Preparation of final accounts is the last stage of the accounting cycle. The basic objective of every concern that maintains a book of accounts is to determine the profit or loss in their business at the end of the year. Every businessman wishes to ascertain the financial position of their business firm as a whole during a particular period. To achieve this objective, it is essential to prepare final accounts which include Manufacturing and Trading, Profit and Loss Account, and Balance Sheet. The determination of profit or loss is done by preparing a Trading, Profit and Loss Account.
The purpose of preparing the Balance Sheet is to determine the overall financial health of a business during a specific period. To prepare the Trading, Profit and Loss Account and Balance Sheet, it is important to follow these procedures and consider key points:
- Manufacturing Account: The Manufacturing Account is an essential component in preparing the Trading, Profit and Loss Account. It is necessary to determine the Cost of Goods Manufactured or Cost of Goods Sold in order to calculate Gross Profit or Gross Loss.
The main purpose of preparing a Manufacturing Account is to ascertain the cost of goods manufactured or sold, which is transferred to the Trading Account. This account is debited with opening stock and all items of costs related to production, including purchases, and credited with the closing balance of work in progress and cost of goods produced transferred to the Trading Account. The term “Cost of Goods Sold” refers to the cost of raw materials consumed plus direct related expenses. The components of a Manufacturing Account include:
The following are the important components to be considered for the preparation of Manufacturing Accounts:
- Opening Stock of Raw Materials
- Purchase of Raw Materials
- Purchase Returns
- Closing Stock of Raw Materials
- Work in Progress (semi-finished goods)
- Factory Expenses
- Opening Stock of Finished Goods
- Closing Stock of Finished Goods.
(1) Opening Stock:
The term Opening Stock refers to stock on hand at the beginning of the year, which includes raw materials, work-in-progress and finished goods.
(2) Purchases:
Purchases include both cash and credit purchases. If any purchase is returned, it will be deducted from gross purchases.
(3) Direct Expenses:
Direct expenses are chargeable or productive expenses which include factory rent, wages, freight on purchases, manufacturing expenses, factory lighting, heating and fuel costs. Customs duty, dock duty and packing expenses are also included. In short, all those expenses incurred in bringing the raw materials to the factory and converting them into finished goods will constitute direct expenses that need to be shown on the debit side of the trading account.
Calculation of Cost of Goods Sold
Cost of Goods Sold can be calculated as follows:
Illustration 1:
From the following information, calculate cost of goods sold:
Amount (Rs.) Stock of materials on 1.1.2003 35,000 Purchases of materials 62,000 Purchase Returns 2,000 Wages <
Particulars | Amount (Rs.)— | —Opening Stock of raw materials | Rs. 35,000Purchases | Rs.62,000 Less: Purchase Return| Rs.2,000 Freight and Carriage| Rs.10,000 Less: Closing stock of raw materials| Rs.5,000 Cost Of Raw Materials Consumed|Rs.1000Add: Direct Expenses : Wages | Rs.10,000 Factory Expenses| Rs.3,500 Other direct expenses| Rs.2,500 Cost of Goods Sold|Rs.1,16,000Trading Profit and Loss Account:
Trading Account and Profit and Loss Account are the two important parts of income statements. Trading Account is the first stage in the final account which is prepared to know the trading results of gross profit or loss during a particular period.
In other words, it is a summary of the purchases, and sale of a business or production cost of goods sold and the value of sales. The difference between the elements establishes the gross profit or loss which is then carried forward to the profit or loss account for calculation of net profit or net loss. Accordingly, if the sales revenue is higher than the cost of goods sold the difference is known as ‘Gross Profit,’ Similarly, if the sales revenue is less than the cost of goods sold the difference is known as ‘Gross Loss. Specimen Proforma of 1rading Account The following Specimen Proforma of a Trading Account which is widely used in practice: TRADING ACCOUNT For the year ended 31. 1…………… .. Particulars Amount Rs. Particulars Amount Rs. To Opening Stock To Purchases Less,’ Purchase Return To Direct Expenses: Carriage Inward Wages Freight Custom Duty Fuel and Power Factory Expenses Royalty on Production Other Direct Expenses To Gross Profit c/d (Transferred to P & LAIc) *** *** *** By Gross Sales Less ” Sales Return Net Sales By Closing Stock By Gross Loss c/d (Transferred to Freight P & LAIc) *** *** *** *** ***
The balancing figure in the Trading Account will be either Gross Profit or Gross Loss. The elements of the Trading Account on the Debit Side are: (1) Opening Stock, (2) Purchases and Purchase Returns, and (3) Direct Expenses. Gross Profit is the excess value of sales over the cost of Sales. On the Credit Side, the elements are: (1) Sales – referring to both cash sales and credit sales during a specific period, (2) Sales Return – deducting any goods returned from customers from total sales, and (3) Closing Stock – referring to unsold goods at the end of a specific period.
The closing stock may consist of raw materials, work-in-progress, and finished goods. Typically, the closing stock is not included in the Trial Balance. As a result, it is not entered into the books of Final Accounts 93 accounts. However, it is credited to the Trading Account and also recorded on the assets side of the Balance Sheet.
The value of the closing stock is determined through stock taking and brought into the books via an adjusting entry as Closing Stock Account To Trading Account Dr. The closing stock is valued at cost price or market price whichever is less.
