Accounts Sem1

Final Accounts • Final Accounts: The term final accounts means statements that results finally from the preparation of accounts showing the profit earned or loss suffered by the firm and the financial state of affairs of the firm at the end of the period concerned. • The statement showing the profit and loss position is called the Profit & Loss A/c or the income statement and the statement portraying the financial state of affairs is called the B/s.

• The P&L A/c is worked out in two stages: In the first stage we work out the gross profit/loss & in the second stage net profit or net loss. The first section is called the Trading a/c and the subsequent section is the P&L a/c.

• Gross Profit : is defined as the excess of sales revenue over the cost of goods actually sold. (And it is said to be made when sale proceeds exceeds the cost of goods sold.) • GP=Net Sales – Cost of goods sold Net Sales = Total sales – Sales Return Cost of GS= Op. Stock + Net Prch +Dir exp. – Closing Stock.

Trading A/c of ….. for the Yr ended ….. Dr. To Opening Stock To Purchases

XX XX

Less Returns (Outwards) XX

Cr.

By Sales

XX

Less Returns (Outwards) XX XX

By Closing Stock

XX XX

To Direct Expenses Freight & Carriage

XX

Customs & Insurance

XX

Wages, Fuel, Water, Gas XX Factory Expenses

XX

Royalty on Production

XX

To Gross Profit C/d

XX XX XXX

XXX

Balancing of Trading A/c • If total of Cr. side is more than the total of Dr. side, the excess represents gross pr. & vice-versa. GP is transferred to the Cr. Side of P&L A/c. • While preparing a trading a/c one important point must be kept in mind that a closing journal entry is to be made in the journal proper.

(4) For Gross loss P& L A/c Dr. To Trading A/c

gE

(3) For Gross Profit Trading A/c Dr. To P& L A/c

n tr ies

(2) For the items on the Cr. Side Sales A/c (Net) Dr. Cl St A/c Dr. To Trading A/c

Clo sin

/c gA din Tra

(1) For the items on the Dr. side Trading A/c Dr To Op St A/c To Purch A/c (Net) To Direct Exp A/c

Manufacturing A/c • In case of manufacturing concerns, a Manufacturing a/c precedes the Trading A/c. • A manufacturing a/c is prepared in order to know the cost of production of goods or services manufactured. • The debit side of manufacturing a/c includes the following: - Cost of Raw materials consumed (Direct MC) - Op Stock of WIP (Semi finished goods) - Direct Wages, - Other Direct Expenses - Indirect Expenses or factory expenses incurred other than the direct expenses.

Manufacturing A/c for the yr. ended………. Dr.

Cr.

To Opening Stock

XX

By Closing WIP

XX

Raw Materials

XX

By Sale of Scrap

XX

Add Purchases

XX

By Cost of Production

XX

Less Cl St. of Raw Mat

XX

XX

To Op St of WIP

XX

To Carriage inwards

XX

To Direct Wages

XX

To Direct Expenses

XX

To Indirect Expenses Rent, Electr, Coal,

XX

Repairs of Pl, Depr,

XX

Other indirect exp

XX XXX

XXX

Trading P&L A/c for the yr ended….

Dr. To OpStock of Finished Goods Add Cost of Prod (Manuf A/c)

Cr. XX XX

By Sales

XX

Less Returns (Outwards) XX By Closing Stock of finished Gds

To Gross Profit C/d

XX XX

XX XXX

XXX

Important Adjustments in Trading A/c & pts. to remember •

• •

4)

5)

Closing Stock: Closing stock appearing in the additional information will be credited to trading a/c and will be shown as a current asset in the B/s. If the closing stock is appearing in the T/b, it will not be credited to trading a/c (because it is already adjusted against purchases) But it will be shown in the B/s only. Closing stock is to be valued at cost or market price which ever is lower. Wages Outstanding: At the end of the accounting period, if some wages are outstanding it will be added to the wages appearing in the t/b and total amount of wages will be charged to the trading a/c. Wages outstanding will be shown in the b/s as a liability. However, if the wages outstanding a/c is appearing in the t/b, no adjustments are required. It will only be shown in the b/s. Please note that all similar direct outstanding expenditures will be treated similarly. If there are any prepaid expenses at the end of the accounting period these should be deducted from the respective expenses a/c and shown in the b/s as an asset. However if the prepaid expense is appearing in the t/b no adjustments are required Goods taken by proprietor for personal use should be deducted from purchases

•

Abnormal Loss of Stock by Accident etc: The value of the stock lost is to be debited to abnormal loss a/c and trading a/c is credited. Abnormal loss a/c is closed by transferring to P&L A/c (P&L a/c dr. & Ab Ls Cr.)

