Final Accounts PDF

Final Account By Debayan Ray Definition and Explanation of Final Accounts: - Every businessman goes into a business with the idea of making profit, which is the reward of this effort. He tries his best to get more and more profit at the smallest economic cost. The role of accounting is to a...

Final Account By Debayan Ray Definition and Explanation of Final Accounts: - Every businessman goes into a business with the idea of making profit, which is the reward of this effort. He tries his best to get more and more profit at the smallest economic cost. The role of accounting is to accumulate accounting data in such a manner that the amount of profit made or loss sustained during a particular period ascertained. The "final accounts" enable us to check on the conduct of the business, and to discover whether it is being run profitably. They are the means of conveying to the owner/owners, management, creditors, and interested outsiders a concise picture of profitability and financial position of the business. The preparation of the final accounts is not the first stage of an accounting cycle but they are the final products of the accounting cycle that is why, they are called final accounts. These accounts summaries all the accounting information recorded in the original books of entry and the ledger consisted of hundreds of thousands of pages. The most important function of an accounting system is to provide information about the profitability of the business. A sole trader furnishes a Trading and Profit and loss Account which depicts the result of the business transactions of the sole trader. Along with the Trading and Profit and Loss Account he also prepares a Balance Sheet which shows the financial position of the business. Meanings and Sources of Revenue: In common language revenue means tax or income. But in a business concern revenue means sales proceeds of goods or services or it is the price of goods sold or services rendered to the customers. According to American Accounting Association, "revenue is the monetary expression of the aggregate of products or services transferred by an enterprise to its customers during a period of time".  What is revenue? Revenue = Amount received in cash + Receivable Sources of Revenue: The sources of revenue are: 1. Sale proceeds of goods or services (Sales A/C). 2. Interest received on investment (Interest A/C credit balance). 3. Dividend received on share (Dividend A/C). 4. Discount received from creditors (Discount received account credit balance) 5. Commission received from customers (Commission A/C credit balance). 6. Profit on sale of assets (except goods). Different type of source of revenue Revenue Direct Source of revenue e.g. sale proceed of goods Indirect or minor source of revenue e.g. interest received, divident received, commission received, Discounbt received etc. What are the different type of expense? Type of Expenses: Direct and indirect expenses - Expenses means the expired costs incurred for earning revenue of a certain accounting period. They are the cost of the goods and services used up in the process of obtaining revenue. In other words, it becomes possible to earn revenue with the help of expenses. For example, purchase of goods, wages, salaries, rent, carriage, customs duty etc. We have to incur all these expenses in order to earn revenue. Expenses are mainly divided into two categories: Direct expenses Indirect expenses  Direct Expenses: Expenses connected with purchases of goods are known as direct expenses. For example, freight, insurance, of goods in transit, carriage, wages, custom duty, import duty, octroi duty etc. Without incurring these expenses, it is not possible to bring the goods from the purchase point to the go down of the business. such expenses are collectively known as direct expenses. Indirect Expenses: All expenses other than direct expenses are assumed as indirect expenses. Such expenses have no relationship with purchase of goods. Examples of indirect expenses include rent of building, salaries to employees, legal charges, insurance of building, depreciation, printing charges etc.  