INTERNAL RESEARCH ASSIGNMENT

Name of the candidate: Kanchan Arora

Enrollment no.: 11915903912

Course: MBA

Batch: 2012-2014

Semester: I (Sec. B)

Subject Name: Accounting For Management

Subject code: MS107

Topic of assignment: Final Accounts

Subject Teachers name: Ms. Nidhi Sharma

Date of submission: 08.10.2012

AFM RESEARCH ASSIGNMENT

FINAL ACCOUNTSFinancial statements are prepared to know profit or loss and financial position of the
business at the end of the financial year or at the end of the accounting period. These financial statements are communicated to the users of accounting information. Financial statements are the end-product of the accounting function drawn from the trial balance. They are prepared to know1. The profit earned during an accounting period, by preparing the profit and loss account, and 2. The financial position by preparing the balance sheet. These two financial statements are also known as FINAL ACCOUNTS. The information in the financial statements is of interest to a number of internal and external parties. Internal users include- owners, management, employees and workers. External users includes- banks and financial institutions, investors and potential investors, creditors, Government and its authorities, researchers, consumers, public, etc.

INCOME STATEMENT- An Income Statement is a summary of accounts that affects the profit or loss of an enterprise. Many accounts shown in the Trial balance relate to expenditure or income. These accounts either increase or decrease the profit. Accounts that increase the profit are shown on one side while accounts that decrease the profit are shown on the other side. An income statement has two parts, namely1. Trading account- It reveals gross profit or gross loss. 2. Profit and loss account- It reveals net profit or net loss.

TRADING ACCOUNT- Trading account is the first stage in the process of preparing the final accounts. Trading account shows the gross profit pr gross loss during an accounting year. It is prepared to know the outcome of a trading operation. This account is based on matching the selling price of goods and services with the cost of goods sold and services rendered. It records only net sales and direct cost of goods sold.

CONTENTS OF A TRADING ACCOUNTItems shown on the DEBIT SIDE of the trading account:1. Opening stock- It refers to the closing stock of the previous year, which has been entered in the opening stock account through an opening entry. It contains the value of goods in which business deals. 2. Purchases and purchases return- It shows the gross amount of purchases made of the materials. It refers to the goods purchased, both cash and credit purchases. The purchases return account will show a credit balance showing the returns of materials to the suppliers. Besides the purchases return, goods taken by the proprietor for his personal use, goods given as charity, and goods given by way of samples are also deducted from the purchases. ADJUSTED PURCHASES = NET PURCHASES + OPENING STOCK CLOSING STOCK 3. Direct Expenses- Direct Expenses are those expenses which are incurred on the goods purchased till they are bought to the place of business for sale. In a manufacturing business, expenses incurred for the purposes of production are also direct expenses. Direct Expenses include- carriage or freight inwards, manufacturing wages, power and fuel, factory lighting, factory rent and rates, duty on purchases, royalties, and consumable stores. Items shown on the CREDIT SIDE of the trading account:1. Sales and Sales return- The sales account indicates the total sales made during the year. The sales return account always has a debit balance, showing the total of the amount of goods returned by customers. The net of the two amounts is called net sales. 2. Closing stock- Closing stock means the stock of unsold goods which includes raw materials, semi-finished goods, finished goods or goods traded in at the end of the current accounting period. According to the convention of conservatism, stock is valued at its cost or net realisable value, whichever is lower. Closing stock is usually given outside the trial balance. As a result, the closing stock appears both on the credit side of the trading account and on the asset side of the balance sheet.

BALANCING OF TRADING ACCOUNTAfter recording the above items in the respective sides of the trading account, the balance is calculated to ascertain gross profit or gross loss. If the total of the credit side is more than that of the debit side, the excess is Gross Profit. If the total of the debit side is more than that of the credit side, the excess is Gross Loss. Gross profit is transferred to the credit side of the profit and loss account and gross loss is transferred to the debit side of the profit and loss account.

FORMAT OF A TRADING ACCOUNTTRADING ACCOUNT FOR THE YEAR ENDED. DR. PARTICULARS To opening stock To purchases Less: return purchases . . . . . . . ... ... *Either gross profit or gross loss shall appear. ... ... AMOUNT (RS.) . PARTICULARS By sales Less: sales returns. By scrap sales By closing stock By gross loss* . . . . AMOUNT (RS.) CR.

To wages & salaries To direct expenses To carriage inwards To freight, octroi & cartage A/c To gross profit*

PROFIT AND LOSS ACCOUNT- Profit and Loss Account is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice versa. Profit and loss account is prepared to calculate the net profit or net loss of the business for a given accounting period. It is the second stage in the preparation of final accounts. It starts with the credit from the trading account in respect of gross profit or debit if there is gross loss. Accrual basis of accounting is followed in the preparation of this account. Expenses and

losses are shown on the debit side of the profit and loss account. Incomes and items of profit are shown on the credit side of the profit and loss account.

