Final Accounts

2
Chapter Objectives
Identify the objectives of preparing various
final accounts
Understand the treatment of different items in
the preparation of the final accounts
Explain the importance of final accounts
Describe the role of worksheet in preparing
final accounts
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Objectives of Final Accounts
Final accounts refer to the various accounts
and statements that provide information related
to the progress of the business.
These are prepared from the Trial Balance.
They provide the following information:
Profit earned or loss suffered by the business
during a particular accounting period
Financial position of the business
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Accounts and Statements
Comprising Final Accounts
Final accounts with respect to a particular
business are:
Trading account
Profit and Loss account
Balance Sheet
Trading account and Profit and Loss account
are together known as income statements.
Income statements are the final summary of
the accounts that affect the profit and loss
position of the business.
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Trading Account
It shows the overall results of purchasing and
selling of goods.
It includes all the direct expenses incurred in
the business.
It provides gross profit earned by the business,
if total sales is greater than total purchases.
It provides gross loss suffered by the business,
if total sales is less than total purchases.
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Format of Trading Account
Trading Account
Dr. (For the period ended . . . . . . . . ) Cr.
Particulars Amount Particulars Amount
To Opening stock By Sales
To Purchases Less: Sales returns
Less: Purchases returns By Closing stock
To Wages
To Customs and import duty
To Carriage expenses
To Royalty
To Manufacturing expenses
To Packing expenses
Total Total
To gross profit transferred to
profit and loss account
By gross loss transferred
to profit and loss account
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Items on Debit Side of Trading
Account
Opening stock: It refers to the total cost of goods left
unsold at the beginning of the current accounting
period.
Purchases: It refers to the total cost of goods
purchased, both in cash and credit. In case of
purchases returns, first net purchases is computed by
deducting purchases returns from purchases and the
result is then debited to the Trading account.
Wages: It refers to the amount paid to the workers for
manufacturing, loading and unloading of goods.
Customs and import duty: It refers to the amount
paid as customs and import duty when the goods are
purchased from outside the country.
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Items on Debit Side of Trading
Account (cont)
Carriage expenses: It refers to the direct expenses
that are incurred while transferring the purchased
goods from vendor to the factory. These expenses are
also known as freight in, carriage in or cartage.
Royalty: It refers to the amount paid to the owner for
using his rights.
Manufacturing expenses: It refers to the expenses
spent on gas, electricity, water and fuel, which are
required to run the factory.
Packing expenses: It refers to the amount spent in
packing the purchased goods to bring them to factory.
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Items on Credit Side of Trading
Account
Closing stock: It refers to the total cost of the goods
that are left unsold at the end of the accounting
period.
Sales: It refers to the total cost of goods sold, both in
cash and credit. In case of sales returns, first the net
sales is computed by deducting the sales returns from
total sales and the result is then credited to the
Trading account.
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Importance of Trading Account
It provides information related to gross profit and loss
and helps in defining the upper limits for the
operating expenses of the business.
It helps in the computation of gross profit ratio. A
decrease in the gross profit ratio indicates increase in
the purchased cost or decrease in the selling price.
It allows the comparison of opening and closing
stocks of two accounting periods. This helps in
preventing unnecessary investment of funds for the
purchase of inventories.
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Profit and Loss Account
Profit and Loss account shows all incomes and
indirect expenses related to business.
Indirect expenses include those expenses such
as administrative, selling and distribution
expenses that are required for the operation of
business.
Profit and Loss account provides net profit
earned or net loss suffered by the business.

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Format of Profit and Loss Account
Profit and Loss Account
Dr. (For the period ended . . . . . . . . ) Cr.
Particulars Amount Particulars Amount
To Gross loss b/d By Gross profit b/d
To Salaries By Interest received
To Rent By Commission received
To Commission By Discount received
To Advertisements
To Bad debts
To Discount
To Net profit transferred to
Capital Account
To Net loss transferred to
Capital Account
Total Total
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Items on Debit Side of Profit and
Loss Account
Gross loss: It is transferred from the Trading account.