•

If the above loss is insured then insurance claim a/c or Ins co. a/c dr. to Abnormal Loss A/c.

•

Till the time money is not received Ins claim will find a place in the asset side of the b/s. When money is received bank a/c dr and ins claim a/c cr. (If goods are partially insured, the portion not covered by insurance is to be charged to P&L a/c) Accidental Loss A/c Dr (actual loss of stock) To Trading A/c/ Prch A/c Insurance Claim A/c P&L A/c To Accidental Loss A/c

Dr. (claim admitted by ins co) Dr. (claim not admitted)

•

•

Goods sent on approval basis: It is not considered as sale till it is not approved by the customer/ expiry of the period. When such a sale is made: entry: customer a/c dr. to sales. When at the end of the yr. goods are still lying with the customer awaiting approval: Sales a/c Dr To Sundry Drs. A/c (To cancel the entry of sales) (To add to the value of closing stock): Stock with customer’s a/c Dr. To Trading A/c In the B/s it will be deducted form sundry drs. At sales price and closing stock will be increased by cost of such sales. Goods in Transit (Stock in Transit) If goods have been purchased but the same are in transit the cost of goods will be added with the purchases. The total purchases will be debited to trading a/c. Cost of goods in transit will be shown in the b/s just like closing stock.

Profit & Loss A/c (Concepts) • Operating profit: It is the profit made by a business unit as a result of its principal trading activities. • It is the excess of operating revenue before taking into a/c any extraordinary items e.g. loss on sale of asset and non operating revenues. • Operating Rev: Sales Rev + Other trade related rev. as disc received, allowance by suppliers. • Normal Op exp are often classified into 3 heads: Selling expenses, Administrative Exp. and financial exp.

• P&L a/c is prepared to ascertain the net profit or net loss during an accounting period. • It starts with transferring the G/P or the G/L from the Trading A/c and is debited with all expenses which does not find a place in the trading a/c and all losses arising out of sale of assets and any abnormal losses. The credit side is used to record all non operating incomes. • Need for Prparting P& L A/c : besides its main obj. – It is a link between 2 consecutive b/s – It shows the earning power of the business – It makes a distinction between trading and non-trading incomes and expenses incurred for earning revenue and losses suffered during the accounting period. – It is a critical study of the past.

P&L A/c for the yr. ended …..

Dr.

Cr.

To Salaries

By GP B/d

To Office Rent Rates and Taxes

By Discount Received

To Printing and Stationery

By Commission Received

To Telephone etc

By Bank Interest Received

To Postage, Courier

By Rent on Property lent out

To Insurance

By Dividend from Shares

To Audit Fees

By Profit on Sale of Assets

To Legal Charges To Electricity Charges To Repairs & Renewals To Depreciation on (Of Bld, furn, equip) To Advertisement

Contd: To Advertisement To Godown Rent To Carriage outwards To Bad Debts To Provision for Doubtful Debts To Selling Commission To Bank Charges To Interest on loan To Discount allowed To loss on sale of assets To loss by fire/ accident etc To Net Profit (Transferred to Capital a/c)

Balance Sheet •

Definition: A balance sheet is a list of assets and liabilities of a business at some specific point of time. It shows the financial position of the business. • The main function of a balance sheet is to summarize the various assets and liabilities of the business in a properly classified and arranged manner and there by facilitate the determination of the financial position of the concern. It also acts as the basis for calculating the liquidity and the solvency position of the concern. • Limitations: 1) A conventional B/s cannot reflect the true value of assets (as they are shown at historical cost – dep.) and as such there is no relationship with Mkt.val. 2) It includes such assets which has no market value like: preliminary exp, debenture disc etc. Such assets unduly increase the total assets. 3) It does not reflect values of certain factors as skill, loyalty etc. 4) Value of a major of current assets depends on some estimates so it cannot reflect the true financial position.

