Accounting , CPT – Chapter 6 CA PRATHAP SS

Preparation of Final Accounts is the last phase of the Accounting Process.

INTRODUCTION

INTRODUCTION The process of accounting starts from Transaction then entered in Journal then it is posted in Ledger and Summarized in Trial Balance The next step is the Preparation of Final Accounts.

Final Accounts is mainly divided into two parts Income Statement & Position Statement.

The profit of the enterprise is obtained through the preparation of Income Statement.

Financial position of the enterprise can be known through the preparation of the Position Statement.

INTRODUCTION

Income Statement: Trading A/c Profit and Loss A/c

Position Statement: Balance Sheet.

PARTS OF FINAL ACCOUNTS

The principle function of final statements of account (T, P&L, B/S) is to exhibit truly and fairly the profitability and the financial position of the business.

PREPARATION OF FINAL ACCOUNTS

The two statements, the Profit and Loss Account and the Balance Sheet are thoroughly inter-related.

The assets shown in the Balance Sheet are mostly the remainder of the expenditure incurred after a suitable amount has been charged to the Profit and Loss Account or the Trading Account.

INTER-RELATIONSHIP OF THE TWO STATEMENTS

TRADING A/C Following are the items appearing in the Trading A/c: Debit Side : Opening Stock Purchases less Purchase Return Carriage (or) Freight Inward Wages Credit Side : Sales less Sales Returns Closing Stock The Balancing figure will be Gross Profit / Loss Trading A/c is based on Matching Concept.

All Indirect expenses will appear on the Debit side of the Profit and Loss account.

Indirect expenses are classified into two types.

Administrative expenses and Selling and Distribution expenses

PROFIT AND LOSS A/C

Salaries

Rent

Lighting in the office

Legal expenses

Audit Fees

EXAMPLES OF ADMINISTRATIVE EXPENSES

Advertising

Packing expenses

Carriage outwards (i.e., on sales)

Insurance

Bad Debts

EXAMPLES OF SELLING AND DISTRIBUTION EXPENSES

JOURNAL ENTRIES FOR ADJUSTMENTS

EXPENSES UNPAID / OUTSTANDING Eg : Rent for last month Rs.50,000 not yet paid Rent a/c Dr. 50,000 To Rent Outstanding a/c 50,000 (Being Rent due and not paid) This will be the Standard entry for all

expenses incurred but not yet paid. Example : salary , Interest , Wages

INCOME EARNED BUT NOT RECEIVED Eg : On our Bank deposit of Rs.10,00,000 , the

Bank has not yet paid the interest earned of Rs.50,000

Interest Accrued a/c Dr. 50,000 To Interest a/c 50,000 (Being Interest earned but not yet received) In our B/S on the Asset side along with the

Bank Deposits of Rs.10,00,000 , the Interest Accrued of Rs.50,000 will have to be shown.

CARRYING FORWARD INCOMES AND PAYMENTS RECEIVED IN ADVANCE Eg : We have received a fee collection in advance of

Rs.75,000 Fee collection a/c Dr. 75,000 To Fee Collection received in advance a/c 75,000 (Being Fees received in advance reduced from Fee

Collection account and shown as a Liability) This will be the standard treatment for all Incomes

received in advance , which will have to be shown on the Liability side of the Balance Sheet .

BAD DEBTS Eg. There is a bad debt of Rs.10,000. Bad Debts A/c Dr. 10,000 To Sundry Debtors A/c 10,000 (Being bad debts brought into accounts) Profit and loss a/c Dr. 10,000 To Bad Debts a/c 10,000 (Being transfer of bad debts to P&L a/c)

CREATION OF PROVISION FOR BAD AND DOUBTFUL DEBTS Profit & Loss A/c Dr. XXX To Prov. For Bad & Doubtful Debts A/c. XXX When a provision for Bad and Doubtful debts

already exists and a bad debt occurs, then only the provision account will be debited and not the P&L a/c.

ABNORMAL LOSS BY FIRE Eg. Stock of Rs.90,000 was destroyed by fire. Abnormal loss A/c Dr. 90,000 To Purchases A/c 90,000 (Being stock destroyed by fire.) Profit & Loss A/c Dr. 90,000 To Abnormal loss A/c 90,000 (Being the abnormal loss booked in P&L a/c) When any stock is not available for sale in

the shop then purchases a/c has to be reduced.

GOODS TRANSACTED OTHER THAN THROUGH SALE Charity : Eg. Goods of Rs.67,000 was distributed at an

orphanage Charity A/c Dr. 67,000 To Purchases A/c 67,000 Personal use : Eg. Goods worth Rs.10,000 was taken for own use. Drawings A/c Dr. 10,000 To Purchases A/c 10,000

GOODS TRANSACTED OTHER THAN THROUGH SALE (CONTD...) Advertisement : Eg. Goods worth Rs.70,000 were distributed as free

samples. Advertisement A/c Dr. 70,000 To Purchases A/c 70,000 Whenever the goods are not available for sale in the

shop, then in the eyes of Accounts these goods were never purchased, so, Purchases a/c will have to be reduced.

A statement which sets out the assets and Liabilities of a firm ( or ) an institution as at a certain date.

The Balance Sheet is true only at a particular point of time / date .

It is prepared on a particular date .

