Accountancy Module 3

AccountancyModule 3

Samitesh Brahma

Department of Humanities

Jorhat Engineering College

DEPARTMENT OF HUMANITIES

Module 3

➢ Final Accounts

➢Trading and Profit and Loss account

➢Balance Sheet

➢Preparation of final accounts

➢Profit and loss accounts with adjustments

Financial Statements

➢It refers to such statements which report the profitability and the

financial position of the business at the end of accounting period.

➢The term financial statements includes at least two basic

statements which are:

➢Income statement (or Trading and Profit & Loss Account) which shows

the results of business operation during an accounting period.

➢Statement of Financial Position (or Balance Sheet) which shows the

financial position of an enterprise at a specific point of time.

➢These two financial statements are termed as “Final Accounts”.

Objectives or need or Importance of Financial Statements

1. Trading and Profit and Loss Account

a) Determine Gross Profit or Gross Loss

b) Determine Net Profit or Net Loss

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 Solvency Position.

Users of financial statements

1. Owners

2. Management

3. Employees and Trade Unions

4. Investors

5. Creditors

6. Government

7. Taxation authorities

Income statement

Income statement is a summary of accounts that affects the profit or loss

of an enterprise.

• It is divided into two parts

✓First part is called ‘Trading Account’. It shows the gross profit or gross loss,

✓The second part is called ‘Profit and Loss Account’. It shows the net profit or

net loss.

Concept of Gross Profit and Net Profit

➢Direct expenses means all expenses directly connected with the manufacture,

purchase of goods and bringing them to the point of sale. Direct expenses include

carriage inwards, freight inwards, wages, factory lighting, coal, water and fuel,

royalty on production, etc.

➢The excess of sales over purchases and direct expenses is called gross profit.

➢If the amount of purchases including direct expenses is more than the sales

revenue, the resultant figure is gross loss.

➢Gross Profit = Sales – (Purchases + Direct Expenses)

➢If the total of the credit side of the profit and loss account is more than the total of

the debit side, the difference is the net profit for the period of which it is being

prepared. On the other hand, if the total of the debit side is more than the total of

the credit side, the difference is the net loss incurred by the business firm.

➢Net Profit = Gross Profit + Other Incomes – Indirect Expenses

Cost of goods sold and Gross Profit

Illustration

From the following information, calculate the cost of goods sold and gross profit on the basis of cost of goods sold.

Cost of goods sold = Opening Stock + purchases + Direct expenses – Closing stock

Cost of goods sold = Sales – Gross Profit

₹

Opening Stock 40,000

Purchases 4,20,000

Expenses on purchase 8,000

Expenses on Sales 15,000

Wages 30,000

Sales 6,00,000

Closing Stock 52,000

Solution

Cost of Goods

Sold

= Opening Stock + Purchases + Direct Expenses – Closing

Stock

= Opening Stock + Purchases + Expense on Purchases + Wages

– Closing Stock

= ₹ (40,000 + 4,20,000 + 8,000 + 30,000 – 52,000)

= ₹ 4,46,000

Gross Profit = Sales – Cost of Goods Sold

= ₹ (6,00,000- 4,46,000)

= ₹ 1,54,000

Trading Account

✓ It is prepared for calculating the gross profit or gross loss arising or

incurred as a result of the trading activities of a business.

✓All expenses which relate to either purchase of raw materials or

manufacturing of goods are recorded in the trading account.

✓All such expenses are called ‘Direct Expenses’.

✓Trading Account is a nominal account.

Transactions recorded in Trading account

1. Opening Stock

2. Purchases

3. Purchases Returns/ Return Outward

4. Sales

5. Sales return / return inward

6. Closing Stock

7. Expenses incurred on manufacturing of goods

8. Expenses incurred on purchasing and bringing the goods to the

trading place

Preparation of Trading Account

A. Items written on the Dr. side of the trading account1. Opening stock or inventory

2. Purchases and purchases return3. Direct expenses

i. Wages

ii. Carriage or carriage inwards or freight

iii. Manufacturing expenses

iv. Stores consumed

v. Docks charges

vi. Royalty

B. Items written on the Cr. Side of the trading account1. Sales and sales return

2. Closing Stock

Closing entries

➢If the credit side of the trading account exceeds the debit, thedifference will be Gross Profit. The Gross Profit will be transferred tothe credit of a newly opened account called Profit and Loss Account.

➢If the debit side of the Trading account exceeds the credit, thedifference will be gross Loss. It will be transferred to the debit of P&LA/c by means of the following entry.

