1

Name of InstitutionFinal Accounts

There are three following stages of preparing final accounts of a trading concern:

1. Trading Account2. Profit and Loss Account3. Balance Sheet Manufacturing concerns prepare

Manufacturing Account also before preparing Trading Account

2

Name of InstitutionTrading Account

Gross profit or Gross loss is ascertained by preparing Trading A/c. Cost of goods sold = opening stock+ Net purchases+ Direct expenses-

Closing stock Importance and purpose of preparing Trading A/c:• Ascertaining gross profit or gross loss• Ascertaining ratio of direct expenses to gross profit• Calculation of gross profit ratio• Comparison of stock with the stock of previous year• Comparing the actual performance with the desired performance• Comparing the actual performance with the previous performance

3

Name of InstitutionProfit and Loss Account

This account gives the overall profit or loss made or suffered during a particular period.

Importance:• Knowledge of net profit or net loss• Calculation of expenses ratio to sales• Comparison of actual performance with the

desired performance• Maintaining provision and reserves• Determining future line of action

4

Name of InstitutionManufacturing Account

This account gives the cost of the goods manufactured by a manufacturer during a particular period.

Dr Manufacturing A/c CrParticulars Amount Particulars Amount

To work in process (opening)

By work in process (closing)

To Raw Material consumed:

Opening stock

Add: purchase of raw material

Less: closing stock of raw material

By sale of scrap

To factory overheads By cost of production transferred to trading A/c

5

Name of InstitutionBalance sheet

‘A balance sheet is a mirror which reflects the true position of assets and liabilities on a particular date.’

Assets = Liabilities + Capital

Characteristics:• Balance sheet is a statement• Prepared on a specified date• It is a statement of assets and liabilities• Knowledge about the nature of assets and liabilities• Knowledge of financial position• Assets and Liabilities tally each other

6

Name of InstitutionObjectives:

• To assess the financial position of the firm

• Knowledge of proprietary ratio

• Protection against possible losses

• Calculation of financial ratios

• Calculation of working capital

• Knowledge regarding sources and application of funds

7

Name of Institution

While preparing final accounts, at the end of every accounting period, we come across certain problems. The accountant may come to know of certain adjustments to be made in the books of accounts to give a true picture of the state of affairs of the business after closing the books of accounts. These adjustments generally relate to the following:

Adjustment If appears in Trial Balance If appears in Adjustment

I. Closing stock Cr. Side of trading a/c (i) Cr. Side of trading A/c

(ii) Asset side of Balance sheet

II. Depreciation Dr. side of P/L a/c (i) Dr. side of P/L a/c(ii) Reduce the value of

concerned asset in balance sheet

III. Appreciation Cr. Side of P/L a/c (i) Cr. Side of P/L a/c(ii) Increase the value of

concerned asset in balance sheet

IV. Outstanding Expenses Liability side only in Balance Sheet (i) Added to concerned expense at the debit side of Trading or P/L a/c

(ii) Liability side of Balance Sheet

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Name of Institution

Adjustment If appears in Trial Balance If appears in Adjustment

V. Prepaid expenses Asset side of Balance Sheet (i) Deduce from concerned expenses at the debit side of Trading or P/L a/c

(ii) Asset side of Balance Sheet

VI. Outstanding or Accrued income

Asset side of Balance sheet (i) Added to the concerned income at the credit side of P/L a/c

(ii) Asset side of Balance Sheet

VII. Unearned Income Shown at the liabilities side of Balance Sheet

(i) Deduct from the concerned income at the credit side of P/L a/c

(ii) Shown at liabilities side of Balance Sheet.

VIII. Interest on capital Debit side of the P/L a/c (i) Dr. side of P/L a/c(ii) Increase amount of

capital at the liabilities side of Balance Sheet.

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Name of Institution

Adjustment If appears in Trial Balance If appears in Adjustment

IX. Interest on drawings Credit side of P/L a/c (i) Cr. Side of P/L a/c(ii) Deduct from capital

at liabilities side of Balance Sheet.

X. Interest on loan (BORROWED)Debit side of P/L a/c(ADVANCED)Credit side of P/L a/c

(i) Debit side of P/L a/c(BORROWED)(ii) Added to loan A/c at

liability side of Balance sheet.

(ADVANCED)(i) Credit side of P/L a/c(ii) Added to lon A/c at

asset side of Balance Sheet.

XI. Interest or dividend on investment

Credit side of P/L a/c (i) Credit side of P/L a/c(ii) Added to the value of

investment, shown at the asset side of Balance Sheet

XII. Bad Debts Debit side of P/L a/c (i) Debit side of P/L a/c(ii) Deducted from

debtors at the Asset side of Balance Sheet

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Name of Institution

Adjustment If appears in Trial Balance If appears in Adjustment

XIII. Provision for bad debt (i) Shown at Cr. Side of P/L a/c or

(ii) Deducted from total of bad debts, further bad debts at debit side of P/l a/c

Or(iii) Liability side in Balance Sheet

(i) Shown at liability side of Balance sheet

OrDeducted from sundry

debtors at the asst side of Balance sheet

(ii) Debit side of P/L a/c

XIV. Provision for discount on debtors

Debit side of P/L a/c (i) Debit side of P/L a/c(ii) Deducted from

debtors at the asset side of balance sheet

XV. Provision for discount on creditors

Credit side of profit and loss A/c (i) Credit side of P/L a/c(ii) Deducted from

creditors at the liability side of Balance Sheet

11

Name of InstitutionThe following is the trial balance of Mr. Kapur on 31st March

1993: Debit Credit

Cash in hand Rs. 1080Cash at bank 5260Purchases 81350

Sales 197560 Returns 1360 1000

Wages 20960Fuel and power 9460Carriage on sales 6400Carriage on purchases 4080Stock (1-4-92) 11520Buildings 60000Freehold land 20000Machinery 40000Salaries 30000Patents 15000General expenses 6000Insurance 1200