Salaries: It refers to the amount paid to the
employees as their salaries.
Interest paid: It refers to the amount paid as interest
on loans.
Commission paid: It refers to the amount paid as
commission to the agents.
Trade expenses: It refers to the amount spent on
various number of small but important expenses
related to business.
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Items on Debit Side of Profit and
Loss Account (cont)
Printing and stationary: It refers to the amount
spent on printing of bills, invoices, registers, files and
letter heads.
Advertisements: It refers to the amount spent for
attracting customers to buy the products.
Bad debts: It refers to the amount, which is not paid
by the debtors to whom the goods were sold on
credit.
Discount: It refers to the amount, which is reduced
from the list price of goods.
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Items on Credit Side of Profit and
Loss Account
Gross profit: It is transferred from the Trading
account.
Interest received: It refers to the amount received as
interest on investments.
Commission received: It refers to the commission
earned by the business for giving business to others.
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Importance of Profit and Loss
Account
It provides information about net profit earned or net
loss suffered by the business.
It helps in determining whether the business is being
run efficiently or not by comparing the Profit and
Loss account of two accounting periods.
It helps in taking effective control steps by analyzing
the various expenses listed in the Profit and Loss
account of the current year with that of the previous
years.
It allows in the estimation of profits for the coming
years by comparing the profits of previous years.
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Balance Sheet
It is a financial statement that states the
financial position of the business.
It lists the assets and liabilities of a business on
a particular date.
The assets and liabilities on a Balance Sheet
are listed in either of the following two orders:
Liquidity order
Permanency order
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Format of Balance Sheet
Balance Sheet
(As on . . . . . . . . . . . )
Liabilities Amoun
t
Assets Amount
Bank overdraft Cash in Hand
Outstanding expenses Cash at bank
Bills payable Prepaid expenses
Sundry creditors Bills receivables
Long-terms loans Sundry debtors
Capital Closing stock
Raw materials
Work-in-progress
Finished goods
Plant and machinery
Total Total
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Items on Balance Sheet
The left side of Balance Sheet represents the
liabilities of the business.
Liabilities are the claims of the creditors
against the assets of a firm.
The two categories of liabilities are:
Current liabilities: The liabilities that are payable
within a year.
Fixed liabilities: The liabilities that are to be paid
at least after a year.
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Items on Balance Sheet (cont)
The right side of Balance Sheet represents the
assets of the business.
Assets represents the resources acquired by the
business.
The categories of assets are:
Current assets: The assets that can be easily
convertible into cash.
Liquid assets: The assets that can be immediately
convertible into cash without any loss.
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Items on Balance Sheet (cont)
Fixed assets: The assets that are acquired for
carrying out the business and are not meant for
resale.
Intangible assets: The assets like Goodwill and
patents that cannot be seen or touch.
Fictitious assets: The assets that are neither
tangible nor possess a property.
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Adjustment Entries
These are the entries that are made at the end of an
accounting period after closing the books of accounts
and preparing Trail Balance.
