Presentation on theme: "FINAL ACCOUNTS vis-à-vis Financial Statements Samir K Mahajan."— Presentation transcript:
FINAL ACCOUNTS vis-à-vis Financial Statements Samir K Mahajan
CLASSIFICATION OF FINAL ACCOUNT Trial balance proves the arithmetical accuracy of the business transactions, but it is not the end. The businessman is interested in knowing whether the business has resulted in profit or loss and what the financial position of the business is at a given period. In short, he wants to know the profitability and the financial soundness of the business. The trader can ascertain these by preparing the final accounts. The final accounts are prepared at the end of the year from the trial balance. Hence the trial balance is said to be the connecting link between the ledger accounts and the final accounts. The basic objectives of preparing financial statements are : (a) To present a true and fair view of the financial performance of the business; (b) To present a true and fair view of the financial position of the business; and For this purpose, the firm usually prepares the following financial statements: 1. Trading and Profit and Loss Account 2. Balance Sheet Trading and Profit and Loss account, also known as Income statement, shows the financial performance in the form of profit earned or loss sustained by the business. Balance Sheet shows financial position in the form of assets, liabilities and capital. These are prepared on the basis of trial balance and additional information, if any.
TRADING AND PROFIT AND LOSS ACCOUNT Trading and Profit and Loss account is prepared to determine the profit earned or loss sustained by the business enterprise during the accounting period. It is basically a summary of revenues and expenses of the business and calculates the net figure termed as profit or loss. Profit is revenue less expenses. If expenses are more than revenues, the figure is termed as loss. Trading and Profit and Loss account summarises the performance for an accounting period. It is achieved by transferring the balances of revenues and expenses to the trading and profit and loss account from the trial balance. Trading and Profit and Loss account is also an account with Debit and Credit sides. It can be observed that debit balances (representing expenses) and losses are transferred to the debit side of the Trading and a Profit and Loss account and credit balance (representing revenues/gains) are transferred to its credit side.
Concept of Gross Profit and Net Profit The trading and profit and loss can be seen as combination of two accounts, viz. Trading account and Profit and Loss account. The trading account or the first part ascertains the gross profit and profit and loss account or the second part ascertains net profit.
TRADING ACCOUNT The trading account ascertains the result from basic operational activities of the business. The basic operational activity involves the manufacturing, purchasing and selling of goods. It is prepared to ascertain whether the selling of goods and/or rendering of services to customers have proved profitable for the business or not. Trading account ascertain gross profit or gross loss. Gross Profit = Sales – (Purchases + Direct Expenses) The gross profit or the gross loss is transferred to profit and loss account.
ITEMS APPEARING IN THE DEBIT SIDE OF TRADING ACCOUNT o Opening stock: Stock on hand at the beginning of the year is termed as opening stock. The closing stock of the previous accounting year is brought forward as opening stock of the current accounting year. In the case of new business, there will not be any opening stock. o Purchases: Purchases made during the year, includes both cash and credit purchases of goods. Purchase returns must be deducted from the total purchases to get net purchases. Direct Expenses: Direct expenses means all expenses directly connected with the manufacture, purchase of goods and bringing them to the point of sale. Some of the direct expenses are: i. Wages: It means remuneration paid to workers. ii. Carriage (Freight or cartage ) or carriage inwards: It means the transportation charges paid to bring the goods from the place of purchase to the place of business. iii. Octroi Duty: Amount paid to bring the goods within the municipal limits. iv. Customs duty, dock dues, clearing charges, import duty etc. These expenses are paid to the Government on the goods imported. v. Factory rent vi. Other expenses :Fuel, power, lighting charges, oil, grease, waste related to production and packing expenses. Trading Account contd.
ITEMS APPEARING IN THE CREDIT SIDE OF TRADING ACCOUNT o Sales: This includes both cash and credit sale made during the year. Net sales is derived by deducting sales return from the total sales. o Closing stock: Closing stock is the value of goods which remain in the hands of the trader at the end of the year. It does not appear in the trial balance. It appears outside the trial balance. (As it appears outside the trial balance, first it will be recorded in the credit side of the trading account and then shown in the assets side of the balance sheet). BALANCING OF TRADING ACCOUNT The difference between the two sides of the Trading Account, indicates either Gross Profit or Gross Loss. If the credit side total is more, the difference represents Gross Profit. On the other hand, if the total of the debit side is more, the difference represents Gross Loss. o The Gross Profit or Gross Loss is transferred to Profit & Loss Account. Trading Account contd.
