

The next step is the Preparation of Final Accounts.

INTRODUCTION

Final Accounts is mainly divided into two parts

Income Statement & Position Statement.

The profit of the enterprise is obtained through

the preparation of Income Statement.

Financial position of the enterprise can be

known through the preparation of the Position
Statement.
PARTS OF FINAL ACCOUNTS

Income Statement:
Trading A/c
Profit and Loss A/c

Position Statement:
Balance Sheet.
PREPARATION OF FINAL ACCOUNTS

The principle function of final

statements of account
(T, P&L, B/S) is to exhibit truly
and fairly the profitability and
the financial position of the
business.
INTER-RELATIONSHIP OF THE TWO
STATEMENTS

The two statements, the Profit and Loss

Account and the Balance Sheet are
thoroughly inter-related.

The assets shown in the Balance Sheet are

mostly the remainder of the expenditure
incurred after a suitable amount has been
charged to the Profit and Loss Account or
the Trading Account.
TRADING A/C
Following are the items appearing in the
Trading A/c:
Debit Side : Opening Stock
Purchases less Purchase Return
Carriage (or) Freight Inward
Wages
Credit Side : Sales less Sales Returns
Closing Stock

The Balancing figure will be Gross Profit / Loss

Trading A/c is based on Matching Concept.
PROFIT AND LOSS A/C

All Indirect expenses will appear on the Debit

side of the Profit and Loss account.

Indirect expenses are classified into two

types.

Administrative expenses and Selling and

Distribution expenses
EXAMPLES OF ADMINISTRATIVE EXPENSES

Salaries

Rent

Lighting in the office

Legal expenses

Audit Fees
EXAMPLES OF SELLING AND DISTRIBUTION
EXPENSES

Advertising

Packing expenses

Carriage outwards (i.e., on sales)

Insurance

Bad Debts
JOURNAL ENTRIES FOR
ADJUSTMENTS
EXPENSES UNPAID / OUTSTANDING
Eg : Rent for last month Rs.50,000 not yet paid

Rent a/c Dr. 50,000

To Rent Outstanding a/c 50,000
(Being Rent due and not paid)

This will be the Standard entry for all

expenses incurred but not yet paid.

Example : salary , Interest , Wages

INCOME EARNED BUT NOT RECEIVED
Eg : On our Bank deposit of Rs.10,00,000 , the
Bank has not yet paid the interest earned of
Rs.50,000

Interest Accrued a/c Dr. 50,000

To Interest a/c 50,000
(Being Interest earned but not yet received)

In our B/S on the Asset side along with the

Bank Deposits of Rs.10,00,000 , the Interest
Accrued of Rs.50,000 will have to be shown.
CARRYING FORWARD INCOMES AND
PAYMENTS RECEIVED IN ADVANCE
Eg : We have received a fee collection in advance of
Rs.75,000

Fee collection a/c Dr. 75,000

To Fee Collection received in advance a/c 75,000
(Being Fees received in advance reduced from Fee
Collection account and shown as a Liability)

This will be the standard treatment for all Incomes

received in advance , which will have to be shown on the
Liability side of the Balance Sheet .
BAD DEBTS
Eg. There is a bad debt of Rs.10,000.

Bad Debts A/c Dr. 10,000

To Sundry Debtors A/c 10,000
(Being bad debts brought into accounts)

Profit and loss a/c Dr. 10,000

To Bad Debts a/c 10,000
(Being transfer of bad debts to P&L a/c)
CREATION OF PROVISION FOR
BAD AND DOUBTFUL DEBTS
Profit & Loss A/c Dr. XXX
To Prov. For Bad &
Doubtful Debts A/c. XXX

When a provision for Bad and Doubtful debts

already exists and a bad debt occurs, then only
the provision account will be debited and not the
P&L a/c.
ABNORMAL LOSS BY FIRE
Eg. Stock of Rs.90,000 was destroyed by fire.

Abnormal loss A/c Dr. 90,000

To Purchases A/c 90,000
(Being stock destroyed by fire.)

Profit & Loss A/c Dr. 90,000

To Abnormal loss A/c 90,000
(Being the abnormal loss booked in P&L a/c)

When any stock is not available for sale in

the shop then purchases a/c has to be reduced.
GOODS TRANSACTED OTHER THAN
THROUGH SALE

Charity :
Eg. Goods of Rs.67,000 was distributed at an
orphanage
Charity A/c Dr. 67,000
To Purchases A/c 67,000

Personal use :
Eg. Goods worth Rs.10,000 was taken for own use.
Drawings A/c Dr. 10,000
To Purchases A/c 10,000
GOODS TRANSACTED OTHER THAN
THROUGH SALE (CONTD...)

Advertisement :
Eg. Goods worth Rs.70,000 were distributed as free
samples.
Advertisement A/c Dr. 70,000
To Purchases A/c 70,000

Whenever the goods are not available for sale in the

shop, then in the eyes of Accounts these goods were never
purchased, so, Purchases a/c will have to be reduced.
BALANCE SHEET

A statement which sets out the assets and Liabilities

of a firm ( or ) an institution as at a certain date.

The Balance Sheet is true only at a particular

point of time / date .

It is prepared on a particular date .

