5. Final Accounts

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 …

Particulars To Opening Work in Progress To Raw material consumed: Opening stock … Add: Purchase of Raw materials … …. Less: Closing stock of Raw Materials …

Amnt Particulars ….

By Closing Work in progress By Sale of Scrap By Cost of production of finished goods during the period transferred to Trading A/c

Cr. Amount …. …. ….

…. …..

…..

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 …

Particulars To Opening stock of Finished . Goods To Cost of production of finished . Goods transferred from . . manufacturing Account To Purchase of Finished goods Less: Returns To Carriage charges on goods . . Purchased To Gross Profit c/d

Rs xx xx

Particulars By Sales xxx Less: Returns xx By Closing stock of finished . . Goods By Gross Loss

Cr. Rs xxx xx xx

xx xx 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 ………

Particulars To Gross Loss b/d To Salaries To Rent To Printing & stationary To Commission To Advertisement To Bad Debts To Discount To Misc. expenses To Depreciation To Preliminary expenses w/o To Net Profit

Amount … … … … … … … … … … … … ..

Particulars By Gross Profit b/d By Discount received By Interest received By Net Loss

Cr Amount … … … …

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 To Salaries To Rent To Commission To Advertisement To Bad Debts To Discount To Printing and Stationary

Dr

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 To Capital Account(s)

Dr

 For Transfer of Net Loss Capital Account(s) To Profit and Loss account

Dr

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

Dr. (Rs)

Cr. (Rs)

2000 20000 2000 1000 1000 1000

30000 1000

2000 2000 1000 500 500

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

Trading and Profit & Loss Account (For the year ending 31st Dec. 2007) Dr. Particulars To Opening Stock To Purchases 20000 Less Returns 1000 To Carriage To Cartage To Gross Profit To Rent To Salaries To General Expenses To Insurance To Net Profit

Cr. Amount 2000 19000 1000 1000 10000 33000 1000 2000 1000 500 8000 12500

Particulars By Sales 30000 Less Returns 2000 By Closing Stock

Amount 28000 5000

33000 By Gross Profit b/d By Interest By Discount

10000 2000 500

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 Less Cost of Sales = Gross Profit Less Expenses / Overheads

X x x 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 Capital (Less Drawings) Profit and loss A/c Reserves Long term loans Debentures Sundry creditors Bills payable Bank overdraft Outstanding expenses

Amnt.

Assets Land and building Plant and machinery Patents Preliminary expenses Sundry debtors Bills receivable Closing stock: Raw materials Work in progress Cash in hand Cash at Bank

Amnt.

… …

From the following balances, prepare a Trading and Profit and Loss Account and a Balance Sheet.             

Opening Stock Sales Depreciation Commission (cr) Insurance Carriage Furniture Printing charges Carriage outward Capital Creditors Bills payable Bad debts

1250 11800 667 211 380 300 670 481 200 9228 1780 541 180

 Plant and machinery 6230  Returns outward  Cash in hand  Salaries  Debtors  Discount (dr)  Bills receivable  Wages  Return inwards  Bank overdraft  Purchases  Petty cash in hand

The value of closing stock was Rs 3700

1380 895 750 1905 328 2730 1589 1659 4000 8679 47