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Unit 7 UNIT – 7 UNIT – 7 FINAL ACCOUNTS. Unit 7 Final accounts Structure Introduction and Objectives Introduction and Objectives Adjustments before preparing.

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Presentation on theme: "Unit 7 UNIT – 7 UNIT – 7 FINAL ACCOUNTS. Unit 7 Final accounts Structure Introduction and Objectives Introduction and Objectives Adjustments before preparing."— Presentation transcript:

1 Unit 7 UNIT – 7 UNIT – 7 FINAL ACCOUNTS

2 Unit 7 Final accounts Structure Introduction and Objectives Introduction and Objectives Adjustments before preparing final accounts Adjustments before preparing final accounts Trading account Trading account Preparation of Trading account Preparation of Trading account Financial Accounting

3 Unit 7 Final accounts Profit and Loss Account Profit and Loss Account Preparation of Profit and Loss Account Preparation of Profit and Loss Account Balance Sheet – Meaning Balance Sheet – Meaning Preparation of Balance Sheet Preparation of Balance Sheet Introduction Introduction Financial Accounting

4 Unit 7 Introduction and Objectives Final Accounts are those prepared at the end of Accounting period and the last leg of the entire Accounting trail. Final Accounts are those prepared at the end of Accounting period and the last leg of the entire Accounting trail. Final Accounts For Manufacturing Concerns Final Accounts For Manufacturing Concerns –Manufacturing Account –Trading Account –P & L Account –Balance Sheet Financial Accounting

5 Unit 7 Introduction and Objectives Final Accounts For Trading Concerns Final Accounts For Trading Concerns –Trading Account –P & L Account –Balance Sheet Financial Accounting

6 Unit 7 Introduction and Objectives Final Accounts For Non-Trading Concerns Final Accounts For Non-Trading Concerns –Receipts & Payments Account –Income & Expenditure Account –Balance Sheet Objectives: Objectives: Financial Accounting

7 Unit 7 Introduction and Objectives –To know the meaning and purpose of final accounts –To identify the items of Trading Accounts –To identify the items of Profit and Loss Account. –To identify the items of assets and liabilities of Balance Sheet Financial Accounting

8 Unit 7 Introduction and Objectives –To know the adjustments such as RBD, Reserve for discount, depreciation, closing stock, stock destroyed by fire, used for personal purposes, prepaid and outstanding items etc., Financial Accounting

9 Unit 7 Introduction and Objectives –To prepare Balance Sheet without any adjustments from the trial balance. –To prepare Balance Sheet with adjustments Financial Accounting

10 Unit 7 Adjustments before preparing final accounts GAAP (Generally Accepted Accounting Principles) recognizes the accrual basis of accounting GAAP (Generally Accepted Accounting Principles) recognizes the accrual basis of accounting So revenue is recognized when it is earned, whether received or not and expenses are recognized when they are incurred whether paid or payable. So revenue is recognized when it is earned, whether received or not and expenses are recognized when they are incurred whether paid or payable. Financial Accounting

11 Unit 7 Adjustments before preparing final accounts Adjustments are more internal transactions and they include: Adjustments are more internal transactions and they include: –Outstanding Expenses –Prepaid expenses –Outstanding Incomes/ Accrued income –Pre-received Incomes Financial Accounting

12 Unit 7 Adjustments before preparing final accounts –Depreciation on assets –Reserve for bad and doubtful debts –Reserve for discount on debtors –Reserve for discount on creditors –Stock used for personal purposes –Closing stock valuation Financial Accounting

13 Unit 7 Adjustments before preparing Final Accounts – Outstanding Expenses Expenses incurred but not paid are regarded as Outstanding Expenses Expenses incurred but not paid are regarded as Outstanding Expenses Outstanding expenses should be considered for calculating profit because they are incurred before the end of accounting period Outstanding expenses should be considered for calculating profit because they are incurred before the end of accounting period The entry in the journal proper is The entry in the journal proper is Financial Accounting

14 Unit 7 Adjustments before preparing Final Accounts – Outstanding Expenses –Concerned Expense account Dr –To Outstanding Expenses account –(Being outstanding expense amount brought into account) The outstanding portion of the expense is added to the concerned expense account in P & L A/c. The outstanding portion of the expense is added to the concerned expense account in P & L A/c. Outstanding expense account is shown as a liability in the balance sheet Outstanding expense account is shown as a liability in the balance sheet Financial Accounting

15 Unit 7 Adjustments before preparing Final Accounts – Outstanding Expenses Example: Salaries payable for the year 2005 Rs.60,000. Actual payment made is Rs.48,000. The salary account shows only Rs.48,000 because it is paid and recorded in cash account. The salary account shows only Rs.48,000 because it is paid and recorded in cash account. So, the outstanding amount is Rs.12,000 (60,000 – 48,000). So, the outstanding amount is Rs.12,000 (60,000 – 48,000). The entry is The entry is Financial Accounting

