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INTERNAL RESEARCH ASSIGNMENT
Name of the candidate: Kanchan Arora
Enrollment no.: 11915903912
Course: MBA
Batch: 2012-2014
Semester: I (Sec. B)
Subject Name: Accounting For Management
Subject code: MS107
Topic of assignment: Final Accounts
Subject Teacher’s name: Ms. Nidhi Sharma
Date of submission: 08.10.2012
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AFM RESEARCH ASSIGNMENT
FINAL ACCOUNTS-
Financial statements are prepared to know profit or loss and financial position of the
business at the end of the financial year or at the end of the accounting period. These
financial statements are communicated to the users of accounting information. Financial
statements are the end-product of the accounting function drawn from the trial balance. They
are prepared to know-
1. The profit earned during an accounting period, by preparing the profit and loss
account, and
2. The financial position by preparing the balance sheet.
These two financial statements are also known as FINAL ACCOUNTS.
The information in the financial statements is of interest to a number of internal and external
parties. Internal users include- owners, management, employees and workers. External users
includes- banks and financial institutions, investors and potential investors, creditors,
Government and its authorities, researchers, consumers, public, etc.
INCOME STATEMENT- An Income Statement is a summary of accounts that affects the
profit or loss of an enterprise. Many accounts shown in the Trial balance relate to expenditure
or income. These accounts either increase or decrease the profit. Accounts that increase the
profit are shown on one side while accounts that decrease the profit are shown on the other
side.
An income statement has two parts, namely-
1. Trading account- It reveals gross profit or gross loss.
2. Profit and loss account- It reveals net profit or net loss.
TRADING ACCOUNT- Trading account is the first stage in the process of preparing the
final accounts. Trading account shows the gross profit pr gross loss during an accounting
year. It is prepared to know the outcome of a trading operation. This account is based on
matching the selling price of goods and services with the cost of goods sold and services
rendered. It records only net sales and direct cost of goods sold.
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CONTENTS OF A TRADING ACCOUNT-
Items shown on the DEBIT SIDE of the trading account:-
1. Opening stock- It refers to the closing stock of the previous year, which has been
entered in the opening stock account through an opening entry. It contains the value
of goods in which business deals.
2. Purchases and purchases return- It shows the gross amount of purchases made of the
materials. It refers to the goods purchased, both cash and credit purchases. The
purchases return account will show a credit balance showing the returns of materials
to the suppliers. Besides the purchases return, goods taken by the proprietor for his
personal use, goods given as charity, and goods given by way of samples are also
deducted from the purchases.
ADJUSTED PURCHASES = NET PURCHASES + OPENING STOCK – CLOSING
STOCK
3. Direct Expenses- Direct Expenses are those expenses which are incurred on the goods
purchased till they are bought to the place of business for sale. In a manufacturing
business, expenses incurred for the purposes of production are also direct expenses.
Direct Expenses include- carriage or freight inwards, manufacturing wages, power
and fuel, factory lighting, factory rent and rates, duty on purchases, royalties, and
consumable stores.
Items shown on the CREDIT SIDE of the trading account:-
1. Sales and Sales return- The sales account indicates the total sales made during the
year. The sales return account always has a debit balance, showing the total of the
amount of goods returned by customers. The net of the two amounts is called net
sales.
2. Closing stock- Closing stock means the stock of unsold goods which includes raw
materials, semi-finished goods, finished goods or goods traded in at the end of the
current accounting period. According to the convention of conservatism, stock is
valued at its cost or net realisable value, whichever is lower. Closing stock is usually
given outside the trial balance. As a result, the closing stock appears both on the credit
side of the trading account and on the asset side of the balance sheet.
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BALANCING OF TRADING ACCOUNT-
After recording the above items in the respective sides of the trading account, the balance is
calculated to ascertain gross profit or gross loss. If the total of the credit side is more than that
of the debit side, the excess is Gross Profit. If the total of the debit side is more than that of
the credit side, the excess is Gross Loss. Gross profit is transferred to the credit side of the
profit and loss account and gross loss is transferred to the debit side of the profit and loss
account.
