Financial Accounting Final Accounts – tryspring

By | November 17, 2018

Financial Accounting – Final Accounts

Final Accounts are the accounts, which are prepared at the end of
a fiscal year. It gives a precise idea of the financial position
of the business/organization to the owners, management, or other
interested parties. Financial statements are primarily recorded
in a journal; then transferred to a ledger; and thereafter, the
final account is prepared (as shown in the illustration).

Usually, a final account includes the following components −

  • Trading Account
  • Manufacturing Account
  • Profit and Loss Account
  • Balance Sheet

Now, let us discuss each of them in detail −

Trading Account

Trading accounts represents the Gross Profit/Gross Loss of the
concern out of sale and purchase for the particular accounting
period.

Study of Debit side of Trading Account

  • Opening Stock − Unsold closing stock of the last
    financial year is appeared in debit side of the Trading
    Account as “To Opening Stock“ of the current financial year.

  • Purchases − Total purchases (net of purchase return)
    including cash purchase and credit purchase of traded goods
    during the current financial year appeared as “To Purchases”
    in the debit side of Trading Account.

  • Direct Expenses − Expenses incurred to bring traded
    goods at business premises/warehouse called direct expenses.
    Freight charges, cartage or carriage charges, custom and
    import duty in case of import, gas, electricity fuel, water,
    packing material, wages, and any other expenses incurred in
    this regards comes under the debit side of Trading Account
    and appeared as “To Particular Name of the Expenses”.

  • Sales Account − Total Sale of the traded goods
    including cash and credit sales will appear at outer column
    of the credit side of Trading Account as “By Sales.” Sales
    should be on net releasable value excluding Central Sales
    Tax, Vat, Custom, and Excise Duty.

  • Closing Stock − Total Value of unsold stock of the
    current financial year is called as closing stock and will
    appear at the credit side of Trading Account.

    closing Stock = Opening Stock + Net Purchases – Net
    Sale

  • Gross Profit − Gross profit is the difference of
    revenue and the cost of providing services or making
    products. However, it is calculated before deducting
    payroll, taxation, overhead, and other interest payments.
    Gross Margin is used in the US English and carries same
    meaning as the Gross Profit.

    Gross Profit = Sales – Cost of Goods Sold

  • Operating Profit − Operating profit is the difference
    of revenue and the costs generated by ordinary operations.
    However, it is calculated before deducting taxes,
    interest payments, investment gains/losses, and many other
    non-recurring items.

    Operating Profit = Gross Profit – Total Operating
    Expenses

  • Net Profit − Net profit is the difference of total
    revenue and the total expenses of the company. It is also
    known as net income or net earnings.

    Net Profit = Operating Profit – (Taxes +
    Interest)

Format of Trading Account

Trading Account of M/s ABC Limited

(For the period ending 31-03-2014)

Particulars Amount Particulars Amount
To Opening Stock XX By Sales XX
To Purchases XX By Closing Stock XX
To Direct Expenses XX By Gross Loss c/d XXX
       
To Gross Profit c/d XXX
Total XXXX Total XXXX

Manufacturing Account

Manufacturing account prepared in a case where goods are
manufactured by the firm itself. Manufacturing accounts represent
cost of production. Cost of production then transferred to
Trading account where other traded goods also treated in a same
manner as Trading account.

Important Point Related to Manufacturing Account

Apart from the points discussed under the section of Trading
account, there are a few additional important points that need to
be discuss here −

  • Raw Material − Raw material is used to produce
    products and there may be opening stock, purchases, and
    closing stock of Raw material. Raw material is the main and
    basic material to produce items.

  • Work-in-Progress − Work-in-progress means the
    products, which are still partially finished, but they are
    important parts of the opening and closing stock. To know the
    correct value of the cost of production, it is necessary to
    calculate the correct cost of it.

  • Finished Product − Finished product is the final
    product, which is manufactured by the concerned business and
    transferred to trading account for sale.

  • Raw Material Consumed (RMC) − It is calculated as.

  • RMC = Opening Stock of Raw Material + Purchases –
    Closing Stock

  • Cost of Production − Cost of production is the
    balancing figure of Manufacturing account as per the format
    given below.

Manufacturing Account

(For the year ending……….)