16 Unit 7 Adjustments before preparing Final Accounts – Outstanding Expenses Salary account Dr 12,000 Salary account Dr 12,000 To outstanding expenses account 12,000 To outstanding expenses account 12,000 (Being salary due to be paid brought into account) (Being salary due to be paid brought into account) In the Profit and Loss Account, the outstanding salary is added and in the balance sheet, the outstanding salary Rs.12,000 appears as liability, since it shows credit balance. In the Profit and Loss Account, the outstanding salary is added and in the balance sheet, the outstanding salary Rs.12,000 appears as liability, since it shows credit balance. Financial Accounting

17 Unit 7 Adjustments before preparing Final Accounts – Prepaid Expenses Meaning: Prepaid expenses are those which are paid in advance in the current accounting period even though they relate to the next accounting period. Meaning: Prepaid expenses are those which are paid in advance in the current accounting period even though they relate to the next accounting period. –Eg: Taxes paid in advance, Rent paid in advance, Insurance premium paid in advance Adjusting Entry in the Journal Proper: Adjusting Entry in the Journal Proper: Prepaid expenses account Dr Prepaid expenses account Dr Financial Accounting

18 Unit 7 Adjustments before preparing Final Accounts – Prepaid Expenses To Concerned expense account To Concerned expense account Treatment in Accounts: Treatment in Accounts: –Deduct prepaid portion of the expense from the concerned expense account in the final accounts. –Prepaid portion of the expense is shown as an asset in the balance sheet, since it shows debit balance. Financial Accounting

19 Unit 7 Adjustments before preparing Final Accounts – Prepaid Expenses Example: Insurance premium paid from 1-4-2005 to 31-3-2006, Rs.18,000. Example: Insurance premium paid from 1-4-2005 to 31-3-2006, Rs.18,000. –The accounting year is from 1-1-2005 to 31-12-2005. –Therefore the prepaid portion is for 3 months – Jan, Feb and Mar 2006 – Rs.4,500 (18000 X 3 / 12) –The Adjusting Entry: Financial Accounting

20 Unit 7 Adjustments before preparing Final Accounts – Prepaid Expenses Prepaid Insurance A/c Dr 4,500 Prepaid Insurance A/c Dr 4,500 To Insurance Premium A/c 4,500 To Insurance Premium A/c 4,500 Treatment: Treatment: –A. Deduct the prepaid portion of insurance Rs.4,500 from Insurance paid in P & L Account –Show the prepaid portion of insurance as an asset in the Balance Sheet Financial Accounting

21 Unit 7 Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income Meaning: Accrued Income is an income which is earned but not received. Meaning: Accrued Income is an income which is earned but not received. Adjusting Entry Adjusting Entry –Accrued Income A/ c Dr To Concerned Income A/c Financial Accounting

22 Unit 7 Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income Accounting Treatment: Accounting Treatment: –Add the outstanding portion to the concerned item of income in Final accounts –Show the accrued portion of income as an asset in the Balance Sheet Financial Accounting

23 Unit 7 Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income Example: –Rent receivable for 12 months 1-1- 2006 to 31-12-2006 is Rs.72,000 –Rent received for only 9 months up to 30th September, 2006 is Rs.54,000 –Rent accrued but not received before 31-12-2006 is Rs.18,000 Financial Accounting

24 Unit 7 Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income –The adjusting entry is Outstanding Rent account Dr 18,000 Outstanding Rent account Dr 18,000 To Rent account 18,000 To Rent account 18,000 Treatment is Treatment is Financial Accounting

25 Unit 7 Adjustments before preparing Final Accounts – Income Received In Advance –Add Rs.18,000 to rent received account Rs.54,000 to make it Rs.72,000 in P & L Account. –Show the outstanding rent account as an asset in the Balance Sheet on 31-12-2006. Financial Accounting

26 Unit 7 Adjustments before preparing Final Accounts – Income Received In Advance Meaning : Income actually received in the current accounting period but relating to the next accounting period Meaning : Income actually received in the current accounting period but relating to the next accounting period Example: Rent received in advance. Example: Rent received in advance. Adjusting entry in Journal Proper: Adjusting entry in Journal Proper: –Concerned Income account Dr –To Pre-received Income account Financial Accounting

27 Unit 7 Adjustments before preparing Final Accounts – Income Received In Advance Accounting Treatment: Accounting Treatment: –Deduct pre-received portion of the income from the concerned item of income in final accounts. –Show the pre- received amount of the income as a liability in the Balance Sheet Financial Accounting

28 Unit 7 Adjustments before preparing Final Accounts – Income Received In Advance Example: Example: –Royalty actually received during the year is Rs.1,25,000 –Royalty relating to next year included in the above is Rs.25,000 –Adjusting Entry Royalty account Dr 25,000 Royalty account Dr 25,000 Financial Accounting