Gross Loss refers to the excess of cost of sales over the sales revenue. The purpose of preparing the Trading Account is to calculate the Gross Profit or Gross Loss of a concern during a particular period. The following equations are highly useful for determining Gross Profit or Gross Loss:
- Calculation of Gross Profit: Sales – Cost of Sales = Gross Profit
- Calculation of Gross Loss: Cost of Sales + Gross Profit = Sales
- Alternate Calculation for Gross Profit: Stock in the beginning + Purchases + Direct Expenses – Stock at the end + Gross Profit = Sales
- Alternate Calculation for Gross Loss: Stock in the beginning + Purchases + Direct Expenses + Gross Profit = Sales + Stock at the end
Profit and Loss Account
The determination of Gross Profit or Gross Loss is done by preparing the Trading Account. However, it does not reveal the Net Profit or Net Loss of a concern during a particular period. This is where the second part of the income statement comes in, called the Profit and Loss Account. The purpose of preparing this account is to calculate the Net Profit or Net Loss of a concern.
Net profit refers to the surplus that remains after deducting related trading expenses from Gross Profit. These trading expenses include office and administrative expenses, selling, and distribution expenses.
Simply put, the Profit and Loss Account displays all operating expenses (such as office and administrative expenses, selling and distribution expenses, and non-operating expenses) on the debit side. On the credit side, all operating and non-operating gains and incomes are shown. The difference between these two sides is either a Net Profit or Net Loss. If the total of all operating and non-operating expenses exceeds the Gross Profit and other non-operating incomes, then it is considered a Net Profit. Conversely, if it falls short, it is known as a Net Loss. This result is then transferred to the Capital Account of Balance Sheet.
Specimen Proforma of a Profit and Loss Account The following Specimen Proforma which is used for preparation of Trading, Profit and Loss Account. 94 A Textbook of Financial Cost and Management Accounting Trading, Profit and Loss Account for the year ending 31st Dec •••• Particulars Amount Rs. Particulars Amount Rs. To Opening Stock To Purchases Less : Purchases Returns To Carriage Inwards To Wages To Gross Profit c/d To Gross Loss bId To Office & Administrative Expenses: Office Salaries Office Rent and Rates Printing and Stationery Telephone Charges Legal Charges Audit fees General Expenses To Selling
Expenses: Advertisement Discount Allowed Commission Paid Salesmen Salaries Godown Rent Carriage Outward Agent Commission Traveling Expenses To Distribution Expenses: Depreciation on Vehicle Upkeep of Motor Van Travelers’ Salaries Repairs and Maintenance To Non-Operating Expenses: Discount on Issue of Shares Preliminary Expenses To Net Profit c/d } (Transferred to Capital Nc) ••• ••• ••• By Sales Less : Sales Returns .*. ••• By Closing Stock By Gross Loss c/d ••• • •• •• •
By Gross Profit:
- Bid
By Non-Operating Incomes:
- Interest Received
- Discount Received
- Dividend Received
- Income from Investment
- Interest on Debenture
- Any other incomes
By Net Loss c/d (Transferred to Capital Account)
Components appearing on Debit Side of the P & L A/c:
All those expenses incurred during the manufacturing process of conversion of raw materials into finished goods will be treated as direct expenses which are recorded in the debit side of Trading Account.
Any expenditure incurred after that will be known as indirect expenses and should be shown on the debit side of the Profit and Loss Account. Indirect expenses can be classified into two categories: (1) Operating Expenses and (2) Non-Operating Expenses.
- Operating Expenses: These are the day-to-day expenses of operating a business, including office and administrative expenses, selling, and distribution expenses.
- Non-Operating Expenses: These are expenses incurred other than operating expenses. Non-operating expenses are typically related to financial matters.
This classification is important for final accounts preparation.
For example, interest payments on loans and overdrafts, losses on the sale of fixed assets, writing off fictitious assets such as preliminary expenses and underwriting commission are components that appear on the credit side of the P&L account. The following are the components shown on the credit side:
- Gross Profit brought down from Trading Account
- Operating Income: This refers to income earned from the operation of the business excluding Gross Profit and Non-Operating incomes.
- Non-Operating Income: This refers to incomes other than operating income.
For example, interest earned on investments outside of the business, profits from the sale of fixed assets, and dividends received are all included in the balance sheet.
The American Institute of Certified Public Accountants (AICPC) defines a balance sheet as a tabular statement summarizing balances (debits and credits) carried forward after an actual and constructive closing of books of accounts according to accounting principles. The purpose of preparing a balance sheet is to provide an accurate view of the status of the business as a going concern during a particular period.
The balance sheet is one of the important statements used by owners or investors to measure the financial soundness of the concern as a whole. It shows a list of liabilities and capital credit balances on the left-hand side, and a list of assets and other debit balances on the right-hand side. This statement is known as the Balance Sheet.” The Balance Sheet is also described as a statement showing the sources of funds and application of capital or funds.
Simply put, the liability side of a balance sheet displays the sources from which a business obtained its funds, while the assets side shows how those funds were utilized. This provides a comprehensive overview of all assets owned by the company and all liabilities and claims owed to both owners and outsiders. The Companies Act 1956 has established a specific format for presenting these assets and liabilities on the balance sheet for companies registered under this act.