Balance Sheet of abc co. as at…… Liability Current Liabilities:

Asset Current Assets

Creditors

Cash in Hand

Bills Payable

Cash at Bank

Bank O/d

Debtors/ Sundry Debtors/ Book Drs.

Outstanding Expenses

Debts

Income received in advance

Stock/ Inventory

Short term Loans

Goods sent on Consignment

Fixed Liabilities (LTL)

Bills Receivable

Loan

Short term or Trade Investments

Mortgage

Prepaid Expenses

Debentures

Accrued Income

Sales Tax Collected/ VAT contd…

Contd….

Liability

Asset

contd….

Capital

Investments (Long Term Loans / Loans granted)

Add: Net Profit

Fixed Assets :

Add: Interest on capital

L&B/ Freehold Premises

Add: Interst/sal/comm payable to proprietor

Machinery/ P&M / Equipment

Less: Drawings

Tools & Equipment or Loose Tools

Less: Interest on drawings

Furniture & Fixtures

Less: Net Loss (if any)

Fixtures & Fittings

Less: Income Tax

Vehicle

Reserves & Funds

Livestock

Gen Reserve

Goodwill, Patents, TradeMark

Reserve Fund Contingency Rsv

(Msc Exp: Adv Exp; Disc on issue of Sh/d)

PF/ Employees Comp Fund etc. XXX

XXX

Capital & Revenue Expenditure • Capital Expenditure: Is the money spent on buying fixed assets or adding to their value. These assets are expected to provide benefits to the business for more than one accounting period. Eg. Purchase of Land or cost of extension of existing building. • Characteristics of Capital Exp: 1) Amount involved is generally large 2) The benefit accruing from such exp is available for more than 1 accounting period. 3) The exp is of non-recurring nature 4) It may result in an increase in the val of an asset already possessed.

• Revenue Expenditure: Revenue expenditure is the money spent on running the business on a day-to-day basis. Eg. Salaries paid to employees, misc. exp etc. Therefore revenue exp is incurred to carry on the normal course of business and to maintain the fixed assets in good condition. Since a revenue expenditure is of benefit for the current accounting period only it is debited to an exp. a/c transferable to Tr./P&L A/c. • Characteristics of Revenue Exp: 1) Amount involved is relatively small 2) The benefit accruing from such exp is available for only 1 accounting period. 3) The exp is of recurring nature 4) It is incurred in pursuance of trading activities.

Besides the main differences the following are worth noting: CAPTIAL EXPENDITURE

REVENUE EXPENDITURE

It is debited to an asset a/c

It is debited to an expense a/c

It is a real a/c

It is a nominal a/c

It does not affect the profit of an a/c period directly

It directly affects the profit

It may be incurred before or after the commencement of the business

It is always incurred after the commencement of the business.

RULES FOR DETM. CAP EXP

RULES FOR DTM REV. EXP

It is incurred for the purpose of acquiring long term assets

Exp for day to day conduction of the bsns.

If the exp is incurred to improve the present condition of an existing asset that enhances its value.

Expenditure on consumable items. Eg. Raw mat, stationery.

If it increases the earning cap of the bsns.

Exp incurred in maintaining FA

Wages paid for erecting a mch/bld Preliminary exp incurred before commn of bsns.

Adjustments Adjustme nts. Closing St Depreciation

Journal Entry

Adjustment in Trading P&L A/c

Adjustment in Balance Sheet

Closing Stock A/c Dr Posted at the credit side Shown at the asset of trading a/c side To TradingA/c A/c Dr Posted at the debit side Shown as deducted Depreciation of the P&L A/c from concerned asset To Asset A/c

Outstanding Expenses A/c Dr. Exp. To Outs. Exp A/c Prepaid Prepaid Exp A/c Dr Expenses To Exp. A/c

Added to the concerned exp at the debit side of Tr/P&L A/c

Shown at the liabilities side

Deducted from the concerned exp at the debit side of P&L A/c

Shown at the asset side

Accrued Income

Accrued Inc A/c Dr To Income A/c

Added to the concerned exp at the credit side of P&L A/c

Shown at the asset side

Un earned Income

Income A/c Dr To un earned Inc.

Deducted from the concerned inc at the credit side of P&L A/c

Shown at the liabilities side

Adjustme nts.

Journal Entry

Adjustment in Trading P&L A/c

Adjustment in Balance Sheet