FINAL ACCOUNTS

INTRODUCTION
Every business concern wants to know business result (i.e. profit or loss) for the accounting period and financial
position (assets and liabilities) at the end of the accounting period. Final accounts are the means through which a
business concern can find out its business result and financial position. Once the trial balance is prepared and
relevant information is gathered, final accounts can be prepared to summaries the business operations. Preparation of
final accounts is the last step in the process of accounting and gives the final results of the business for the trading
period. Therefore, it is known as final accounts. Final accounts consist of Manufacturing account, Trading account,
Profit & Loss account and Balance Sheet. Manufacturing account is not required for trading concerns.

FINAL ACCOUNTS
Final accounts also known as financial statements consisting of income statement (or profit and loss account) and
balance sheet, prepared from the ledger balances and various adjustments at the end of accounting period, to
summarize the business activates. Normally final accounts are prepared at the end of financial year. But corporate
practice is to prepare the final accounts at the end of the quarter.

PREPARATION OF FINAL ACCOUNTS OF A SOLE TRADING CONCERN

Normally a sole trading concern prepares final accounts at the end of the financial year. Final accounts of a sole
trading concern consist of trading account, profit & loss account and balance sheet. Each of these are explained in
the following paragraphs.

Trading Account
Trading account is prepared to know the trading result. Trading result indicates gross profit or loss of the trading
period due to the difference between selling price and purchase price of the goods sold. If selling price of the goods
sold is more than the purchase price, the difference is known as gross profit. On the contrary, when the situation is
reverse, difference is termed as gross loss. Here, purchase price includes the cost of shipment and other direct
expenses incurred until the goods reach the point of sale and to make the goods ready to sale, if any.

Gross Profit or Loss

Gross profit or gross loss represents:

Gross Profit /Loss = Net Sales – Cost of goods sold

OR

Gross Profit /Loss = Net Sales – (Opening stock + Net Purchases – Closing Stock + Direct Expenses)

Net Sales = Sales – Sales Returns

Net Purchases = Purchases – Purchases returns
Direct expenses casuists of all purchase related, loading, transpiration, unloading and expenses incurred in
making the goods ready for resale (such as repacking, seasoning, refrigerating etc.).

A proforma of trading account is shown below:

Trading Account for the period ending …

Dr. Cr.

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 Rs. Rs. Rs. Rs.
To Opening Stock xxxx By Sales xxxx
To Purchases xxxx Less: Returns xxx xxxx
Less: Returns xxx xxxx By Closing Stock xxxx
To Direct Expenses By Profit and Loss a/c xxxx
Wages xxxx (Gross loss transferred
Carriage/Cartage/ xxxx to P&L a/c )
Fright Inwards xxxx
Power, fuel, gas, xxxx
water, oit xxxx
Dock dues, Octroi, xxxx
Import duty, xxxx
Excise duty xxxx
To Profit and Loss a/c xxxx
(Gross profit transferred
to P&L a/c)
xxxx xxxx

a. Closing Stock: The value of unsold goods at the end of the accounting period is closing stock. The value of
closing stock is the cost price of the unsold goods, or market price, whichever is less (Indian Accounting
Standard 1). The closing stock of one accounting period becomes opening stock of the following
accounting period.
b. Opening Stock: Opening stock is the value of unsold goods at the beginning of the accounting period. The
opening stock is brought forward from the previous accounting period.
c. Purchases: Major activity of a trading concern is to buy and sell goods. The value of goods bought for
resale is purchases. It consists of cash as well as credit purchases. Here purchase returns is deducted to find
the net purchases. If the proprietor of the business, draws some goods from his business at cost price, it is to
be deducted from the purchases.
d. Direct Expenses: Direct expenses are expenses incurred in procuring goods and making them ready for
sale. Such expenses include wages, carriage, cartage or fright inward are transport charges incurred for
bringing the goods purchased to the point of sale; power, fuel, gas, water, oil, heating, lighting, etc. are
incurred in the process of manufacturing; dock dues, octroi duty, import duty, excise duty, customs duty,
clearing charges are the duties paid on the goods purchased.
e. Sales: The sale proceeds of goods sold is sales, it includes both cash and credit sales. Sales returns is
deducted from gross sales to find the net sales to credited to the trading a/c.