Some of the adjustment entries that are required for
the preparation of final accounts are:
Closing stock
Outstanding expenses
Outstanding income
Income received in advance
Depreciation
Bad debts
Interest on capital
Interest on drawings
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Summary
In this chapter, you have:
Identified the objectives of preparing various final
accounts
Understood the treatment of different items in the
preparation of the various final accounts
Explained the importance of various final accounts

September 20, 2014 Prof. Anuj Verma
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Trial Balance of ABC&Co. as on 31 March,2014
Particulars Debit Balance Credit Balance
Opening Stock 1250
Sales 11800
Depreciation 667
Commission earned 211
Insurance 380
Carriage Inwards 300
Furniture 670
Printing Charges 481
Carriage Outwards 200
Capital 9228
Creditors 1780
Bills Payables 541
Plant & Machinery 6230
Returns outwards 1380
Cash 942
Salaries 750
Debtors 1905
Discount allowed 328
Bills Receivables 2730
Wages 1589
Returns Inwards 1659
Bank Overdraft 4000
Purchases 8679
Bad Debts 180
Total 28940 28940
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Expenditure Amount Incomes Amount
Food & Beverages 15500 Sales 26000
Rent 1500
Profit 9000
26000 26000
Trading & Profit & Loss A/c for the year ending 31
July 2009
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Liabilities Amount Assets Amount
Capital: Furniture 10500
Dev Gopal 20000 Utensils 9200
Dev Saran 20000 Equipments 6300
Profits 9000 Security Deposit 10500
Cash 2500
Bank 10000
49000 49000
Balance Sheet as on 31 July 2009
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Particulars Amount Particulars Amount
Furniture 10500 Capital 40000
Utensils 9200 Sales 26000
Equipment 6300
Security Deposit 10500
Food & Beverages 15500
Rent 1500
Cash & Bank 12500
66000 66000
Cash & Bank A/c for the year ending 31 July 2009
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Expenditure Amount Incomes Amount
Materials 150000 Sales 410000
Eatables 58000 Closing stock 10500
Gas & Fuel 36000
Wages 26000
Soft Drinks 60000
Rent 3000
Travelling 15000
Interest on Loan 2500
Miscellaneous 5000
Depreciation:
Uternsils 1840
Furniture 1050
Equipments 945
Profit 61165
420500 420500
Trading & Profit & Loss A/c for the year ending 31
July 2010
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Liabilities Amount Assets Amount
Capital 70165 Furniture 9450
Bank Loan 11500 Utensils 7360
Equipments 5355
Security Deposit 10500
Closing stock 10500
Cash 38500
81665 81665
Balance Sheet as on 31 July 2010
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Particulars Amount Particulars Amount
Materials 150000 Balance b/d 12500
Eatables 58000 Bank Loan 25000
Gas & Fuel 36000 Sales 410000
Wages 26000
Soft Drinks 60000
Rent 3000
Travelling 15000
Interest on Loan 2500
Miscellaneous 5000
Loan repaid 13500
Withdrawal 40000
Balance c/f 38500
447500 447500
Cash & Bank A/c for the year ending 31 July 2010
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Expenditure Amount Incomes Amount
Opening stock 10500 Sales 770000
Materials 400000 Closing stock 18500
Gas & Fuel 50000
Wages 52400
Soft Drinks 84800
Rent 3000
Travelling 23200
Interest on Loan 1150
Miscellaneous 2800
operating 80000
Depreciation:
Uternsils 1472
Furniture 945
Equipments 803.25
Profit 77429.75
788500 788500
Trading & Profit & Loss A/c for the year ending 31
July 2011
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Liabilities Amount Assets Amount
Capital 97595 Furniture 8505
Bank Loan 3500 Utensils 5888
o/s Wages 3600 Equipments 4552
Security Deposit 10500
Closing stock 18500
FD 30000
Cash 26750
104695 104695
Balance Sheet as on 31 July 2011
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Particulars Amount Particulars Amount
Materials 400000 Balance b/d 38500
operating 80000 Sales 770000
Gas & Fuel 50000
Wages 48800
Soft Drinks 84800
Rent 3000
Travelling 23200
Interest on Loan 1150
Miscellaneous 2800
Loan repaid 8000
Withdrawal 50000
FD 30000
Balance c/f 26750
808500 808500
Cash & Bank A/c for the year ending 31 July 2011
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DINDORF COMPANY
Income Statement for the year ----.
Sales 716,935
Sales discounts -6,220
Net sales 710,715
Cost of goods sold 302,990
Depreciation 12,750
Sales salaries 109,325
Selling expense 24,900
Supplies expense 10,265
Insurance expense 4,660
Social Security taxes 9,600
Miscellaneous general expenses 31,000
Interest expense 13,030
Interest income 390
Net income 192,585
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DINDORF COMPANY
Balance Sheet as of January 31, ----.
