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Introduction
Y The main purpose of any business is to earn profits and to
achieve a good financial position.
Y Final Accounts are prepared for ascertaining the profit or loss
for an accounting period and the financial position of the
business as on a certain date.
Y Final Accounts are prepared at the end of the accounting period
(31st March every year).
Y The final accounts comprise of the following Ȃ
Ô Trading Account,
Ô Profit & Loss (P & L) Account, and
Ô Balance Sheet
minal Accounts Ȃ Steps
i. Trial balance as at the end of the year is available.
ii. Ledger balances from trial balance are transferred, either to
Trading A/c, P & L A/c or Balance Sheet.
iii. Nominal accounts are transferred to Trading A/c or P & L A/c (except
stock), Personal & Real accounts are in Balance Sheet.
iv. Record the additional information (i.e. adjustments) provided at the
end of the trial balance.
v. Balance the Trading A/c with Gross Profit or Gross Loss, which is
transferred to P & L A/c.
vi. Balance the P & L A/c with Net Profit or Net Loss, which is
transferred to Balance Sheet.
vii. The total of both sides of the Balance Sheet should match.
rading Account
Y A Trading Account is prepared to ascertain the profit or loss
from the activity of buying and selling of goods.
Y All expenses & incomes related to goods as well as all
manufacturing expenses are recorded in Trading A/c.
Y Trading A/c is a nominal account and hence it is debited with
all expenses and credited with all incomes.
Y It starts with opening stock of goods on the debit side and
ends with closing stock of goods on the credit side.
Y On closing the Trading A/c, if credit side is more than debit
side the difference is Gross Profit vice versa is a Gross Loss.
Both are transferred to P & L Account.
rading Account for the year ended 31-03-2010
Dr. Cr.
Particulars Rs. Particulars Rs.
To Opening Stock
To Purchases By Sales
(-) Purchase Returns (Outwards) (-) Sales Returns (inwards)
To Wages By Scrap Sale
To Power & Fuel By goods as free samples
To Carriage Inwards
To Coal, Gas, Water By Closing Stock
To Octroi / Customs Duty
To Factory Rent & Taxes
To Freight
To Royalty
To Gross Profit trf. to P & L By Gross Loss trf. to P & L
Total Total
Profit & Loss Account
Y A Profit & Loss Account is prepared to ascertain the overall
profit or loss from all the activities of a business.
Y All indirect expenses & incomes are recorded in P & L A/c. For
e.g. administration exp, office exp. marketing exp, interest,
depreciation, rent recd., discount recd. etc.
Y P & L A/c is a nominal account and hence it is debited with all
expenses and credited with all incomes.
Y P & L A/c starts with Gross Profit or Gross Loss transferred
from the Trading A/c.
Y On closing the P & L A/c, if credit side is more than debit side
the difference is Net Profit vice versa is a Net Loss. Both are
transferred to Balance Sheet.
 P & L Account for the year ended 31-03-2010
Dr. Cr.
Particulars Rs. Particulars Rs.
To Gross Loss from Trading A/c By Gross Profit from Trading A/c
To Office Salaries By Discount received
To Rent and Taxes By Interest received
To Printing & Stationery By Commission received
To Postage and Telegrams By Rent received
To Telephone Charges By Profit on sale of asset
To Insurance By Other income
To Legal / Audit Fees
To Bad Debts
To Carriage Outwards
To Advertisement & Promotion
To Depreciation , loss on sale of asset
To Interest & Bank Charges
To Travelling Expenses
To Discount allowed
To Net Profit trf. to Balance Sheet By Net Loss trf. to Balance Sheet
Total Total
alance Sheet
Y A Balance Sheet is a statement of financial position of a
business at a given date.
Y Balance Sheet is a statement showing the Assets (right
side) and Liabilities (left) of a business as a certain date.
Y At the end of the year, all the Real and Personal accounts
are transferred to the Balance Sheet.
Y If all the transactions are correctly recorded, the totals of
both sides (Assets & Liabilities) should match (i.e. tally).
Y A Balance Sheet is not an account, but a statement
showing the financial position.
Y Assets = Capital + Liabilities
Y Capital = Assets Ȃ Liabilities
 alance Sheet as on 31-03-2010
Liabilities Rs. Assets Rs.
Capital Goodwill
(+) Net Profit Land & Buildings
(-) Net Loss Plant & Machinery
(-) Drawings Furniture
Vehicles
Sundry Creditors Patents, TM, CP
Loans from Banks, FI Investments
Bank Overdraft Cash in Hand
Outstanding Expenses Bank Balance
Income recd. In Advance Sundry Debtors
Closing Stock
Prepaid Expenses
Outstanding Income
Total Total
Adjustments
Y The P & L A/c & Balance Sheet show the true and fair view of
the financial performance and position, respectively.
Y Hence, all the transactions affecting the business status must
be incorporated in the final accounts.
Y Final accounts are prepared on the basis of trial balance.
Y However, certain transactions do not appear in the trial
balance due to inadequate information, pertaining to next
period or due to any error.
Y All such transactions must be included in final accounts to
show true picture of the business.
Y Such transactions are known as ǮAdjustmentsǯ and every
adjustment must be given min. 2 effects in final accounts.
 Adjustments and its effects
Sr. Nature of Adjustment Accounting Effects
1. Closing Stock (lower of Trading A/c Ȃ Credit side
cost or market price) Balance Sheet Ȃ Asset side
2. Depreciation on fixed P & L A/c Ȃ Debit side
assets Balance Sheet Ȃ Deduct from F. Assets
3. Bad Debts P & L A/c Ȃ Debit side
Balance Sheet Ȃ Deduct from Debtors
4. Provision for Bad Debts P & L A/c Ȃ Debit side
Balance Sheet Ȃ Deduct from Debtors
5. Discount on Creditors P & L A/c Ȃ Credit side
Balance Sheet Ȃ Deduct from Creditors
6. Outstanding expenses Trading or P & L Ȃ Debit Ȃ add in resp. exp.
Balance Sheet Ȃ Liabilities side
7. Prepaid expenses Trading or P & L Ȃ Debit Ȃ deduct from exp.
Balance Sheet Ȃ Assets side
8. Accrued income P & L A/c Ȃ Credit Ȃ add in resp. income
Balance Sheet Ȃ Assets side
 Adjustments and its effects
Sr. Nature of Adjustment
p. Income recd. in advance
10. Interest on capital
11. Interest on drawings
12. Goods distributed as free
samples
13. Goods lost by fire
14. Goods lost and insurance
company admitted claim
Accounting Effects
P & L Ȃ Credit Ȃ deduct from resp. income
Balance Sheet Ȃ Liabilities side
P & L A/c Ȃ Debit side
Balance Sheet Ȃ Liabilities Ȃ add in Capital
P & L A/c Ȃ Credit side
Balance Sheet Ȃ Liabilities Ȃ less from Cap.
Trading A/c Ȃ Credit side
P & L A/c Ȃ Debit side
Trading A/c Ȃ Credit side
P & L A/c Ȃ Debit side
Trading A/c Ȃ Credit side (goods lost Ȃ 100)
P & L A/c Ȃ Debit side (actual loss Ȃ 20)
Balance Sheet Ȃ Assets side (claim Ȃ 80)