Module 3

with
account, PL account and Balance sheet
of trading
Final Account: Preparation
adjustments
Final Account: maintained
accounting process where the different ledgers
Final Accounts is the
ultimate stage of business organization are presented in the
(Books of Accounts) of the specified
in the Trial Balance and financial position of the entity for a Profit
profitability Statement of
specificd way to provide the other interested parties i.e., Trading Account,
period to the stakeholders and
& Loss, Balance Shect.
Financial Statements
profitability and the financial position of the
statements which report the
>It refers to such period.
business at the end of accounting statements which are:
statements includes at least two basic
> The term financial
which shows the results of
Profit & Loss Account)
> Income statement (or Trading and
accounting period.
business operation during an of
Balance Sheet)which shows the financial position
>Statementof Financial Position (or
point of tine.
an enterprise at a specitic
"Final-Accounts".
statements are termed as
These two financial
Loss Account
1. Trading and Profit and
or Gross Loss
a) Determine Gross Profit
Loss
b) Determine Net Profit or Net

c) Comparison with previous year

d) Details of Expenses and Income
e) Ratio Analysis
2. Balance Sheet

a) Ascertaining financial position

b) Comparison with previous year

c)Determining So'vency Position.

 Concept of Gross Profit and Net Profit
connected with the manufacture, purchase of
>Direct expenses mcans all expenses directly
expenses include carriage inwards, freight
goods and bringing them to the point of sale.andDirect
fuel, royalty on production, etc.
inwards, wages, factory lighting, coal, water
direct expenses is called gross profit.
> The excess of sales over purchases and
Direct Expenses)
>Gross Profit =Sales - (Purchases +
detbit
and loss account is more than the total of the
>If the total of the credit side of the profit
difference is the net profit for the period of which it is being prepared. On the other
side, the
the debit side is more than the total of the credit side,the difference is the net
hand, if the totalof
loss incurred by the business firm.
- Indirect Expenses
>Net Profit= Gross Profit + Other Incomes
Cost of goods sold and Gross Profit
of
purchases + Direct expenses - Closing stock Cost
Cost of goods sold = Opening Stock +
goods sold = Sales -Gross Profit
caleulate the cost of goods sold and gross
Illustration: From the following information,
profiton the basis of cost of goods sold.

Opening Stock 40,000

Purchases 4,20,000
Expenseson purchase 8,000
Expenseson Sales 15,000
Wages 30,000
Sales 6,00,000
ClosingStock 52,000

Solution:

Cost of Goods OpeningStock+Purchases+Direct Expenses-Closing

Sold Stock
OpeningStock+Purchases+ExpenseonPurchases+ Wages
-ClosingStock
 C(40,000+4,20,000+8,000+30,000-$2,000)

04,46,000
Sales- Costof Goods Sold
Gross Profit
C(6.00,0004,46,000)
C1,54,000

Important takeaway:
recorded in the Journal of the company, which is then rellected in
Initially, the transactions are the relative transaction type & party. The closing balance
the individual ledgers maintaincd for credit side for the
Trial Balance, which shows equal debit and
of this ledger is maintained in the performance of the business organization for the
the status &
period. Then for providing quarter, etc.), Final accounts are prepared which included
specified period (i.., a ycar, half-year, the period and
Account for, Statement of Profit & Loss for net profit carned during
Trading Liabilities of the entity at the period end.
Balance Sheet which provide the Assets &
TRADINGACCOUNT
DIRECT INCOME
DIRECT EXPENSE BY CLOSING STOCK
TO GROSS PROFIT CD
PROFIT & LOSS ACCOUNT
INDIRECT INCOME
INDIRECT EXPENSE
BY GROSS PROFIT B/D
TO NET PROFIT
BALANCE SHEET
ASSETS
| LIABILITY
Tradiug Account
loss of a business which results
Trading account is used to determine the gross profit or gross to the buying and selling activities
from trading activities. Trading activities are mostly related that are dealing in the trading
involved in abusiness. Trading account is useful for businesses gross profit or gross loss of the
business. This account helps them to easily determine the overall the business in buying
business. The amount thus determined is an indicator of the efficiency of
and selling. The trading account considers only the direct expenses and direct revenues while
earned by the
calculating gross profit. This account is mainly prepared to understand the profit
business on the purchase of goods.
Profit and Loss Account

