LECTURE NOTES

ON

HS105CSM: FINANCE AND ACCOUNTING

UNIT – II: FINAL ACCOUNTS

B.E CSM (AI&ML) II Year I Semester

Mohammed Ashfaq Hussain, MBA.(PhD).SHRM.SAP.PMP.

Associate Professor

Department of Master of Business Administration

LORDS INSTITUTE OF ENGINEERING & TECHNOLOGY

Approved by AICTE/Affiliated to Osmania University/Estd.2003
(An Autonomous Institution)
Survey No. 32, Near Police Academy, Appa Junction,
Himayath Sagar, Hyderabad, Telangana 500091.

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 Course Course Title Core/
Code Elective
HS105CSM Finance and Accounting Core
Contact Hours per Week
Prerequisite CIE SEE Credits
L T D P
- 3 - - - 30 70 3

Course Objectives

The course will introduce the students

⮚ To provide basic understanding of Financial and Accounting aspects of a business unit

⮚ To provide understanding of the accounting aspects of business
⮚ To provide understanding of financial statements
⮚ To provide the understanding of financial system
⮚ To provide inputs necessary to evaluate the viability of projects
⮚ To provide the skills necessary to analyse the financial statements

Course Outcomes

After successful completion of the course the students will be able to

1. Evaluate the financial performance of the business unit.

2. Take decisions on selection of projects.
3. Take decisions on procurement of finances.
4. Analyse the liquidity, solvency and profitability of the business unit.
5. Evaluate the overall financial functioning of an enterprise.

UNIT-I
Basics of Accounting: Financial Accounting–Definition- Accounting Cycle – Journal - Ledger and
Trial Balance-Cash Book-Bank Reconciliation Statement (including Problems)

UNIT-II
Final Accounts: Trading Account-Concept of Gross Profit- Profit and Loss Account-Concept of
Net Profit- Balance Sheet (including problems with minor adjustments)

UNIT-III
Financial System and Markets: Financial System-Components-Role-Considerations of the
investors and issuers- Role of Financial Intermediaries. Financial Markets-Players- Regulators and
instruments - Money Markets Credit Market- Capital Market (Basics only)
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 UNIT-IV
Basics of Capital Budgeting techniques: Time Value of money- Compounding- Discounting-
Future Value of single and multiple flows- Present Value of single and multiple Flows- Present
Value of annuities- Financial Appraisal of Projects– Payback Period, ARR- NPV, Benefit Cost
Ratio, IRR (simple ratios).

UNIT-V
Financial statement Analysis: Financial Statement Analysis- Importance-Users-Ratio Analysis-
liquidity, solvency, turnover and profitability ratios.
Suggested Readings:
1. Satyanarayana. S.V. and Satish. D., Finance and Accounting for Engineering, Pearson
Education
2. Rajasekharan, Financial Accounting, Pearson Education
3. Sharma. S.K. and Rachan Sareen, Financial Management, Sultan Chand
4. Jonathan Berk, Fundamentals of Corporate Finance, Pearson Education
5. Sharan, Fundamentals of Financial Management, Pearson Education

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 UNIT - II: FINAL ACCOUNTS
FINAL ACCOUNTS

The accounts prepared at the final stage of the accounting cycle to illustrate the profit or loss and
financial position of a business concern are known as the final accounts

Objectives of Final Accounts

To determine gross profit and net profit of the business during the year. To present the true financial
position of the business on a given date. To make effective control on financial activities of the
business. To make a summary presentation of all the financial transactions.

Objectives of Accounting (with diagram)

• Systematic Recording of Business Transactions:

• Ascertainment of Results:
• Ascertainment of Financial Position:
• Communicating Information to Various Users:

PREPARATION OF FINAL ACCOUNTS

In every business, the business man is interested in knowing whether the business has resulted in
profit or loss and what the financial position of the business is at a given time. In brief, he wants
to know (i)The profitability of the business and (ii) The soundness of the business.

