UNIT-3rd

Company Final Accounts: Preparation of Final accounts with

adjustments, Trading account, Profit & Loss Account, Balance sheet as per
schedule-III of the new companies act 2013.

The term "final accounts" includes the trading account, the profit and loss account,
and the balance sheet.

In other words:-

Final accounts is a set of Trading Account, Profit and Loss Account and Balance
sheet prepared on the basis of trial balance and adjustments to find out working results
of the business for a given period and financial status as on a particular date.

There are generally three types of final accounts and they are: Trading account. Profit
and loss account. Balance sheet.

Objectives of Final Account preparation

Final accounts are prepared with the following objectives:

1. To determine profit or loss incurred by a company in a given financial period

2. To determine the financial position of the company
3. To act as a source of information to convey the users of accounting information
(owners, creditors, investors and other stakeholders) about the solvency of the
company.

Different stages of final account of a company are:

1. Prepare trial balance
2. Adjusting the trial balance
3. Preparing adjusted trial balance
4. Prepare financial statements
5. Closing the books
Final accounts can be calculated as follows:
1. Make a list of trial balance items and adjustments
2. Record debit items on expense side of P and L account or assets side in balance
sheet
3. Record credit items on the income side of trading P and L account or liabilities
side of balance sheet.
4. Balance the profit and loss account and determine profit or loss from the trial
balance
5. Add any profit obtained to the capital on the liabilities side of the balance sheet.
6. Make a total of the balance sheet.

Trading Account
This is often the first final account to be tabulated. This account is used to determine the
gross profit or the gross loss that is incurred by a corporation at the end of a financial
year. On the left-hand side (LHS), all debited sums, including direct purchases, opening
stock and direct expenses, are recorded.

A company will have a gross profit scenario when the credit side (RHS or right-hand
side) is greater than the value represented on the LHS. The gross profit is later
transferred to the credit side of a profit and loss account, which is drawn up after the
completion of a trading account.

A company will have a gross loss scenario when the debit side is greater than the credit
side or when LHS > RHS. Should there be a gross loss incurred, it will then be
transmitted to the debit side of the P & L account.
Here is a Sample Trading Account

Particulars Amount Amount Particulars Amount Amount

To opening stock XX By sales xx

(Less returns
To purchases xx (xx) XX
inward)

( Less returns
(xx) XX By closing stock XX
outward)

By gross loss
To wages (Adjust
XX (transfer to P & L XXX
O/S and prepaid)
A/C)

To carriage inwards XX

To freight and octroi,

among other XX
transportation

To direct expenses XX

To fuel and power XX

To gross profit
(transfer to P & L XXX
A/C)

Profit and Loss Account

Once a trading account is finished, the profit and loss account is readied. This final
account is also known as an income statement in some companies. It is started as soon
as the gross profit or gross loss from the table made earlier is transferred.

All indirect expenses, including salary, office and administrative expenses, rent, wages
and costs on marketing and advertising, are mentioned on the debit side.

All indirect incomes, including dividends received on shares, interests earned, profits
earned on asset sales and recovered debts go to the credit side.
Here is a Sample P & L Account

Particulars Amount Particulars Amount

To gross loss (brought from By gross profit (brought

XXX XXX
trading account) from trading account)

To salaries (adjust O/S and

XXX By rent received XXX
prepaid)

To rents and taxes XXX By discounts earned XXX

To travelling expenses XXX By interests earned XXX

To stationary/printing expenses XXX By bad debts recovered XXX

To postage XXX By commissions earned XXX

To audit & legal charges XXX By dividends received XXX

By income from other

To telephone expenses XXX XXX
sources

To insurance premium (prepaid By Net Loss (transferred to

XXX XXX
adjusted) Capital A/C)

To marketing/advertisement XXX

To interest paid XXX

To interest paid XXX

To discount allowed XXX

To sundry expenses XXX

To carriage outwards XXX

To bad debts XXX

To depreciation XXX

To loss by fire/theft XXX

To any other expenses XXX

 To net profit (transferred to
XXX
Capital A/C)
A Profit and Loss Account may have certain other essential information too.

Balance Sheet
Since this is, by definition, a sheet of information and not a statement, there are no
elements of ‘to’ and ‘by’ as in the other accounts. The balance sheet consists of a
company’s total assets, liabilities and capital as on the last day of a financial year.
All LHS elements of a balance sheet are liabilities. All RHS elements of a balance sheet
are assets. During Balance Sheet preparations, the liabilities must equal the assets.

Here is a Sample of the Balance Sheet of a Fictitious Company

Liabilities Amount Assets Amount

Capital
75000 Land and building 1,00,000
(Less drawings-85000-10000)

Reserves and surplus 25000 Plant and machinery 10000

Outstanding expenses 5000 Furniture 3000

Loans 25000 Stock 10000

Trade creditors 10000 Sundry debtors 6000

Bills payable 10000 Bills receivable 9000

Misc. investments 2000

Cash in hand 10000

Total sum 1,50,000 Total sum 1,50,000

The Balance Sheet is the most important financial tool for any enterprise to assess its
financial position and where it stands for future planning and implementation.