Profit and loss account shows the net profit and net loss of the business for the accounting
period. This account is prepared in order to determine the net profit or net loss that occurs during
an accourting period for a business concern.
 on
account gets initiated by entering the gross loss on the debit side or gross profit
Trading
Profit and loss carried down from the
the credit side. Thisvalue is obtained from the balance which is
account.
expenses are
expenses in addition to the direct expenses. These
Abusiness will incur many other and the resulting value thus obtained will be
from the profit or are added to gross loss
deducted
net profit or net loss.
Balance Sheet
financial position of a
prepared with a view to measure the exact
A balance sheet is a statement
business on a certain fixed date.
Assets and Liabilities of the business enterprise.
Abalance sheet contains all the
liabilities.
accounts are group as assets and
Balances of allthe personal and real
hand side.
of the Balance Sheet and Assets on the right
Liabilities are shown on the left hand side
Accounts
Important points for preparing Final
question, it is better to prepare a trail balance
1. If a trail balance is not given in the
at first.
be shown
debit side of the Trail Balance should side of
The items which appear on theTrading
2, or P&L account or on the assets
either on the debit side of the
balance sheet.

The items which appear on the credit sideP&Lof the Trail Balance should be shown
3.
either on the credit side of the Trading or account or on the liabilities side of
balance sheet.
in the balance
4. The balances of Personal and Real Accounts are always shown
sheet.
stated as having
If the expenses in respect of Rent' and 'Lighting" are clearly
in the Trading Account,
these will be shown
been incurred in respect of factory, and Loss Account.
otherwise these will be shown in Profit
6 The total of both sides of the balance sheet will always be equal.

fepaid, Oudstendig, iqriaton )

Accrud , Bad dist Ne
will be epualid in Trading/
Bala nee Sheet
Aell in

for lg Aepriciatien is indisuet eupne

Same amocnt
lbut aloo the
PlL Alc
building in Ascet sdu 6f
will be duduetd fom Balehe Sket .
 Adjustment entries

Adjustment |Adustnent Entry Treatment tn Tradng| Treatment tn

andProftt ndLoss Balarce Sheet
Accout

stock A/c Dr. Shown on the credit Shown on the

I. Closing stock Closing
To Trading A/e assets side and proftt assets side
and loss account

Dr. Added to the Shown on the

2. Outstandng Expense A/c
respecttve expense l1abilities s1de
expenses To outstandng on the debít side
expense A/c
Dr. Deducted from the Shown on the
3. Prepaid/ Prepaid expense A/c
To Expenses A/c respectlve expense on assets side
Unexpired the debit side
expenses
Added to the Shown on the
4. Income earned| Accured income A/c Dr.
assets side
To Income A/C respective income
but not recelvedl on the credit side

Dr. Deducted from the Shown on the

5. Income recetved Income A/c respective income llabilllttes
1n advance To Income recetved
in advence A/c on the credit side s1des
Shown on the debit Deducted from
6. Deprectation Depreclaton A/c the value of
To Assets A/c side
asset

Shown on the debt Showm as

7. Provision for Profit andLoss Afc Dr.
deduction
bad and To Provision for side
doubtful debts doubtful debts from debtors

8. PrOviston for Proftt and Loss A/c Dr. Shown on the debtt Shown as
discount on To Provision for side deductoin
debtors discount debtors form debtors