There is no prescribed form of Balance Sheet for a sole trader and partnership firm. However, the assets and liabilities can be arranged in the Balance Sheet into (a) In the Order of Liquidity (b) In the Order of Performance (a) In the Order of Liquidity: When assets and liabilities are arranged according to their order of liquidity and ability to meet its short-term obligations, such an arrangement of order is called “Liquidity Order. ” The Specimen form of Balance Sheet arranged in the Order of Liquidity is given below: 6 A Textbook of Financial Cost and Management Accounting Balance Sheet (I) as on •••• Liabilities Amount Rs. Assets Amount Rs. Current Liabilities : Sundry Creditors Bills Payable Bank Overdraft Outstanding Expenses Long-Term Liabilities : Loan from Bank Loan from Mortgage Debenture Any other Long Term Total Liabilities Capital Account : Add: Net Profit Add : Interest on Capital Less : Drawings Reserves and Surplus : General Reserve Reserve for Contingency Reserve for Sinking Fund ; *** *** *** *** ***
Current Assets : Cash in Hand Cash at Bank Sundry Debtors Short Term Investments Stock in Trade Bills Receivable Prepaid Expenses Accrued Incomes Fixed Assets : Plant and Machinery Furniture & Fixtures Buildings Loose Tools Motor Cars Intangible Assets : Goodwill Patents Copy Rights Trade Marks Fictitious Assets : Preliminary Expenses Advertisement Misc. Expenses *** *** *** *** *** *** (b) In the order of Performance: This method is commonly used by the companies. The specimen fonn of Balance Sheet arranged in the order of Perfonnance is given below : Balance Sheet (II) as on •••• Liabilities Amount Rs.
Assets Amount Rs. Current Liabilities Fixed Liabilities Long-Term Liabilities Capital, Reserves and Surplus *** *** *** *** *** Current Assets Fixed Assets Fictitious Assets Any other Investments *** *** *** *** *** Classification of Assets and Liabilities I. Assets Business assets are resources or items of values owned by the business and which are utilized in the nonnal course of business operations to produce goods for sale in order to yield a profit. The assets are grouped into: (1) (2) (3) (4) (5) Fixed Assets Current Assets or Floating Assets Fictitious Assets Liquid Assets Contingent Assets Final Accounts 97 1) Fixed Assets: This class of assets include those of a tangible nature having a specific value and which are not consumed during the normal course of business and trade but provide the means for producing saleable goods or providing services. Components of Fixed Assets (1) Goodwill Land and Buildings Plant and Machinery Furniture and Fixtures Patents and Copy Rights Livestock Leaseholds Long-term Investments Vehicles (2) (3) (4) (5) (6) (7) (8) (9) (2) Current Assets or Floating Assets : The assets of a business of a transitory nature which are used for resale or conversion into a cash during the course of business operation.
In other words, those assets which are easily converted into cash in normal course of business during the shorter period say, less than one year are treated as current or floating assets. Components of Current Assets (1) Cash in hand Cash at Bank Inventories: Stock of raw materials Stock of work-in-progress Stock of finished goods. (2) (3) (4) (5) (6) (7) (8) Sundry Debtors Bills Receivable Short-Term Marketable Securities Short-Term Investments Prepaid Expenses (3) Fictitious Assets : Fictitious Assets refer to any deferred charges. They are really not assets.
Preliminary expenses, share issue expenses, discount on the issue of shares and debentures, and debit balance of profit and loss account are important components of fictitious assets.
Contingent assets refer to a right to property that may come into existence on the happening of some future event. For example, a right to obtain shares in another company on favorable terms or a right to sue for infringement of patents and copyrights.
Liquid assets are those that can be immediately converted into cash. In other words, these assets are easily encashable in the normal course of business.
Cash in hand, cash at bank, bills receivable, sundry debtors, marketable securities, short-term investments etc. are important components of liquid assets. When measuring liquid assets, the stock of raw materials, work-in-progress, finished goods and prepaid expenses are excluded from the components of current assets.
II. Liabilities
The Accounting Principles Board defines liabilities as economic obligations of an enterprise that are recognized and measured in conformity with generally accepted accounting principles.
The liabilities are classified into:
- Non-Current Liabilities
- Current Liabilities
Non-Current Liabilities:
Non-Current Liabilities, also known as Long-Term Liabilities, are liabilities that become due for payment beyond a period of one year. This can be five to ten years or more. The following are examples of Non-Current Liabilities:
- Long-Term Debt
- Debenture
- Long-Term Loan from Bank
- Long-Term Loan from Financial Institutions
- Long-Term Loan raised by Issue of Public Deposits. Long-term debt raised by issue of securities.
- Bills Payable
- Sundry Creditors
- Short-Term Bank Loans
- Dividend Payable
- Provision for Taxes Payable
- Short-Term Bank Overdraft
- Trade Liabilities and Accrued Expenses
- Outstanding Expenses
Final Accounts 99
ADJUSTMENT ENTRIES
The preparation of income statements, i.e., Trading, Profit and Loss Account, and Balance Sheet is the last stage of the accounting process. According to the principles of the double-entry system of accounting, all expenses and incomes relating to a particular period should be taken into account, whether incurred or not. In order to provide a true and fair view of the state of affairs of the business concern, it is essential to consider various adjustments while preparing Trading, Profit and Loss Account and Balance Sheet.
The following are the various adjustments usually related to:
- Closing Stock
- Outstanding Expenses
- Prepaid Expenses
- Accrued Income
- Income Received in Advance
- Depreciation
- Interest on Capital
- Interest on Drawings
- Bad Debts Provision for Doubtful DebtsProvision for Discount on Debtors Provision for Discount on Creditors
(1) Closing Stock: The term Closing Stock refers to the stock of raw materials, work in progress, and finished goods at the end of the year valued at cost price or market price whichever is less.
The following adjustment entry is Closing Stock Account To Trading Account – Dr. *** ***. The stock at the end of the period appears in the balance sheet, and its balance is carried forward to the next year as opening stock. The opening stock account balance will appear in the Trial Balance and will be closed and transferred to the debit of the Trading Account.
Outstanding expenses refer to those expenses that are incurred but remain unpaid during the accounting period, such as salary, rent, interest, etc.