CONTENTS OF THE PROFIT AND LOSS ACCOUNTItems shown on the DEBIT SIDE of the profit and loss account:1. Administration and office management expenses- It include the followingEstablishment expenses, office salaries, office rent and rates, lighting, printing and stationery, postage and telephone charges, legal expenses, audit fee, general or trade expenses. 2. Selling and distribution expenses- It include the followingSalesmans salaries and commission, commission of agents, advertising, warehousing expenses, packing expenses, freight and carriage on sales, export duties, maintenance of vehicles for distribution of goods and their running expenses, insurance of finished goods, stock and goods in transit, and bad debts. 3. Financial expenses- These are those expenses which are incurred in respect of arranging finance for business. Financial expenses include the following expensesinterest on loan, interest on capital and discount allowed. 4. Abnormal losses- Abnormal loss such as stock loss by fire not covered by insurance, loss on sale of fixed assets, loss by theft, cash defalcation, etc., may occur during the accounting period. Abnormal expenses are treated as extraordinary expenses and debited and shown separately in the profit and loss account. Items shown on the CREDIT SIDE of profit and loss account:1. Income from main business- These refer to those profits and incomes which are received from the operations of the main business. This includes the following types of profits and incomes- Gross profit, profit on consignment, profit on joint venture, commission receivable, etc. 2. Financial and other incidental income- Income received from other sources except the main function of the business comes under this category. These include- Interest on fixed deposits, income from investment, rent received, interest on drawings, discount received, etc. Certain items of profit and loss account with explanation1. Salary- salary is an indirect expense. The combined salaries and wages account is also treated as an indirect expense and therefore, it is transferred to the profit and loss account.

2. Depreciation- It is the decrease in the value of an asset due to wear and tear, use, or lapse of time. It is treated as business expense and is charged to the profit and loss account. 3. Bad debts and bad debts recovered account- The bad debts account is debited and if the amount is recovered later then it is treated as a gain. It is credited to the bad debts recovered account. It is written on the credit side in the profit and loss account. 4. Insurance- Assets are generally insured to cover the risk of loss. Insurance premium is treated as a business expense and debited to the profit and loss account.

BALANCING OF THE PROFIT AND LOSS ACCOUNTThe balance in the profit and loss account represents the net profit or net loss. If the credit side is more than the debit side, it shows net profit. If the debit side is more than the credit side, it shows net loss. Either (net profit or net loss) are transferred to the capital account.

FORMAT OF PROFIT AND LOSS ACCOUNTPROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED.. DR. PARTICULARS To gross loss* To salaries To bad debts To depreciation To discount allowed To rent, rates and taxes To stationery & . & . insurance . . . AMOUNT (RS.) . . . . . PARTICULARS By gross profit* By discount received By bad debts . commission . from . . . on . . AMOUNT (RS.) . . CR.

received By earned By income

investment By rent received By interest By dividends

printing To postage

telegrams To premium To interest

shares By interest on fixed deposits

To loss by fire, theft To commission To freight & carriage Outwards To establishment

. . . . . . . . . . . . ... ...

By income from any other source By net loss* . .

expenses To office lighting To legal charges To audit fee To trade or general expenses To advertising To packing expenses To warehousing

expenses To net profit*

... ...

*Either net profit or net loss shall appear.

BALANCE SHEET- A Statement which sets out the assets and liabilities of a firm or an institution as at a certain date is known as the balance sheet. A balance sheet is a screen picture of the financial position of a going business at a certain moment. It is a statement which reports the property owned by the enterprise and the claims of the creditors and owners against these properties. It shows the status of the business as at a given moment of time, in so far as accounting figures can show its status. A balance sheet is prepared with a view to measure the true financial position of a business at a particular point of time. It is a device to show the financial position of a business in a systematic and standard form. By looking at the balance sheet, one can know whether the firm is solvent or not. If the assets exceed liabilities it is solvent. In other case it would be insolvent. It may serve as the basis for determining purchase consideration of the business. The debit balances are shown on the assets side and credit balances are shown on the liabilities side. The assets are shown on the right-hand side and the liabilities and capital on the left-hand side. It is prepared after the preparation of the

profit and loss account. The balance sheet is not an account but only a statement of assets and liabilities. The total of the asset side must be equal to the total of liabilities side, that is, the two sides of the balance sheet must have equal totals. If this is not the case, there is certainly an error somewhere.

