UNIT II

Final Accounts

2.1 Preparation of Profit and loss account and Balance sheet

Meaning

The final account is the account prepared by the Joint Stock Company at the end of the fiscal year. The purpose of creating a final account is to provide a clear picture of the financial situation of the organization to its management, owners or other users of such accounting information.

Final account preparation involves preparing a set of accounts and statements at the end of the fiscal year.

1. Trading and profit and loss accounts
2. Balance sheet
3. Profit and loss appropriation account
4. Purpose of Final Account preparation

The final account is prepared for the following purposes:

1. To determine the profit and loss incurred by the company within a certain financial period
2. To determine the financial status of the company
3. To serve as a source of information to inform users of accounting information (owners, creditors, investors and other stakeholders) about the solvency of the company.  

Trading account

The results of the purchase and sale of goods are known as the trading account. This sheet is provided to show the difference between the sales price and the cost price. It is prepared to show the trading results of the business i.e.  The total profit or total loss maintained by the business. It records the direct costs of the business company.

J.R. According to Batlibboi,

The trading account shows the results of buying and selling goods. When we prepare this account, the general establishment costs are not taken into account and only the transaction of goods is included."

Profit and loss accounts

This account is prepared to check the net profit/loss and fiscal year expenses of the business during the fiscal year. It records the indirect expenses of the business company like rent, salary, and advertising expenses. Profit and loss a/C includes expenses and losses and gains and losses incurred in business other than the production of goods and services.

Balance sheet

The balance statement shows the financial status of the business at a specific date. The financial status of a business is discovered by aggregating its assets and liabilities on a specific date. The excess of assets over liabilities represents the capital sunk into the business and reflects the financial health of the enterprise.

Now it is known as a statement of the financial status of the company.

1. Trading Account

Trade and manufacturing operating companies deal with the sale and purchase of goods. Therefore, only the manufacturing and trading entities prepare the trading account. Service providers do not prepare for this.

Advantages of preparing a trading account format

1. It is a very important statement from the point of view of the cost of goods. By preparing a trading account, an entity may take a decision to continue or discontinue a particular product, which helps to obtain maximum profit or reduce losses.
2. With the help of a trading account, the sales tax authority can, in accordance with the sales tax declaration filed by the business, It also helps the excise duty authorities to assess the excise duty of a business enterprise.
3. The management, having in mind the market competition, determines the price of the product with the help of a trading account.                                              

Items in trading account format

The trading account contains the following details:

1. Details of raw materials, semi-finished goods and finished products, opening stock.
2. Close inventory details of raw materials, semi-finished products, and finished products.
3. Total purchase of goods less purchase return.
4. Total sales of goods less sales return.
5. All direct costs associated with the purchase or sale or manufacture of goods.    

Item of income (Cr. Side)

1. Less sales return than total sales of goods
2. Close the stock of the product.
3. Expenditure item (Doctor) side

Item of expenditure (Dr. Side)

1. Opening stock
2. Total purchase of goods less purchase return
3. All the direct cost like carriage interior & freight cost, rent, electricity and power cost, wages for godown or factory, packing cost, etc. for workers and supervisors.

Notes

1. The trial count will not be displayed on the close. But, firstly, we need to show the amount of closing shares on the income side of the trading account, and secondly, on the balance sheet under current assets.
2. We value closing inventory at either lower cost or market price.
3. On the day of preparation of the trading account, we value the physically available closed shares.
4. However, the trading account can also be prepared in horizontal form, but the content remains the same.

Trading Account Format

2.    Profit and loss A/C

All companies generally prepare profit and loss accounts/statements at the end of the year to gain visibility of income, revenue, expenses, and losses incurred in a certain range of periods. It is important to prepare a profit and loss statement because this information helps organizations make the right business decisions, such as where to cut costs, from where the business can generate more profit, and which parts of the business are suffering from losses.

1. Profit and loss accounts / statements
2. Types of profit and loss
3. Gross profit/gross loss
4. Profit / loss

Trading account is prepared to check gross profit/loss while profit and loss account is created to check profit and loss/net loss.

Profit and loss accounts are made to check the annual profit or loss of a business. This account only shows overhead. All items of income and expenses, whether cash or non-cash, are considered in this account.

Only revenue or expenses related to the current period are debited or credited to the profit and loss account. The profit and loss account starts with gross profit on the credit side and, if there is a total loss, appears on the debit side. Items not displayed in the profit and loss account format

Drawing: the drawing is not the company's expense. Therefore, we debit it to capital a/c, and not to profit and loss a/c.

Income tax: for a company, income tax is an expense, but for a sole proprietor, it is his personal expense. Therefore, we debit it to the capital A/C.

Discounts: as we know, discounts are of two types–trade discounts and cash discounts. We deduct the trade discount from the amount charged and therefore do not show it in the account books. On the other hand, if the customer pays the amount on a certain date, a cash discount will be possible. We view cash discounts in account books. Therefore, we debit it to the profit and loss account.