Profit &Loss Account

Profit & Loss account is prepared to know the net profit or net loss of a business, for the accounting period. Gross
profit/loss (result of trading activities) is the base for profit and loss account. Further all other expenses (except
purchases and direct expenses) are added and other incomes (except sales) are to be deducted to find the net profit or
loss.

Net Profit or Net Loss:

Net profit or Net loss represents:

Net Profit/Net Loss = Gross Profit/ Loss ± Other Incomes – (Administrative expenses + Selling and
distribution expense + asset related expenses + financial expenses).

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 Here,
a. Other Incomes: Other incomes refer to incomes other than sales income such as interest earned, rent
received, commission earned, discounts allowed by suppliers, income on investments, etc.
b. Administrative Expenses: Expenses incurred in administering the business such as rent, printing and
stationery, telephone bill, electricity bill, salaries of administrative staff, staff welfare expense,
insurance, etc.
c. Selling and Distribution Expenses: Expenses incurred on advertising, other sales promotion a
activities, traveling expenses, salaries and commission o f the sales team, transportation outwards,
bad debts, discounts allowed to customers, debt collection costs, etc.
d. Asset related Expenses: This group of expenses consists of depreciation expenses, maintenance of
assets, insurance premium paid for the assets, etc.
e. Financial Expenses: These are the expenses related to the financing of the business requirements, such
as interest on capital, interest on loan, interest on bank over draft, etc.

A specimen of profit and loss account is shown below:

Profit and Loss a/c for the accounting period ending………….
Dr. Cr.
To Trading a/c Rs. By Trading a/c Rs.
(Gross loss transferred from P& L a/c) xxxxxx (Gross profit transferred to Trading a/c ) xxxxxx
Administrative Expenses By Rent received xxxx
To Rent, Rates, Insurance and Taxes xxxxx By Discount earned xxxx
To Salaries xxxxx By Commission received xxxx
To Printing and Stationery xxxxx By Income on investments xxxx
To Office heating and lighting xxxxx By Interest on drawings xxxx
To Telephone xxxxx By Bad debts recovered xxxx
To Postage and courier xxxxx By Provision for bad debts (old) xxxx
To Bank charges xxxxx By Discount on creditors xxxx
To Legal expenses xxxxx To Net Profit
Selling and Distribution Expenses (Transferred to Balance Sheet) xxxxx
To Traveling Expenses xxxxx
To Advertising and Sales promotion xxxxx
To Commission xxxxx
To Freight/ Carriage outwards xxxxx
To Bad debts xxxxx
To Provision for bad debts xxxxx
To Discount on debtors xxxxx
To Discount allowed xxxxx
Asset related Expenses
To Depreciation xxxxx
To Repairs and maintenance xxxxx
To Insurance xxxxx
Financial Expenses
To Interest on Capital xxxxx
To Interest on loan xxxxx
To Net Profit

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 (Transferred to Balance Sheet) xxxxx
xxxxxx xxxxxx

Points to be noted in preparing Trading and Profit & Loss a/c:

1. All the expenses and incomes for the accounting period are to be taken into account. Outstanding
income/expenses should be added to the concerned income/ expenses. Prepaid expenses and Incomes
received in advance should be deducted from the concerned income/ expense.
2. Personal expenses of the proprietor, such as life insurance premium, income tax etc. are not the business
expense. Hence, should not be debited to the P& L a/c.

Balance Sheet
Owners of the business are interested in knowing the financial position of the business (what the business concern
owns and what it owes) as on a particular date. Balance sheet is a statement of assets and liabilities prepared at the
end of the accounting period to know the financial position of the business concern.