Balance Sheet also helps identify areas where the company is facing hurdles and
difficulties. The management can then plan accordingly.
The Questions will be like this:
Q. Following is the Trial Balance of Rajesh Ltd., Gurgaon as on 31.12.2009.

Adjustments:
1. Transfer Rs. 10000 to Reserve Fund.
2. Provide depreciation on building at 5%.
3. Stock on 31.12.2009 was valued at Rs. 12000.
4. Dividend at 15% on share capital is to the provided.
5. Depreciation on Plant and Machinery at 10%.
Prepare Trading, Profit and Loss Account and Balance Sheet in the prescribed form.
 In Detailed

Income Statement
Income statement is a statement which is prepared to know the operating results of the
business firm in the form of net profit or net loss. This statement is divided into two parts the first
part is called trading a/c, which is prepared to know the gross profit or gross loss & the second
part is called profit & loss a/c, which is prepared to know the net profit or net loss of the
business enterprise.

DIERCT EXPENSES

These are the expenses which are incurred on the goods purchased till they are brought to the
place of business for sale. Like freight, import duty, dock dues, clearing charges, octroi duty,
carriage, cartage, etc.

ITEMS TAKEN IN TRADING A/C

1.OPENING STOCK: This is a stock which was the closing stock of last year.

2.PURCHASES & PURCHASE RETURNS: Purchases a/c includes the gross amount of
purchases of materials dealt in by the firm ,i.e, both cash & credit purchases.

The purchase returns a/c includes the amount of the purchases returned by the firm to the
suppliers.

If the proprietor has taken the goods for personal use, the cost of the goods shall be deducted
from the purchases a/c instead of taking it in the sales a/c.

3.CARRIAGE OR FREIGHT INWARDS: It is the cost of bringing the materials to the firm’s
godown.

4.MANUFACTURING WAGES: It is the cost of converting the raw materials into the finished
goods.

NOTE: SOMETIMES SALARIES & WAGES IS COMBINED & SHOWN UNDER A SINGLE A/C
NAMED AS WAGES & SALARIES A/C (SHOW IN TRADING A/C) OR SALARIES & WAGES
A/C (SHOW IN P & L A/C).

5.POWER & FUEL: It is the cost incurred on electricity & coal to run the machines in the
factory.

6.FACTORY RENT & RATES: It is the rent & municipal taxes paid for the premises of factory.

7.FACTORY LIGHTING: It is the cost of electricity consumed in the factory.

8.SALES & SALES RETUNS: Sales a/c includes the gross amount of sales of finished goods
,i.e, both cash & credit. Sales returns a/c includes the amount of the sales returned by the
customers.

9.CLOSING STOCK: It is the stock of the materials or the finished goods remained unsold at
the end of the current year.

The adjustment of the closing stock can be done in the following manner:

a) WHEN CLOSING STOCK IS NOT GIVEN IN THE TRIAL BALANCE

Closing stock a/c Dr.

To Trading a/c

b) WHEN CLOSING STOCK IS GIVEN IN THE TRIAL BALANCE

In such a case, closing stock is not taken in the trading a/c rather it is directly taken on the asset
side of the balance sheet because closing stock has already been adjusted from the purchases
a/c by making the following entry:

Closing stock a/c Dr.

To purchases a/c

All other expenses which cannot be taken in the trading

a/c is taken in p & l a/c, which absorbs all indirect
expenses.

BALANCE SHEET
“It is a statement which sets out the assets & liabilities of a firm or an institution as at a certain
date”.

It is a device for showing the financial position of the business in a systematic standard form.

ITEMS TAKEN IN BALANCE SHEET

1.FIXED ASSETS: Fixed assets are those assets that are acquired for long term use & not
meant for resale.

a) TANGIBLE ASSETS: These are the assets which can be seen & felt like building, furniture,
stock, cash, etc.
b) INTANGIBLE ASSETS: These are the assets which cannot be seen but can be felt only like
goodwill, patent right, trade mark, etc.
c) WASTING ASSETS: These are the assets which have some definite life span like oil wells,
quarries, mines, etc

2.CURRENT ASSETS: Current assets are those assets that are kept temporarily for resale or
for converting into cash. These are the assets which are likely to be realised in the period of
one year or during the normal operating cycle. Such types of are also known as floating or
circulating assets.

Eg. Unsold finished goods, cash-in-hand, B/R, bank, etc.

3.FICTITIOUS ASSETS: These are not assets in reality & nothing can be realised by selling
such assets. However these are shown on the assets side of the balance sheet, sothat the
adjustment may be done properly of such assets over the number of years. Eg. Preliminary
exp., losses not yet written off, etc.

4.OWNER’S FUND: The amount owing to the proprietors as capital including

undistributed profits & reserve is called owner’s fund or net assets.

