Final Accounts

There are 2 statements in a standard set of final a/c

2. Balance Sheet
 The “what do we have?” statement
 Shows what the entity owns and owes (the difference being
the owners’ residual interest)
3. Income Statement
 The “what did we do?” statement
 Shows the activity the entity undertook in its normal course
of operations.

1
Preparation of Balance Sheet and Profit and
Loss Account

 The company has to prepare its balance sheet and

profit & loss account from the books of account
maintained by it. Every Balance Sheet of a company
must give a true and fair view of the state of affairs
of the company as at the end of the financial year
and must be in the prescribed format.
 Final Statements of Accounts

 Final accounts prepared at the end of the year

consists of the profit & loss A/c, Trading &
Manufacturing A/c & Balance Sheet.

 All expenses & receipts of revenue nature are

recorded in Manufacturing , Trading & P&L A/C and
all capital expenses & receipts are recorded in the
Balance sheet.
 Capital Expenditure
 Capital expenditure is an expenditure intended
to benefit future periods which extends to more
than one year.
 This expenditure results in the acquisition of
fixed assets. These assets are used over a period of
years.
 This expenditure also includes an expenditure
incurred for putting a new asset to use or for
improvement of an asset, to produce more.
 The nature of such expenditure is non-recurring.
It is recorded in the Balance sheet.
 Examples are, purchase of plant & machinery,
land & building etc.
 Revenue Expenditure
 Revenue expenditure is incurred for carrying out
the day to day business activities.
Such expenditure may be incurred for maintaining
the fixed assets in the state of working efficiency.
The benefit of such expenditure is for a short
period, i.e. not more than a year. The amount spent
is comparatively small.
This expenditure is of a recurring nature. It is
shown in Trading & P& L A/C.
It includes such items as repairs, depreciation of
fixed assets, discounts, wages, salaries, power etc.
 Capital & Revenue Receipts
 Capital receipts are those which do not recur.
They are of an unusual nature not arising through
normal activities of business. For example, amount
received on account of issue of share capital,
debentures, loans etc. These are shown in Balance
sheet.

 Revenue receipts are those items of income

which are received in the ordinary course of
business. For example, cash received on account of
sales, discount received, commission & interest
received, etc. These are shown in P&L A/c
 Deferred Revenue Expenditure
 Heavy revenue expenditure may be incurred in one year but
the benefit of it may arise or accrue not in one year only but in
the following two or more years.

These are of a quasi capital nature

Then so much of such expenditure as benefits the current

year may be considered revenue & written off to profit & loss
A/c
The balance is carrying forward as ‘deferred revenue
expenditure’ I.e. a revenue expenditure which is deferred or
postponed.

That part of expenditure not written off appears in the

balance sheet on asset side.
 Manufacturing Account
 A manufacturing account deals only with all
costs & expenses of manufacture. The purpose is to
ascertain the cost of goods manufactured.

It includes all expenses relating to purchase of

raw materials, carriage, freight & all other expenses
incurred to convert raw materials into finished
goods.

It includes Direct material, Direct Wages &

Factory expenses ( indirect expenses).
 Manufacturing Account

* Direct Materials :
Refers to such materials which are
incorporated into the physical units of product
manufactured.

* Direct Labour:
Refers to the labour performed in physical
contact with the product. It is the amount of
wages paid to the workers who are engaged in
converting raw materials into finished goods.
 Manufacturing Account

* Factory overhead- It is an indirect cost which

includes:

• indirect labour (foremen, works manager,

storekeeper)
• indirect material (factory supplies)
• depreciation of factory building, plant &
machinery
• insurance on building, machinery, materials
• water, heat, light etc. used in factory
 Manufacturing Account

Manufacturing Account
Dr. For the year ending … Cr.

Particulars Amnt Particulars Amount

To Opening Work in Progress …. By Closing Work in progress ….
To Raw material consumed: By Sale of Scrap ….
Opening stock … By Cost of production of finished
Add: Purchase of Raw goods during the period
materials … transferred to Trading A/c ….
….
Less: Closing stock of
Raw Materials …
….

….. …..
 Trading A/C

 The main purpose of preparing Trading account

is to ascertain the gross profit or gross loss. Gross
profit or Gross loss is the difference between the
Sales value & Cost of goods sold.

 Cost of goods sold= Opening stock of finished

goods + Purchase of finished goods – Closing
stock
 Trading A/C
Trading A/C
Dr. For the year ending … Cr.
Particulars Rs Particulars Rs
To Opening stock of Finished By Sales xxx
. Goods xx Less: Returns xx xxx
To Cost of production of finished By Closing stock of finished .
. Goods transferred from . Goods xx
. . manufacturing Account xx By Gross Loss xx
To Purchase of Finished goods
Less: Returns xx
To Carriage charges on goods
. . Purchased xx
To Gross Profit c/d Xx

xxxx xxxx
 Profit & loss A/C

 It is prepared to know the Net profit earned or

Net loss sustained by the business during the year.

 All expenses & losses (those which are not

transferred to the trading A/c) of regular nature, i.e.
the administrative expenses are transferred to the
debit side of this A/c and all gains & incomes are
recorded on the credit side.
A P&L account contains the following:

 Sales :This is the turnover of the business, the main source of

income from sales of products or services. This figure is always net
of taxes as these are payable to the government and do not form
part of the income of the business.

Purchases (stock/inventory): Purchases are the items of stock you

buy in order to sell on to customers. A basic accounting principle is
that income is exactly matched against the cost of generating that
income. In this regard the stock or inventory on hand at the end of
the accounting period is always deducted from the total purchases
cost. These stock items will be used to generate future sales and
will be matched against those sales in the next period.
A P&L account contains the following:
 Sales related expenditure : These costs are those that
are directly incurred in the process of making a sale to a
customer. They include items such as sales commission,
promotional costs and courier charges.