Format of Trading Account DrTrading Account for the year ending 31st March ………….Cr ParticularsRs To Opening Stock To Stock: Raw materials Work in progress Semi-finished goods Finished goods XXX By Sales Less: Returns inwards By Closing stock By Gross Loss c/d (Transferred to P&L A/C) XXX To Purchases Less: Returns outward or purchase return Less: goods taken away by proprietor Less: goods given as free samples Less goods: given as charity To direct wages or manufacturing wages To Freight or carriage inwards or purchase carriage To octroi duty or local taxes To import duties, customs, To Clearing charge, landing charges, Dock duties To power (factory) To fuels To coal, gas, water To heating, lighting To manufacturing expenses To packing expenses to assembling expenses To royalty To gross profit c/d (Transferred to P&L A/C) XXX xxx
If gross profit DateParticularL.F.Debit Amount (Rs) Credit Amount (Rs) 2013 January 1 Trading A/c Dr To profit and loss account (Gross Profit transferred to Profit and loss A/c) xxx CLOSING ENTRIES OF TRADING ACCOUNT Like ledger accounts, trading account will be closed by transferring the gross profit or gross loss to the profit and loss account. If gross loss DateParticularL.F.Debit Amount (Rs) Credit Amount (Rs) 2013 January 1 Profit and loss A/c Dr To Trading A/C (Gross Loss transferred to Profit and loss A/c) xxx
PROFIT AND LOSS ACCOUNT After calculating the gross profit or gross loss the next step is to prepare the profit and loss account. To earn net profit a trader has to incur many expenses apart from those spent for purchases and manufacturing of goods. If such expenses are less than gross profit, the result will be net profit. When total of all these expenses are more than gross profit the result will be net loss. The aim of profit and loss account is to ascertain the net profit earned or net loss suffered during a particular period. Net Profit = Gross profit + Other incomes – Indirect Expenses
ITEMS APPEARING IN THE DEBIT SIDE 0F PROFIT AND LOSS ACCOUNT Those expenses which are chargeable to the normal activities of the business are recorded in the debit side of profit and loss account. They are termed as indirect expenses which include: Office and Administrative Expenses :Expenses incurred for the functioning of an office such as office salaries, office rent, godown rent, municipal rates and taxes office lighting, printing and stationery, postages, telephone charges office. Repairs and Maintenance Expenses :Expenses relates to the maintenance of assets such deprecation, repairs and small renewals/ replacements relating to plant and machinery, furniture, fixtures, fittings, etc o Financial Expenses :Expenses incurred on borrowings – interest paid on loan, Bad debts o Selling and Distribution Expenses :All expenses relating to sales and distribution of goods such as: advertising, travelling expenses, salesmen salary, commission paid to salesmen, discount allowed, repacking charges etc. PROFIT AND LOSS ACCOUNT contd.
ITEMS APPEARING IN THE CREDIT SIDE 0F PROFIT AND LOSS ACCOUNT Besides the gross profit, other gains and incomes of the business are shown on the credit side. The following are some of the incomes and gains. o Dividend received on investment o Interest received on fixed deposits. o Discount earned. o Commission earned. o Rent Received BALANCING 0F PROFIT AND LOSS ACCOUNT The difference between the two sides of profit and loss account indicates either net profit or net loss. If the total on the credit side is more the difference is called net profit. On the other hand if the total of debit side is more the difference represents net loss. The net profit or net loss is transferred to capital account. PROFIT AND LOSS ACCOUNT contd.