The trader can ascertain this by preparing the final accounts. The final accounts are prepared
from the trial balance. Hence the trial balance is said to be the link between the ledger accounts
and the final accounts. The final accounts of a firm can be divided into two stages. The first stage
is preparing the trading and profit and loss account and the second stage is preparing the balance
sheet.
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CLASSIFICATION OF FINANCIAL STATEMENTS

Financial Statements of a sole trader comprise of the following statements:

I. Income Statement
(i) Trading Account and
(ii) Profit and loss Account

II. Position Statement or Balance Sheet

Income Statement
Income statement is prepared to find out the profit or loss of business for a particular
accounting year. Income statement is made up of the following accounts:

a) Trading Account and

b) Profit and loss Account

a) Trading Account :Trading Account is prepared to find out the Gross profit
earned or Gross loss suffered by the business from business activities during
an accounting year. This account is prepared in T-form. Following is the
proforma of a Trading Account:
b) Profit and Loss Account :After finding out the gross profit/ gross loss by
preparing the Trading Account, Profit and Loss Account is prepared to find
out the net profit / net loss of the business during an accounting year. This
account is also prepared in T-form. Following is the proforma of a Profit
and loss Account

II. Position Statement or Balance Sheet

Balance Sheet or Position Statement is prepared to find out the financial position of
a business on a particular date. Generally it is prepared on the last date of an
accounting year. It is prepared after preparing Trading Account and Profit &
Loss Account.
Balance Sheet has two sides. Left hand side is known as Liabilities side and
right hand side is known as Assets side.
The Liabilities side is used for showing liabilities of the business. The term
liabilities include ‘Internal Liabilities’ and ‘External Liabilities’ of the business. Internal
liabilities means the amount payable by the business to its owner, while external
liabilities mean the amount payable to outsiders.

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 Trading Account

The first step in the preparation of final account is the preparation of trading account. The main
purpose of preparing the trading account is to ascertain gross profit or gross loss as a result of
buying and selling the goods.

Proforma of Trading Account

Trading account of Mr.………… ………. for the year ended ……………………

Dr. Cr.
Particulars Amount Particulars Amount
To Opening Stock Xxxx By Sales xxxx
To Purchases xxxx Less: Returns Outwards xx
Less: Return Inwards xxx Xxxx
Xxxx By Closing Stock Xxxx
To Wages Xxxx By Profit and Loss A/c Xxxx
To Carriage Inwards Xxxx (Gross Loss c/d)
To Direct Expenses Xxxx
To Freight Xxxx
To Manufacturing Expenses Xxxx
To Power Xxxx
To Coal, Gas and Water Xxxx
To Factory Lighting Xxxx
To Octroi Xxxx
To Customs Duty Xxxx
To Royalty Xxxx
To Factory Rent and Rates Xxxx
To Profit and Loss Xxxx
(Gross Profit c/d)

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PROBLEM 1 :

From the following trial balance of ZB Sons, prepare a trading account for the year ending 31
December 2019.

The closing stock was valued at $160,000.

SOLUTION :

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PROBLEM 2 :

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 Finally, a ledger may be defined as a summary statement of all the transactions relating to a
person , asset, expense or income which have taken place during a given period of time. The up-
to-date state of any account can be easily known by referring to the ledger.

Concept of Gross Profit

Gross profit is the profit a business makes after subtracting all the costs that are related to manufacturing
and selling its products or services. You can calculate gross profit by deducting the cost of goods sold
(COGS) from your total sales.

The gross profit margin formula, Gross Profit Margin = (Revenue – Cost of Goods Sold)

You can find the gross profit by subtracting the cost of goods sold (COGS) from the revenue. For example,
if a company had $10,000 in revenue and $4,000 in COGS, the gross profit would be $6,000. This figure is on
your income statement.

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 Profit And Loss Account

The business man is always interested in knowing his net income or net profit.Net profit
represents the excess of gross profit plus the other revenue incomes over administrative, sales,
Financial and other expenses. The debit side of profit and loss account shows the expenses and
the credit side the incomes. If the total of the credit side is more, it will be the net profit. And if
the debit side is more, it will be net loss.

Proforma of Profit And Loss Account

Profit And Loss Account for the year ended ……………………

Dr. Cr.
Particulars Amount Particulars Amount
To Gross Loss (Trading A/c) Xxxx By Gross Profit (Trading A/c) Xxxx
To Salaries and Wages Xxxx By Discount received Xxxx
To Rent and Rates Xxxx By Interest received Xxxx
To Insurance Xxxx By Interest on drawing Xxxx
To Printing and Stationery Xxxx By Commission received Xxxx
To General Expenses Xxxx To Discount received Xxxx
To Telephone Expenses Xxxx By Bad Debts recovered Xxxx
To Legal Expenses Xxxx By Dividend on shares Xxxx
To Postage Xxxx By Profit on sales of Assets Xxxx
To Audit Fees Xxxx By Profit on sale of Assets Xxxx
To Direct Fees Xxxx By Net Loss transferred to capital A/c
To Carriage outward
To Bad Debts written off xxxx
Less: Increase in Bad Debts xxx Xxxx
Xxxx
To Commission Xxxx
To Depreciation Xxxx
To Advertising Xxxx
To Heating and lighting Xxxx
To Repairs and Renewals Xxxx
To Cost of samples Xxxx
To Interest and Loans Xxxx
To Interest on Capital Xxxx
To Discount Allowed Xxxx
To Insurance Xxxx
To Export Duty Xxxx