BALANCE SHEET

ARRANGEMENT OF ASSETS & LIABILITIES

Liquidity or Permanence. Liquidity : Cash in hand Cash at Bank S. Debtors Stock Machinery Furniture Patent Goodwill. Permanence : The reverse order of

above.

Liability is arranged according to the urgency with which payment has to be made . There are two ways of arranging : (I) Capital Long term borrowings Short term borrowings. (II) Short term borrowings Long term borrowings Capital

ASSET LIABILITIES

Provision means “any amount written off “ ( or ) retained by way of providing for say Depreciation, Bad Debts .

The provision for discount on debtors is calculated on debtors after deducting the provision for Doubtful Debts.

Provisions are a charge on Profits.

PROVISIONS

Historical cost

Intangible strengths and weakness.

Perpetual continuity

Different accounting policies

Management policies.

LIMITATIONS OF FINANCIAL STATEMENTS

Profit or loss on sale of fixed asset is transferred to Profit and Loss A/c.

Work in progress is shown in the Balance Sheet under the head current asset .

Prepaid rent is current asset .

If closing stock appears in the Trial Balance then it appears in Balance Sheet .

IMPORTANT EXAM POINTS

Sale of scrap of raw materials appearing in the trial balance are shown on the credit side of Manufacturing a/c.

Full claim accepted by Insurance company on the loss of goods by fire is credited to Trading A/c.

A surplus of revenue over cost is known as profit of business.

IMPORTANT EXAM POINTS (CONTD..)

Fixed assets are kept in the business for use over a long time for earning income.

Manufacturing account is prepared to ascertain the cost of the manufactured goods.

Bonus given to employees is recorded in P&L a/c.

IMPORTANT EXAM POINTS (CONTD..)

MCQ’S

Current Asset

Current Liability

Fixed Asset

Income

Answer : A

PREPAID RENT IS SHOWN AS :

Trading A/c

Profit & Loss A/c

Balance Sheet

Profit and Loss Appropriation

Answer : C

IF CLOSING STOCK APPEARS IN THE TRIAL BALANCE THEN IT APPEARS IN :

Trading A/c

Profit and Loss A/c

Manufacturing A/c

None of these

Answer : C

SALE OF SCRAP OF RAW MATERIALS APPEARING IN THE TRIAL BALANCE ARE SHOWN ON THE CREDIT SIDE OF

Trading A/c

Profit and Loss A/c

Profit and Loss Appropriation A/c

None of the above

Answer : B

BONUS GIVEN TO EMPLOYEES IS RECORDED IN :

Appropriation of profits

Charge on profits

Both

None

Answer : B

PROVISIONS ARE :

Liabilities

Assets

P & L A/c

Foot Notes

Answer : D

BILLS RECEIVABLE DISCOUNTED BUT NOT DUE TILL DATE OF FINAL ACCOUNTS IS SHOWN AS :

Trading A/c

Profit and Loss A/c

Debtors Account

Provision for Bad Debts A/c

Answer : B

THE PROVISION FOR BAD DEBTS IS CREATED BY DEBITING :

Raw materials

Work in progress

Finished goods

All the above

Answer : D

IN BOOKS OF MANUFACTURING CONCERN , OPENING STOCK CONSISTS OF :

Personal A/c

Real A/c

Nominal A/c

None

Answer : C

TRADING ACCOUNT IS A :

Trial Balance

Balance Sheet

Trading A/c

Profit & Loss A/c

Answer : B

ONLY PERSONAL AND REAL ACCOUNTS ARE SHOWN IN :

Trading A/c

P & L A/c

Insurance company

None

Answer : B

FULL CLAIM ACCEPTED BY INSURANCE COMPANY ON THE LOSS OF GOODS BY FIRE IS CREDITED TO ______ A/C

Trial Balance

Profit & Loss A/c

Balance Sheet

Funds flow Statement

Answer : C

____ IS A SUMMARY OF ALL ASSETS AND LIABILITIES ON A PARTICULAR DATE.

Capital

Profit

Asset

None

Answer : B

A SURPLUS OF REVENUE OVER COST IS KNOWN AS ______ OF BUSINESS.

Bad Debt A/c

Debtor A/c

Bad debt recovered A/c

Suspense A/c

Answer : C

BAD DEBT RECOVERED OF RS.2,000 WHICH WAS PREVIOUSLY WRITTEN OFF AS BAD DEBT WILL BE CREDITED TO ___ A/C

Godown rent

Carriage outwards

Insurance for stock of finished goods

Carriage Inwards

Answer : D

SELLING AND DISTRIBUTION EXPENSES DOES NOT INCLUDE :

Goods lost in transit account

Purchase Return Account

Trading Account

Sales Account

Answer : C

IF PURCHASES A/C IS NOT CREDITED IN CASE OF GOODS LOST IN TRANSIT THEN WHICH ACCOUNT CAN BE CREDITED :

P&L A/c

Trading A/c

Balance Sheet

Manufacturing A/c

Answer : A

POSTAL EXPENSES ACCOUNT IS SHOWN IN :

Share Capital

Current Asset

Fixed Asset

Current Liability

Answer : B

WORK IN PROGRESS IS SHOWN IN THE BALANCE SHEET UNDER WHICH HEAD ?

Cost of Goods Sold

Purchases

Opening Stock

None

Answer : A

SALES = ______ + GROSS PROFIT

Purchases

Sales

Return Inwards

Closing Stock

Answer : B

RETURN INWARD ARE DEDUCTED FROM _______

THANK YOU

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