Manager's Dr. Shown on the deblt Shown on the

9. Manager's
comm1ssion cOmmissionA/c side l1abil1ties side
To outstanding
commisslon A/c
10. Interest on Interest on cap1tal A/c Dr. Shown on the debit Shown as
capital To capital A/c side addition to
capital
11. Further bad Bad debts A/c Dr. Shown on the deblt Deducted from
debts To Sund1y Debtors A/c side debtors
 Prepare finalaccounts from the TB of Rajan.
TRAIL BALANCE
As at 31st March, 2020
Head of accounts L.F.Dr (rs) Cr (Rs)
384000
Capital 7600
Drawings 89000
Purchases 0E
150000
Sales
Wages DE 8000
220000
buildings A 100000
|Investments A
KInterest on investments 1.N 9000
3000
|Accrued Interest on Investments A
2800
Sales return
4500
Purchases return
12000
Stock as on 1st april, 2019
20000
Frieght and carriage inwards DE
2000
Trade expenses 1 E 2400
|Advertisement
Commission 3500
1300
Taxes and insurance I.E
65000
Debtors
12000
Creditors
BillReceivable A 15000
7000
Bils payable
Cash at bank 12000
cash in hand 1900
salaries ID E 8000
570000| 570000|

Adjustments:
1. Stock on 31st March, 2020 was valued at Rs 15000 C-S
|2. Insurance was prepaid to the extent of Rs 400
3. Outstanding Liabilities were
A
4. commisssion of Rs 5,000 is yet to be recived and
5. depreciate: building at 2% p.a.
 TRADING AND PROFIT AND LOSS A/C
Fo the year ended on 31st march, 2020 CR
|DR Amount Particulars |Amount
Particulars 12000|by sales 150000
to opening stock less: sales return 2800 147200
89000
to purchase 84500|by closing stock 15000
less: purchase return 4500
8000
to wages 20000
carriage inwards
tofreight ad transferred
to gross profit 162200
162200
to p&l a/c 286700 t2450
162200
2000 by gross profit b/d 162200
to trade exp 2400 by inst on ivett. 9000
to advertisement |by commission 3500
1300
totaxes and isurance Add:
accrued comm 5000 8500
400
less: Prepaid ins
900
1300 2200
Add: out taxes
8000
|to salaries
2000 10000
Add: out salaraies
to depriciation: Building
|TO net profit transaferred to
2420
163400 2\b00
capital a/c 179709
16600

Balance sheet
As at 31st march, 2020
|Amount |Assets Amount
Liabilities
384000 buildings 220000
Capital less: Depreciation 4400 215600
Add: Net profit Y20D6D
418200 547200 investment 100000
L DoD |Accrued Interest
Less: Drawings 7600 539500 on Investments 3000

Creditors 12000 Debtors 65000

Bils payable 7000 BillReceivable 15000

Joustanding :salaries 2000 Cash at bank 1.2000

: taxes 1300 3300 cash in hand 1900

closing stock 15000

prepaid ins 400
Accrued comm 5000

561800 432900
 balances taking adjustment into cosideration
Prepare final accounts from the followingMarch.
As at 21I 2020
Amount Rs
Debit balances
Amount Rs Credit Balances
6300|Capital 150000
Drawings 13870|discount receivedIN 2980
Carriage H/ A 1860|Loans 15000
Bills receivable A 42580|Purchase return 1450
Land and Building 281500
5130|Sales
Furniture reserved/provision for
3960|bad debts 4650
Discount allowed 18670
100|Creditors
Bank charges
6420
Salaries
199080
Purchases
opening stock 60220
18701
Sales return
5170
Carriage
7680
Rent and Taxes e
3630
General expenses
Plant and Machinery 31640
Book debts A 82740|
Bad debts 1250
Insurance 750
474250
474250