To Sales Tax Xxxx

To Trading Expenses Xxxx
To Loss due to fire Xxxx
To Profit transferred to capital A/c Xxxx

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Illustration 3
From the following information, prepare Profit and loss Account of M/s Sahil Bros for the Year
ending on 31.03.2012.
`
Gross Profit 97,000
Discount allowed to customers 2,000
Printing and stationery 2,000
Office rent 5,000
Repair 2,400
Insurance Premium 5,100
Telephone Charges 1,000
Discount received from Creditors 3,000
Interest earned during the year 5,000

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Illustration 4

From the following information, prepare Profit & Loss Account of M/s Sarthak Traders for the year
ending on 31.03.2012 `

Gross Profit 43,000

Discount allowed to customers 7,000
Salaries 45,000
Interest paid on loan 13,000
Postage 2,400
Discount received from creditors 6,000
Commission received 1,000
Sales expenses 10,000

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 Concept of Net Profit
Net profit is the amount of money your business earns after deducting all operating, interest, and tax
expenses over a given period of time. To arrive at this value, you need to know a company's gross
profit. If the value of net profit is negative, then it is called net loss.

Net Profit = Total Revenue - Total Expenses

Here's an example: An ecommerce company has $350,000 in revenue with a cost of goods sold
of $50,000. That leaves them with a gross profit of $300,000.

1. Gross Profit = Revenue – Cost of Goods Sold.

2. Net Profit = Gross profit – Expenses.
3. Gross profit ratio = (Gross profit / Net sales revenue)
4. Gross profit margin ratio = (Gross profit / Net sales revenue) x 100.
5. Net profit margin ratio = (Net income / Revenue) x 100.

Gross Profit Margin=Revenue(Revenue−COGS)×100

where: COGS=Cost of goods sold

Example of Gross Profit Margin

For the fiscal year ending September 30, 2017, Apple reported total sales or revenue of $229 billion
and COGS of $141 billion

Apple's gross profit margin for 2017 was 38%. Using the formula above, it would be calculated as
follows:

The net profit margin is the ratio of net profits to revenues for a company or business segment.
Expressed as a percentage, the net profit margin shows how much of each dollar collected by a
company as revenue translates to profit.

Net Profit Margin=Revenue(NI)×100

Where: NI=Net income=R − COGS − OE − O − I – T

R=Revenue
OE=Operating expenses
O=Other expenses
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I=Interest
T=Taxes

Apple reported a net income number of roughly $48 billion (highlighted in blue) for the fiscal year
ending September 30, 2017, as shown from its consolidated 10K statement below. As we saw earlier,
Apple's total sales or revenue was $229 billion for the same period

Apple's net profit margin for 2017 was 21%. Using the formula above, we can calculate it as:

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Comparison Chart

BASIS FOR PROFIT AND LOSS

BALANCE SHEET
COMPARISON ACCOUNT

Meaning A statement that shows Account that shows the

company's assets, liabilities and company's revenue and
equity at a specific date. expenses over a period
of time.

What is it? Statement Account

Represents Financial position of the business Profit earned or loss

on a particular date. suffered by business for
the accounting period

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 BASIS FOR PROFIT AND LOSS
BALANCE SHEET
COMPARISON ACCOUNT

Preparation Prepared on the last day of Prepared for the

financial year. financial year.

Information Assets, liabilities, and capital of Income, expenses,

Disclosed shareholders. gains and losses.

Accounts Accounts shown in the Balance Accounts transferred to

Sheet do not lose their identity, Profit and Loss account
rather their balance is carry are closed and cease to
forward to next year as opening exist.
balance.

Sequence It is prepared after the It is prepared before the

preparation of Profit & Loss preparation of Balance
Account. Sheet.

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 Balance Sheet
The second point of final accounts is the preparation of balance sheet. It is prepared often in the
trading and profit, loss accounts have been compiled and closed. A balance sheet may be
considered as a statement of the financial position of the concern at a given date

Definition: A balance sheet is an item wise list of assets, liabilities and proprietorship of a
business at a certain state.

J.R.botliboi: A balance sheet is a statement with a view to measure exact financial position of a
business at a particular date.