In order to accurately determine the profit and loss for the year, it is essential to treat related expenses such as Salary Outstanding, Interest Outstanding, and Rent Outstanding as such. The necessary adjustment entry is: Expenses (Salaries) Account To Outstanding Expenses (Salaries) Nc Dr. As per accounting rules, respective expenses are nominal accounts and should be charged to the profit and loss account while also being shown on the liability side of the balance sheet.
Prepaid expenses are also known as unexpired expenses. These are expenses that have been incurred and paid in advance.
Such expenses are related to a future period. To ascertain the correct picture of the profit and loss accounts, the following adjustment entry is required for adjusting prepaid expenses:
Prepaid Expenses Account To Expenses Account Dr
The amount paid in advance will be deducted from the actual amount paid because it is related to the future accounting period. The net amount will be debited to the profit and loss account, and the balance in the prepaid expenses account shows as an amount due to the business concern.
Accrued Income, also known as Outstanding Income, is income accrued during an accounting period but not actually received in cash during that period. The adjustment entry will be as follows:
Accrued Income Account To Concerned Income Account Dr
The accrued income is added to its respective income account. The total accrued amount will be credited to profit and loss account and shown on the asset side of the balance sheet.
Income Received in Advance refers to any income received in advance which is not earned during an accounting period.
Therefore, if any income is received in advance, it should be treated as income for the subsequent year. The adjustment entry will be: Income Account To Income Received in Advance Account Dr. *** *** The Income Received in Advance is treated as a liability because it is an amount due to the party. Therefore, it is shown on the liability side of the balance sheet. Only the income actually earned will appear on the credit side of Profit and Loss Account.
(6) Depreciation: The term depreciation refers to loss on account of reduced value of assets due to wear and tear, obsolescence, effluxion of time or accident. Depreciation is treated as a cost or loss that arises when an asset is used in the normal course of time. In order to ascertain the correct value of assets in the balance sheet, it is essential to make following adjustment entry: Depreciation Account To Fixed Assets Account Dr. *** *** The amount of depreciation charged goes on debit side of profit and loss account and gets deducted from its respective assets shown on asset side of balance sheet.
(7) Interest on Capital: In order to ascertain true profitability of business concern, it’s essential that profit be determined after deducting interest on capital provided by proprietor. Interest on capital is included in capital expenditure; thus adjustment entry will be: Interest on Capital Account To Capital Account Dr. *** *** Interest on Capital gets charged as expenditure onto debit side profit and loss account while being added onto capital shown onto liability side balance sheet.
(8) Interest on Drawings: It’s like interest paid by proprietor for providing capital.
Any amount charged as interest on drawings made by the proprietors for personal use during a particular period is treated as interest on drawings. Interest on drawings should be taken as income to ascertain the true profit for a period. The adjustment entry will be: Capital Account To Interest on Drawings Account Dr. *** *** Interest on drawings is charged to the credit side of the profit and loss account, and it is deducted from the capital account shown on the liability side of the Balance Sheet.
(9) Bad Debts: The term bad debts refers to any amount that is definitely irrecoverable and termed as Bad Debts.
Any amount that is irrecoverable due to the inability of debtors should be treated as an actual loss for the business. This amount should be written off from the accounts of debtors, and a necessary adjustment entry will be made: Bad Debts Account To Debtor’s Personal Account Dr. *** *** As bad debts are treated as expenses, they are charged to the debit side of the profit and loss account. The amount deducted from debtors’ accounts is shown on the assets side of the balance sheet. (10) Provision for Doubtful Debts: This is similar to bad debts but with uncertain recovery. Therefore, doubtful debts should not be written off from the books of accounts.
Doubtful debts are treated as anticipated losses, and therefore suitable provisions must be made in the books of accounts. To ascertain the correct picture of the debtor’s balance, an adjustment entry is essential: Profit and Loss Account to Provision for Doubtful Account Dr. The provision for doubtful debts is an anticipated expense charged to the debit side of the profit and loss account, which is deducted from the debtor’s account shown on the asset side of the balance sheet.
Provision for Discount on Debtor: Discounts allowed to debtors are treated as expenses of a business concern.
Discounts are offered to encourage prompt payment by debtors on credit sales. When a discount is allowed, an adjustment entry is made: Discount Allowed Account To Debtor’s Personal Account Dr. *** *** The provision for the discount is charged to the debit side of the profit and loss account and deducted from the debtor’s account shown on the assets side of the balance sheet.
Similarly, a provision for discounts on creditors is made to encourage prompt payment by them. The firm receives such discounts when payments are made to its creditors in time.
Anticipated income or profit is necessary to create suitable provisions for ascertaining the correct picture of the creditor’s balance. To make an adjustment entry, use:
- For receipt of discount: Sundry Creditor’s Account To Discount Received Account Dr.
- For provision for discount on creditors: Provision for Discount on Creditor’s Account To Profit and Loss Account Dr.
The provision for discount on creditors is treated as an anticipated profit charged to the credit side of the profit and loss account.