A specimen form of a balance sheet is given below:

Balance Sheet as on ……………

LIABILITIES Rs. ASSETS Rs.
Capital Fixed Assets
Opening balance xxxxxx Land & Buildings xxxxxx
Add: Additional Capital Invested xxxx Plant & Machinery xxxxxx
Add: Interest on Capital xxxx Furniture & Fixtures xxxxx
xxxxx Vehicles xxxxx
Less: Drawings xxxx Loose Tools xxxxx
Less: Interest on Drawings xxxx Patents xxxxx
xxxxx Copy Rights xxxxx
Add/Less: Net Profit /Loss xxxx xxxxxx Designs xxxxx
Long term liabilities Geographical Indications xxxxx
Long term loans xxxx Long-term Investments
Mortgage xxxx Shares xxxxx
Hypothecation xxxx Debentures xxxxx
Current Liabilities Government Bonds xxxxx
Creditors xxxx National Savings Certificates xxxxx
Bills Payable xxxx Current Assets
Bank overdraft xxxx Inventory xxxxx
Outstanding expenses xxxx Debtors xxxxx
Incomes received in advance xxxx Bills Receivable xxxxx
Prepaid expenses xxxxx
Outstanding incomes xxxxx
Cash at bank xxxxx
Cash in Hand xxxxx
xxxxxx xxxxxx

Brief explanation of balance sheet contents is given in the following paragraphs.

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 1. Assets: Assets are the properties owned by a business and the amounts due to the business from others.
Assets can be classified on the following basis.
a. On the basis of physical status of the assets, assets are divided into tangible or intangible.
Tangible Assets: These are the assets having physical existence, can be bought and sold, such as
plant and machinery; land and buildings; furniture and fixtures; stock of goods, cash etc.
Intangible Assets: are the assets not having physical existence, such as goodwill, patents,
copyrights, trademarks, designs, know-how, geographical indications, etc.
b. On the basis of fluctuation in the value of assets, assets are divided into fixed and current assets.
Fixed Assets: These are the assets, which the business firm owns for long period of time, and the
value remains same for long time in the books of accounts (of course, depreciation is to be
adjusted), examples of fixed assets are land and buildings, furniture and fixtures, plant and
machinery, long term investments, patents, trademarks etc.
Current Assets: These are the assets, which are converted into cash in the routine business
operations. For example, raw materials are bought for cash and converted into finished products,
finished products are sold to customers either for cash or credit (debtors), cash is collected from
debtors. In the routine business operations, current assets value changes in a day for ‘n’ number of
times. Current assets also known as fluctuating assets.

2. Liabilities: Liabilities are economic obligations of the business to outsiders. Liabilities can be divided into
two on the basis of time frame available for repayment:
a. Long-term liabilities: Long term liabilities can be paid in the long run, normally more than one
year. For example, long term loans from banks, friends and relatives, mortgage, hypothecation,
etc.
b. Current liabilities: Current liabilities are to be paid within a short span of time (with in a year or
less) in the routine business operations. For example Creditors, bills payable, outstanding
expenses, income received in advance, short-term loans are some of the examples of current
liabilities.

Marshalling of the Balance Sheet.

The arrangement and grouping the items in the balance sheet is known as marshaling of balance sheet. Assets and
liabilities can be arranged in the balance sheet in two ways, given as under. The break of assets and liabilities in the
order of liquidity and permanence is discussed as under.
1. Assets: Assets may be grouped in the following two ways:
a. Liquidity: Under this approach the asset are arranged in the order of liquidity. First asset to be
recorded, under this approach will be easily realisable (i.e. converted into cash), followed by less
liquid assets.
b. Permanence: Here, assets are arranged in the order of permanence. Assets that are indented for
use in the long run are to be recorded first, followed by less permanent assets.
2. Liabilities: Liabilities may be arranged in the order of urgency of payment or staring form long-term
liabilities.
a. Urgency: In this approach the liability to be paid immediately is taken into first and followed by
the liabilities, which can be paid later.
b. Permanence: Here, first long term liabilities are to be recorded.