CLASSIFICATION OF ASSETS AND LIABILITIESTypes of assets:1. Fixed assets- Fixed assets are those assets that are acquired for continued use and are not meant for resale, though later it may be decided to sell a particular asset. They may be tangible like land, building, plant & machinery, furniture & fixtures, etc., or intangible like goodwill, patents, trademarks, etc. Fixed assets are valued at cost less depreciation. Investments represent capital expenditure on purchase of shares, bonds, etc., to earn interest, dividend and other benefits. Investment is shown separately in the balance sheet. Fictitious assets are not represented by anything concrete. The examples of fictitious assets are- discount on issue of shares or debentures, profit and loss account (debit balance), preliminary expenses, advertisement suspense, etc. 2. Current assets- Current assets are those assets of a firm which are kept temporarily for resale or for converting into cash. These assets are temporary and may change. These include cash, bank balance, bills receivable, debtors and readily marketable securities. Types of liabilities:1. Fixed or long term liabilities- These liabilities are not payable by the business in the next year. They mainly include long term loans, amount of debentures, etc. funds from this source are used for purchase of fixed assets. 2. Current liabilities- These are liabilities payable by the business within a year. Examples are- trade creditors, bills payable, expenses outstanding, bank overdraft, etc. 3. Owners funds- The amount owning to the proprietors as capital is a class by itself. It will include undistributed profits and reserves also. It is equal to the net assets of the business and is defined as the difference between assets and liabilities. 4. Contingent liabilities- A Contingent liability is a liability that becomes payable on the happening of an event. In case, the event does not happen, no amount is payable. Such liabilities are not shown in the balance sheet. They are disclosed by way of a note.

Examples are- liabilities in respect of bills discounted, guarantee for loan, disputed claims, etc.

FORMAT OF BALANCE SHEETBALANCE SHEET OF As at.. LIABILITIES Trade creditors Bills payable Bank overdraft Employees provident fund Loans (cr.) Mortgage Reserves Capital Add: capital interest on . . AMOUNT (RS.) .. . . ASSETS Cash in hand Cash at bank Bills receivable Sundry debtors Loans (dr.) Closing stock Loose tools Investments Furniture & fittings Plant & machinery Land & building Freehold land Business premises Patents, trademarks, etc. Goodwill . ... ... . . AMOUNT (RS.) . . . . . . .

Add: net profit Less: drawings Less: Income tax... Less: Interest on drawings .

Less: net loss

QUES. The following is the trial balance extracted from the books of Akhilesh as on 30 September 2011:

Name of the account

Debit Amount(Rs.)

Credit Amount(Rs.)

Capital Account Plant and Machinery Furniture Purchases and Sales Returns Opening stock Discount Sundry Debtors/ Creditors Salaries Manufacturing wages Carriage outwards 78,000 2,000 60,000 1,000 30,000 425 45,000 7,550 10,000 1,200

1,00,000 1,27,000 750 800 25,000 525 2,54,075

Provision for doubtful debts Rent, rates and taxes Advertisements Cash Total 10,000 2,000 6,900 2,54,075

Prepare trading and profit and loss account for the year ended 30 September 2001 and a balance sheet on that date after taking into account the following adjustments: (a) Closing stock was valued at Rs, 34,220. (b) Provision for doubtful debts is to be kept at Rs. 500.

(c) Depreciate plant and machinery @ 10% p.a. (d) The proprietor has taken goods worth Rs. 5,000 for personal use and additionally distributed goods worth Rs. 1,000 as samples. (e) Purchase of furniture Rs. 920 has been passed through purchases book. SOLUTIONTRADING ACCOUNT FOR THE YEAR ENDED 2010-11 PARTICULARS To opening stock To purchases 60,000 Less: return purchases 750 AMOUNT (RS.) 30,000 PARTICULARS By sales 1,27,000 Less: sales returns 1,000 By closing stock 1,26,000 34,220 AMOUNT (RS.)

Purchase of furniture 920 Drawings of goods 5,000 Samples 1,000 To wages To Gross profit 52,330 10,000 67,890 1,60,220 -------------------------1,60,220 ---------------------------

PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 2010-11 PARTICULARS To free samples To rent, rates & taxes To advertisement To salaries To carriage outward To depreciation on plant & machinery To discount allowed 7,800 425 AMOUNT (RS.) 1,000 10,000 2,000 7,550 1,200 PARTICULARS By Gross profit By discount received By provision for AMOUNT (RS.) 67,890 800

doubtful debts (525500) 25

To Net profit

38,740 68,715 -------------------------68,715 --------------------------

BALANCE SHEET AS AT 31 MARCH, 2011 LIABILITIES Capital 1,00,000 Less: drawings 5,000 Add: net profit 38,740 creditors 1,33,740 25,000 AMOUNT (RS.) ASSETS Cash Closing stock Plant & machinery 78,000 Less: depreciation 7,800 70,200 Furniture 2,000 Add: purchase of 920 2,920 AMOUNT (RS.) 6,900 34,220

furniture Debtors 45,000

Less: provision for doubtful debts 500 44,500

1,58,740 ---------------------------

1,58,740 --------------------------