Particulars Amount Particulars Amount
To Opening Stock of Work-in-Progress XX By Closing Stock of Work-in-Progress XX
To Raw Material Consumed XX By Scrap Sale XX
To Wages XXX By Cost of Production XXX
To Factory overheadxx (Balancing figure)
Power or fuelxx
Dep. Of Plantxx
Rent- Factoryxx
Other Factory Exp.xx xxx
Total XXXX Total XXXX

Profit and Loss Account

Profit & Loss account represents the Gross profit as
transferred from Trading Account on the credit side of it along
with any other income received by the firm like interest,
Commission, etc.

Debit side of profit and loss account is a summary of all the
indirect expenses as incurred by the firm during that particular
accounting year. For example, Administrative Expenses, Personal
Expenses, Financial Expenses, Selling, and Distribution Expenses,
Depreciation, Bad Debts, Interest, Discount, etc. Balancing
figure of profit and loss accounts represents the true and net
profit as earned at the end of the accounting period and
transferred to the Balance Sheet.

Profit & Loss Account of M/s ………

(For the period ending ………..)

Particulars Amount Particulars Amount
To Salaries XX By Gross Profit b/d XX
To Rent XX
To Office Expenses XX By Bank Interest received XX
To Bank charges XX By Discount XX
To Bank Interest XX By Commission Income XX
To Electricity Expenses XX By Net Loss transfer to Balance sheet XX
To Staff Welfare Expenses XX
To Audit Fees XX
To Repair & Renewal XX
To Commission XX
To Sundry Expenses XX
To Depreciation XX
To Net Profit transfer to Balance sheet XX
Total XXXX Total XXXX

Balance Sheet

A balance sheet reflects the financial position of a business for
the specific period of time. The balance sheet is prepared by
tabulating the assets (fixed assets + current assets) and the
liabilities (long term liability + current liability) on a
specific date.

Assets

Assets are the economic resources for the businesses. It can be
categorized as −

  • Fixed Assets − Fixed assets are the
    purchased/constructed assets, used to earn profit not only in
    current year, but also in next coming years. However, it also
    depends upon the life and utility of the assets. Fixed assets
    may be tangible or intangible. Plant & machinery, land
    & building, furniture, and fixture are the examples of a
    few Fixed Assets.

  • Current Assets − The assets, which are easily
    available to discharge current liabilities of the firm called
    as Current Assets. Cash at bank, stock, and sundry debtors
    are the examples of current assets.

  • Fictitious Assets − Accumulated losses and expenses,
    which are not actually any virtual assets called as
    Fictitious Assets. Discount on issue of shares, Profit &
    Loss account, and capitalized expenditure for time being are
    the main examples of fictitious assets.

  • Cash & Cash Equivalents − Cash balance, cash at
    bank, and securities which are redeemable in next three
    months are called as Cash & Cash equivalents.

  • Wasting Assets − The assets, which are reduce or
    exhausted in value because of their use are called as Wasting
    Assets. For example, mines, queries, etc.

  • Tangible Assets − The assets, which can be touched,
    seen, and have volume such as cash, stock, building, etc. are
    called as Tangible Assets.

Assets

  • Intangible Assets − The assets, which are valuable in
    nature, but cannot be seen, touched, and not have any volume
    such as patents, goodwill, and trademarks are the important
    examples of intangible assets.

  • Accounts Receivables − The bills receivables and
    sundry debtors come under the category of Accounts
    Receivables.

  • Working Capital − Difference between the Current
    Assets and the Current Liabilities are called as Working
    Capital.

Liability

A liability is the obligation of a business/firm/company arises
because of the past transactions/events. Its
settlement/repayments is expected to result in an outflow from
the resources of respective firm.

There are two major types of Liability −

  • Current Liabilities − The liabilities which are
    expected to be liquidated by the end of current year are
    called as Current Liabilities. For example, taxes, accounts
    payable, wages, partial payments of long term loans, etc.

  • Long-term Liabilities − The liabilities which are
    expected to be liquidated in more than a year are called as
    Long-term Liabilities. For example, mortgages, long-term
    loan, long-term bonds, pension obligations, etc.

Grouping of Assets and Liabilities

There may be two types of Marshalling and grouping of the assets
and liabilities −

  • In order of Liquidity − In this case, assets and
    liabilities are arranged according to their liquidity.

  • In order of Permanence − In this case, order of the
    arrangement of assets and liabilities are reversed as
    followed in order of liquidity.