Bad debt: it is because of the customer and the amount he does not pay it. We debit this amount to profit and loss a/c in the event that preparations have already been made for a bet that is worse than it is initially written off from it. When bad loans are recovered, it is again. Now it is not credited to the account of the party, but recovered account should be credited to the bad debt and is written on the credit side of the profit and loss account

Profit and Loss Account Format

3.    Balance Sheet

A balance sheet (also known as a financial statement) is a financial statement that shows the Assets, Liabilities and ownership interests of a business at a specific date. The main purpose of drawing up a balance sheet is to disclose the financial status of the enterprise at a certain date. The balance sheet can be prepared at any time, but it is prepared mainly at the end of the accounting period.

Most of the information about Assets, Liabilities and owner's equity items is taken from the company's adjusted trial balance. Retained earnings are the part of the owner's equity section which is provided by the retained earnings statement.
 

Section of the balance sheet

To be widely considered about the balance sheet of the division part of assets part of liabilities main capital. For each department:

Assets section

In the balance sheet, assets with similar characteristics are grouped. The mainly adopted approach is to divide assets into current and non-current assets. Liquid assets include cash and all assets that can be converted into cash or expected to be consumed in a short period of time–usually one year. Examples of current assets include cash, cash equivalents, accounts receivable, prepayment costs or prepayment, short-term investments and inventories.

All assets that aren't listed as current assets are grouped as non-current assets. A common feature of such assets is that they continue to provide profit for a long time-usually more than one year. Examples of such assets include long-term investments, equipment, plants and machinery, land and buildings, and intangible assets.

Debt Division

A debt is an obligation to a party other than the owner of the business. They are grouped as current and long-term liabilities in the balance sheet. Current liabilities are obligations that are expected to be met within a one-year period by using current assets of the business or by providing goods or services.

Owner's equity division

The owner's interest is the obligation of the business to its owner. The term owner's equity is mainly used in the balance sheet of a business in the form of a sole proprietor and partnership. In the balance sheet of the company the term “ownership interest “is often replaced by the term "shareholder interest".

When the balance sheet is created, the liabilities section appears first, and the owner's equity section appears later.

Balance sheet format there are two formats on the balance sheet that present Assets, Liabilities and owner's ' equity–the account format and the report format.

In the account form, the balance sheet is divided into the left and right, like the t-account. Both liabilities and the owner's capital are listed on the right side of the balance sheet, while assets are listed on the left. If all the elements of the balance sheet are listed correctly, then the sum on the asset side (that is, on the left) is equal to the sum on the debt and the capital side of the owner (that is, on the right).

BUSINESS CONSULTING COMPANY

BALANCE SHEET

As at December 31, 2015

In reporting format, the balance table element is displayed vertically, the asset section is displayed at the highest, and therefore the liabilities and owner's equity sections are displayed below the asset section.

The example below shows both formats.

Key takeaways:

1. Trading assets are securities held by way of a corporation for the cause of reselling them for profit.
2. Treasury securities, loan-sponsored securities, foreign exchange contracts, and other securities may be considered trading belongings.
3. A business enterprise's funding portfolio is separated from its trading assets.
4. Buying and selling assets are considered modern belongings due to the fact they may be meant to be bought quick.
5. The fee of buying and selling belongings should be up to date on the balance sheet and recorded as earnings or loss within the earnings statement.
6. The profits announcement is a monetary assertion that summarizes the income, charges, and expenses incurred for the duration of a selected duration.
7. The income assertion, at the side of the stability sheet and cash go with the flow statement, is one of three economic statements issued quarterly and yearly through all public companies.
8. You could use the earnings statement, balance sheet, and coins glide assertion collectively to get an in depth view of your organisation's economic performance.
9. Monetary statements are prepared using coins or accrual accounting methods.
10. It's far crucial to evaluate the income statements for exclusive accounting intervals, as changes through the years become greater significant than the numbers themselves.
11. The stability sheet is a economic declaration that reports a organisation's property, liabilities, and shareholders' equity.
12. The stability sheet is one of the 3 most important economic statements used to evaluate a enterprise.
13. It provides a photograph of the company's budget (owned and borrowed) as of the issue date.
14. The stability sheet is based totally on an equation that equalizes property to the sum of liabilities and shareholders' equity.
15. Fundamental analysts use the stability sheet to calculate economic ratios.

References:

1. Monga, J.R. Fundamentals of Corporate Accounting. Mayur Paper Backs, New Delhi.
2. Shukla, M.C., T.S. Grewal, and S.C. Gupta. Advanced Accounts. Vol. – II. S. Chand & Co. New Delhi.
3. Maheshwari, S.N. And S.K. Maheshwari. Corporate Accounting. Vikas Publishing House, New Delhi.
4. Sehgal, Ashok and Deepak Sehgal. Corporate Accounting. Taxman Publications, New Delhi.
5. Gupta, Nirmal. Corporate accounting. Sahitya Bhawan, Agra.
6. Jain, S.P. And K.L. Narang. Corporate Accounting. Kalyani Publishers, New Delhi Copendium of Statements and Standards of Accounting. The Institute of Chartered Accountants of India, New Delhi.
7. Bhushan Kumar Goyal, Fundamentals of Corporate Accounting. International Book House.