It is deducted from various creditors listed on the liability side of the balance sheet. The following are the summary of adjustment entries:
- Closing Stock NC to Trading Account – Debit
- Expenses Account to Outstanding Expenses Account – Debit
- Prepaid Expenses Account to Expenses Account – Debit
- Accrued Income Account to Concerned Income Account – Debit
- Income Account – Debit, Income Received in Advance Account – Credit
- Depreciation on Fixed Assets:
Depreciation Account:
To Fixed Assets Account Dr. *** *** (7)For Interest on Capital:
Interest on Capital Account To Capital Account Dr. *** *** (8)For Interest on Drawings:
Dr. Capital Account To Interest on Drawing Account (9) *** ***For Bad Debts:
Bad Debts Account To Debtor’s Personal Account Dr. *** *** Final Accounts /03 (10)For Provision for Doubtful Debts:
Profit and Loss Account Dr. *** *** ***,
To Provision for Bad and Doubtful Debts Account (11)For Provision for Discount on Debtors:
Discount Allowed Account To Debtors Personal Accounts(12)Provision for Discount on Creditors:
Dr.For Receipt of Discount:
Sundry Creditor Account To Discount Received Account Dr. *** ***
(b) For Provision for Discount on Creditors:
Provision for Discount on Creditor’s Account To Profit and Loss Account
Difference between Profit and Loss Account and Balance Sheet Dr. *** ***
Profit and Loss Account (1)
Balance Sheet (1)
The Profit and Loss account is prepared with the debit or credit balance of Nominal Accounts. It reveals the net profit or net loss of a concern during a particular period. The difference between the two sides of Trading Accounts will be gross profit transferred to Profit and Loss account.
The debit or credit balances of nominal accounts are closed by transferring Profit and Loss Account. It shows the assets and liabilities on a particular date. It is a statement of financial position on a particular date. The difference between the two sides of profit and loss account will be Net Profit or Net Loss transferred to liability side of Balance Sheet. accounts do not require to close them. (2) (3) (2) (3) (4) (4) It is the statement of static in nature thus, Illustration: 2 From the following informations of Jansons Ltd. n 31 sl March, 2003 you are required to prepare the Trading, Profit and Loss Nc and Balance Sheet: Rs. Rs. Opening Stock Bills Receivable Purchases Wages Insurance Sundry Debtors Carriage Inward Commission (Dr. ) Interest on Capital Stationery Return Inward 5,000 22,500 1,95,000 14,000 5,500 1,50,000 4,000 4,000 3,500 2,250 6,500 Capital Commission (Cr. ) Return Outward Trade Expenses Office Fixtures Cash in Hand Cash at Bank Rent & Rates Carriage Outward Sales Bills Payable Creditors Closing Stock 89,500 2,000 2,500 1,000 5,000 2,500 23,750 5,500 7,250 2,50,000 15,000 98,250 12,500 04 A Textbook of Financial Cost and Management Accounting Solution: Dr. Trading, Profit & Loss Ale of Jansons Ltd. for the year ending 31st March, 2003 Cr. Particulars Amount Rs. Particulars Amount Rs. To Opening Stock To Purchase Less: Pu’rchase Return 5,000 1,95,000 2,500 1,92,500 14,000 4,000 1,53,000 3,68,500 By Sales Less : Sales Return 2,50,000 6,600 2,43,500 1,25,000 By Closing Stock To Wages To Carriage Inward To Gross Profit cld To To To To To To To To Insurance Commission Interest on Capital Stationery Trade Expenses Rent & Taxes Carriage Outward Net Profit c/d ,68,500 By Gross Profit bId By Commission 1,53,000 2,000 5,500 4,000 3,500 2,250 1,000 5,500 7,250 1,26,000 1,55,000 1,55,000 Balance Sheet of Jansons Ltd. Liabilities Amount Rs. Assets Amount Rs. Creditors Bills Payable Capital Add : Net Profit 98,250 15,000 89,000 1,26,000 2,15,500 Cash in Hand Cast at Bank Bills Receivable Stock Sundry Debtors Office Fixtures 2,500 23,750 22,500 1,25,000 1,50,000 5,000 3,28,750 3,28,750 Illustration: 3 From the Trial Balance in illustration 12 of Chapter on Trial Balance you are required to prepare a Trading, Profit and Loss Account and Balance Sheet. Final Accounts 05 Solution: Dr. Particulars To Purchase Trading, Profit and Loss Account for the year ending 31. 4. 2003 (Rs. in lakhs) Cr. Amount Rs. 1,500 Particulars Amount Rs. By Sales Less: Sales Return To Gross Loss cld 1,250 100 1,150 350 1. 500 2 758 1,500 To Gross Loss bId To Telephone Rent To Stationery To Rent To Salaries 350 40 20 100 250 760 By Discount By Net Loss cld (Balancing figure) 760 Balance Sheet as on 31. 4. 2003 Liabilities Capital Less : Net Profit Less: Drawings Sundry Creditors 4,500 758 3,742 100 3,642 100 3,742 Amount Rs. Assets Cash Bank Furniture Sundry Debtors Amount Rs. ,242 1,400 500 600 3,742 Illustration: 4 From the Trial Balance in illustration 14 of Chapter on Trial Balnce you are required to Prepare Trading, Profit and Loss Account and Balance Sheet : Solution: Dr. Particulars To Purchases To Freights To Gross Profit cld To To To To To Discount allowed Rent Paid Salaries Depreciation Net Profit cld Trading, Profit and Loss Account for the year ending 31. 3. 2003 Amount Rs. 6. 000 500 5,000 11,500 150 400 1. 000 1,000 4. 250 6,800 By Gross Profit bId By Dividend Received By Interest on Investment Particulars By Sales Cr. Amount Rs. 11,500 11. 00 5,000 300 1,500 (Balancing figure) 6. 800 /06 A Textbook of Financial Cost and Management Accounting Balance Sheet as on 31. 3. 2003 Liabilities Amount Rs. Assets Amount Rs. Capital Add: Net Profit Less: Drawings 65,000 4,250 69,250 500 68,750 5,000 970 74,720 Cash Account Stock Machinery Furniture Building Bank Sundry Debtors 33,970 10,000 9,000 5,000 5,000 4,500 7,250 74,720 Sundry Creditors Share Capital IIIustration: 5 From the following particulars of Mrs. Raman & Co. , you are required to prepare Trading, Profit and Loss Account and Balance Sheet for the year ended 31 st Dec. 2003 : Rs. Rs.
