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.

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.

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.

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.

Format of Trading and Profit & Loss A/C of ……….for the year ending ……………..

Particulars	Amount	Particulars	Amount
To Opening stock	xxxx	By Sales	xxxx
To Purchases	xxxx	Less: Returns	xxxx
Less: Returns	xxxx	By Closing stock	xxxx
To Carriage inwards	xxxx	By Gross loss (c/d)	xxxx
To Freight, cartage	xxxx
To Customs duty	xxxx
To Clearing charges	xxxx
To Octroi	xxxx
To Wages	xxxx
To Gas, water, coal, light	xxxx
To Factory rent	xxxx
To Works manager salary	xxxx
To Factory supervision	xxxx
To consumable stores	xxxx
To Plant depreciation	xxxx
To Gross profit (c/d)	xxxx
	xxxx		xxxx
To Gross loss (b/d)	xxxx	By Gross profit (b/d)	xxxx
To Salaries	xxxx	By Discount received	xxxx
To Rent, Taxes	xxxx	By Interest received	xxxx
To Insurance	xxxx	By Dividend received	xxxx
To Printing stationery	xxxx	By Rent received	xxxx
To Advertisement	xxxx	By Commission received	xxxx
To Carriage outward	xxxx	By Net loss (c/d)	xxxx
To Bad debts	xxxx		xxxx
To Repairs	xxxx		xxxx
To Depreciation	xxxx		xxxx
To Discount allowed	xxxx		xxxx
To Commission allowed	xxxx		xxxx
To Interest paid	xxxx		xxxx
To Provision for doubtful debts	xxxx		xxxx
To Postage	xxxx		xxxx
To General expenses	xxxx		xxxx
To Net profit (c/d)	xxxx		xxxx
	xxxx		xxxx

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.

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

Balance Sheet of……………….company as on ……………..

Capital & Liabilities	Amount	Assets	Amount
Capital	xxxx	Land and buildings	xxxx
Add: Net profit	xxxx	Furniture	xxxx
	xxxx	Plant and machinery	xxxx
Less: Drawings	xxxx	Land	xxxx
Loans	xxxx	Vehicles	xxxx
Bank Over Draft	xxxx	Debtors	xxxx
Bills payable	xxxx	Investments	xxxx
Creditors	xxxx	Bills receivables	xxxx
Outstanding expenses	xxxx	Goodwill	xxxx
Incomes received in advance	xxxx	Patents	xxxx
All reserves	xxxx	Copyright	xxxx
		Trade marks	xxxx
		Prepaid expenses	xxxx
		Incomes receivables	xxxx
		Securities	xxxx
		Closing stock	xxxx
		Cash in hand	xxxx
		Cash at bank	xxxx
	xxxx		xxxx

Final Accounts Preparation

Example: From the following trial balance and additional information, prepare final accounts for the year ending 31-12-2014.

Trial Balance

Particulars	Rs	Particulars	Rs
Sundry debtors	64,000	Discount received	9,000
Stock (1-1-2014)	44,000	Bank over draft	15,000
Cash in hand	3,160	Long term loan	25,300
Wages	35,000	Sales	3,65,000
Trade expenses	2,150	Capital	1,50,000
Gas, water, power	4,450
Sales returns	800
Bank charges	1,800
Purchases	2,37,740
Advertisements	2,200
Premises	1,60,000
Drawings	9,000
	5,64,300		5,64,300

Adjustments

1. Bank charges outstanding Rs.150

2. Write off bad debts Rs. 500

3. Provide 5% for doubtful debts

Example:From the following data prepare final accounts for the year ending 31-12-2014.

Trial Balance

Particulars	Rs	Rs
Drawings and capital	12,000	80,000
Opening stock	12,000
Investments	30,600
Stationery	12,000
Carriage	3,000
Returns	6,000	2,600
Purchases and sales	1,20,000	1,60,000
Loans	2,400	10,000
Debtors and creditors	60,000	25,000
Discount allowed	2,200
Freight in	10,400
Freight out	6,000
Charity	28,000
Reserve for doubtful debts		2,000
Bills payables		25,000
Total	3,04,600	3,04,600

Adjustments

1. Closing stock Rs. 20,000

2. Appreciate investment by 10%

3. Maintain reserve for doubtful debts at the rate of 5%

4. Provide 5% as interest on capital