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 Treatment of items of Adjustments appearing inside the Trial Balance
If the adjustment item is appearing within the trial balance, it is recorded and classified, in such case only one effect
is to be given. It may be either debit effect or credit effect as the case may be.
Sl. No. Adjustment Explanation Accounting treatment
It appears in the trail balance only when trial To be shown as current asset
1. Closing Stock
balance is prepared and gross profit is found. in the balance sheet.
Outstanding It appears in the trial balance, if it is debited to To be shown as current
2.
expenses the concerned expenditure a/c. liability in the balance sheet.
It appears in the trial balance, if it is credited to To be shown as current asset
3. Prepaid Expenses
the concerned expenditure a/c. in the balance sheet.
It appears in the trial balance, if it is credited to To be shown as current asset
4. Accrued Income
the concerned income a/c. in the balance sheet.
Income received in It appears in the trial balance, if it is debited to To be shown as current
5.
advance the concerned income a/c. liability in the balance sheet.
It appears in the trial balance, if it is credited to To be debited to the profit and
6. Depreciation
the concerned asset/s account loss account.
Bad debts and/or
It appears in the trial balance, if is credited to To be debited to
7. provision for bad
debtors account. P& L Account
debts
Provision for It appears in the trial balance, if is credited in the To be debited to
8.
discount on debtors debtors account. P& L Account
Provision for It appears in the trial balance, if it is credited to To be debited to
9.
discount on creditors debtors account. P& L Account
It appears in the trial balance, if it is credited to
10. Interest on capital To be debited to P&L a/c.
capital account.
It appears in the trial balance, if it is debited to
11. Interest on drawings To be credited to the P&L a/c.
capital a/c or drawings a/c

Adjustments in final accounts:

The glimpse of the acquainting treatment of the adjustments in final accounts is shown in the following table.
Accounting treatment in the:
Sl. No. Adjustment
Trading and/or Profit and Loss Account Balance Sheet
Credited to the Trading account (Credit To be shown as an asset in the
1. Closing Stock
effect). balance sheet (Credit effect)
To be added to the concerned expense
Outstanding account on the debit side of the trading To be shown as current liability in
2.
Expenses account or profit and loss account (Debit the balance sheet (Credit effect).
effect).
To be deducted from the concerned expense
Prepaid To be shown as current asset on the
3. on the debit side of the trading or profit and
Expenses in the balance sheer (Debit effect).
loss account (Credit effect)
To be added to the concerned income on the
Outstanding To be shown as current asset in the
4. credit side of the profit and loss account
income balance sheet (Credit effect).
(Credit effect).
5. Income received To be deducted from the concerned income To be shown as current liability in

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 in advance on the credit side of the profit and loss the balance sheet (Credit effect).
account (Debit effect).
Bad debts,
provision for To be deducted from the sundry
6. doubtful debts and To be debited to P&L a/c (Debit effect). debtors on the assets side of the
discount on balance sheet (Credit effect).
debtors
Provision for To be deducted from sundry
7. discount on To be credited to P&L a/c (Credit effect). creditors on the liabilities side of
creditors the balance sheet (Debit effect).
To be deducted from the concerned
8. Depreciation To be debited to P&L a/c (Debit effect). fixed asset in the balance sheet
(Credit effect).
To be added to the concerned fixed
9. Appreciation To be credited to P&L a/c (Credit effect). asset in the balance sheet (Debit
effect).
To be added to capital on the
10. Interest on capital To be debited to P&L a/c (Debit effect). liabilities side of the balance sheet
(Credit effect).
To be deducted from the capital on
Interest on
11. To be credited to P&L a/c (Credit effect). the liabilities side of the balance
drawings
sheet (Credit effect).

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