DrProfit and Loss Account for the year ended 31 March, …….Cr ParticularsRs To Trading A/c (Gross loss)xxxBy Trading A/c (Gross profit)xxx To SalariesxxxBy Commission earnedxxx To rents and ratesxxxBy Rent receivedxxx To stationariesxxxBy Interest receivedxxx To postage expensesxxxBy Discount receivedxxx To insurancexxxBy Net Loss(Transferred to Capital A/c)xxx To repairsxxx To trading expensesxxx To office duesxxx To interest paidxxx To bank chargesxxx To sundry expensesxxx To Commission paidxxx To Discount allowedxxx To Advertisementxxx To Carriage outwardsxxx To Travelling expensesxxx To Distribution expensesxxx To Repacking chargesxxx Bad debtsxxx Depreciationxxx To Net Profit (transferred capital A/C)xxx
If net profit DateParticularL.F.Debit Amount (Rs) Credit Amount (Rs) 2013 January 1 Profit and Loss A/c Dr To Capital A/C (Net Profit transferred to Capital A/C ) xxx CLOSING ENTRIES OF 0F PROFIT AND LOSS ACCOUNT Like ledger accounts, trading account will be closed by transferring the gross profit or gross loss to the profit and loss account. If net loss DateParticularL.F.Debit Amount (Rs) Credit Amount (Rs) 2013 January 1 Capital A/c Dr To Profit and Loss A/C (Net loss transferred to capital A/C) xxx
BALANCE SHEET Balance sheet is defined as ‘a statement which sets out the assets and liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date’. This forms the second part of the final accounts. It is a statement showing the financial position of a business. Balance sheet is prepared by taking up all personal accounts and real accounts (assets and properties) together with the net result obtained from profit and loss account. On the left hand side of the statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Balance sheet is not an account but it is a statement prepared from the ledger balances. So we should not prefix the accounts with the words ‘To’ and ‘By’. The need for preparing a Balance sheet is as follows: i. To know the nature and value of assets of the business ii. To ascertain the total liabilities of the business. iii. To know the position of owner’s equity.
FORMAT OF BALANCE SHEET The Balance sheet of a business concern can be presented in the following two forms i. Horizontal form or the Account form ii. Vertical form or Report form Horizontal form of Balance Sheet: The right hand side of the balance sheet is asset side and the left hand side is liabilities side. All accounts having debit balance will appear in the asset side and all those having credit balance will appear in the liability side.
BALANCE SHEET contd. Balance Sheet Liabilities and CapitalAmount(Rs)AssetsAmount(Rs) Fixed Liabilities Loans Debentures Mortgages Fixed Assets Lands Building Plants & machines Fixtures & filings Capital / Owner’s Equity Investments Reserves and Surpluses Current Liabilities Short term loans sundry creditors Bills payables Outstanding expenses Current Assets Cash in hand & bank Stock of inventories Sundry debtors Receivables Prepaid expenses Accrued income
Liabilities The amount which a business owes to others is liabilities. Credit balance of personal and real accounts together with the capital account are liabilities. Long Term Liabilities: Liabilities which are repayable after a long period of time are known as Long Term Liabilities. For example, capital, long term loans etc. Current Liabilities: Current liabilities are those which are repayable within a year. For example, creditors for goods purchased, short term loans etc. Contingent liabilities: It is an anticipated liability which may or may not arise in future. For example, liability arising for bills discounted. Contingent liabilities will not appear in the balance sheet. But shown as foot note BALANCE SHEET contd.
Assets The properties and assets owned the business are assets. Debit balance of personal and real accounts together with the capital account are assets. Fixed Assets :Fixed assets are acquired for long term use in business. They are not meant for business transaction rather are used to produce goods or service. Fixed assets includes, Lands, buildings, Machines and plants, Furniture's, fixtures, fittings, Livestock Current Assets : Currents assets / floating assets/circulating assets includes cash and other resources or assets which are reasonably expected to be realised in cash, sold or consumed during normal operation of business. Current assets are most liquid assets meaning that they are either in cash or going to be converted into cash. Current assets change their value constantly. Current assets include Cash in hand and bank, Stock of inventories of raw materials, finished and semi-finished goods, Sundry debtors/book debt/buyers of goods on credit that have not paid yet to the firm, account/ Bill receivables (bills drawn by the firm to buyers on credit and buyers have accepted.), prepaid expenses, Accrued income Investments: Investment includes purchase of in shares and debentures of other firms. BALANCE SHEET contd.