Sales Sales Return Stock at the beginning Purchases Purchases Return Direct Wages Direct Expenses Carriage Inwards Capital at the beginning Drawings Sundry Debtors Sundry Creditors 65,000 500 8,000 29,000 300 5,000 5,000 4,000 30,000 5,000 10,000 12,000 Discount Allowed Discount Received Salaries Interest paid Furniture Buildings Plant and Machinery Cash in Hand Bills Payable Reserve for Bad and Doubtful Debts Bad Debts Closing stock at the end 100 500 3,000 400 3,000 20,000 20,000 1,000 6,200 500 300 8,000 Additional Information (1) (2) (3) (4) (5) Outstanding Salaries Rs. 500 Interest on Capital at 10% P. A.
Depreciation on Plant and Machinery at 10% P. A. and Buildings at 5% P. A. Prepaid of Interest Rs. 100 Provision for Bad and Doubtful Debts at 10% on Debtors Final Accounts 107 Solution: Dr. Particulars To Opening Stock To Purchases Less : Purchases Return To Carriage Inward To Dintct Wages To Direct Expenses To Gross Profit cld To Discount allowed To Salaries Add : Outstanding To Interest paid Less: Prepaid Expenses To Bad Debts Add : 10% of ProviSiOn} For Doubtful Debts Less : Existing of Doubtful Debits To Interest on Capital at 10% P. A To Depreciation : 10% on Plant and Machinery 5% on Buildings To Net Profit cld 29,000 300
Trading, Prpfit and Loss Account for the year ended 31st Dec. 2003 Amount Rs. 8,000 28,700 4,000 5,000 5,000 21,800 72,500 100 3,000 500 400 100 3,500 300 300 1,000 1,300 By Gross Profit bId By Discount Received Particulars By Sales Less: Sales Return By Closing Stock 65,000 590 Cr. Amount Rs. 64,500 8,000 72,500 21,800 500 } } } 500 800 3,000 2,000 1,000 11,600 22,300 22,300 Balance Sheet as on 3151 Dec. 2003 Liabilities Capital Add: Net Profit Add: Interest on Capital Less : Drawings Sundry Creditors Outstanding Salary Bills Payable 30,000 11,600 41,600 3,000 44,600 5,000 39,600 12,000 500 6,200 Amount Rs.
Assets Cash in hand Furniture Closing Stock Plant and Mach. Less : Depreciation Buildings Less : Depreciation Prepaid Interest Sundry Debtors Less : Provision for} Doubtful Debts 20,000 2,000 20,000 1,000 10,000 800 9,200 58,300 18,000 19,000 100 Amount Rs. 1,000 3,000 8,000 – 58,300 108 A Textbook of Financial Cost and Management Accounting Illustration: 6 From the foIl owing transactions of Mrs. Sharma & Co. , you are required to Prepare Trading, Profit and Loss Account and Balance Sheet for the year ended 31 st Dec. 2003 : Rs.
Sales
Sales Return
Purchases Return Outwards
Carriage Outward
Carriage Inward
Opening Stock
Direct Expenses
Capital Furniture
Bank Overdraft Buildings Plant and Machinery Sundry Creditors Bills Payable 3,55,000 5,000 2,52,000 2,000 1,000 5,000 40,000 5,000 60,000 5,000 10,000 45,000 40 ,000 25 ,000 30 ,000
Sundry Debtors Rent Received Discount Received Discount Allowed Commission Allowed Taxes and Insurance Provision for Doubtful Debts Bad Debts Salaries Dividend Paid General Expenses Rent Paid Bills Receivable Rs.
30 ,000
3 ,000
3 ,000
2 ,000
1 ,000
3 ,000
2 ,000>Provision for Doubtful Debts Bad Debts Salaries Dividend Paid General Expenses Rent Paid Bills Receivable Rs. 21,500
Additional Informations (1) (2) Stock at the end Rs. 42,000 Depreciation made on Plant and Machinery Buildings Rs. 2oo0 Rs. 1000 (3) Provision for Doubtful Debts at 5% on Sundry Debtors Outstanding Rent Rs. 1000 Prepaid Salaries Rs. 1000 Interest on Capital at 5% (4) (5) (6) Solution: Trading, Profit and Loss Account for the year ended 31st Dec. 2003 Particulars Amount Rs. Particulars Amount Rs. To Opening Stock To Purchases Less ” Purchase Return To Carriage Inward To Direct Expenses To Gross Profit cld To To To To To Carriage outward Discount allowed Commission allowed Dividend Paid General Ex pe nses 0,000 2,52,000 2,000 2,50,000 5,000 5,000 92,000 3,92,000 1,000 2,000 1,000 5,000 5000 Sales Less ” Sales Return By Closing Stock 3,55,000 5,000 3,50,000 42,000 3,92,000 By Gross Profit bid By Rent Received By Discount Received 92,000 3,000 3,000 Final Accounts /09 To Depreciation on Plant & Machinery Buildings 20,000 To Salaries 1,000 Less: Prepaid To Rent Paid Add : Outstanding Rent To Bad Debts Add : Bad & Doubtful Debts 3,000 1,000 1,500 1,500 2,000 1,000 19,000 4,000 3,000 Less : Existing Doubtful Debts 2,000 To Taxes and Insurance To Interest on Capital To Net Profit c/d 1,000 3,000 3,000 51,000 98,000 98,000