Adjustments
Rs 70000
closing stock
@10% on book debts
create a reserve/provison for bad and dubtful debts
|insurance prepaid Rs 50
rent outsatnading Rs150
interest on loan is due @ 6% p.a.
 Prepare final accounts from the As
following balancestaking adjustment into cosideration
at 21 March, 2020
Debit balances |Amount Rs Credit Balancs JAmount Rs
6300|Capital 150000
Drawings 13870 discount received IN
CaFriege H/ A 2980
Bills receivable
1860|Loans 15000
Land and Building 42580| Purchase return 1450
S130|Sales 281500|
Furniture
|reserved/provision for
Disçountallowed e 3960]bad debts 4650
100/Creditors 18670
Bank charges 6420
Salaries 199080
Purchases 60220
opening stock
1870
Sales return
5170
Carriage 7680
Rent and Taxes 1e 3630
General expenses 31640
Plant and Machinery
Book debts A 82740
1250
Bad debts
750
|Insurance 474250|
474250

Adjustments
Rs 70000
Jclosing stock
dubtful debts @10% on book debts
Jcreate a reserve/provison for bad and
insurance prepaid Rs 50
rent outsatnading Rs150
|interest on loan is due @ 6% p.a.
 TRADING AND PROFIT AND LOSS
ACCOUNT
JDR for the year ended on 31st
march 2020 CR
JParticulars lAmount Particulars Amount Rs
Toopeningstock 60220|By sales 281500
|Topurchases 199080 less: Sales return
lless: purchase return 1870 279630
1450
197630|By closing stock 70000
To carriage 5170
tranmsferred
To Gross profit
to P&L a/c 349630
349630 349630 263026
to discount allowed 3960|BY gross profit b/d
To bank chrages
86610 349630|
100|By discount receîved 2980
TO salaries 6420
To rent and taxes 7680
Add: outstanding rent 150 7830
To general expenses 3630
To bad debts 1250
Add: New Prov for bad and
doubtful debts 8274
9524
less: Old prov for bad and
Jdoubtful debts 4650 4874
To insurance 750
Less: prepaid insurance 50 700
tointerest on loan 900
to net profit tranferred
to capital a/c 61176
89590 4540352610
BALANCE SHEET
AS AT 31ST MARCH, 2020
JLiabilities Amount rsAssets Amount rs
capital
|Add: net prrofit
150000
61176
Cariage N
Bills receivable
13870
1860
211176| Land and Building 42580
Less: drawings 6300 204876 Furniture S130
Loans 15000 Plant and Machinery 31640
Add: interest on loan 900 15900 Book debts 82740
|less: New prov for bad
|Creditors 18670 and doubtful Debts 8274 74466
Joutstanding rent 150\closing stock 70000
prepaid insurance 50

239596| 239596|
 Trail balance
DR
Cr
Particulars Amount Rs Particulars Amount Rs,
Cash in hand
Cash at bank 15000|Capital 90000
Opening Stock 45000|Return outward 4240
Wages 17190|Discount 180
|Salaries 9420|Bills payable 12000
Furniture
12840 sundry creditors 17000
Rent and insurance 37500|Commission 2000

Machinery 6940\sales 149840

24000|reserve for bad debts 2240
Printing and stationery 7950|Bank loan 45650
|Bills recivable 1240
Sundry debtors 38970
Bad debts 1000
Carriage Outwards 3240
Office expenses 9520
|Carriages inwards 2310
Purchases 82210
return inward 1820
Drawing 7000
323150 323150|

|Adjustments
1|Closing stock on 31st March, 2021 was Rs 14920
2 Wages outstanding Rs 1580
3|Insurance prepaid Rs 440
4|write off further bad debts Rs 970
s Create a reseve for bad debts@5% on sundry debtors
6|Depreciate machinery and furniture @10% p.a.
 TRADING AND PROFTT AND LOS
Dr ACCOUNT
for the year ended 3st CR
Particulars Murch, 2021
io openingstock |Amountarticulars
17190|By sales 149840
|Amount