29 Unit 7 Adjustments before preparing Final Accounts – Income Received In Advance To Pre-received Income account 25,000 To Pre-received Income account 25,000 Treatment in Accounts: Treatment in Accounts: –Deduct Rs.25,000 from Rs.1,25,000 in the Profit and Loss Account –Show Rs.25,000 as a liability in the Balance Sheet in the Balance Sheet Financial Accounting

30 Unit 7 Adjustments before preparing Final Accounts – Depreciation on assets Meaning : Depreciation is reduction in the value of an asset as a result of wear and tear or constant use. It is a loss and charged against profit of the business. Meaning : Depreciation is reduction in the value of an asset as a result of wear and tear or constant use. It is a loss and charged against profit of the business. Accounting Entries : Accounting Entries : –Depreciation account Dr – To Concerned Asset account –Profit and Loss Account Dr – To Depreciation account Financial Accounting

31 Unit 7 Adjustments before preparing Final Accounts – Depreciation on assets Accounting Treatment: Accounting Treatment: –Charge depreciation against gross profit in P & L Account –Deduct depreciation amount from the concerned asset account if depreciation appears outside T.B. Methods of Depreciation Methods of Depreciation –Fixed Installment Method –Reducing Balancing Method Financial Accounting

32 Unit 7 Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts Meaning: Bad Debts are the debts which can not be recovered and represent total loss to the business. Meaning: Bad Debts are the debts which can not be recovered and represent total loss to the business. Accounting Entries: Accounting Entries: –Bad Debts account Dr –To Sundry debtor’s account –(Being bad debts taken to account) –Profit and Loss Account Dr Financial Accounting

33 Unit 7 Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts – To Bad debts account – (Being bad debts charged to P&L account) Occurrence of Bad debts: Occurrence of Bad debts: –Case I : Bad debts deducted from debtors and brought to the account and trial balance. –Case II: Bad debts are accounted after the preparation of trial balance Financial Accounting

34 Unit 7 Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts Accounting Adjustment: Accounting Adjustment: –First case: Transfer the bad debts to P&L Account and Sundry Debtors need not be reduced. –Second Case: Transfer the bad debts to P&L Account and Transfer the bad debts to P&L Account and Reduce the sundry debtors by the amount of bad debts. Reduce the sundry debtors by the amount of bad debts. Financial Accounting

35 Unit 7 Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts –Third Case: If there is any reserve for bad debts maintained, then bad debts should be set off against such reserve and later if there is uncovered bad debts, then charge them against P&L Account Financial Accounting

36 Unit 7 Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts Purpose of Provision for Bad Debts: To cover the risk of bad debts that may arise in future. It is a charge against profits of the business. This is also known as Reserve for bad and doubtful debts. Purpose of Provision for Bad Debts: To cover the risk of bad debts that may arise in future. It is a charge against profits of the business. This is also known as Reserve for bad and doubtful debts. Adjusting Entries: Adjusting Entries: Financial Accounting

37 Unit 7 Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts Profit and Loss Account Dr Profit and Loss Account Dr To Reserve for Bad Debts account To Reserve for Bad Debts account (Being provision made for bad and doubtful debts) (Being provision made for bad and doubtful debts) Reserve for Bad Debts account Dr Reserve for Bad Debts account Dr To Bad debts account To Bad debts account (Being bad debts incurred set off against RBD) (Being bad debts incurred set off against RBD) Financial Accounting

38 Unit 7 Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts Accounting treatment: Accounting treatment: –Charge P & L Account by the amount of RBD to the extent it is needed. –Show the balance of RBD as liability in the Balance Sheet OR deduct RBD from Good Debtors. Financial Accounting

39 Unit 7 Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts –Deduct bad debts from RBD in case there is adequate balance is available –The amount to be transferred to P&L Account towards RBD is calculated by applying the formula Financial Accounting

40 Unit 7 Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts New RBD required – (Old RBD + Bad Debts ) New RBD required – (Old RBD + Bad Debts ) Calculation of RBD: RBD is calculated at a fixed percentage of good debtors and basing on the past experience of business man. Calculation of RBD: RBD is calculated at a fixed percentage of good debtors and basing on the past experience of business man. Good debtors = Total debtors – Bad debts unadjusted. (As given outside the trial balance) Good debtors = Total debtors – Bad debts unadjusted. (As given outside the trial balance) Financial Accounting

41 Unit 7 Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts Illustration: Illustration: –Debtors on 1-1-2005 Rs.2,00,000; RBD balance on 1-1-2005 : Rs.10,000; Bad debts incurred during the year 2005 Rs.9,000; RBD should be at 5% on debtors. Debtors on 31-12-2005 Rs.3,00,000. Draw ledger accounts and show in the balance sheet. –Answer: Financial Accounting

42 Unit 7 Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts Reserve for Bad and Doubtful Debts Account Rs Rs Rs Rs To Bad debts(31-12- 05) To balance c/d(31-12- 05) 9,000 9,000 15,000 15,000 24,000 24,000 By balance b/d (1-1- 2005) By P & L A/c (31-12- 2005) By balance b/d( 1-1- 2006) 10,000 10,000 14,000 14,000 24,000 24,000 15,000 15,000 Financial Accounting