Balance Sheet as on 31 s1 Dec. 2003 Liabilities Amount Rs. Assets Amount Rs. Capital Add: Net Profit Add : Interest on Capital Bank Overdraft Sundry Creditors 60,000 51,000 1,11,000 3,000 1,14,000 10,000 25,000 30,000 1,000 Sundry Debtors Less : Provision for Bad & Doubtful Debts Furniture Buildings Less : Depreciation Plant & Machinery Less: Depreciation Prepaid Salaries Stock at end Bills Receivable 30,000 1,500 28,500 5,000 45,000 44,000 38,000 1,000 42,000 21,500 1,80,000 1,000 40,000 2,000 Bills Payable Outstanding Rent 1,80,000 Illustration: 7 The following are the particulars of Mr. I. M. Pandey for the year ended 31 51 Dec. 003 : Capital Land & Building Goodwill Furniture & Fixtures Bills Receivable Bills Payable Sundry Debtors Commission Paid Dividend Paid Bank Overdraft Discount Allowed Carriage Inwards Carriage Outwards Opening Stock: Raw Materials Finished goods Purchase of Raw Materials 1,00,000 1,00,000 30,000 15,000 15,000 24,000 40,000 5,000 4,000 23,000 3,000 15,000 7,000 1,50,000 75,000 5,00,000 Sundry Creditors Plant & Machinery Investments Cash in Hand Cash at Bank Drawings Long-Term Loan Salaries Coal and Fuel Factory rent & rates General Expenses Advertisement Provision for Bad & Doubtful Debts Sales Sales Return 50,000 30,000 25,000 20,000 5,000 20,000 2,00,000 20,000 15,000 20,000 4,000 5,000 } 2,000 8,50,000 10,000 llO Purchase Returns Direct Wages (Factory) Power 5,000 80,000 30,000 A Textbook of Financial Cost and Management Accounting Additional Information (1) Stock at the end of the year Rs. ,00,000 A provision for doubtful depts. at 5% on Sundry Debtors Interest on Capital at 5% P. A. Depreciation on building Rs. 1,000 and Rs. 3,000 on Machinery to be provided Accrued commission Rs. 12,500 Interest has accrued on investment Rs. 15,000 Salary Outstanding Rs. 2,000 Prepaid Interest Rs. 1,500 (2) (3) (4) (5) (6) (7) (8) You are required to prepare Manufacturing, Trading and Profit and Loss Account for the year ended 31 st Dec. 2003. Solution: Manufacturing Account Particulars Amount Rs. Particulars Amount Rs. To Opening Stock of Raw Materials To Purchase Less: Purchase Return To Carriage Inwards To Direct Wages To Power To Coal and Fuel To Factory Rent and Rates ,50,000 5,00,000 5,000 4,95,000 15,000 80,000 30,000 15,000 20,000 8,05,000 By Cost of Manufactured goods transferred to Trading A1c 8,05,000 8,05,000 Trading, Profit and Loss Account Particulars Amount Rs. Particulars Amount Rs. To Opening Stock of finished goods To Cost of goods transferred from Manufacturing A1c To Gross Profit cld To To To To To To Carriage Outward Discount Allowed Commission Paid Dividend Paid General Expenses Advertisement 75,000 8. 05,000 60,000 9,40,000 7,000 3. 000 5,000 4,000 4,000 5,000 } Sales Less : Sales Return By Closing Stock 8,50,000 10,000 8,40,000 1,00,000 9,40,000 By Gross Profit bId By Accrued Commission By Accrued Interest 60,000 12,500 15,000 Final Accounts 11/
To Salaries Add : Outstanding To Interest Paid Less : Prepaid To Provision for Bad & Doubtful Debts Add: Bad Debts 20,000 2,000 7,000 1,500 22,000 5,500 } 2,000 4,000 6,000 Less: Old Provision for } Doubtful Debts To Depreciation on Building Machinery To Interest on Capital @ 5% P. A. To Net Profit c/d 2,000 1,000 3,000 4,000 4,000 5,000 19,000 87,500 87,500 Balance Sheet as on 31S Dec. 2003 Liabilities Capital Add : Net Profit Add: Interest on Capital Less : Drawings Bills Payable Sundry Creditors Salary Outstanding Long-Term Loans Bank Overdraft 1,00,000 19,000 1,19,000 5,000 1,24,000 20,000 1,04,000 24,000 50,000 2,000 2,00,000 23,000 Amount Rs.
