ASSIGNMENT-1

FINANCIAL ACCOUNTING
PREPARATION OF FINAL
ACCOUNTS WITH REGARD TO
ORGANISATION

SUBMITTED BY
SUBMITTED TO
K.MOUNICA
PROF.N.SUNDERAN
(16BCC0033)

FINAL ACCOUNTS
INTRODUCTION
Every business concern wants to know business result (i.e. profit or loss) for the accounting
period and financial position (assets and liabilities) at the end of the accounting period. Final
accounts are the means through which a business concern can find out its business result and
financial position. Once the trial balance is prepared and relevant information is gathered, final
accounts can be prepared to summaries the business operations. Preparation of final accounts
is the last step in the process of accounting and gives the final results of the business for the
trading period. Therefore, it is known as final accounts. Final accounts consist of
Manufacturing account, Trading account, Profit & Loss account and Balance Sheet.
Manufacturing account is not required for trading concerns.

FINAL ACCOUNTS
Final accounts also known as financial statements consisting of income statement (or profit
and loss account) and balance sheet, prepared from the ledger balances and various
adjustments at the end of accounting period, to summarize the business activates. Normally
final accounts are prepared at the end of financial year. But corporate practice is to prepare the
final accounts at the end of the quarter.

PREPARATION OF FINAL ACCOUNTS OF A SOLE TRADING

CONCERN
Normally a sole trading concern prepares final accounts at the end of the financial year. Final
accounts of a sole trading concern consist of trading account, profit & loss account and
balance sheet. Each of these are explained in the following paragraphs.

TRADING ACCOUNT
Trading account is prepared to know the trading result. Trading result indicates gross profit or
loss of the trading period due to the difference between selling price and purchase price of the
goods sold. If selling price of the goods sold is more than the purchase price, the difference is
known as gross profit. On the contrary, when the situation is reverse, difference is termed as
gross loss. Here, purchase price includes the cost of shipment and other direct expenses
incurred until the goods reach the point of sale and to make the goods ready to sale, if any.

GROSS PROFIT OR LOSS

Gross profit or gross loss represents:
Gross Profit /Loss = Net Sales Cost of goods sold
OR
Gross Profit /Loss = Net Sales (Opening stock + Net Purchases Closing Stock + Direct
Expenses)
Net Sales = Sales Sales Returns
Net Purchases = Purchases Purchases returns

Direct expenses casuists of all purchase related, loading, transpiration, unloading and expenses
incurred in making the goods ready for resale (such as repacking, seasoning, refrigerating etc.).
A proforma of trading account is shown below:

Trading Account for the period ending

Dr.

Cr.

Rs.
Rs.
Rs.
Rs.
To Opening Stock
xxxx
By Sales
xxxx
To Purchases
xxxx
Less: Returns
xxx
xxxx
Less: Returns
xxx
xxxx
By Closing Stock
xxxx
To Direct Expenses

By Profit and Loss a/c

xxxx
Wages
xxxx
(Gross loss transferred

Carriage/Cartage/
xxxx
to P&L a/c )

Fright Inwards
xxxx

Power, fuel, gas,

xxxx

water, oit
xxxx

Dock dues, Octroi,

xxxx

Import duty,
xxxx

Excise duty
xxxx

To Profit and Loss a/c

xxxx

(Gross profit transferred

to P&L a/c)

xxxx

xxxx
Closing Stock: The value of unsold goods at the end of the accounting period is closing stock.
The value of closing stock is the cost price of the unsold goods, or market price, whichever is
less (Indian Accounting Standard 1). The closing stock of one accounting period becomes
opening stock of the following accounting period.
Opening Stock: Opening stock is the value of unsold goods at the beginning of the accounting
period. The opening stock is brought forward from the previous accounting period.
Purchases: Major activity of a trading concern is to buy and sell goods. The value of goods
bought for resale is purchases. It consists of cash as well as credit purchases. Here purchase
returns is deducted to find the net purchases. If the proprietor of the business, draws some
goods from his business at cost price, it is to be deducted from the purchases.
Direct Expenses: Direct expenses are expenses incurred in procuring goods and making them
ready for sale. Such expenses include wages, carriage, cartage or fright inward are transport
charges incurred for bringing the goods purchased to the point of sale; power, fuel, gas, water,
oil, heating, lighting, etc. are incurred in the process of manufacturing; dock dues, octroi duty,
import duty, excise duty, customs duty, clearing charges are the duties paid on the goods
purchased.
Sales: The sale proceeds of goods sold is sales, it includes both cash and credit sales. Sales
returns is deducted from gross sales to find the net sales to credited to the trading a/c.