 ARRANGEMENT OF ASSETS & LIABILITIES
ASSET LIABILITIES
Liquidity or Permanence. Liability is arranged
Liquidity : according to the urgency
Cash in hand with which payment has to
be made . There are two
Cash at Bank
ways of arranging :
S. Debtors
(I) Capital
Stock
Long term borrowings
Machinery
Short term borrowings.
Furniture
Patent
(II) Short term borrowings
Goodwill.
Long term borrowings
Permanence :
Capital
The reverse order of
above.
PROVISIONS

Provision means any amount written off ( or )

retained by way of providing for say Depreciation,
Bad Debts .

The provision for discount on debtors is calculated

on debtors after deducting the provision for
Doubtful Debts.

Provisions are a charge on Profits.

LIMITATIONS OF FINANCIAL
STATEMENTS

Historical cost

Intangible strengths and weakness.

Perpetual continuity

Different accounting policies

Management policies.
IMPORTANT EXAM POINTS

Profit or loss on sale of fixed asset is transferred

to Profit and Loss A/c.

Work in progress is shown in the Balance

Sheet under the head current asset .

Prepaid rent is current asset .

If closing stock appears in the Trial Balance then

it appears in Balance Sheet .
IMPORTANT EXAM POINTS (CONTD..)

Sale of scrap of raw materials appearing in the trial

balance are shown on the credit side of
Manufacturing a/c.

Full claim accepted by Insurance company on

the loss of goods by fire is credited to Trading
A/c.

A surplus of revenue over cost is known as profit of

business.
IMPORTANT EXAM POINTS (CONTD..)

Fixed assets are kept in the business for use over

a long time for earning income.

Manufacturing account is prepared to

ascertain the cost of the manufactured goods.

Bonus given to employees is recorded in P&L a/c.

MCQS
PREPAID RENT IS SHOWN AS :

Current Asset

Current Liability

Fixed Asset

Income

Answer : A
IF CLOSING STOCK APPEARS IN THE
TRIAL BALANCE THEN IT APPEARS IN :

Trading A/c

Profit & Loss A/c

Balance Sheet

Profit and Loss Appropriation

Answer : C
SALE OF SCRAP OF RAW MATERIALS
APPEARING IN THE TRIAL BALANCE ARE
SHOWN ON THE CREDIT SIDE OF

Trading A/c

Profit and Loss A/c

Manufacturing A/c

None of these

Answer : C
BONUS GIVEN TO EMPLOYEES IS
RECORDED IN :

Trading A/c

Profit and Loss A/c

Profit and Loss Appropriation A/c

None of the above

Answer : B
PROVISIONS ARE :

Appropriation of profits

Charge on profits

Both

None

Answer : B
BILLS RECEIVABLE DISCOUNTED BUT
NOT DUE TILL DATE OF FINAL
ACCOUNTS IS SHOWN AS :

Liabilities

Assets

P & L A/c

Foot Notes

Answer : D
THE PROVISION FOR BAD DEBTS IS
CREATED BY DEBITING :

Trading A/c

Profit and Loss A/c

Debtors Account

Provision for Bad Debts A/c

Answer : B
IN BOOKS OF MANUFACTURING
CONCERN , OPENING STOCK CONSISTS
OF :

Raw materials

Work in progress

Finished goods

All the above

Answer : D
TRADING ACCOUNT IS A :

Personal A/c

Real A/c

Nominal A/c

None

Answer : C
ONLY PERSONAL AND REAL ACCOUNTS
ARE SHOWN IN :

Trial Balance

Balance Sheet

Trading A/c

Profit & Loss A/c

Answer : B
FULL CLAIM ACCEPTED BY INSURANCE
COMPANY ON THE LOSS OF GOODS BY
FIRE IS CREDITED TO ______ A/C

Trading A/c

P & L A/c

Insurance company

None

Answer : B
____ IS A SUMMARY OF ALL ASSETS AND
LIABILITIES ON A PARTICULAR DATE.

Trial Balance

Profit & Loss A/c

Balance Sheet

Funds flow Statement

Answer : C
A SURPLUS OF REVENUE OVER COST IS
KNOWN AS ______ OF BUSINESS.

Capital

Profit

Asset

None

Answer : B
BAD DEBT RECOVERED OF RS.2,000 WHICH
WAS PREVIOUSLY WRITTEN OFF AS BAD DEBT
WILL BE CREDITED TO ___ A/C

Bad Debt A/c

Debtor A/c

Bad debt recovered A/c

Suspense A/c

Answer : C
SELLING AND DISTRIBUTION EXPENSES
DOES NOT INCLUDE :

Godown rent

Carriage outwards

Insurance for stock of finished goods

Carriage Inwards

Answer : D
IF PURCHASES A/C IS NOT CREDITED IN
CASE OF GOODS LOST IN TRANSIT THEN
WHICH ACCOUNT CAN BE CREDITED :

Goods lost in transit account

Purchase Return Account

Trading Account

Sales Account

Answer : C
POSTAL EXPENSES ACCOUNT IS SHOWN
IN :

P&L A/c

Trading A/c

Balance Sheet

Manufacturing A/c

Answer : A
WORK IN PROGRESS IS SHOWN IN THE
BALANCE SHEET UNDER WHICH HEAD ?

Share Capital

Current Asset

Fixed Asset

Current Liability

Answer : B
SALES = ______ + GROSS PROFIT

Cost of Goods Sold

Purchases

Opening Stock

None

Answer : A
RETURN INWARD ARE DEDUCTED FROM
_______

Purchases

Sales

Return Inwards

Closing Stock

Answer : B
 THANK YOU

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