Final Accounts

Introduction:

The important function of accounting is to arrange data on accounts in an

specified order for a limited period which project the money value of loss or profit
occurred& is disclosed in account statements made at finish of accounting year.
Showing detailed description of income and expenditure arise for the accounting
period, are grouped under important heads where they are accompanying by
balance sheet, it projects assets &liabilities of a company’s business at the finish
of the period. Adding more information for projecting the economic activities
nature to which the account refers, revenue account as well as different sections in
which it is set up are invariably headed as manufacturing trading and P&L
account. These 2 statements were prepared to show the business final results,
because of this they are called final accounts

Thus, final accounts preparation is accounting cycle last step. It covers a number
of accounts, i.e.
(i) Trading Account
(ii) P&L Account
(iii) Balance sheet.
for all practical purposes, although balance sheet is a statement it is projected as
one of the final accounts. Once the "trial balance" is extracted and 'errors' rectified,
a trader prepares the "final accounts" so as to know the final results &daily
cash/credit transaction position of the company. Transferring from the trial
balance both the trading& P&L accounts are made, accounts on nominal and
goods account by passing entry known as "closing entries". All balance accounts
i.e.., real & personal accounts pertaining to property, assets, debtors and creditors
are just projected in a statement called balance sheet.
Final Accounts are prepared at the final stage of an accounting period. These are
prepared to show the financial situation of a firm. It also helps in determining the
profitability of the firms. Trial balance is the basis for the final account of every
business. It constitutes the following:
1. Trading Account – It is the first account in the normal trading business
wherein the ordinary buying and selling happens which reveal the profit or loss on
gross terms at the end of the period and that too will be considered for the
computation of net results of the firms. Suppose the firms are manufacturing in
nature, it will also have one account prior to this called Manufacturing account
that reveal the total cost of production or manufacturing process.

2. Profit and Loss Account – It is the second account in the normal course of
business prepared after the trading account. The aim of this account is to know the
operating results at the end of the period in terms of Net Profit or Net Loss. It
starts with the gross profit or loss and ends with the net profit or net loss.

3. Balance Sheet – The above said are prepared to know the profit or loss of the
business for the said period not more than one accounting period but the Balance
sheet is prepared to understand the financial status of the firm as on date on which
the final accounts are prepared from the inception. It is very useful for the
determination of the financial position of a business on any particular date. It is
also known as financial position statement of the business firms.

Objectives pf Preparation of Final Accounts:

1. These are prepared to know or determine or compute the result of transactions

with the aim of determining the profitability of the business that arises from the
daily operations.
2. These are also prepared to calculate the position of the firms through the
balance sheet which helps in determining the financial status of the firms on any
given date.

Need and importance of final accounts:

To run a business, you would like information, records, reports, analysis, and
correct info concerning assets, debts, liabilities, and profits; which is why
Accounting is Importance for any business activities. The accounting info is
incredibly vital for the management or the choice of creating the body of a
corporation. Financial position is mirrored by the record.
These are, usually, ready at the shut of the year thus called final accounts. They
serve the final word purpose of keeping accounts. Their purpose is to analyze the
consequence of assorted incomes and expenses throughout the year and therefore
the ensuing profit or loss.
Final Accounts are the accounts, which are prepared at the end of a fiscal year. It
gives a precise idea of the financial position of the business/organization to the
owners, management, or other interested parties. Financial statements are
primarily recorded in a journal; then transferred to a ledger; and thereafter, the
final account is prepared.
Importance of Final Accounts in Accounting
Final accounts are very important for accounting purpose. Here are some reasons
which show how important final accounts are:
1. To determine the net effect of all transactions
2. To determine profit or loss arising from the operations
3. To help investors determine if more investment is required
4. To determine an organisations financial viability
Account on Manufacturing: Includes converting scratch materials into final
goods and then sell the finished goods, or essential in preparing account on
manufacturing after making Trading and P&L account. The expenses relating to
factory are transferred to account on manufacturing.
The main objectives are:
a) Finished goods cost produced and
b) Materials cost consumed, wages, Expenses. Direct & Indirect