Trading A/c DR

To Profit and Loss A/c

(The Transfer of Gross Profit to the Credit Side of P&L A/c

Profit and Loss A/c DR

To Trading A/c

(The Transfer of Gross Loss to the Dedit Side of P&L A/c

Format of a Trading Account

TRADING A/C

Dr For the year ending…………… Cr

Particulars Amount (₹) Particulars Amount (₹)

To opening stock By sales

Less: sales return

Or return inwardsTo purchases

Less: Purchase returns

Or return outward By closing stock

To wages By Gross Loss

(if any) transferred to

P&L A/cTo wages and salaries

To Direct expenses

To Carriage

To carriage inwards

To carriages on purchases

To Gas, fuel and power

To freight and cartage

Continued….

To manufacturing expenses, or

Productive Expenses

To Factory expenses, such as,

Factory lighting

Factory rent, etc.

To dock charges and clearing charges

To import duty or custom duty

To royalty

To Gross Profit

Transferred to P&L A/c

Illustration 1

Prepare a Trading Account for the year ended on 31st March, 2020 fromthe following balances:-

Closing Stock = ₹ 3,00,000

Particulars ₹ Particulars ₹

Opening Stock 2,00,000 Purchases return 60,000

Purchases 10,00,000 Sales Return 1,00,000

Sales 25,00,000 Carriage on purchase 40,000

Freight 32,500 Carriage on sales 50,000

Wages 1,50,000 Factory Rent 2,20,000

Factory Lighting 54,000 Office rent 37,500

Coal, Gas and water 11,000 Salaries 1,00,000

SolutionTRADING A/C

Dr For the year ending on 31st March, 2020 Cr


To Opening stock 2,00,000 By sales

Less: sales return

25,00,000

1,00,000 24,00,000To purchases

Less: Purchase returns

10,00,000

60,000 9,40,000 By closing stock 3,00,000

To Freight 32,500

To Wages 1,50,000

To Factory Lighting 54,000

To Coal, Gas and Water 11,000

To Carriage on Purchase 40,000

To Factory Rent 2,20,000

Total 16,47,500

To Gross Profit transferred to

P&L A/c 10,52,500

27,00,000 27,00,000

Profit and Loss Account

✓A Profit & Loss Account is an account into which all gains

and loses are collected, in order to ascertain the excess of

gains over the losses or vice- versa.

✓A Profit & Loss Account is started with the amount of gross

profit or gross loss brought down from the Trading Account.

✓These expenses include administrative expenses, selling

expenses, distribution expenses, etc.

✓These are called ‘Indirect Expenses’.

✓P&L Account is a nominal account.

Preparation of Profit and Loss Account

➢Items written on the Dr. Side of Profit & Loss Account :-

1. Gross Loss.

2. Office and Administrative Expenses.

3. Selling and Distribution Expenses.

4. Miscellaneous Expenses

➢Items written on the Cr. Side of Profit & Loss Account:-

1. Gross Profit.

2. Other incomes and gains.

Closing Entries relating to P&L A/c

1. For the transfer of credit balance of Profit & Loss A/c known as net profit:

2. For the transfer of debit balance of Profit & Loss A/c, known as net loss:

Profit and Loss A/c Dr.

To Capital A/c

(The transfer of net profit to capital A/c

Capital A/c Dr.

To Profit and Loss A/c

(The transfer of net profit to capital A/c

Format of a Profit and Loss Account

PROFIT AND LOSS A/C

Dr. For the year ending ……………… Cr.


To Gross Loss b/d

(Transferred from Trading A/c)

By Gross Profit B/d

(Transferred from Trading A/c)

Office Expenses : By Rent from tenant

To Salaries By Discount Received

To Salaries and Wages By Commission Received

To Rent, Rates and taxes By Interest on Investments

To Printing and Stationary By Dividend on shares

To Postage By Bad-Debts Recovered

To Lighting By Profit on sale of assets

To Insurance Premium By Income from other sources

To Telephone charges By Misc. Income

To Legal Charges By Net Loss ( if any)

To Audit fees Transferred to Capital A/c


PROFIT AND LOSS A/C



To Travelling Expenses

To Establishment Expenses

To Trade expenses

To General Expenses

Selling and distribution expenses:

To Carriage outwards, or

Carriage on Sales

To Advertisement

To Commission

To Brokerage

To Bad-Debts

To Export duty

To Packaging charges


PROFIT AND LOSS A/C



To Delivery Van Expenses

To Stable expenses

Miscellaneous Expenses:

To Discount allowed

To Repairs

To Depreciation

To Bank charges

To Conveyance Expenses

To Donation and charity

To Loss on sale of assets

To Net Profit

Transferred to Capital A/c

IllustrationFrom the following particulars, prepare a profit and loss account for the years ending 31st March, 2021


Gross Profit 10,52,500 Discount Allowed 15,000

Trade Expenses 10,000 Lighting 3,900

Carriage on Sales 50,000 Commission Received 4,200

Office Salaries 79,000 Bad-Debts 6,000

Postage 3,600 Discount Received 3,000

Office Rent 37,500 Interest on loan 11,000

Legal Charges 2,000 Stable Expenses 7,000

Audit fee 8,000 Export duty 11,500

Donation 5,500 Misc. Income 2,500

Sundry Expenses 1,800 Unproductive Expenses 20,500

Selling Expenses 26,600 Travelling Expenses 12,500

Solution

PROFIT AND LOSS A/C

Dr. For the year ending 31st March 2021 Cr.


