1.Meaning of Final Accounts
Final accounts are financial statements prepared at the end of an accounting year to determine the profit or loss of a business and its financial position.
They answer two main questions:
1.How much profit or loss did the business make?
2.What is the financial condition of the business?
Final Accounts include:
1.Trading Account
2.Profit and Loss Account
3.Balance Sheet
2.Objectives of Final Accounts
1.To determine profit or loss of the business
2.To know the financial position of the business
3.To find the correct amount of capital
4.To know total assets and liabilities
5.To help in future planning
6.To provide information to owners, investors, banks
7.To summarize all accounting records
TRADING ACCOUNT
3.Definition of Trading Account
Trading account is prepared to calculate Gross Profit or Gross Loss. It includes only transactions directly related to goods.
In simple words:
At what cost were goods purchased and at what price were they sold?
4.Objectives of Trading Account
1.To calculate gross profit or gross loss
2.To check control over direct expenses
3.To compare purchases and sales
4.To measure trading efficiency
5.To provide base for Profit and Loss Account
5.Specimen of Trading Account
Trading Account of ABC Traders for the year ending 31st Chaitra
| Dr. Particulars | Amount | Cr. Particulars | Amount |
|---|---|---|---|
| To Opening Stock | 50,000 | By Sales | 3,00,000 |
| To Purchases | 2,00,000 | By Closing Stock | 60,000 |
| To Carriage Inward | 10,000 | ||
| To Wages | 20,000 | ||
| To Gross Profit c/d | 80,000 | ||
| Total | 3,60,000 | Total | 3,60,000 |
6.Debit Side Items of Trading Account
1.Opening stock
2.Net purchases
3.Carriage inward
4.Factory wages
5.Manufacturing expenses
7.Credit Side Items
1.Net sales
2.Closing stock
8.Procedure to Prepare Trading Account
1.Record opening stock on debit side
2.Record net purchases on debit side
3.Record direct expenses on debit side
4.Record sales on credit side
5.Record closing stock on credit side
6.Balance both sides
7.If credit side is greater, it is Gross Profit
8.If debit side is greater, it is Gross Loss
PROFIT AND LOSS ACCOUNT
9.Definition
Profit and Loss Account is prepared to find Net Profit or Net Loss by considering indirect expenses and indirect incomes.
10.Advantages of Profit and Loss Account
1.Shows real earning of the business
2.Helps to control expenses
3.Measures overall performance
4.Helps in adjusting capital
5.Provides base for balance sheet
11.Specimen of Profit and Loss Account
| Dr. Particulars | Amount | Cr. Particulars | Amount |
|---|---|---|---|
| To Salaries | 30,000 | By Gross Profit | 80,000 |
| To Rent | 10,000 | By Interest Received | 5,000 |
| To Advertising | 5,000 | ||
| To Depreciation | 10,000 | ||
| To Net Profit c/d | 30,000 | ||
| Total | 85,000 | Total | 85,000 |
12.Debit Side Items
1.Office salary
2.Office rent
3.Advertising
4.Carriage outward
5.Depreciation
6.Bad debts
13.Credit Side Items
1.Gross profit
2.Interest received
3.Discount received
4.Commission received
14.Procedure
1.Bring gross profit to credit side
2.Record indirect expenses on debit side
3.Record indirect incomes on credit side
4.Balance the account
5.Net profit is added to capital
TRADING ACCOUNT VS PROFIT AND LOSS ACCOUNT
1.Trading account shows gross profit; P&L shows net profit
2.Trading includes direct items; P&L includes indirect items
3.Trading is prepared first; P&L later
4.Result of trading account is transferred to P&L
BALANCE SHEET
15.Definition
Balance sheet is a statement showing assets, liabilities, and capital of a business on a specific date.
16.Specimen of Balance Sheet
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Capital | 5,40,000 | Building | 3,00,000 |
| Creditors | 1,00,000 | Stock | 1,00,000 |
| Loan | 50,000 | Debtors | 80,000 |
| Outstanding Exp. | 20,000 | Cash | 1,30,000 |
| Total | 7,10,000 | Total | 7,10,000 |
17.Liabilities Side Items
1.Capital
2.Loans
3.Creditors
4.Bills payable
5.Outstanding expenses
18.Assets Side Items
1.Fixed assets
2.Current assets
3.Intangible assets
4.Fictitious assets
5.Investments
ADJUSTMENTS IN FINAL ACCOUNTS
19.Closing Stock
1.Shown on credit side of trading account
2.Shown as asset in balance sheet
20.Prepaid Expenses
1.Deducted from expense in P&L
2.Shown as asset in balance sheet
21.Outstanding Expenses
1.Added to expense in P&L
2.Shown as liability in balance sheet
22.Depreciation
1.Treated as expense in P&L
2.Deducted from asset value
23.Pattern to Solve Practical Problems
1.Prepare trading account
2.Find gross profit
3.Prepare profit and loss account
4.Find net profit
5.Adjust capital
6.Prepare balance sheet
7.Remember dual effect of adjustments
IMPORTANT QUESTIONS
1.Define Final Accounts and state their objectives.
Answer:
Final accounts are financial statements prepared at the end of an accounting year to determine profit or loss and the financial position of a business.
Objectives:
1.To find out profit or loss
2.To know financial position
3.To determine capital amount
4.To know assets and liabilities
5.To help in planning
6.To provide information to users
2.What is a Trading Account? Write its purpose.
Answer:
Trading account is prepared to determine Gross Profit or Gross Loss by comparing direct expenses with sales.
Purpose:
1.To find gross profit or loss
2.To control direct expenses
3.To measure trading efficiency
4.To compare sales and purchases
5.To help prepare P&L account
3.Prepare Trading Account
Opening Stock 40,000
Purchases 1,50,000
Purchase Return 10,000
Wages 20,000
Sales 2,50,000
Sales Return 20,000
Closing Stock 50,000
Trading Account
| Dr. Particulars | Amount | Cr. Particulars | Amount |
|---|---|---|---|
| To Opening Stock | 40,000 | By Sales (2,50,000–20,000) | 2,30,000 |
| To Purchases (1,50,000–10,000) | 1,40,000 | By Closing Stock | 50,000 |
| To Wages | 20,000 | ||
| To Gross Profit c/d | 80,000 | ||
| Total | 2,80,000 | Total | 2,80,000 |
4.Prepare Profit and Loss Account
Gross Profit 80,000
Salaries 25,000
Rent 10,000
Advertising 5,000
Interest Received 4,000
Depreciation 10,000
Profit and Loss Account
| Dr. Particulars | Amount | Cr. Particulars | Amount |
|---|---|---|---|
| To Salaries | 25,000 | By Gross Profit | 80,000 |
| To Rent | 10,000 | By Interest Received | 4,000 |
| To Advertising | 5,000 | ||
| To Depreciation | 10,000 | ||
| To Net Profit c/d | 34,000 | ||
| Total | 84,000 | Total | 84,000 |
5.Prepare Balance Sheet
Capital 3,00,000
Net Profit 34,000
Drawings 10,000
Creditors 70,000
Loan 50,000
Building 2,00,000
Stock 50,000
Debtors 60,000
Cash 84,000
Balance Sheet
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Capital (3,00,000+34,000–10,000) | 3,24,000 | Building | 2,00,000 |
| Creditors | 70,000 | Stock | 50,000 |
| Loan | 50,000 | Debtors | 60,000 |
| Cash | 84,000 | ||
| Total | 4,44,000 | Total | 4,44,000 |
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