Illustration1: Prepare a trading account from the following trial balance of Tuli Hotel as on 31 march, 2013 Dr Rs Cr Rs Purchase Sales Returns inward Opening stock Freight outward Carriage inward Salaries and wages Rents and taxes Ravelling expenses Discount Commission Bank A/C Trade creditors Sundry debtors Capital A/C Drawing A/C 15750 600 13000 65 50 572 226 187 115 108 6647 4380 200 21000 2700 4300 43700 Closing stock was estimated at Rs. 12,000
Illustration1: Trading Account of Tuli Hotel for the year ended 31 st March, 2014 DrCr Expenses/LossesAmount Rs Revenue/GainAmount Rs To Opening stock To Purchase To carriage Inward To Gross Profit transferred to P/L A/C 13000 15750 50 3600 By Sales 21000 Less: Returns 600 By Closing stock 20400 12000 32400
Illustration2: Prepare a profit and loss account from the following information ParticularsRsParticularsRs Carriage on purchases Carriage on sales Duty on export Water and electricity advertisement 2000 1000 2020 1050 2120 100 Salaries – factory’s manager Office manger Gross profit Rent received Rent paid Commission (CR) 2200 1500 15200 1500 500 1200
Illustration2: Profit and Loss Account DrCr Expenses/LossesAmount Rs Revenue/GainAmount Rs To carriage on sales To duty on export To lighting To water and electricity To advertisement To salaries –office To Rent paid To Net Profit transferred to P/L A/C 1000 2020 1050 2120 100 1500 500 9610 By gross profit By rent received By Commission 15200 1500 1200 17900
Illustration3: Prepare a Trading Account and Profit & Loss account from the following trial balance of Tali and Sons as on 31 March, 2002 Name AccountDr Rs Cr Rs Tali’s capital Tali’s drawings Purchase and sale Sales and purchase return Stock (1-4-2001) Wages Building Freight and carriage Trade expenses Advertisement Interest Taxes and insurance Debtors and creditors Bills receivables and bills payables Cash at bank Cash in hand Salaries 760 8900 280 1200 800 2200 2000 200 240 130 6500 1500 1200 190 800 29000 15000 450 350 1200 700 46700 Adjustment: Stock on 31 st March, 2002 was valued at Rs. 1500
Illustration3: Trading and Profit and Loss Account of Tali and Sons for the year ended 31 st March, 2002 DrCr Expenses/LossesAmount Rs Revenue/GainAmount Rs To Stock (1-4-2001) To Purchase 8900 Less: Return 450 To wage To freight and carriage To Gross profit c/d To trade expenses To Advertisement To taxes and insurance To salaries To Net profit transferred to Capital A/C 1200 8450 800 2000 3770 By Sales Less: Return By Closing stock 15200 1500 1200 16220 200 240 130 800 2750 By Goss profit b/d By Interest 3770 350 4120
Illustration 4 : Prepare a Trading Account and Profit & Loss account from the following trial balance of Mr Ram on 31 March, 20014 and balance sheet on that date. Name AccountDr Rs Cr Rs Drawings and capital Plant and machineries Debtor and creditors Purchase and sales Returns Wages Cash in hand Cash at bank Salaries Repairs Stock Rent Manufacturing expenses Bills receivables Bills payables Bad debts Carriage Furniture's Income tax 20000 80000 70000 110000 10000 40000 5000 10000 30000 8000 45000 10000 7000 12000 5000 9000 15000 10000 199000 50000 222000 7000 20000 496000 Adjustment: Closing Stock was valued at Rs. 50000
Illustration 4: Trading and Profit and Loss Account of Mr Ram for the year ended 31 st March, 2002 DrCr Expenses/LossesAmount Rs Revenue/GainAmount Rs To Opening Stock To Purchase 110000 Less: Return 7000 To Manufacturing Expenses To carriage To wage To Gross profit c/d To salaries To Repairs To Rent To bad debts To Net Profit transferred to Capital A/C 45000 103000 7000 9000 40000 56000 By Sales Less: Return By Closing stock 15200 1500 50000 260000 30000 8000 10000 5000 3000 By Goss profit b/d56000
Illustration4: Balance Sheet of Mr Mr Ram as on 31 st March, 2002 LiabilitiesAmount Rs AssetsAmount Rs Capital 199000 Add: Net Profit 3000 202000 Less: Drawings 2000 182000 Less : Income tax 10000 Sundry creditors Bills Payables 172000 50000 20000 Plant and machineries Furniture Bills receivables Sundry Debtors Closing Stock Cash at bank Cash in hand 80000 15000 12000 7000 50000 10000 5000 242000