PROFIT &LOSS ACCOUNT

Profit & Loss account is prepared to know the net profit or net loss of a business, for the
accounting period. Gross profit/loss (result of trading activities) is the base for profit and loss
account. Further all other expenses (except purchases and direct expenses) are added and other
incomes (except sales) are to be deducted to find the net profit or loss.

Net Profit or Net Loss:

Net profit or Net loss represents:
Net Profit/Net Loss = Gross Profit/ Loss Other Incomes (Administrative expenses + Selling and
distribution expense + asset related expenses + financial expenses).
A specimen of profit and loss account is shown below:

Profit and Loss a/c for the accounting period ending.

Dr.

Cr.

To Trading a/c
Rs.
By Trading a/c
Rs.
(Gross loss transferred from P& L a/c)
xxxxxx
(Gross profit transferred to Trading a/c )
xxxxxx
Administrative Expenses
By Rent received
xxxx
To Rent, Rates, Insurance and Taxes
xxxxx
By Discount earned
xxxx
To Salaries
xxxxx
By Commission received
xxxx
To Printing and Stationery
xxxxx
By Income on investments
xxxx
To Office heating and lighting
xxxxx

By Interest on drawings
xxxx
To Telephone
xxxxx
By Bad debts recovered
xxxx
To Postage and courier
xxxxx
By Provision for bad debts (old)
xxxx
To Bank charges
xxxxx
By Discount on creditors
xxxx
To Legal expenses
xxxxx
To Net Profit
Selling and Distribution Expenses
(Transferred to Balance Sheet)
xxxxx
To Traveling Expenses
xxxxx

To Advertising and Sales promotion

xxxxx

To Commission
xxxxx

To Freight/ Carriage outwards

xxxxx

To Bad debts
xxxxx

To Provision for bad debts

xxxxx

To Discount on debtors
xxxxx

To Discount allowed
xxxxx

Asset related Expenses

To Depreciation
xxxxx

To Repairs and maintenance

xxxxx

To Insurance
xxxxx

Financial Expenses

To Interest on Capital
xxxxx

To Interest on loan
xxxxx

To Net Profit

(Transferred to Balance Sheet)

xxxxx
xxxxxx
xxxxxx

Points to be noted in preparing Trading and Profit & Loss a/c:

All the expenses and incomes for the accounting period are to be taken into account.
Outstanding income/expenses should be added to the concerned income/ expenses. Prepaid
expenses and Incomes received in advance should be deducted from the concerned income/
expense.
Personal expenses of the proprietor, such as life insurance premium, income tax etc. are not the
business expense. Hence, should not be debited to the P& L a/c.

BALANCE SHEET
Owners of the business are interested in knowing the financial position of the business (what
the business concern owns and what it owes) as on a particular date. Balance sheet is a
statement of assets and liabilities prepared at the end of the accounting period to know the
financial position of the business concern.
A specimen form of a balance sheet is given below:
Balance Sheet as on
LIABILITIES
Rs.
ASSETS
Rs.
Capital

Fixed Assets
Opening balance
xxxxxx
Land & Buildings
xxxxxx
Add: Additional Capital Invested
xxxx
Plant & Machinery
xxxxxx
Add: Interest on Capital
xxxx
Furniture & Fixtures
xxxxx

xxxxx
Vehicles
xxxxx
Less: Drawings
xxxx
Loose Tools
xxxxx
Less: Interest on Drawings
xxxx
Patents
xxxxx
xxxxx
Copy Rights
xxxxx
Add/Less: Net Profit /Loss
xxxx
xxxxxx
Designs
xxxxx
Long term liabilities

Geographical Indications
xxxxx
Long term loans
xxxx
Long-term Investments
Mortgage
xxxx
Shares
xxxxx
Hypothecation
xxxx
Debentures
xxxxx
Current Liabilities