Manufacturing A/c for the year ended…

Components Amount Components Amount

To Work in progress By Scrap sale
To Consumed/used materials By Work in progress
(opening) By Produced goods cost
Opening stock By Transfers to trade A/c
Sum: Purchase

Minus: Stock closing

To Daily Wage
To Expenses Factory
To Expenses purchase
To Duty import
To Inward carriage
To Machinery depreciation
To Machinery repair
Trading Account: It is made for a specific period to know the business trading
results. It contains in a summarised form all the transactions occurrence during a
period of trading which have direct relation to the goods dealt in by the business.
Trading A/c for the year ended…

Components Amount Rupees. Components Amount

To Stock opening By Selling
To Purchase Less: Returns on sale
Less: Return By Stock closing
Purchase By Loss on Gross c/d*
To Direct expenses: To P & L A/c
Inward carriage
Daily Wages
Freight
Import duties
Gas & fuel
Production royalty
Expenses on factory
etc…
To Profit on gross c/d*
transferred to
P&L A/c

*Balancing amount is profit/loss

Profit & loss Account: According to Prof. Carter, it is an account into which all
gains and losses are recorded in order to predict the more of gains over the losses
or vice versa.

P&L A/c of …for the year ended….

Components Rs. Components Rs.
To Gross Loss b/d By Gross Profit b/d
To Expenses on management: By Received Interest
Office salary By Received Discount
Rent and taxes By Received Commission
Printing & Stationery By Tenants rent
Postage and telegrams By Investments income
Charges on telephone By Premium on apprenticeship
Charges legal By Debentures interest
Fees for audit By Miscellaneous receipts
Insurance By Net loss transferred to capital
Expenses general A/c
Office lighting
To Expenses on Financial:
Capital interest
Loans interest
Allowed discounts
Bills discounts
To Selling and Distribution exp:
Advertising
Traveler’s salaries
Commission
Bad debt
 Rent of go-down
Outwards carriage
Commission for agent
Motor vans upkeep
Export expenses
To Depreciation & Maintenance:
Depreciation
Repairs and maintenance
To Extraordinary expenses:
fire loss (uncovered by
insurance)
defalcations of cash
To Net profit transferred to
capital A/c
Balance sheet: It is a segregated overall of balances remaining unclosed in the
General ledger after closure of all income & expenditure accounts by transferring
to trading and P&L account.
Assets – capital = Liability
Balance Sheet as at ……………………………
Liabilities Amount Assets Amount
Capital Assets - fixed:
Sum: Total profit Goodwill
Sum: Capital Interest Buildings
Tools Looe
Minus: Drawings Furniture
Minus: Drawings interest Vehicle
Minus: Any loss Patent
Trade mark
Liabilities long term: Loans long term
Mortgage loan (Advances)
Loan from bank Investment:
Current liability Current asset:
Sundry creditors Stock closing
Payable bills Sundry debtors
Overdraft Bank Receivables bills
Outstanding expenses Expenses prepaid
Incomes received in advance Incomes accrued
Bank cash
Hand cash
Fictitious asset:
Expenses Preliminary
Expenses on advertising
 Commission underwriting
Discount on issue of shares
and debentures