Capital 1,42,000Drawings 10,490Sundry debtors 29000

Sundry creditors 12600 ____________________________________________________________________________

353160 353160

12

Name of Institution

Taking into account the following adjustments, prepare Trading and P&L A/c and the Balance Sheet:

(a) Stock on hand on 31st March1993 is Rs. 13600(b) Machinery is to be depreciated at the rate of 10% and

the patents at the rate of 20%(c) Salaries for the month of March 1993 amount to

Rs.3000 were unpaid(d) Insurance includes a premium of 170 for next year(e) Wages include a sum of Rs.4000,spent on the erection

of cycle shed for employees and customers(f) A provision for bad and doubtful debts is to be created

to the extent of 5% on sundry debtors

13

Name of Institution

The following is the trial balance of Sri Om as on 31st March, 1999. You are requested to prepare the trading and Profit and Loss A/c for the year ended 31st March1999 and Balance

sheet as on that date after making the necessary adjustments:

Particulars Debit ( Rs.) Credit (Rs.)

Sundry debtors

Sundry creditors

Outstanding expenses

Wages

Carriage outwards

Carriage Inwards

General Expenses

Cash Discounts

Bad debts

Motor car

Printing and stationery

Furniture and fittings

Advertisement

Insurance

Salesmen’s commission

Postage and telephone

Salaries

Rates and taxes

Drawings

Capital Account

Purchases

Sales

Stock on 1.4.99

Cash at Bank

Cash in hand

500000

55000

100000

110000

50000

70000

20000

10000

240000

15000

110000

85000

45000

87500

57500

160000

25000

20000

1550000

2,50000

60000

10500

36,30,500

200000

14,43,000

19,87,500

36,30,500

14

Name of Institution

The following adjustments are to be made:1. Stock on 31st March 1999 was valued at Rs.7,25,0002. A provision for bad and doubtful debts is to be created to the

extent of 5% on sundry debtors3. Depreciate: Furniture and fittings by 10% Motor car by 20%4. Shri Om had withdrawn goods worth Rs.25000 during the year5. Sales include goods worth Rs.75000 sent out to Shanti& co. on

approval and remaining unsold. The cost of the goods was Rs.50000

6. The salesmen are entitled to a commission of 5% on total sales7. Debtors include Rs.25000 bad debts8. Purchases include purchase of furniture worth Rs.50000

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Name of InstitutionDepreciation

“Loss in the value and utility of assets due to their constant use and expiry of time is termed as depreciation”

Features of depreciation:• Depreciation is the loss in the value of assets• Loss should be gradual and constant• Depreciation is the exhaustion of the effective life of business• It is a normal feature• Maintenance of assets is not depreciation• It is continuing decrease in the value of assets• It is the allocation of cost of assets to the period of its life

16

Name of InstitutionCauses for depreciation:

By constant use By expiry of time By obsolescence By depletion Permanent fall in price By accidents

Importance or need for providing depreciation : For determination of net profit or loss For showing assets at fair prices and true value in the balance sheet Provision for funds in the replacement of assets Ascertaining accurate cost of production Distribution of dividend out of profit only Avoiding over payment of income tax

17

Name of InstitutionMethods of providing depreciation:

Fixed installment method Diminishing balance method Annuity method Depreciation fund method Insurance policy method Revaluation method Depletion method Machine hour rate method Sum of years digit method Replacement method

18

Name of InstitutionStraight line method/ Fixed installment method

Q1. On 1st July 1993, Raj & co. purchased machinery worth Rs.40000. On 1st July, 1995 they buy additional machinery worth Rs.10000. On 30thJune 1996 half of the machinery purchased on July 1993 is sold for Rs.9500. The company writes off 10% on the original cost. The accounts are closed every year on 31st December.

Show the machinery account for four years .

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Name of Institution

Machinery A/c

Dr. Cr.

Date Particulars J.F. Amount Date Particulars J.F. Amount

1st july 1993 To bank A/c 40000 Dec 31 1993

By depreciation(on 40000 for six months) 2000

Dec31 By bal c/d 38000

40000 40000

20

Name of InstitutionDiminishing or written down value method:

A manufacturing concern whose books are closed on 31st Dec purchased machinery for Rs.50000 on 1-1-90. Additional machinery was acquired for Rs.10000 on 1-7-91 and for Rs.16061 on 1-1-94. Certain machinery purchased for Rs.10000 on 1-1-90 was sold for Rs.5000 on 30-6-93.

Give the machinery account for 5 years. Depreciation is written off at 10% per annum on written down value.

21

Name of InstitutionReservesAmerican Institute of Accounting views “ The use of the term reserve be limited to indicate that an undivided art of

the asset is being held or retained for general or specific reserve”Reserves may be classified as under:

a) General reserve or revenue reserve1. Reserve for development fund2. Capital reserve3. Secret reserve4. Sinking fund

b) Specific reserve (Provision)1.Provision for bad debts2. Reserve for discount on debtors3. Reserve for discount on creditors4.Provision for a taxation