43 Unit 7 Reserve for Bad and Doubtful Debts (Continued) I Method I Method Balance Sheet for the year ending 31-12-2004 Balance Sheet for the year ending 31-12- 2005 Liabilities Assets Liabilities Assets Liabilities Assets Liabilities Assets R B D 10,000 Sundry Debtors 2,00,000 R B D 15,000 Sundry Debtors 3,00,000 R B D 10,000 Sundry Debtors 2,00,000 R B D 15,000 Sundry Debtors 3,00,000 II Method II Method Balance Sheet for the year ending 31-12-2004 Balance Sheet for the year ending 31-12-2005 Liabilities Assets Liabilities Assets S.Debtors 2,00,000 Debtors 3,00,000 Less RBD 10,000 Less RBD 15,000 1,90,000 2,85,000 Financial Accounting

44 Unit 7 7.2.7. Adjustments before preparing Final Accounts - Reserve for Discount on Debtors Nature and purpose of Discount Nature and purpose of Discount Discounts are of two types – Trade discount and cash discount. Discounts are of two types – Trade discount and cash discount. Trade discount is allowed to retain the customer ship and does not get reflected in the accounts Trade discount is allowed to retain the customer ship and does not get reflected in the accounts Financial Accounting

45 Unit 7 7.2.7. Adjustments before preparing Final Accounts - Reserve for Discount on Debtors Cash discount is to encourage prompt and regular payment of cash by the customers to whom goods are sold on credit. It appears in Cash book. Discount allowed is business expense and discount received is business income. Cash discount is to encourage prompt and regular payment of cash by the customers to whom goods are sold on credit. It appears in Cash book. Discount allowed is business expense and discount received is business income. Need for Reserve for Discount on Debtors: Need for Reserve for Discount on Debtors: To cover the risk of discount allowable to debtors To cover the risk of discount allowable to debtors Financial Accounting

46 Unit 7 7.2.7. Adjustments before preparing Final Accounts - Reserve for Discount on Debtors Accounting Entries: Accounting Entries: When reserve for discount on debtors is created: P & L Account Dr To Reserve for discount on Drs a/c To Reserve for discount on Drs a/c When discount is allowed to Debtors: Discount allowed account Dr To Sundry debtor’s a/c To Sundry debtor’s a/c When Discount on debtors is set off against Reserve: Reserve for Discount A/c Dr To discount allowed a/c To discount allowed a/c Financial Accounting

47 Unit 7 7.2.7. Adjustments before preparing Final Accounts - Reserve for Discount on Debtors Accounting Treatment: Accounting Treatment: Show Reserve for discount on debtors either as a liability in the balance sheet or deduct the same from good debtors on the asset side of the balance sheet. The later is the popular practice Show Reserve for discount on debtors either as a liability in the balance sheet or deduct the same from good debtors on the asset side of the balance sheet. The later is the popular practice Financial Accounting

48 Unit 7 7.2.7. Adjustments before preparing Final Accounts - Reserve for Discount on Debtors Important Note: Important Note: Reserve for discount on debtors is computed on the amount of debtors minus new RBD, at a fixed percentage. Reserve for discount on debtors is computed on the amount of debtors minus new RBD, at a fixed percentage. Any excess reserve is present, transfer it to P & L Account as income. Any excess reserve is present, transfer it to P & L Account as income.

49 Unit 7 7.2.8.Adjustments before preparing Final Accounts – Reserve for Discount on Creditors Nature and purpose: Discounts are allowed by creditors when we pay them promptly and in time. Discount is thus received and treated as income. Anticipating such income, a reserve is maintained in the business. Nature and purpose: Discounts are allowed by creditors when we pay them promptly and in time. Discount is thus received and treated as income. Anticipating such income, a reserve is maintained in the business. Financial Accounting

50 Unit 7 7.2.8.Adjustments before preparing Final Accounts – Reserve for Discount on Creditors Accounting entries Accounting entries 1. Whenever discount is received: Creditors Account Dr To Discount received account To Discount received account 2. When Discount received is transferred to P&L: Discount received a/c Dr (Reserve for discount is not available) To P & L Account (Reserve for discount is not available) To P & L Account 3. When Discount received is set off against Discount received a/c Dr Reserve for Discount on Debtors : To Reserve for discount on creditors a/c Reserve for Discount on Debtors : To Reserve for discount on creditors a/c 4. When Reserve is created in P&L A/c : Reserve for Discount on Creditors a/c Dr To Profit and Loss Account To Profit and Loss Account Financial Accounting

51 Unit 7 7.2.8.Adjustments before preparing Final Accounts – Reserve for Discount on Creditors Accounting Treatment Accounting Treatment 1. Reserve for discount on creditors shows debit balance and it is an asset. But it is deducted from the amount of creditors on the liability side of balance sheet. 2. The amount of reserve for discount on creditors is computed basing on total creditors. Financial Accounting