Liabilities Assets
Accounts payable 118,180 Cash and cash equivalent 119,115
Accrued interest 3,730 Accounts receivable 162,500
Accrued sales salaries 3,575 Merchandise inventory 397,690
Current liabilities 125,485 Supplies inventory 5,210
Prepaid insurance 33,590
Notes payable 143,000 Interest receivable 390
Total liabilities 268,485 Current assets 718,495
Owners Equity
Common stock 300,000 Store equipment 215,000
Retained earnings 314,960 Accumulated depreciation -50,050
Total liabilities
and owners equity 883,445 Total assets 883,445
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Dr. Cr.
5000
5500
4000
500
4000
8000
2000
10000
19500 19500
Cash
Fixed Assets(at Cost)
Inventories
Owners' Equity
Total
Reserve for Doubtful Debts
Axis Corporation's accounts had the following beginning balances
Account
Accounts payable
Accounts Receivable
Accumulated Depreciation
TEST
Max. Time: 40 Mins. Max. Marks: 10
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During the year following transactions occurred:

1. Purchased Inventory on credit Rs. 1500.
2. Salaries paid Rs. 1500.
3. Sold goods for cash Rs. 2000.
4. General expenses paid Rs. 1000.
5. Sold goods on credit Rs. 2500.
6. Collection of accounts receivables Rs. 1800.
7. Paid certain accounts payables Rs. 1500.
8. Closing balance of inventory Rs. 1000.
9. Depreciation Rs. 500.
10. Bad Debts during the year Rs. 300.

Que. 1. Set up ledger accounts and post beginning balances and transactions.
2. Prepare the Trial Balance.
3. Prepare the income statement for the period.
4. Prepare the ending Balance Sheet.
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cash 1500 Op bal 5000
cl bal 5000 inv 1500
6500 6500
Accounts Payable
Op bal 5500 bad debts 300
Sales 2500 cash 1800
cl bal 5900
8000 8000
Accounts Receivable
Op bal 4000
cl bal 4500 Dep 500
4500 4500
Acc Dep
Op bal 500
cl bal 500
500 500
Res for Doudtful debts
Op bal 4000 salary 1500
Sales 2000 Gen exp 1000
A/c Rec 1800 a/c pay 1500
Cl bal 3800
7800 7800
Cash
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Op bal 8000
Cl Bal 8000
8000 8000
Fixed Asset
Op bal 2000 COGS 2500
A/c Pay 1500 Cl bal 1000
3500 3500
Inventories
Op bal 1500
Cl Bal 1500
1500 1500
Salary
Cash 2000
cl bal 4500 A/c Rec 2500
4500 4500
Sales
Op bal 1000
Cl Bal 1000
1000 1000
General Exp
Accv Dep 500
Cl Bal 500
500 500
Depreciation
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A/c Rec 300
Cl Bal 300
300 300
Bad debts
Inv 2500
Cl Bal 2500
2500 2500
COGS
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Dr. Balance Cr. Balance
5000
5900
4500
500
3800
8000
1000
1500
4500
1000
500
300
2500
10000
24500 24500
Genearl Expenses
Depreciation
Bad Debts
COGS
Owners' Equity
Total
Reserve for Doubtful Debts
Cash
Fixed Asseta(cost)
Inventories
Salaries
Sales
Trial Balance
Particulars
Accounts Payables
Accountds Receivables
Accumulated Depreciation
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Amount
4500
2500
1500
1000
500
300
-1300
Depreciation
Bad Debts
Net Loss
Income Statement
Particulars
Sales
COGS
Salaries
General Expenses
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Amount
10000
-1300
8700
5000
500
14200
3500
5900
3800
1000
14200
Balance Sheet
Particulars
Owners' Equity
Net Loss
Net worth
Accounts Payables
Res. For Doudtful Debts
Total
Net Fixed Assets
Accounts Receivables
Cash
Inventories
Total