|owages 1820| 148020

outstanding wages
9420 |less: retun inward 14920
ocarriagerinwards
1580 11000]By closing stock
2310|
fopurchases 82210
ecs: Return Outward 4240| 77970
ale
P&L
o Gross profitttd to 54470 162940
162940 54470
Tosalaries 12840|By gross profit b/d 180
insurance 6940 by discount
Irorent and 2000
less: Prepaid insurance 440 6500\by commission
To print and stationery 7950|
Tobaddebts 1000|
debts 970
dd: further bad
1970
debts (new) 1900
Add: reseve for bad
3870
debts (old) 2240 1630
fx: reserve for bad 3240
o carriageoutwards
9520
fio office expense
Machinery 2400
o depreciation : :furniture 3750 6150| 566504K30
8820
onet profit tfd to capital a/c 56650
March, 2021
BALANCE SHEET, As at 3st Amount
JAmount ASSETS 15000
IABILITIES Cash in hand 45000
90000
Capital Cash at bank
8820 37500
uldi:Net profit Furniture 3750 33750
98820
91820|Less: Depreciation
7000 24000
es: Drawings 12000|Machinery 21600
2400
Bil s payable 17000|Less: Depreciation 1240
RIndry creditors 45650Bills recivable
38970
Bank loan 1580] Sundrydebtors
debts 970
ulstanding wages Less: further bad
38000
bad debts
|less: Reserve for 1900| 36100|
lNew) 14920
Closing stock 440
prepaid insurance 168050
168050
 tor the year ended on 31st march 2021 and balance sheet
Prepare a trading and P&L a/c
Trail balance
as on that date from the following 2020
as at 31st march Amount Rs
Amount Rs Credit
Debit 98780
Cash in hand 540 Sales
2630|Return Outward 500
Cash at bank 62000
|Purchases 40675|Capital 6300
680 sundry creditors
|returninwards 9000
8480|rent
wages 4730
fuel & power
carriage on sales 3200
carriage on purchase 2040
opening stock 5760
32000
building 10000
freehold land
20000|
machinery 15000
salaries
7500|
patents
3000
general expenses
600
insurance
5245
drawingsS 14500
sundry debtors 176580
176580

|Adjustments
march,2020 was Rs 6800
|Stock in hand as on 31st
patents @20%
machine is depreciated (@10% and outstanding
amounting to Rs 1500 were
salaries in march, 2020 policy expiring on sept 30, 2020
premium of Rs 170 on a
insurance inculedes a provision @5% on debtors
bdebts are Rs 725. Create
furether bad
rent receivable rs 1000
 TRADING AND P&L ACCOUNT
|Amount Particulars Amount Rs
Particulars 98780
To opening stock 5760 By sales
|less: Return inwards 680 98100
40675
To purchase 6800
|less: return outward 500 40175|BY closing stock
|To wages 8480
To fuel & power 4730
2040
To carriageon purchase
|To gr profit tfd to P&La/c 43715 104900
104900
43715
3200|by gross profit b/d
|To carriage on sales
9000
to salaries 15000 By rent
1000| 10000
add: Outstanding salaries 1500| 16500\add: rent receivable
to general expesnes 3000
To insurance 600
less: prepaid insurance 85 515
To depreciation: Machine 2000
:Patents 1500 3500|
To further bad debts 725
Add: Provision for baddebts 688.75| 1413.8
To net profit tfd to capital a/c 25586
53715|
53715
BALANCE SHEET, Asat 31st march, 2020
Amount Rs
|Amount ASSETS
LIABILITIES 540
6300/Cash in hand
sundry creditors 2630
1500|Cash at bank
JOutstanding salaries 32000
62000 building
Capital freehold land 10000
Add: Net Profit 25586
|machinery 20000
87586
5245| 82341|less: deprectiation 2000 18000
|less: Drawings
patents 7500
1500 6000
|less: deprectiation
sundry debtors 14500
|less: further bad debts 725
13775
less : Prov for bad debts 688.75| 13086.25
6800
Closing stock
85
Prepaid insurance
1000
Rent rev
90141
90141.25
 qnaiyys bAane
Makaconpaaie