Expences Direct Expences e.g Purchase price of goods, carrige on goodspurchased, wages on goods, insuarence on goods in transit, customs duty, freight etc. Induirecct expences i.e salaries paid, rent paid, insuarence of building, printing charges, Legal charges etc.  Steps in the Process of Finalization of Accounts A. For Trading Concerns: – 1. Trading Account. – 2. Profit and Loss Account. – 3. Balance Sheet. B. For Manufacturing and Trading Concerns: – 1. Manufacturing Account. – 2. Trading Account. – 3. Profit and Loss Account. – 4. Balance Sheet. The following items will appear in the debit side of the Trading Account (i) Opening Stock: In case of trading concern, the opening stock means the finished goods only. The amount of opening stock should be taken from Trial Balance. (ii)Purchases: The amount of purchases made during the year. Purchases include cash as well as credit purchase. The deductions can be made from purchases, such as, purchase return, goods withdrawn by the proprietor, goods distributed as free sample etc. (iii) Direct expenses: it means all those expenses which are incurred from the time of purchases to making the goods in suitable condition. This expenses includes freight inward, octroi, wages etc. (iv) Gross profit: If the credit side of trading A/c is greater than debit side of trading A/c gross profit will arise.  The following items will appear in the credit side of Trading Account (i) Sales Revenue: The sales revenue denotes income earned from the main business activity or activities. The income is earned when goods or services are sold to customers. If there is any return, it should be deducted from the sales value. As per the accrual concept, income should be recognized as soon as it is accrued and not necessarily only when the cash is paid for. The Accounting standard 7 (in case of contracting business) and Accounting standard 9 (in other cases) define the guidelines for revenue recognition. The essence of the provisions of both standards is that revenue should be recognized only when significant risks and rewards (vaguely referred to as ownership in goods) are transferred to the customer. For example, if an invoice is made for sale of goods and the term of sale is door delivery; then sale can be recognized only on getting the proof of delivery of goods at the door of customer. If such proof is pending at the end of accounting period, then this transaction cannot be taken as sales, but will be treated as unearned income. (ii) Closing Stocks: In case of trading business, there will be closing stocks of finished goods only. According to convention of conservatism, stock is valued at cost or net realizable value whichever is lower. (iii) Gross Loss: When debit side of trading account is greater than credit side of trading account, gross loss will appear. Specimen Form of a trading A/c Example 1. - Following are the ledger balances presented by M/s. P. Sen as on 31st March 2013.  Answers – Specimen Form of profit and loss a/c  Indicate where the following items will be shown in various components of Trading Account and P & L A/c : (1) Wages (13) Travel & conveyance (2) Salaries to office staff (14) Insurance (3) Depreciation on (15) Audit fees office car (16) Carriage inward (4) Power & fuel (17) Freight outward (5) Repairs to machinery (18) Bad debts (6) Maintenance of office (19) Provision for building outstanding rent (7) Purchase returns or (20) Return inwards or sales return outwards returns (8) Closing stock of WIP (21) Discount earned (9) Opening stock of (22) Depreciation on delivery finished goods van (10) Interest received (23) Printing and stationery (11) Commission paid (24) Sale (12) Telephone  Answers - Classification of assets and liabilities Assets Real Assets Fixed Assets Tangible Assets Intangible Assets Current Assets Liquid or quick Assets Floating or circulating assets Ficticious Assets  Different assets and liability Assets: Assets represent everything which a business owns and has money value. Assets are always shown as debit balance in the ledger. Assets are classified as follows. 1. Tangible Assets: Assets which can be seen and felt by touch are called Tangible Assets. Tangible Assets are classified into two: – a. Fixed Assets: Assets which are durable in nature and used in business over and again are known as Fixed Assets. e.g. land and Building, Machinery, Trucks, etc. – b. Floating Assets or Current Assets: Current Assets are i. Meant to be converted into cash, ii. Meant for resale, iii. Likely to undergo change e.g. Cash, Balance, stock, Sundry Debtors. 