Assets Sundry Debtors Less : Provision for Bad & Doubtful Debts Goodwill Furniture & Fixtures Bills Receivable Land & Building Less : Depreciation Plant & Machinery Less : Depreciation Accrued Commission Accrued Interest Prepaid Interest Cash in Hand Cash at Bank Investments Stock at the end 40,000 2,000 38,000 30,000 15,000 15,000 1,00,000 1,000 30,000 3,000 99,000 27,000 12,500 15,000 1,500 20,000 5,000 25,000 1,00,000 4,03,000 Amount Rs. 4,03,000 Illustration : 8 From the following information, you are required to prepare Trading and Profit and Loss Account and Balance Sheet Rs. Raman’s Capital Raman’s Drawings Plant and Machinery Freehold Property Purchases Purchase Return 2,28,800 13,200 99,000 66,000 1,10,000 1,100 Stock 1. 4. 003 Wages Sundry Creditors Postage and Telegram Insurance Gas and Fuel Rs. 38,500 35,200 44,000 1,540 1,760 2,970 112 A Textbook of Financial Cost and Management Accounting Salaries Office Expenses Office Furniture Discount allowed Sundry Debtors Loan to Mr. Kumar } At 10% p. a. balance on 1. 4. 2003 Cash at Bank BiIIs Payable 13,200 2,750 5,500 1,320 29,260 44,000 29,260 5,500 Bad Debts Office Rent Freight Loose Tools Factory Lighting Provision for bad and } doubtful debts Interest on loan to } Mr. Kumar Cash on hand Sales 660 2,860 9,900 2,200 1,100 880 1,100 2,640 2,31,440 Additional Information (I) (2) (3) (4) (5) (6) (7) Stock on 1. 3. 2004 was valued at Rs. 2,6oo A new machine was installed during the year costing Rs. 15,400 but it was not recorded in the books as no payment was made for it. Wages Rs. l,loo paid for its erection have been debited to wage account Depreciation on plant and machinery by 33 113% ; furniture by 10% ; Freehold property by 5% Loose Tools were valued at Rs. I,76O on 31. 3. 2004 Of the sundry debtors Rs. 600 are bad and should be written off Maintain a provision of 5% on sundry debtors for doubtful debts The manager is entitled to a commission of 10% of the net profit after charging such commission ICA Inter. 2oo1J Solution: . Shri Raman Trading, Profit and Loss Account for the year ended 31. 3. 004 Particulars To Opening Stock (1. 4. 2003) To Purchases Less : Returns To Wages Less : Erection of Dr. Cr. Amount Rs. 2,31,440 72,600 Amount Rs. 38,500 1,10,000 1,100 35,200 1,08,900 Particulars By Sales By Closing Stock Machinery To To To To To To To To To To To Gas and Fuel Freight Factory Lighting Gross Profit cld } 1,100 34,100 2,970 9,900 1,100 1,08,570 3,04,040 3,04,040 By Gross Profit bId By Interest Add : Outstanding 1,08,570 1,100 3,300 4,400 13,200 2,750 1,540 1,760 2,860 1,320 Salaries Office Expenses Postage & Telegram Insurance Office Rent Discount Bad Debts Add : Bad debts Add : New Provision 660 600 1,430 2,690 Final Accounts J/3
Less: Old Provision To Depreciation : Machinery Furniture Freehold Property Loose Tools To Commission to Manager To Net Profit c/d } (Transferred to Balance sheet) 880 38,500 550 3,300 440 1,870 42,790 4,080 40,800 1,12,970 1,12,970 Balance Sheet As at 31. 3. 2004 Liabilities Capital Add : Net Profit 2,28,800 40,800 2,69,600 13,200 2,56,400 5,500 59,400 Amount Rs. Assets Plant &Machinery Add: New Machinery (15400 +1100) Less : Depreciation Freehold property Less: Depreciation Office Furniture Less : Depreciation Loose Tools Less : Depreciation Closing Stock Sundry Debtors Less : bad debts 99,000 16,500 1,15,500 38,500 66,000 3,300 5,500 550 2,200 440 29,260 660 28,600 Amount Rs. Less: Drawings
On 31st December 2003, William & Co.’s Trial Balance included the following:
Debit Balances Credit Balances Bills Payable Sundry Creditors Manager’s Commission Outstanding 77,000 62,700 4,950 < td>< tr> Loan to Mr. Kumar Add: Interest accrued Cash at Bank Cash in hand Rs.44,000 Rs.3,300 Rs.3,25,380 Rs.47,300 Less : Provision for doubtful debts Rs.1,430 The total of the above debit balances is INR 77, 000 and credit balances are INR 72, 600.
The Debt Balance Stock on January I of that year was as follows:
- Raw Materials: INR 21, 000
- Work in Progress: INR 9, 500
- Finished goods: INR 15, 500
- Sundry Debtors: INR 24, 000
- Carriage on Purchases: INR ’
A Textbook of Financial Cost and Management Accounting Bills Receivable Wages Salaries Telephone, Postage etc. Repairs to Office Furniture Cash at Bank Office Furniture Lighting 15,000 13,000 10,000 1,000 350 17,000 10,000 1,350 3,02,800 Capital Account Sales Current Asset of William Repairs to Plant Purchases Plant and Machinery Rent General Expenses I ,00,000 1,67,200 8,500 1,100 85,000 70,000 6,000 1,500 3,02,800 The following additional information is available : (a) Stocks on 31″ December, 2003 were: Raw Materials 16,200 Finished goods 18,100 Semi finished goods 7,800 (b) Salaries and wages unpaid for December 2003 were respectively, Rs. 900 and Rs. ,000 (c) Machinery is to be depreciated by 10% and office furniture by 7 1/2 % (d) Provision for doubtful debts is to be maintained @ 1% of sales (e) Office premises occupy Y2 of total area. Lighting is to be charged as to 2/3 to factory and 113 to office. Prepare the Manufacturing Account Trading Account, Profit and Loss Account and the Balance Sheet relating to 2003. Solution: Dr. Particulars Manufacturing Account of William & Co. for the year ended 31 51 December 2003 Amount Particulars Amount Cr. Raw material consumed: To Opening Stock of Raw Materials Add ” Purchases Less ” Closing Stock 21,000 85,000 1,06,000 16,200 13,000 2,000 15,000 1,500 1,100 4,500 9O
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Capital:
In business, Capital refers to the value of assets owned by a business and used during the course of operations to generate additional capital or wealth. It is also known as Owner’s Equity or Net Worth. When a business first comes into existence, the initial capital may be provided by the proprietor in the form of cash which needs to be converted into plant and machinery, building and stock materials prior to commencing operations.
Capital is equal to the total assets.
Current liabilities refer to any amount owed by the business that is currently due for payment. In other words, these are liabilities that are paid within one year. The following components make up current liabilities: