Presentation on theme: "FINAL ACCOUNTS vis-à-vis Financial Statements"— Presentation transcript:
1 FINAL ACCOUNTS vis-à-vis Financial Statements Samir K Mahajan
2 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; andFor this purpose, the firm usually prepares the following financial statements:1. Trading and Profit and Loss Account2. Balance SheetTrading 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.
3 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.
4 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 andprofit and loss account or the second part ascertains net profit.
5 TRADING ACCOUNTThe 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.
6 ITEMS APPEARING IN THE DEBIT SIDE OF TRADING ACCOUNT Trading Account contd.ITEMS APPEARING IN THE DEBIT SIDE OF TRADING ACCOUNTOpening 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.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 rentvi. Other expenses :Fuel, power, lighting charges, oil, grease, waste related to production and packing expenses.
7 BALANCING OF TRADING ACCOUNT Trading Account contd.ITEMS APPEARING IN THE CREDIT SIDE OF TRADING ACCOUNTSales: This includes both cash and credit sale made during the year. Net sales is derived by deducting sales return from the total sales.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 ACCOUNTThe 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.The Gross Profit or Gross Loss is transferred to Profit & Loss Account.
8 Format of Trading Account Dr Trading Account for the year ending 31st March ………….CrParticularsRsTo Opening StockTo Stock:Raw materialsWork in progressSemi-finished goodsFinished goodsXXXBy SalesLess: Returns inwardsBy Closing stockBy Gross Loss c/d(Transferred to P&L A/C)To PurchasesLess: Returns outward or purchase returnLess: goods taken away by proprietorLess: goods given as free samplesLess goods: given as charityTo direct wages or manufacturing wagesTo Freight or carriage inwards or purchase carriageTo octroi duty or local taxesTo import duties, customs,To Clearing charge, landing charges, Dock dutiesTo power (factory)To fuelsTo coal, gas, waterTo heating, lightingTo manufacturing expensesTo packing expensesto assembling expensesTo royaltyTo gross profit c/dxxx
9 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 profitDateParticularL.F.DebitAmount (Rs)Credit 2013January 1 Trading A/c DrTo profit and loss account(Gross Profit transferred to Profit and loss A/c)xxxIf gross lossDateParticularL.F.DebitAmount (Rs)Credit 2013January 1 Profit and loss A/c DrTo Trading A/C(Gross Loss transferred to Profit and loss A/c)xxx
10 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
11 PROFIT AND LOSS ACCOUNT contd. ITEMS APPEARING IN THE DEBIT SIDE 0F PROFIT AND LOSS ACCOUNTThose 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, etcFinancial Expenses :Expenses incurred on borrowings – interest paid on loan, Bad debtsSelling 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.
12 ITEMS APPEARING IN THE CREDIT SIDE 0F PROFIT AND LOSS ACCOUNT PROFIT AND LOSS ACCOUNT contd.ITEMS APPEARING IN THE CREDIT SIDE 0F PROFIT AND LOSS ACCOUNTBesides 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.Dividend received on investmentInterest received on fixed deposits.Discount earned.Commission earned.Rent ReceivedBALANCING 0F PROFIT AND LOSS ACCOUNTThe 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.
13 Profit and Loss Account for the year ended 31 March, ……. Cr DrProfit and Loss Account for the year ended 31 March, …….CrParticularsRsTo Trading A/c (Gross loss)xxxBy Trading A/c (Gross profit)To SalariesBy Commission earnedTo rents and ratesBy Rent receivedTo stationariesBy Interest receivedTo postage expensesBy Discount receivedTo insuranceBy Net Loss(Transferred to Capital A/c)To repairsTo trading expensesTo office duesTo interest paidTo bank chargesTo sundry expensesTo Commission paidTo Discount allowedTo AdvertisementTo Carriage outwardsTo Travelling expensesTo Distribution expensesTo Repacking chargesBad debtsDepreciationTo Net Profit (transferred capital A/C)
14 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 profitDateParticularL.F.DebitAmount (Rs)Credit 2013January 1 Profit and Loss A/c DrTo Capital A/C(Net Profit transferred to Capital A/C )xxxIf net lossDateParticularL.F.DebitAmount (Rs)Credit 2013January 1 Capital A/c DrTo Profit and Loss A/C(Net loss transferred to capital A/C)xxx
15 BALANCE SHEETBalance 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 businessii. To ascertain the total liabilities of the business.iii. To know the position of owner’s equity.
16 FORMAT OF BALANCE SHEET The Balance sheet of a business concern can be presented in the following two formsi. Horizontal form or the Account formii. Vertical form or Report formHorizontal 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.