2. Intangible Assets: Assets which cannot be seen and has no fixed shape. E.g., goodwill, Patent. 3. Fictitious assets: Assets which have no real value and will appear on the Assets side of B/S. are known as Fictitious assets: E.g. Preliminary expenses, Discount or creditors.  Liabilities: All that the business owes to others are called Liabilities. It also includes Proprietor’s Capital. They are known as credit balances in ledger. Classification of Liabilities: 1. Long Term Liabilities: Liabilities will be redeemed after a long period of time 10 to 15 years E.g. Capital, Long Term Loans. 2. Current Liabilities: Liabilities, which are redeemed within a year, are called Current Liabilities or short-term liabilities E.g. Trade creditors, B/P, Bank Loan. 3. Contingent Liabilities: Liabilities, which have the following features, are called contingent liabilities. They are: a. Not actual liability at present b. Might become a liability in future on condition that the contemplated event occurs. E.g. Liability in respect of pending suit. Specimen of balance sheet  Adjustments: 1. Provide for wages Rs.5000. 2. Write off 5% depreciation on freehold premises and 10% on office furniture. 3. Insurance to the extent of Rs.200 belongs to 2010. 4. Closing stock as on 31.3.2010 is Rs.52000. 5. Charge interest on capital @ 5% Solution Final Account : From the following ledger balances of Mr. Ajit prepare Manufacturing and trading and P/L account for the year ended 31.03.2003 Particulars Rs Particulars Rs Stock on 1.1.03 Return outward Raw Material 8,000 Raw Material 2,000 Work in progress 4,000 Finished goods 1,000 Finished Goods 10,000 Purchase Wages 13,000 Raw Material 48,000 Power and fuel 2,500 Carriage on above 3,000 Stores expenses 1,500 Finished goods 30,000 Supervision 4,000 Carriage on above 2,000 Depreciation on factory 2,000 Salary 7,000 Conveyance 1,500 Discount allowed 1,000 Commission received 2,000 Discount Received 2,000 Income tax 4,000 Interest paid 2,500 Repair and replacement 1,000 Rent rates and taxes 3,000 Depreciation on office 500 electricity 1,000 equipment's Stationary 2,000 Stock on 31.12.03 Sales 1,71,000 Raw material 4,000 Sales return 3,000 Work in progress 2,000 Finished goods 3,000 On 31.03.2003 (i) outstanding wages and salaries amounted rs 1,500 and 2,000 respectively (ii) Accrued commission rs 500  Manufacturing Account Particulars Rs Rs Particulars Rs Rs To Opening Stock By Work in 2,000 Raw Material 8,000 progress 79,500 Finished goods 4,000 By Manufacturing Cost (balancing figure)C/D To purchase of raw 48,000 material Less return (2000) Add Carriage 3,000 Less Closing stock (4,000) 45,000 To Wages 13,000 Add Outstanding 1,500 14,500 To power and fuel 2,500 To store expenses 1,500 To Supervision expenses 4,000 To Depreciation on factory assets 2,000 81,500 81,500  Trading Account Particulars Rs Rs Particulars Rs Rs To Opening 10,000 By sales 1,71,000 Stock Less Return 3,000 1,68,000 Finished 30,000 inward goods 3,000 Less Return (1,000) By Closing To purchase 29,000 stock To Add 2,000 31,000 Finished Carriage of goods finished goods 79,500 To manufacturin g a/c 50,500 To Gross Profit 1,71,000 1,71,000  Profit and loss Account for the year ended Particulars Rs Rs Particulars Rs Rs To Salary 7,000 By Gross 50,500 Add outstanding 2,000 9,000 Profit 2,000 To Discount allowed 1,000 By Discount To Interest Paid 2,500 Received To Rent rates and 3,000 2,000 taxes 1,000 By To Electricity 2,000 Commission 500 2,500 To Stationary 1,500 Received To Conveyance 1,000 Add Accrued To Repair and replacement 500 To Depreciation in office equipment's 33,500 To Net Profit ( Transferred to capital account) 55,000 1,71,000 Example – 2 From the following balances and additional information prepare Final a/c. Particulars Amount ( Rs) Amount (Rs) Capital - 25800 Building 20,000 Depreciation on building 1,000 Machinery 6,800 Furniture 2,000 Drawings 1500 Debtors and creditors 8000 12000 bank loan - 6000 Cash in hand 1600 Opening stock 5000 Purchase and sales 31000 53000 