52 Unit 7 7.2.9. Adjustments before preparing Final Accounts – Stock used for personal purposes Situation: Situation: Goods of the business might be used for personal purpose of the proprietor and this is not sale transaction. Goods of the business might be used for personal purpose of the proprietor and this is not sale transaction. The stock of goods in the business is reduced, but cash is not received in return. The stock of goods in the business is reduced, but cash is not received in return. Financial Accounting

53 Unit 7 7.2.9. Adjustments before preparing Final Accounts – Stock used for personal purposes Accounting Treatment Accounting Treatment This transaction is treated as similar to drawings for personal purposes. This transaction is treated as similar to drawings for personal purposes. The cost of goods so used is either deducted from the purchases or shown on the credit side of Trading account. The cost of goods so used is either deducted from the purchases or shown on the credit side of Trading account. The capital of the proprietor is reduced by the amount of drawings of goods in the balance sheet. The capital of the proprietor is reduced by the amount of drawings of goods in the balance sheet. Financial Accounting

54 Unit 7 7.2.9. Adjustments before preparing Final Accounts – Stock used for personal purposes Accounting entries Accounting entries 1. When goods are used for personal purpose: Drawings account Dr To goods account / purchases account 2. When drawings are transferred to capital A/c: Capital account Dr To drawings account To drawings account Financial Accounting

55 Unit 7 7.2.10.Adjustments before preparing Final Accounts – Closing Stock Meaning: Meaning: Closing stock is the stock of goods - finished, semi-finished or raw material – at the end of accounting period, lying unsold. Closing stock is the stock of goods - finished, semi-finished or raw material – at the end of accounting period, lying unsold. Its valuation is important to calculate trading profit / loss. Its valuation is important to calculate trading profit / loss. Financial Accounting

56 Unit 7 7.2.10.Adjustments before preparing Final Accounts – Closing Stock Closing stock does not appear in the trial balance because the closing stock is taken only after the closing of books of accounts. Closing stock does not appear in the trial balance because the closing stock is taken only after the closing of books of accounts. Valuation Valuation Financial Accounting

57 Unit 7 7.2.10.Adjustments before preparing Final Accounts – Closing Stock Closing stock is valued either at cost price at which it was purchased or at market price on the date of valuation which ever is lower. This is as per conservatism principle. Closing stock is valued either at cost price at which it was purchased or at market price on the date of valuation which ever is lower. This is as per conservatism principle. Accounting treatment Accounting treatment 1. To bring closing stock into account, the entry is Closing Stock A/c Dr Closing Stock A/c Dr To Trading Account To Trading Account Financial Accounting

58 Unit 7 7.2.10.Adjustments before preparing Final Accounts – Closing Stock 2. Closing stock is taken to the credit side of Trading account 3. Closing stock being an asset appears on the asset side of balance sheet. 4. Closing stock of the current year automatically becomes opening stock of the coming year. Financial Accounting

59 Unit 7 7.2.10.Adjustments before preparing Final Accounts – Closing Stock 5. Opening stock shows debit balance and it is transferred to Trading account to close it. The entry is Trading Account Dr Trading Account Dr To Opening stock account. To Opening stock account. Financial Accounting

60 Unit 7 7.3. Trading Account Purpose of Trading Account: Purpose of Trading Account: Trading Account gives the over all result of trading, i.e.., purchasing and selling of goods. Trading Account gives the over all result of trading, i.e.., purchasing and selling of goods. It takes into account the cost of goods sold and the value at which they have been sold It takes into account the cost of goods sold and the value at which they have been sold If the sale value is more than cost of goods sold, it is gross profit. Otherwise it is gross loss If the sale value is more than cost of goods sold, it is gross profit. Otherwise it is gross loss It is prepared by both Manufacturing and trading organizations. It is prepared by both Manufacturing and trading organizations. Trading A/c is a revenue account. Trading A/c is a revenue account. Closing entries are: Closing entries are: 1. Trading Account Dr To Opening stock a/c To Opening stock a/c To Purchases etc., To Purchases etc., (Being trade expenses, op.stock etc transferred to Trading A/c) Trading A/c) 2. Sales a/c Dr Closing Stock a/c Dr Closing Stock a/c Dr To Trading Account To Trading Account (Being closing stock and sales transferred to Trading A/c) 3. Trading Account Dr To P & L Account To P & L Account (Being gross profit transferred to P&L Account) Debit Rs Credit (Rs) Credit (Rs) To Opening Stock To Purchases less Purchase returns less Purchase returns less stock personally used stock personally used To wages To carriage inwards To local tax paid To royalty paid on raw material extraction To Freight, cartage To customs & import duty To gas electricity & water To other direct expenses To Gross profit transferred to Profit and Loss Account By Sales less sales returns By Closing stock By gross loss transferred to Profit and Loss Account Form of Trading Account Financial Accounting