Thus, Balance sheet is defined as a statement which sets out the assets and liabilities of a
business firm and which serves to ascertain the financial position of the same on any particular
date. On the left-hand side of this statement, the liabilities and the capital are shown. On the
right-hand side all the assets are shown. Therefore, the two sides of the balance sheet should be
equal. Otherwise, there is an error somewhere.

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 Proforma of Balance Sheet

Balance Sheet Of ………………………… As On …………………………………….

Dr. Cr.
Liabilities Amount Assets Amount
Capital xxxx Goodwill Xxxx
Add: Interest on capital xxx Patents Xxxx
Add: Net Profit xxx Copy rights Xxxx
Plant and Machinery xxxx
xxxx Less: Depreciation xxx
Less: Net Loss xxx Xxxx
Building Xxxx
xxxx Xxxx Furniture and Fixtures xxxx
Less: Drawings xxx Less: Depreciation xxx
Xxxx
Loan Xxxx Motor Car Xxxx
Debentures Xxxx Closing stock Xxxx
Income received in advance Xxxx Debtors xxxx
Creditors Xxxx Less Bad and doubtful debts xxx
Outstanding expenses Xxxx Xxxx
Outstanding wages Xxxx Investments Xxxx
Outstanding Rent Xxxx Bills receivable Xxxx
Outstanding Salaries Xxxx Prepaid Expenses Xxxx
Bills payable Xxxx Cash in Hand Xxxx
Bank overdraft Xxxx Cash at Bank Xxxx
Total Xxxx Total Xxxx

Advantages: The following are the advantages of final balance .

1. It helps in checking the arithmetical accuracy of books of accounts.

2. It helps in the preparation of financial statements.

3. It helps in detecting errors.

4. It serves as an instrument for carrying out the job of rectification of entries.

5. It is possible to find out the balances of various accounts at one place.

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Illustration 5
From the following information supplied by Mr. Roshan Lal, prepare a Balance Sheet of Mr.
Roshan Lal as on 31st March, 2012 `

Capital 50,000
Furniture 15,000
Debtors 25,000
Creditors 30,000
Plant and Machinery 58,000
Investments 5,000
Cash in hand 1,000
Cash at Bank 1,000
Stock at the end 10,000
Bank Overdraft 8,000
Bank Loan 20,000
Net Profit 10,000
Drawings 3,000

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Illustration 6
From the following information supplied by Mr. Arun Kumar, prepare a Balance Sheet as on 31st
March, 2012. `

Creditors 30,000
Debtors 35,000
Cash in hand 24,500
Cash at Bank 27,500
Stock 22,500
Furniture 25,000
Loan 50,000
Plant & Machinery 32,500
Land & Building 52,000
Capital 1,37,000
Net Profit 12,000
Drawings 10,000

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 Problems # 1:
From the following particulars taken out from the books of Abdul Hanan & Co. You are required to prepare
Trading and Profit & Loss Account and Balance Sheet as at December 31st, 2019.

Adjustments:
(a) Closing stock Rs, 35,000.
(b) Provision for doubtful debts at 5% of sundry debtors.
(c) Depreciation furniture and machinery by 10%.
(d) Commission of Rs. 3,600 has been earned but not received till the closing of accounts.

Solution:………….next page

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Illustration 19
Given below are the balances of Pandian as on 31st March, 2016.

Adjustments:

i. The stock value at the end of the accounting period was Rs. 5,000
ii. Interest on capital at 6% is to be provided
iii. Interest on drawing at 5% is to be provided

iv. Write off bad debts amounting to Rs. 2,000

v. Create provision for bad and doubtful debts on sundry debtors @ 10%

vi. Prepare final accounts for the year ended 31st March, 2016.

Solution

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Illustration 20
From the trial balance of Ajith and the adjustments given below, prepare trading and
profit and loss A/c for the year ended 31st March, 2016 and the balance sheet as on that
date.

Adjustments:

i. Stock at the end of the year was Rs. 8,000

ii. Further bad debts amounted to Rs. 100

iii. Create 2% provision for doubtful debts on sundry debtors
iv. Create 1% provision for discount on sundry debtors

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Illustration 21
The following trial balance has been extracted from the books of Rajesh on 31st
December, 2016.

The following adjustments are to be made:

i. Stock on 31st December, 2016 was Rs.  28,000

ii. Unexpired insurance was Rs.  15,000

iii. Provision for doubtful debts is to be maintained at 5% on sundry debtors.

iv. Depreciate plant and machinery at 20%.

You are required to prepare trading and profit and loss account for the year ended 31st
December, 2016 and a balance sheet as on that date.

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