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; 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.

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 and
profit and loss account or the second part ascertains net profit.

5. 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.

6. ITEMS APPEARING IN THE DEBIT SIDE OF TRADING ACCOUNT
Trading Account contd.
ITEMS APPEARING IN THE DEBIT SIDE OF TRADING ACCOUNT
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.
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.

7. BALANCING OF TRADING ACCOUNT
Trading Account contd.
ITEMS APPEARING IN THE CREDIT SIDE OF TRADING ACCOUNT
Sales: 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 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.
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 …………. Cr
Particulars Rs
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)
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
xxx

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 profit
Date
Particular
L.F.
Debit
Amount (Rs)
Credit
 2013
January 1
 Trading A/c Dr
To profit and loss account
(Gross Profit transferred to Profit and loss A/c)
xxx
If gross loss
Date
Particular
L.F.
Debit
Amount (Rs)
Credit
 2013
January 1
 Profit and loss A/c Dr
To 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 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
Financial Expenses :Expenses incurred on borrowings – interest paid on loan, Bad debts
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.

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 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.
Dividend received on investment
Interest received on fixed deposits.
Discount earned.
Commission earned.
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.

13. Profit and Loss Account for the year ended 31 March, ……. Cr Dr
Profit and Loss Account for the year ended 31 March, ……. Cr
Particulars Rs
To Trading A/c (Gross loss)
xxx
By Trading A/c (Gross profit)
To Salaries
By Commission earned
To rents and rates
By Rent received
To stationaries
By Interest received
To postage expenses
By Discount received
To insurance
By Net Loss(Transferred to Capital A/c)
To repairs
To trading expenses
To office dues
To interest paid
To bank charges
To sundry expenses
To Commission paid
To Discount allowed
To Advertisement
To Carriage outwards
To Travelling expenses
To Distribution expenses
To Repacking charges
Bad debts
Depreciation
To 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 profit
Date
Particular
L.F.
Debit
Amount (Rs)
Credit
 2013
January 1
 Profit and Loss A/c Dr
To Capital A/C
(Net Profit transferred to Capital A/C )
xxx
If net loss
Date
Particular
L.F.
Debit
Amount (Rs)
Credit
 2013
January 1
 Capital A/c Dr
To Profit and Loss A/C
(Net loss transferred to capital A/C)
xxx

15. 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.

16. 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.

17. Liabilities and Capital
BALANCE SHEET contd.
  Balance Sheet 
Liabilities and Capital
Amount(Rs)
Assets
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

18. BALANCE SHEET contd.
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

19. 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.

20. Illustration1: Prepare a trading account from the following trial balance of Tuli Hotel as on 31 march, 2013 Dr Rs Cr
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

21. Trading Account of Tuli Hotel
Illustration1:
Trading Account of Tuli Hotel
for the year ended 31st March, 2014 Dr Cr
Expenses/Losses
Amount Rs
Revenue/Gain
To Opening stock
To Purchase
To carriage Inward
To Gross Profit transferred to P/L A/C
13000
15750 50
3600
By Sales
Less: Returns
By Closing stock
20400
12000
32400

22. Illustration2: Prepare a profit and loss account from the following information
Particulars Rs
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
500
1200

23. Profit and Loss Account
Illustration2:
Profit and Loss Account Dr Cr
Expenses/Losses
Amount Rs
Revenue/Gain
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
1200
17900

24. Name Account Dr Rs Cr
Tali’s capital
Tali’s drawings
Purchase and sale
Sales and purchase return
Stock ( )
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
190
29000
15000
450
350
700
46700
Illustration3: Prepare a Trading Account and Profit & Loss account from the following trial balance of Tali and Sons as on 31 March, 2002
Adjustment: 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 Sons
for the year ended 31st March, 2002 Dr Cr
Expenses/Losses
Amount Rs
Revenue/Gain
To Stock ( )
To Purchase
Less: Return
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
16220
200
240
130
2750
By Goss profit b/d
By Interest
350
4120

26. Name Account Dr Rs Cr
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
30000
8000
45000
7000
12000
9000
15000
199000
50000
222000
496000
Illustration 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 Ram
for the year ended 31st March, 2002 Dr Cr
Expenses/Losses
Amount Rs
Revenue/Gain
To Opening Stock
To Purchase
Less: Return
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/d

28. Balance Sheet of Mr Mr Ram
Illustration4:
Balance Sheet of Mr Mr Ram
as on 31st March, 2002
Liabilities
Amount Rs
Assets
Capital
Add: Net Profit
202000
Less: Drawings
182000
Less : Income tax
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
10000
5000
242000