17 Liabilities and Capital BALANCE SHEET contd. Balance Sheet Liabilities and CapitalAmount(Rs)AssetsFixed LiabilitiesLoansDebenturesMortgagesFixed AssetsLandsBuildingPlants & machinesFixtures & filingsCapital / Owner’s EquityInvestmentsReserves and SurplusesCurrent LiabilitiesShort term loanssundry creditorsBills payablesOutstanding expensesCurrent AssetsCash in hand & bankStock of inventoriesSundry debtorsReceivablesPrepaid expensesAccrued income
18 BALANCE SHEET contd.LiabilitiesThe 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
19 BALANCE SHEET contd.AssetsThe 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, LivestockCurrent 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 incomeInvestments: Investment includes purchase of in shares and debentures of other firms.
20 Illustration1: Prepare a trading account from the following trial balance of Tuli Hotel as on 31 march, 2013DrRsCrPurchaseSalesReturns inwardOpening stockFreight outwardCarriage inwardSalaries and wagesRents and taxesRavelling expensesDiscountCommissionBank A/CTrade creditorsSundry debtorsCapital A/CDrawing A/C1575060013000655057222618711510866474380200210002700430043700Closing stock was estimated at Rs. 12,000
21 Trading Account of Tuli Hotel Illustration1:Trading Account of Tuli Hotelfor the year ended 31st March, 2014DrCrExpenses/LossesAmountRsRevenue/GainTo Opening stockTo PurchaseTo carriage InwardTo Gross Profit transferred to P/L A/C1300015750503600By SalesLess: ReturnsBy Closing stock204001200032400
22 Illustration2: Prepare a profit and loss account from the following information ParticularsRsCarriage on purchasesCarriage on salesDuty on exportWater and electricityadvertisement20001000202010502120100Salaries – factory’s managerOffice mangerGross profitRent receivedRent paidCommission (CR)22001500152005001200
23 Profit and Loss Account Illustration2:Profit and Loss AccountDrCrExpenses/LossesAmountRsRevenue/GainTo carriage on salesTo duty on exportTo lightingTo water and electricityTo advertisementTo salaries –officeTo Rent paidTo Net Profit transferred to P/L A/C100020201050212010015005009610By gross profitBy rent receivedBy Commission15200120017900
24 Name AccountDrRsCrTali’s capitalTali’s drawingsPurchase and saleSales and purchase returnStock ( )WagesBuildingFreight and carriageTrade expensesAdvertisementInterestTaxes and insuranceDebtors and creditorsBills receivables and bills payablesCash at bankCash in handSalaries760890028012008002200200020024013065001500190290001500045035070046700Illustration3: Prepare a Trading Account and Profit & Loss account from the following trial balance of Tali and Sons as on 31 March, 2002Adjustment: Stock on 31st March, was valued at Rs. 1500
25 Trading and Profit and Loss Account of Tali and Sons Illustration3:Trading and Profit and Loss Account of Tali and Sonsfor the year ended 31st March, 2002DrCrExpenses/LossesAmountRsRevenue/GainTo Stock ( )To PurchaseLess: ReturnTo wageTo freight and carriageTo Gross profit c/dTo trade expensesTo AdvertisementTo taxes and insuranceTo salariesTo Net profit transferred to Capital A/C1200845080020003770By SalesLess: ReturnBy Closing stock152001500162202002401302750By Goss profit b/dBy Interest3504120
26 Name AccountDrRsCrDrawings and capitalPlant and machineriesDebtor and creditorsPurchase and salesReturnsWagesCash in handCash at bankSalariesRepairsStockRentManufacturing expensesBills receivablesBills payablesBad debtsCarriageFurniture'sIncome tax200008000070000110000100004000050003000080004500070001200090001500019900050000222000496000Illustration 4 : Prepare a Trading Account and Profit & Loss account from the following trial balance of Mr Ram on 31 March, and balance sheet on that date.Adjustment: Closing Stock was valued at Rs
27 Trading and Profit and Loss Account of Mr Ram Illustration 4:Trading and Profit and Loss Account of Mr Ramfor the year ended 31st March, 2002DrCrExpenses/LossesAmountRsRevenue/GainTo Opening StockTo PurchaseLess: ReturnTo Manufacturing ExpensesTo carriageTo wageTo Gross profit c/dTo salariesTo RepairsTo RentTo bad debtsTo Net Profit transferred to Capital A/C45000103000700090004000056000By SalesLess: ReturnBy Closing stock152001500500002600003000080001000050003000By Goss profit b/d
28 Balance Sheet of Mr Mr Ram Illustration4:Balance Sheet of Mr Mr Ramas on 31st March, 2002LiabilitiesAmountRsAssetsCapitalAdd: Net Profit202000Less: Drawings182000Less : Income taxSundry creditorsBills Payables1720005000020000Plant and machineriesFurnitureBills receivablesSundry DebtorsClosing StockCash at bankCash in hand8000015000120007000100005000242000