 Overheads :Lastly there are the overheads of the

business. These are the costs incurred on the rest of the
business that is not directly involved with the selling
process. Examples of overhead costs are: admin staff
salaries, lighting and heating, office stationery, computer
maintenance and legal and accountancy fees.
 Profit & loss A/C

Profit and Loss Account

Dr. For the year ending ……… Cr
Particulars Amount Particulars Amount
To Gross Loss b/d … By Gross Profit b/d …
To Salaries … By Discount received …
To Rent … By Interest received …
To Printing & stationary … By Net Loss …
To Commission …
To Advertisement …
To Bad Debts …
To Discount …
To Misc. expenses …
To Depreciation …
To Preliminary expenses w/o …
To Net Profit …

..
Closing entries for preparing Profit & Loss
A/c

 For transfer for items of expenses, losses, etc.,

appearing in the debit side of the Trial Balance

Profit and Loss A/c Dr

To Salaries
To Rent
To Commission
To Advertisement
To Bad Debts
To Discount
To Printing and Stationary
Closing entries for preparing Profit & Loss
A/c

 For transfer for items of incomes, gains, etc., appearing

in the credit side of the Trial Balance

Interest Account Dr
Dividend Account Dr
Discount Account Dr
To Profit and Loss Account
Closing entries for preparing Profit & Loss
A/c

 For transfer of Net Profit

Profit and Loss account Dr

To Capital Account(s)

 For Transfer of Net Loss

Capital Account(s) Dr
To Profit and Loss account
Ex: From the following balances, taken from the Trial
Balance of Mr. X, prepare a Trading and Profit and Loss
Account for the year ending 31st Dec. 2007

Particulars Dr. (Rs) Cr. (Rs)

Stock on 1.1.2007 2000
Purchase 20000
Sale 30000
Returns (purchase and sale) 2000 1000
Carriage 1000
Cartage 1000
Rent 1000
Interest received 2000
Salaries 2000
General Expenses 1000
Discount 500
Insurance 500

The closing stock on 31st Dec. 2007 is Rs 5000

 Trading and Profit & Loss Account
(For the year ending 31st Dec. 2007)
Dr. Cr.
Particulars Amount Particulars Amount
To Opening Stock 2000 By Sales 30000
To Purchases 20000 Less Returns 2000 28000
Less Returns 1000 19000 By Closing Stock 5000
To Carriage 1000
To Cartage 1000
To Gross Profit 10000
33000 33000

To Rent 1000 By Gross Profit b/d 10000

To Salaries 2000 By Interest 2000
To General Expenses 1000 By Discount 500
To Insurance 500
To Net Profit 8000

12500 12500
Profit & Loss Account

A Profit and Loss Account shows the

following information for a business over a
period of time (norm. one yr)

Sales Revenue earned by the business

Costs of Production that the business has paid
Profit earned by the business
Profit & Loss Account

Sales X
Less Cost of Sales x
= Gross Profit x
Less Expenses / Overheads x

=Net Profit x
Calculating Cost Of Sales

Purchases X
+ Opening Stock X
- Closing Stock X
= Cost of Sales X
 Balance Sheet

 All the Real a/c, Personal A/c, capital A/c,

outstanding liabilities, outstanding income, etc &
the balance in the P&L A/c are recorded in the
Balance sheet.

Balance sheet is considered as a statement

showing the financial position of the business as on
a particular day.
 Classification of assets
 Fixed Assets: Are of a permanent nature & not meant for
resale. E.g. Land, Plant, Machinery, Building, Equipment, etc.

 Current Assets: These are held temporarily & are meant for
resale. They change form from time to time. Cash in hand may be
used for purchasing the goods which will be in stock. Stock may
be sold on credit which becomes debtors.
Thus, Cash in hand, Cash with bank, Debtors, Bills receivables
are all current or circulating assets.

Fictitious Assets: These assets cannot be converted into cash.

These assets are not represented by anything concrete. E.g.
preliminary expenditure, discount on issue of shares &
debentures etc.

Intangible Assets: Those assets which can not be seen or

touched. Ex: Goodwill, patents, trademarks etc
 Classification of Liabilities
 Fixed liabilities: are those which are redeemed
after a long period of time. Long term loans &
capital are the examples of such liabilities.

 Current liabilities: are those liabilities which are

to be paid in the near future, usually within a year.
E.g. Sundry creditors, Bank overdraft, Outstanding
expenses & bills payable.

 Contingent liability: are not actual liabilities, but

they may become so on the happening of certain
events. If the expected event does not occur, no
liability will arise.
 Balance Sheet
(as on 31st Dec./ March …)
Liabilities Amnt. Assets Amnt.
Capital (Less Drawings) Land and building
Profit and loss A/c Plant and machinery
Reserves Patents
Long term loans Preliminary expenses
Debentures Sundry debtors
Sundry creditors Bills receivable
Bills payable Closing stock:
Bank overdraft Raw materials …
Outstanding expenses Work in progress …
Cash in hand
Cash at Bank
From the following balances, prepare a Trading and Profit and
Loss Account and a Balance Sheet.

 Opening Stock 1250  Plant and machinery

 Sales 11800 6230
 Depreciation 667  Returns outward 1380
 Commission (cr) 211  Cash in hand 895
 Insurance 380  Salaries 750
 Carriage 300  Debtors 1905
 Furniture 670  Discount (dr) 328
 Printing charges 481  Bills receivable 2730
 Carriage outward 200  Wages 1589
 Capital 9228  Return inwards 1659
 Creditors 1780  Bank overdraft 4000
 Bills payable 541  Purchases 8679
 Bad debts 180  Petty cash in hand 47

The value of closing stock was Rs 3700