Government Bonds
xxxxx
Creditors
xxxx

National Savings Certificates

xxxxx
Bills Payable
xxxx
Current Assets
Bank overdraft
xxxx
Inventory
xxxxx
Outstanding expenses
xxxx
Debtors
xxxxx
Incomes received in advance
xxxx
Bills Receivable
xxxxx

Prepaid expenses
xxxxx

Outstanding incomes
xxxxx

Cash at bank
xxxxx

Cash in Hand
xxxxx

xxxxxx

xxxxxx

TREATMENT OF ITEMS OF ADJUSTMENTS APPEARING INSIDE THE

TRIAL BALANCE
If the adjustment item is appearing within the trial balance, it is recorded and classified, in such case only one effect is
to be given. It may be either debit effect or credit effect as the case may be.
Sl. No.
Adjustment
Explanation
Accounting treatment
1.
Closing Stock
It appears in the trail balance only when trial
To be shown as current asset

balance is prepared and gross profit is found.

in the balance sheet.

2.
Outstanding
It appears in the trial balance, if it is debited to
To be shown as current

expenses
the concerned expenditure a/c.
liability in the balance sheet.

3.

Prepaid Expenses
It appears in the trial balance, if it is credited to
To be shown as current asset

the concerned expenditure a/c.

in the balance sheet.

4.
Accrued Income
It appears in the trial balance, if it is credited to
To be shown as current asset

the concerned income a/c.

in the balance sheet.

5.
Income received in
It appears in the trial balance, if it is debited to
To be shown as current

advance
the concerned income a/c.
liability in the balance sheet.

6.
Depreciation
It appears in the trial balance, if it is credited to
To be debited to the profit and

the concerned asset/s account

loss account.

Bad debts and/or

It appears in the trial balance, if is credited to
To be debited to
7.
provision for bad

debtors account.
P& L Account

debts

8.
Provision for
It appears in the trial balance, if is credited in the
To be debited to

discount on debtors
debtors account.
P& L Account

9.
Provision for
It appears in the trial balance, if it is credited to
To be debited to

discount on creditors
debtors account.
P& L Account

10.
Interest on capital
It appears in the trial balance, if it is credited to
To be debited to P&L a/c.

capital account.

11.
Interest on drawings
It appears in the trial balance, if it is debited to
To be credited to the P&L a/c.

capital a/c or drawings a/c

Adjustments in final accounts:

The glimpse of the acquainting treatment of the adjustments in final accounts is shown in the following table.

Sl. No.
Adjustment
Accounting treatment in the:

Trading and/or Profit and Loss Account

Balance Sheet

1.
Closing Stock
Credited to the Trading account (Credit
To be shown as an asset in the

effect).
balance sheet (Credit effect)

To be added to the concerned expense

2.
Outstanding
account on the debit side of the trading
To be shown as current liability in

Expenses
account or profit and loss account (Debit
the balance sheet (Credit effect).

effect).

Prepaid
To be deducted from the concerned expense
To be shown as current asset on the
3.
on the debit side of the trading or profit and

Expenses
in the balance sheer (Debit effect).

loss account (Credit effect)

Outstanding
To be added to the concerned income on the
To be shown as current asset in the
4.
credit side of the profit and loss account

income
balance sheet (Credit effect).

(Credit effect).

5.
Income received
To be deducted from the concerned income
To be shown as current liability in

in advance
on the credit side of the profit and loss
the balance sheet (Credit effect).

account (Debit effect).

Bad debts,

provision for
To be deducted from the sundry
6.
doubtful debts and
To be debited to P&L a/c (Debit effect).
debtors on the assets side of the

discount on
balance sheet (Credit effect).

debtors

Provision for
To be deducted from sundry
7.
discount on

To be credited to P&L a/c (Credit effect).

creditors on the liabilities side of

creditors
the balance sheet (Debit effect).

To be deducted from the concerned

8.
Depreciation
To be debited to P&L a/c (Debit effect).
fixed asset in the balance sheet

(Credit effect).

To be added to the concerned fixed

9.
Appreciation
To be credited to P&L a/c (Credit effect).
asset in the balance sheet (Debit

effect).

To be added to capital on the

10.
Interest on capital
To be debited to P&L a/c (Debit effect).
liabilities side of the balance sheet

(Credit effect).

Interest on
To be deducted from the capital on
11.
To be credited to P&L a/c (Credit effect).
the liabilities side of the balance

drawings

sheet (Credit effect).

7
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