Final Accounts (or) Financial Statements with Adjustments Entries and their
Accounting Treatment
Sl. Adjustments Accounting treatment Accounting treatment in
No. in Trading (or) Profit Balance Sheet
and Loss Account
1 Closing Stock To be shown on the To be shown on the Assets
credit side of Trading side of Balance Sheet
Account
2 Outstanding To be added to the To be shown on the
Expenses respective expenses on liabilities side of the
the debit side of trading Balance Sheet as payables
or profit and loss
account
3 Prepaid Expenses To be deducted from To be shown on the assets
the respective expenses side of the Balance Sheet as
on the debit side of paid in advance
trading or profit and
loss account
4 Accrued Income To be added to the To be shown on the assets
(or) Outstanding respective incomes on side of the Balance Sheet as
Income the credit side of profit receivables
and loss account
5 Income Received To be deducted from To be shown on the
in Advance (or) the respective incomes Liabilities side of the
Pre-received on the credit side of Balance Sheet as received
Income profit and loss account in advance
6 Interest on Capital To be recorded on the To be added to the capital
debit side of the Profit and shown on the liabilities
and loss account side of the balance sheet
7 Interest on To be recorded on the To be added to the
 Drawings credit side of the Profit drawings and deducted
and loss account from the capital and shown
on the liabilities side of the
balance sheet under capital
account
8 Bad Debts To be shown on the To be deducted from the
debit side of the Profit sundry debtors on the assets
and Loss account side of the balance sheet
9 Provision for To be shown on the To be deducted from the
Doubtful Debts debit side of the Profit sundry debtors on the assets
and Loss account side of the balance sheet
10 Provision for To be shown on the To be deducted from the
Discount on debit side of the Profit sundry debtors on the assets
Debtors and Loss account side of the balance sheet
11 Reserve for To be shown on the To be deducted from the
Discount on credit side of the Profit sundry creditors on the
Creditors and Loss account liabilities side of the
balance sheet
12 Depreciation on To be shown on the To be deducted from the
Assets debit side of the Profit respective assets on the
and Loss account assets side of the balance
sheet
13 Appreciation on To be shown on the To be added to the
Assets credit side of the Profit respective assets on the
and Loss account assets side of the balance
sheet
14 Free Sample to To be shown on the To be deducted from the
Customers debit side of the Profit stock on the assets side of
and Loss account the balance sheet
15 Hidden To be shown on the To be shown and added to
Adjustment debit side of the Profit the respective borrowings
(Specifically for and Loss account on the liabilities side of the
Interest on Loans) balance sheet
16 Interest on To be shown on the To be added to the
Investments credit side of the Profit respective Investments on
and Loss account the assets side of the
balance sheet
 TREATMENT OF ADJUSTING ENTRIES

S.NO PARTICULARS TRADING PROFIT & BALANCE

ACCOUNT LOSS SHEET
1. Closing stock Credit side - Assets side

2. Outstanding expenses - Debit side Liabilities side

3. Prepaid expenses - Debit side Assets side

4. Accrued income - Credit side Asset side

5. Advance income - Credit side Liabilities side

received

6. Interest on capital - Debit side Liabilities side

7. Interest on drawings - Credit side Liabilities side

8. Interest on outstanding - Debit side Liabilities side

loan

9. Interest on investment - Credit side Assets side

10. Depreciation - Debit side Assets side

11. Bad debts - Debit side Assets side

12. Provision on bad and - Debit side Assets side

doubtful debts

13. Discount on Debtors - Debit side Asset side

provision

14. Discount on Creditors - Credit side Liabilities side

provision

15 Appreciation - Credit side Asset side

16 Hidden Adjustment - Debit side Liabilities side

REFERENCES:

Jain, S. P., & Narang, K. L. (2009). Financial Accounting. Kalyani Publishers.

Tulsian, P. C. (2009). Financial Accounting. Pearson Education India.
Shukla, M. C., Grewal, T. S., & Gupta, S. C. (2008). Advanced Accounts. S.
Chand Limited.
Sehgal, A., & Sehgal, D. (2006). Fundamentals of Financial Accounting: CA
(professional Education: Course-1)/CS (foundation)/B. Com./Management
Courses. Taxmann Allied Services.
Bagavathi, R. S. N., Pillai, & S. Uma (2006). Fundamentals of Advanced
Accounting: (Financial Accounting), Volume I, S.Chand & Company Ltd.
Reddy, T. S., & Murthy, A. (2010). Financial Accounting, Margham
Publications.