To Trade expenses 10,000 By Gross Profit B/d 10,52,500

To Carriage on sales 50,000 By Commission Received 4,200

To Office Salaries 79,000 By Discount Received 3,000

To Postage 3,600 By Misc. Income 2,500

To Office Rent 37,500

To Legal Charges 2,000

To Audit fee 8,000

To Donation 5,500

To Sundry Expenses 1,800

To Selling Expenses 26,600

To Discount Allowed 15,000

To Lighting 3,900

To Bad-Debts 6,000

Solution

PROFIT AND LOSS A/C

Dr. For the year ending 31st March 2021 Cr.


To Interest on Loan 11,000

To Stable Expenses 7,000

To Export duty 11,500

To Unproductive Expenses 20,500

To Travelling Expenses 12,500

To Net Profit transferred to

Capital Account 7,50,800

10,62,200 10,62,200

Operating Profit and Net Profit

Profit may be of two types:

i. Operating profit and

ii. Net profit.

Operating Profit

✓The profit earned through normal operating activities of the business.

✓Expenses which are related to the main or normal activities of the

business are called operating expenses.

✓They include office and administration expenses, selling and

distribution expenses, discount, bad- debts, etc.

✓They are also called ‘Earnings before Interest and Tax’ or EBIT.

Net Profit

✓It is arrived by deducting operating as well as non- operating expenses

from the gross profit.

✓Expenses which are indirect to the main operations of the business are

called non- operating expenses.

✓They include interest on loan, donations, loss on sale of fixed assets,

loss due to theft.

Balance Sheet

✓A balance sheet is a statement prepared with a view to measure the

exact financial position of a business on a certain fixed date.

✓A balance sheet contains all the Assets and Liabilities of the business

enterprise.

✓Balances of all the personal and real accounts are group as assets and

liabilities.

✓Liabilities are shown on the left hand side of the Balance Sheet and

Assets on the right hand side.

Characteristics of Balance Sheet

1. A balance sheet is a part of Final Accounts.

2. A Balance sheet is a summary of the Personal and Real Accounts,

which are still open and have not been closed by transfer of the

Trading and Profit and Loss Account.

3. The totals of the two sides of the balance sheet must be equal.

4. Balance sheet is prepared on a particular date and not for a fixed

period.

5. It shows the financial position

Format of a Balance Sheet

BALANCE SHEET

As at ……………

Liabilities Amount (₹) Assets Amount (₹)

Current Liabilities Current Assets

Bank Overdraft Cash in Hand

Bills payable Cash at Bank

Sundry Creditors Bills Receivable

Outstanding expenses Short Term Investments

Unearned Income Sundry Debtors

Non-Current Liabilities Closing Stock

Long term loans Prepaid Insurance

Reserves Accrued Income

Capital Long Term Investments

Add: Net Profit or

(Less: Net loss)

Non- current Assets

Less: Drawings Furniture

Less: Income Tax Loose tools

Format of a Balance Sheet

BALANCE SHEET

As at ……………

Liabilities Amount (₹) Assets Amount (₹)

Less: Life Insurance Premium Motor Vehicle

Plant and Machinery

Land and Buildings

Patents and Trade Marks

Goodwill

Total Total

Important points for preparing Final Accounts

1. If a trail balance is not given in the question, it is better to prepare a trailbalance at first.

2. The items which appear on the debit side of the Trail Balance should beshown either on the debit side of the Trading or P&L account or on theassets side of balance sheet.

3. The items which appear on the credit side of the Trail Balance should beshown either on the credit side of the Trading or P&L account or on theliabilities side of balance sheet.

4. The balances of Personal and Real Accounts are always shown in thebalance sheet.

5. If the expenses in respect of ‘Rent’ and ‘Lighting’ are clearly stated ashaving been incurred in respect of factory, these will be shown in theTrading Account, otherwise these will be shown in Profit and LossAccount.

6. The total of both sides of the balance sheet will always be equal.

Adjustment entries

Documents

Accountancy Module 3