61 Unit 7 7.4. Preparation of Trading Account Steps to prepare Trading Account Steps to prepare Trading Account 1. Take Opening stock of goods on the debit side and Closing stock to the credit side of Trading Account 2. Identify all expenses of trade, purchase and direct expenses and show them on debit side Financial Accounting

62 Unit 7 7.4. Preparation of Trading Account 3. Give effect to adjustments like outstanding and prepaid items and drawings of goods etc.,.to the relevant accounts 4. Show sales less returns and closing stock on the credit side of Trading account Financial Accounting

63 Unit 7 7.4. Preparation of Trading Account 5. If there is excess of credit, treat it as Gross Profit and transfer it to P&L Account 6. If there is excess of debit, over credit, treat it as Gross Loss and transfer it to P & L Account Illustration Financial Accounting

64 Unit 7 From the following balances extracted from Trial balance, prepare Trading Account. The closing stock at the end of the period is Rs56000 From the following balances extracted from Trial balance, prepare Trading Account. The closing stock at the end of the period is Rs56000 Financial Accounting

65 Unit 7 Particulars Amount in Rs. Stock on 1-1-2004 Returns inwards Returns outwards PurchasesDebtorsCreditors Carriage inwards Carriage outwards Import duty on materials received from abroad Clearing charges Rent of business shop Royalty paid to extract materials Fire insurance on stock Wages paid to workers Office salaries Cash discount Gas, electricity and water Sales 70700 70700 2000 2000 3000 3000 102000 102000 56000 5600045000500040006000700012000100002000800010000 1000 10004000250000 Financial Accounting

66 Unit 7 TRADING ACCOUNT FOR THE YEAR ENDING - - - - Particulars Rs RsParticulars To stock on 1-1-2004 To Purchases 102000 Less Returns Outwards 3000 To Carriage inwards To import duty To Clearing charges To Royalty To Fire Insurance To Wages To Gas, electricity, water To P & L Account (GP) 70700990005000600070001000020008000400091300 By sales 250000 Less Returns Inwards 3000 By Closing stock 2470056000 303000303000 Solution Cr Dr

67 Unit 7 7.6. Profit and Loss Account Nature and Salient features: Nature and Salient features: P&L Account is a revenue account, showing all revenue expenses and incomes P&L Account is a revenue account, showing all revenue expenses and incomes The result is net profit or net loss, transferred to Capital account The result is net profit or net loss, transferred to Capital account Office, administrative, selling and distribution expenses are transferred to debit of P&L Account Office, administrative, selling and distribution expenses are transferred to debit of P&L Account Financial Accounting

68 Unit 7 7.6. Profit and Loss Account Revenue losses such as bad debts, depreciation, loss on sale of certain assets, loss as a result of calamities are also taken to debit side of the account. Revenue losses such as bad debts, depreciation, loss on sale of certain assets, loss as a result of calamities are also taken to debit side of the account. All incomes such as rent received, interest received, discount received etc., are taken to credit side. All incomes such as rent received, interest received, discount received etc., are taken to credit side. Reserves and provisions are charged against profit by taking them on debit side. Reserves and provisions are charged against profit by taking them on debit side. Financial Accounting

69 Unit 7 7.6. Profit and Loss Account Adjustments in the nature of outstanding, prepaid, accrued, incomes received in advance etc., are incorporated. Adjustments in the nature of outstanding, prepaid, accrued, incomes received in advance etc., are incorporated. The Transferring entries are: The Transferring entries are: 1. P & L Account Dr 1. P & L Account Dr To All expenses, reserves & Losses a/c To All expenses, reserves & Losses a/c (Being all revenue expenses, provisions etc., transferred to P&L A/C) (Being all revenue expenses, provisions etc., transferred to P&L A/C) Financial Accounting

70 Unit 7 7.6. Profit and Loss Account 2. All Incomes Accounts Dr To P & L Account To P & L Account (Being incomes of revenue in nature are taken to P & L account) (Being incomes of revenue in nature are taken to P & L account) 3. P & L Account Dr To Capital Account To Capital Account (Being Net profit transferred to Capital Account) (Being Net profit transferred to Capital Account) Financial Accounting

71 Unit 7 Dr PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING --- Cr r Particulars Rs RsParticulars To Trading Account (GL) To Salaries + Out standing –Prepaid salaries as per adjustments To Rent of the premises To Travelling expenses To Rates and Taxes To Printing and stationery To Postage and Telegram To Telephone charges To Insurance –Prepaid amount as per adjustment To Interest paid To Discount allowed To Sundry expenses To Advertisement To Commission To Carriage outwards To Bad Debts To Reserve for Bad debts To Reserve for discount on Debtors To Depreciation To Legal charges To Audit fee To Interest on Capital To Capital Account (Net Profit) By Trading account (GP) By Interest earned + Accrued interest as per adjustments By Commission earned By discount earned By Rent received By Bad debts recovered By Interest on drawings By Reserve for discount on Creditors By Dividends received By Royalty Received By Capital Account( Net Loss) FORMAT Financial Accounting