Financial Statements with Adjustments Entries and their
Accounting Treatment

In order to prepare a true and fair financial statement, there
are some very important adjustments those have to be done before
finalization of the accounts (as shown in the following
illustration
) −

Sr.No. Adjustments Accounting Treatments
1

Closing Stock

Unsold stock at the end of Financial year called Closing
stock and valued at “Cost or market value whichever
is less

First Treatment

Where an opening and closing stock adjusted through a
purchase account and the value of Closing Stock given in
Trial Balance −

Closing stock will be shown as adjusted purchase account on
the debit side of Trading account and will appear in the
Balance Sheet under current Assets.

2

Outstanding Expenses

Expenses which are due or not paid called as outstanding
expenses.

Accounting Treatment

Outstanding expenses will be added in Trading or Profit
& Loss account in particular expense account and will
appear in liabilities side of the Balance Sheet under the
current liabilities.

3

Prepaid Expenses

Expenses which are paid in advance are called as Prepaid
Expenses.

Accounting Treatment

Prepaid Expenses will be deducted from the particular
expenses as appear in Trading & Profit & Loss
account and will be shown in the Balance Sheet under the
current assets.

4

Accrued Income

The income, which is earned during the year, but not yet
received at the end of the Financial Year is called as
Accrued Income.

Accounting Treatment

Accrued income will be added to a particular income under
the Profit & Loss account and will be shown in the
Balance Sheet as current assets.

5

Income Received in Advance

An income received in advance, but not earned like advance
rent etc.

Accounting Treatment

An income to be reduced by the amount of advance income in
profit & loss account and will appear as current
liabilities in the Balance Sheet.

6

Interest on Capital

Where an interest paid on the capital introduced by the
proprietor or partner of the firm.

Accounting Treatment

  • Debit Side of Profit & Loss account

  • Add to capital account (Credit side of Capital
    account).

7

Interest on Drawing

Where an interest paid on the capital introduced by the
proprietor or partner of the firm.

Accounting Treatment

  • Credit Side of Profit & Loss account

  • Reduced from capital account (Debit side of Drawing
    account).

8

Provision for Doubtful Debts

If there is any doubt on the recovery from Sundry Debtors.

Accounting Treatment

  • Debit Side of Profit & Loss Account

  • In a Balance Sheet, provision for the Doubtful will be
    deducted from the Sundry Debtors’ Account.

9

Provision for Discount on Debtors

If there is any offer of discount to pay the debtors within
certain period.

Accounting Treatment

  • Debit Side of Profit & Loss Account

  • In a Balance Sheet, provision for the Discount on
    Debtors will be deducted from the Sundry Debtors
    Account.

10

Bad Debts

Unrecovered debts or irrecoverable debts

Accounting Treatment

  • Debit Side of Profit & Loss Account

  • In a Balance Sheet, Sundry debtors will be shown after
    deducting the Bad Debts.

11

Reserve for Discount on Creditors

If there is any chance to get discount on the payment of
sundry creditors within certain period.

Accounting Treatment

  • Credit Side of Profit & Loss Account

  • In a Balance Sheet, Sundry Creditors will be shown
    after deducting the Reserve for Discount.

12

Loss of Stock by fire

There may be three conditions in this case

Accounting Treatment

1. If Stock is fully insured

  • Credit Side of Trading Account

  • Assets side of Balance Sheet

  • (With full value of loss)

2. If Stock is partially insured

  • Credit side of Trading Account

    (With Total value of Loss)

  • Debit side of Profit & Loss a/c

    (With value of loss unrecoverable)

  • Asset Side of Balance Sheet

    ( With value recoverable)

3. If Stock is not insured

  • Credit Side of Trading Account

  • Debit side of Profit & Loss Account

13

Reserve Fund

Accounting Treatment

  • Debit side of Profit & Loss Account

  • Liabilities side of Balance Sheet

14

Free Sample to Customers

Accounting Treatment

  • Credit side of Trading Account

  • Debit Side of Profit & Loss Account

15

Managerial Commission

Accounting Treatment

  • Debit side of Profit & Loss Account

  • Liabilities side of Balance Sheet as commission payable

16

Goods on Sale or Approval Basis

If there is any un-approved stock lying with the customers
at the end of financial year.

Accounting Treatment

  • Sales AccountDr

    To Debtors A/c

    (With Sale Price)

  • Stock AccountDr

    To Trading Account

    (with cost price)

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