5.LONG TERM LIABILITIES: These are the liabilities which are not payable in a short span
atleast one year. This is a source of fund which is generally used for the purchase of fixed
assets. Eg. Debentures, long term bank loans, etc.

6.CURRENT LIABILITIES: These are the liabilities which are payable within a period of one
year. Eg. Trade creditors, B/P, bank o/d, outstanding exp., etc.

7. CONTINGENT LIABILITIES: These are the liabilities which may arise in future depending on
the occurrence or non-occurrence of one or more uncertain future vents. Eg. Guarantee for
loan, bills discounted, disputed claims, etc.

MANUFACTURING ACCOUNT
This is a a/c which is prepared, in case manufacturing concerns, to ascertain the cost of goods
produced or manufactured. It contains the opening work- in-progress,

material consumed, all factory exp., dep. on plant, repairs to plant & machinery, all other direct
exp. relating to purchases of raw materials, sale of scraps, closing work-in-progress, etc.
ITEMS OF ADJUSTMENTS
1.OUTSTANDING EXPENSES: Exp. which has been incurred during the current year & whose
benefit has been derived during the year, but payment in respect of which has not yet been
made, are called outstanding exp. or accrued exp. like outstanding salaries, outstanding
telephone exp., etc.

Adjustment entry is:

Concerned exp. a/c Dr. (Taken in p & l a/c)

To concerned exp. outstanding a/c (Taken on liabilities side of the balance sheet)

2.PREPAID OR UNEXPIRED EXPENSES: Exp. which has been incurred, but the benefit of
which has not been availed in the current year, are called prepaid exp. or unexpired exp. like
prepaid insurance, advance salary, etc.

Adjustment entry is:

Concerned prepaid exp. a/c Dr. (Taken on assets side of the balance sheet)

To Concerned exp. a/c (Taken in p & l a/c)

3.ACCRUED OR OUTSTANDING INCOME: The incomes which has been earned but has not
yet been received in cash, are called accrued or outstanding incomes. Like interest receivable,
commission receivable, etc.

Adjustment entry is:

Concerned accrued income a/c Dr. (Taken on assets side of the balance sheet)

To Concerned income a/c ( Taken in p & l a/c)

4.UNEARNED INCOME OR INCOME RECEIVED IN ADVANCE: The incomes which has not
been earned in the current accounting year but has been received in this year, are called
income received in advance or unearned income.

Adjustment entry is:

Concerned income a/c Dr. (Taken in p & l a/c)

To Concerned income advance a/c (Taken on liabilities side of the balance sheet)
5.DEPRECIATION: Depreciation is a charge arises due to the usage & passage of time of fixed
assets. It is not provided on day-to-day basis, so it is provided at the end of the year.

Adjustment entry is :

Depreciation a/c Dr. ( Taken in p & l a/c)

To Concerned asset a/c (Taken in the concerned asset a/c)
Or
To Provision for depreciation a/c (Taken on liabilities side of the balance sheet)
6.INTEREST ON CAPITAL: As per the ‘separate entity concept’ the funds provided by the
proprietor is considered as a liability in the eyes of the business, so on such liability,i.e, capital
interest can be given & such interest is treated like other exp. of the business.

Adjustment entry is :

Interest on capital a/c Dr. (Taken in p & l a/c)

To capital a/c (Taken in capital a/c)

7.INTEREST ON DRAWING: It is an interest charged on the amount drawn by the proprietor for
his personal use, so it is income of the business like other incomes.

Adjustment entry is:

Capital a/c Dr. (Taken in capital a/c)

To Interest on drawing a/c (taken in p & l a/c)

8.INTEREST ON LOAN: Interest is payable periodically whether there is profit or loss, so it is

appropriate to provide the interest which has not been paid in the current accounting year.

Adjustment entry is:

Interest a/c Dr. (Taken in p & l a/c)

To Interest outstanding a/c (Taken on the liabilities side of the balance sheet)

Or

To The lender’s personal a/c (Taken on the liabilities side of the balance sheet)

(Implied adjustment of interest: Calculate the total interest payable for the current year &
compare it with the interest given in the trial balance, if any difference is found that may be
interest outstanding or interest paid in advance)

9.BAD DEBTS: It is an amount which is not recoverable from debtors, so it is treated as a loss
& at the end of the year it is transferred to the debit side of the p & l a/c.

Adjustment entry is:

Bad debts a/c Dr. (Taken in p & l a/c)

To concerned debtor a/c (Taken in balance sheet)

NOTE: If the amount written off earlier as bad debts is recovered later on, it will be treated as
profit & taken to credit side of the p & l a/c under the name of ‘Bad Debts Recovered A/c’.
10.PROVISION FOR BAD DEBTS: It is an amount which is set aside for meeting the loss
arising due to bad debts. Balance, at the end of the year, in this a/c is shown as deducted from
the debtors in the balance sheet & then carried forward in the next year.

Adjustment entry is:

P & L A/c Dr. (Taken in p & l a/c)

To provision for Bad & Doubtful Debts A/c. (Taken in balance sheet)