72 Unit 7 Illustration The following Trial Balance is extracted from the books of a merchant on 31-12-2004. Particulars Rs Rs Furniture and fittings Motor Vehicles Buildings Capital Account Bad Debts Provision for Bad debts Sundry Debtors Sundry Creditors Stock on 1-1-2004 PurchasesSales Bank Over Draft Sales Returns Purchase Returns Advertising Interest on Bank Over Draft CommissionCash Taxes and Insurance General Expenses Salaries6406250750012500125200380025003460547515450285020012545011837565012507823300 Financial Accounting

73 Unit 7 The following adjustments are to be made. The following adjustments are to be made. Stock in hand on 31-12-2004 was Rs3250 Stock in hand on 31-12-2004 was Rs3250 Depreciate Buildings at the rate of 5%, Furniture and fittings @ 10% and Motor Vehicles @ 20%. Depreciate Buildings at the rate of 5%, Furniture and fittings @ 10% and Motor Vehicles @ 20%. Rs.85 is due for interest on bank overdraft. Rs.85 is due for interest on bank overdraft. Financial Accounting

74 Unit 7 Salaries of Rs.300 and taxes Rs.120 are outstanding. Salaries of Rs.300 and taxes Rs.120 are outstanding. Insurance amounting to Rs.100 is prepaid Insurance amounting to Rs.100 is prepaid One-third of the commission received is in respect of work to be done next year One-third of the commission received is in respect of work to be done next year Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors. Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors. Prepare Trading Account and Profit and Loss Account. Prepare Trading Account and Profit and Loss Account. Financial Accounting

75 Unit 7 Dr Trading Account for the year ending 31-12-2004 Cr Particulars Rs RsParticulars To Stock on1-1-2004 To Purchases 5475 Less returns 125 To P & L A/C (GP) 346053509690 By Sales 15450 Les Returns 200 By Closing Stock 152503250 Total18500Total 1850 0 Profit and Loss Account for the year ending 31-12-2004 Dr CrParticulars Rs RsParticulars To Salaries 3300 Add Outstanding 300 To Advertising To Interest on OD 118 Add Outstanding Int 85 To Taxes and Insurance 1250 Add Out standing tax 120 1370 1370 Less Prepaid Insurance 100 To General expenses To bad debts To RBD(New) 370 Less old RBD balance 100 To Depreciation: On Bldgs @ 5% 375 On Bldgs @ 5% 375 On FF @ 10% 64 On FF @ 10% 64 On M Vehicles @20% 1250 On M Vehicles @20% 1250 To Capital Account (NP) 3600450203127078212527016891551 By Trading Account (GP) By Commission 375 Less Pre-received 125 9690 250 250 Total9940Total9940 Note: 70

76 Unit 7 Note : Sundry Debtors are Rs.3800 and there have been bad debts outside TB Rs100. The good debtors are Rs.3700. The new RBD is 10% of 3700, i.e.Rs370. The old RBD unspent is Rs100 (200 -100). Therefore RBD to be charged against profit is Rs270 Financial Accounting

77 Unit 7 7.7. Balance Sheet Meaning: Meaning: Balance Sheet is a statement of assets and liabilities of a business as on a certain date Balance Sheet is a statement of assets and liabilities of a business as on a certain date Assets are stated on right hand side and liabilities on the left hand side, in case Balance Sheet is prepared horizontally. Assets are stated on right hand side and liabilities on the left hand side, in case Balance Sheet is prepared horizontally. Financial Accounting

78 Unit 7 7.7. Balance Sheet If balance sheet is prepared vertically, assets are mentioned first (Application of funds) and later the liabilities are mentioned (Sources of funds) If balance sheet is prepared vertically, assets are mentioned first (Application of funds) and later the liabilities are mentioned (Sources of funds) The assets and liabilities are arranged in the liquidity order, i.e.., more liquid assets come first and those that can not be readily converted come next. The assets and liabilities are arranged in the liquidity order, i.e.., more liquid assets come first and those that can not be readily converted come next.

79 Unit 7 7.7. Balance Sheet A balance sheet of a company form of organization, assets and liabilities are arranged on permanency order, i.e.., assets, which are more permanent come first and less permanent next. Format of a Balance Sheet is a A balance sheet of a company form of organization, assets and liabilities are arranged on permanency order, i.e.., assets, which are more permanent come first and less permanent next. Format of a Balance Sheet is a Financial Accounting