wages 3000 carriage inward 400 outstanding carriage inward 200 salary 4000 prepaid salary 1000 advertisements 300 insurance 3500 packing material purchased 7900 Total 97000 97000 Additional information - (1) Closing stock Rs 13,000 (2) Furniture to be depreciated by 15%  Trading Account Particulars Rs Rs Particulars Rs Rs To Opening Stock 5000 By sales 53000 To Purchase 31000 By Closing 13000 Stock To Wages 3000 To carriage inward 400 To Gross profit 26,600 (Balancing Figure) 66,000 66,000  Profit and loss Account Particulars Rs Rs Particulars Rs Rs To salary 4000 By Gross 26,600 To Advertisement 300 Profit To insurance 3500 To packing 7900 Expenses To Depreciation On Building 1000 On Furniture(15%) 300 To Net profit 9600 26,600 26,600  Balance sheet as on …../.…../…... Liability Rs Rs Assets Rs Rs Capital 25800 Fixed Asset Add Net Profit 9600 Building 20000 35400 Machinery 6800 Less Drawings 1500 Furniture 2000 33900 Less Depreciation 300 1700 @15% Loan Current Asset Bank Loan 6000 Stock 13000 Debtors 8000 Cash 1600 Current Liability Prepaid salary 1000 Creditors 12000 Outstanding 200 carriage inward 52,100 52,100 Problem - 2 From the following Trial Balance of M/s. Ram & Sons, prepare final a/c for the year ending on 31st March 2002. Question Question - Following Trial Balance has been extracted from the books of M/s. Ram Prasad & Sons on 31st March, 2018 Prepare Trading and Profit and Loss Account for the year ended 31st March, 2018 and Balance Sheet as at that date after taking into account the following adjustments: Question 7: Following balances are taken from the books of Mr. Niranjan. You are required to prepare Trading and Profit and Loss Account and Balance Sheet for the year ended 31st March, 2018: Question 8: prepare his Final Accounts of Mahesh for the year ended 31st March, 2018: Q - Following balances were extracted from the books of Vijay Kumar on 31st March, 2018 Prepare Trading and Profit and Loss Account for the year ended 31st March, 2018 and Balance Sheet as at that date after giving effect to the following adjustments: (a) Stock as on 31st March, 2018 was valued at Rs. 2,30,000. (b) Write off further Rs. 1,800 as Bad Debts and maintain the Provision for Doubtful Debts at 5%. (c) Depreciate Machinery at 10%. (d) Provide Rs. 7,000 as outstanding interest on loan. Closing Stock on 31st March, 2018 was ₹ 12,74,000. You are required to prepare Trading and Profit and Loss Account for the year ended 31st March, 2018 and Balance Sheet as at that date after making the following adjustments: (a) Depreciate Plant and Machinery @ 10% and Furniture @ 5%. (b) Provision for Doubtful Debts to be maintained at ₹ 1,50,000. (c) Insurance includes annual premium of ₹ 7,200 on a policy which will expire on 30th September, 2018. (d) Purchases include a computer costing ₹ 60,000 purchased on 1st July, 2017 and is subject to depreciation @ 10% p.a. Question 11: Sanjiv Sondhi started business on 1st April, 2017 with a capital of ₹ 3,00,000. Following Trial Balance was drawn up from his books at t he end of the year:  Value of Stock as on 31st March, 2018 was ₹ 2,60,000. You are required to prepare his Trading and Profit and Loss Account for the year ended 31st March 2018 and Balance Sheet as at that date after taking the following facts into account: (a) Plant and Fixtures are to be depreciated by 10%. (b) Salaries outstanding on 31st March, 2018 amounted to ₹ 35,000. (c) Accrued Interest on investment amounted to ₹ 7,500. (d) ₹ 5,000 are Bad Debts and a Provision for Doubtful Debts is to be created at 5% of the balance of debtors. Prepare Trading and Profit and Loss Account for the year ended 31st March, 2018 and Balance Sheet as at that date after taking into account the following: (a) Depreciation is to be written off as follows: Leasehold premises 5%. Plant and Machinery 10%. (b) Write off ₹ 5,000 as further Bad Debts and make a Provision for Doubtful Debts equal to ₹ 5,000. (c) Wages amounted to ₹ 5,700 have become due but have not been paid. (d) Wages include ₹ 10,000 incurred on installation of new machine. Machine was installed on 1st April, 2017. (e) The value of stock on 31st March, 2018 was ₹ 1,49,200. (f) Unexpired premium amount to ₹ 6,800 is to be carried forward to the next yea