Final Accounts

Final accounts give an idea about the profitability and financial position of a business to its
management, owners, and other interested parties. All business transactions are first recorded
in a journal. They are then transferred to a ledger and balanced. These final tallies are prepared
for a specific period. The preparation of a final accounting is the last stage of the accounting
cycle. It determines the financial position of the business. Under this, it is compulsory to make
a trading account, the profit and loss account, and balance sheet.
The term "final accounts" includes the trading account, the profit and loss account, and
the balance sheet.

Trading account
A trading account shows the results of the buying and selling of goods. This sheet is prepared
to demonstrate the difference between the selling price and the cost price. The trading account
is prepared to show the trading results of the business, e.g. gross profit earned or gross loss
sustained by the business. It records the direct expenses of a business firm.

Form of Trading Account

Particulars Rs. Particulars Rs.

To Opening Stock
To Purchases

Less: Purchases Returns

To Wages/Wages and Salaries

To Carriage Inwards By Sales

Less: Return Inwards/Sales
To Freight Inwards
Returns
To Gas & Fuel
By Closing Stock
To Power & Water
By Gross Loss
To Factory Rent & Rates
(Transferred to Profit & Loss
To manufacturing Expenses
Account)
To Import and Customs Duty

To Royalties on Production

To Gross Profit (Transferred to Profit & Loss

Account)

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Profit and Loss Account
This account is prepared to ascertain the net profit/loss and expenses of a business during an
accounting year. It records the indirect expenses of a business firm, like rent, salaries, and
advertising expenses. Profit and loss a/c includes expenses and losses as well as income and
gains, which have occurred in business other than the production of goods and services.

Format of Profit and Loss Account

Particulars Rs. Particulars Rs.

To Gross Loss
(Transferred from Trading A/c)
Office & Admin. Expenses
To Rent Rates &Taxes
To Printing and Stationery By Gross Profit
To Salaries & Wages (Transferred from Trading A/c)
To Postages and Telephones
To Office Lighting By Rent Received
To Insurance Premium
By Discount Received
To Legal Expenses
To Audit Fees By Rebates
To Travelling Expenses
To Selling & Distribution Exp. By Commission Received
To Carriage and Freight Outwards
To Commission By Interest Received
To Brokerage
To Advertisement By Dividend Received
To Publicity
To Bad Debts By Bad Debts Recovered
To Export Duty
To Packing Expenses By Apprentice fees or premium
To Interest paid on loans
To Discounts Allowed By Gain on Sale of Fixed Asset
To Repairs
By Miscellaneous Receipts
To Depreciation on Fixed Assets
To Entertainment Expenses By Net Loss (If Dr. side> Cr. side)
To Donations & Charity (Transferred to capital Account)
To Loss on Sale of Fixed Assets
To Loss by Fire
To Loss by theft
To Net Profit Transferred to Capital Account
(If Cr. side > Dr, side)

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Balance sheet
The balance statement demonstrates the financial position of a business on a specific date. The
financial position of a business is found by tabulating its assets and liabilities on a particular
date. The excess of assets over liabilities represents the capital sunk into the business and
reflects the financial soundness of a company.
It is known as the statement of financial position of the company.
Format of Balance Sheet

Liabilities Rs. Assets Rs.

Current Assets:
Current Liabilities:
Cash-in hand
Bank Overdraft
Cash at Bank
Bills Payable
Bills Receivable
Outstanding
Sundry Debtors
Expenses
Prepaid Expenses
Sundry Creditors
Accrued Income
Income received-in-advance
Closing Stock
Long-term Liabilities:
Investment:
Loan
Fixed Assets:
Capital:
Furniture and Fixture
Opening balance xxxx
Plant & Machinery
Add: Net Profit xxxx
Building
(Less: Net Loss)
Land
Less: Drawing (xxxx)
Goodwill

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Distinction Between Trading Account and Profit And Loss Account

Basis for Difference Trading Account Profit And Loss A/C

Introduction Statement prepared to record Statement prepared to show

the trading activities of the the net profit or loss of the firm
firm for a particular period
Objective/Purpose To find out gross profit or loss To find out net profit or loss

Dependency Not dependent on other Dependent on trading account

accounts

Recording Of Direct expenses and direct Indirect expenses and indirect

revenues incomes

Balance Transfer To profit and loss account To balance sheet

Distinction Between Profit And Loss Account and Balance Sheet

Basis for Difference Balance Sheet Profit And Loss 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.

Represents Financial position of the Profit earned or loss suffered

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

Preparation Prepared on the last day of Prepared for the financial year.
financial year.

Information Disclosed Assets, liabilities, and capital of Income, expenses, gains and
shareholders. losses.

Accounts Accounts shown in the Balance Accounts transferred to Profit

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

Sequence It is prepared after the It is prepared before the

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

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Adjustment in preparation of financial statements
Those entries which need to be passed at the end of the accounting year to show the accurate
profit or loss and fair financial position of the business.
Closing Stock: the closing stock represents the cost of unsold goods lying in the stores at the
end of the accounting period.
Outstanding Expenses: When expenses of an accounting period remain unpaid at the end of
an accounting period, they are termed as outstanding expenses.
As they relate to the earning of revenue during the current accounting year, it is logical that
they should be duly charged against the revenue for computation of the correct amount of profit
or loss.
Prepaid Expenses: At the end of the accounting year, it is found that the benefits of some
expenses have not yet been fully received; a portion of its benefit would be received in the next
accounting year. This portion of expenses, is carried forward to the next year and is termed as
prepaid expenses.
Accrued Income: It may sometime happen that certain items of income such as a interest on
loan, commission, rent, etc. are earned during the current ac- counting year but have not been
actually received by the end of the same year. Such incomes are known as accrued income. .
Income Received in Advance: Sometimes, a certain income is received but the whole amount
of it does not belong to the current period. The portion of the income which belongs to the next
accounting period is termed as income received in advance or an Unearned Income.
Depreciation: It is the decline in the value of assets on account of wear and tear and passage
of time. It is treated as a business expense and is debited to profit and loss account.

(i) Credit side of Trading A/c.

Closing Stock
(ii) Show on the assets side of Balance Sheet.

Outstanding/Unpaid (i) Add to concerned item on Debit side of Trading/Profit & Loss A/c.
Expenses (ii) Shown on the liabilities side of Balance Sheet.

(i) Deduct from the concerned expenses on the Debit side of Profit &
Prepaid expenses/
Loss A/c
Unexpired expenses
(ii) Show on the assets side of Balance Sheet.

Accrued income/
(i) Add to the concerned income on Credit side of Profit and Loss A/c
Income due but not
(ii) Show on the assets side of Balance Sheet.
received

Unearned income/ (i) Deduct from the concerned income on the Credit side of Profit &
Income received in Loss A/c
Advance (ii) Show on the liabilities side of Balance Sheet.

(i) Show on the debit side of Profit Loss A/c

Depreciation
(ii) Deduct from the concerned asset in the Balance Sheet.

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Solution

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