80 Unit 7 7.7. Balance Sheet BALANCE SHEET OF -- - - - - - - - - - -FOR THE YEAR ENDING - - - - - - - - - - Capital and Liabilities Rs Rs Assets Assets Rs Rs Sundry Creditors Less Reserve for Discount on Creditors Creditors Bills Payable Bank Over Draft Loans Borrowed Outstanding Expenses Pre-received Incomes Capital (Opening) Add Additions to capital Add interest on capital if any Add Net profit as per P&L a/c Less personal drawings Less Net loss as per P&L A/C Cash in hand Cash at Bank Land and Building Add Additions if any Less depreciation Plant and Machinery less depreciation Furniture and Fixtures less depreciation Sundry debtors Less Bad debts out side Trial Balance Less Reserve for Bad Debts Less Reserve for discount on Debtors Bills Receivable Loans and advances given to others + Interest outstanding Investments + outstanding income on investments Other outstanding incomes Pre-paid expenses Closing stock TotalTotal

81 Unit 7 7.8. Preparation of Balance Sheet Guidelines to prepare Balance Sheet 1. Check whether the given Trial Balance tallies or not. If it does not tally, make a note of the amount of difference. Financial Accounting

82 Unit 7 7.8. Preparation of Balance Sheet 2. Identify assets from the debit side of Trial balance and arrange them in liquidity order on the assets side of B/S 3. Identify liabilities from the credit side of Trial Balance and arrange them on the liabilities side of Balance Sheet Financial Accounting

83 Unit 7 7.8. Preparation of Balance Sheet 4. Note those items of adjustments, which are given out side Trial Balance. 5. Every adjustment should be recorded at two places, either Trading account or Profit and Loss Account and Balance Sheet. Invariably, an adjustment is recorded in Balance sheet. Financial Accounting

84 Unit 7 7.8. Preparation of Balance Sheet For Example: For Example: Closing stock given in the adjustments, will be first recorded in the trading a/c and later on the asset’s side of balance sheet. Closing stock given in the adjustments, will be first recorded in the trading a/c and later on the asset’s side of balance sheet. Outstanding salaries first are added with salaries in P&L account and then on the liabilities side of balance sheet. Outstanding salaries first are added with salaries in P&L account and then on the liabilities side of balance sheet. Financial Accounting

85 Unit 7 7.8. Preparation of Balance Sheet 6. The difference in the trial balance, if any, should match with the difference between asset and liabilities side of 6. The difference in the trial balance, if any, should match with the difference between asset and liabilities side of balance sheet and accordingly interpret and incorporate. At the end, the balance sheet should tally. ILLUSTRATION: ILLUSTRATION: Financial Accounting

86 Unit 7 Prepare Balance Sheet from the following Trial Balance from the books of a merchant on 31-12-2004 Particulars Rs Rs Furniture and fittings Motor Vehicles Buildings Capital Account Bad Debts Provision for Bad debts Sundry Debtors Sundry Creditors Stock on 1-1-2004 PurchasesSales Bank Over Draft Sales Returns Purchase Returns Advertising Interest on Bank Over Draft CommissionCash Taxes and Insurance General Expenses Salaries6406250750012500125200380025003460547515450285020012545011837565012507823300

87 Unit 7 The following adjustments are to be made. The following adjustments are to be made. Stock in hand on 31-12-2004 was Rs3250 Stock in hand on 31-12-2004 was Rs3250 Depreciate Buildings at the rate of 5%, Furniture and fittings @ 10% and Motor Vehicles @ 20%. Depreciate Buildings at the rate of 5%, Furniture and fittings @ 10% and Motor Vehicles @ 20%. Rs.85 is due for interest on bank overdraft. Rs.85 is due for interest on bank overdraft. Salaries of Rs300 and taxes Rs.120 are outstanding. Salaries of Rs300 and taxes Rs.120 are outstanding. Financial Accounting

88 Unit 7 Insurance amounting to Rs.100 is prepaid Insurance amounting to Rs.100 is prepaid One-third of the commission received is in respect of work to be done next year One-third of the commission received is in respect of work to be done next year Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors. Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors. Financial Accounting

89 Unit 7 7.8. Preparation of Balance Sheet continued BALANCE SHEET OF THE MERCHANT AS ON 31-12-2004 BALANCE SHEET OF THE MERCHANT AS ON 31-12-2004 Solution Capital and Liabilities Rs Rs Assets Assets Rs Rs Sundry Creditors Bank Over Draft 2850 Add interest due 85 Commission received in advance Outstanding Taxes Outstanding Salaries Capital 12500 Add Net Profit 1551 2500293512512030014051Cash Building 7500 Less Depreciation 375 Furniture and Fixtures 640 Less Depreciation 64 Motor Vehicle 6250 Less Depreciation 1250 Sundry Debtors 3800 Less bad debts as per Adjustments 100 Balance 3700 Balance 3700 Less Reserve for Bad Debts(New) 370 Closing Stock Pre-Paid Insurance 6507125576500033303250100 Total20031Total20031

90 Unit 7 NOTE: Every adjustment given outside Trial Balance finds place in two accounts –Trading account / Profit and Loss Account and invariably in Balance Sheet. NOTE: Every adjustment given outside Trial Balance finds place in two accounts –Trading account / Profit and Loss Account and invariably in Balance Sheet. Financial Accounting


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