FORMAT OF A TRADING ACCOUNT-
TRADING ACCOUNT FOR THE YEAR ENDED….
DR. CR.
PARTICULARS AMOUNT (RS.) PARTICULARS AMOUNT (RS.)
To opening stock
To purchases
Less: purchases
return …………….
To wages & salaries
To direct expenses
To carriage inwards
To freight, octroi &
cartage A/c
To gross profit*
……….
……….
……….
……….
……….
……….
……….
……………………...
……………………...
By sales
Less: sales returns….
By scrap sales
By closing stock
By gross loss*
……….
……….
……….
……….
……………………...
……………………...
*Either gross profit or gross loss shall appear.
PROFIT AND LOSS ACCOUNT- Profit and Loss Account is an account into which all gains
and losses are collected in order to ascertain the excess of gains over the losses or vice versa.
Profit and loss account is prepared to calculate the net profit or net loss of the business for a
given accounting period. It is the second stage in the preparation of final accounts. It starts
with the credit from the trading account in respect of gross profit or debit if there is gross
loss. Accrual basis of accounting is followed in the preparation of this account. Expenses and
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losses are shown on the debit side of the profit and loss account. Incomes and items of profit
are shown on the credit side of the profit and loss account.
CONTENTS OF THE PROFIT AND LOSS ACCOUNT-
Items shown on the DEBIT SIDE of the profit and loss account:-
1. Administration and office management expenses- It include the following-
Establishment expenses, office salaries, office rent and rates, lighting, printing and
stationery, postage and telephone charges, legal expenses, audit fee, general or trade
expenses.
2. Selling and distribution expenses- It include the following-
Salesman’s salaries and commission, commission of agents, advertising, warehousing
expenses, packing expenses, freight and carriage on sales, export duties, maintenance of
vehicles for distribution of goods and their running expenses, insurance of finished goods,
stock and goods in transit, and bad debts.
3. Financial expenses- These are those expenses which are incurred in respect of
arranging finance for business. Financial expenses include the following expenses-
interest on loan, interest on capital and discount allowed.
4. Abnormal losses- Abnormal loss such as stock loss by fire not covered by insurance,
loss on sale of fixed assets, loss by theft, cash defalcation, etc., may occur during the
accounting period. Abnormal expenses are treated as extraordinary expenses and
debited and shown separately in the profit and loss account.
Items shown on the CREDIT SIDE of profit and loss account:-
1. Income from main business- These refer to those profits and incomes which are
received from the operations of the main business. This includes the following types
of profits and incomes- Gross profit, profit on consignment, profit on joint venture,
commission receivable, etc.
2. Financial and other incidental income- Income received from other sources except the
main function of the business comes under this category. These include- Interest on
fixed deposits, income from investment, rent received, interest on drawings, discount
received, etc.
Certain items of profit and loss account with explanation-
1. Salary- salary is an indirect expense. The combined salaries and wages account is also
treated as an indirect expense and therefore, it is transferred to the profit and loss
account.
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To loss by fire, theft
To commission
To freight & carriage
Outwards
To establishment
expenses
To office lighting
To legal charges
To audit fee
To trade or general
expenses
To advertising
To packing expenses
To warehousing
expenses
To net profit*
……….
……….
……….
……….
……….
……….
……….
……….
……….
……….
……….
……….
……………………...
……………………...
By income from any
other source
By net loss*
……….
……….
……………………...
……………………...
*Either net profit or net loss shall appear.
BALANCE SHEET- A Statement which sets out the assets and liabilities of a firm or an
institution as at a certain date is known as the balance sheet. A balance sheet is a screen
picture of the financial position of a going business at a certain moment. It is a statement
which reports the property owned by the enterprise and the claims of the creditors and owners
against these properties. It shows the status of the business as at a given moment of time, in
so far as accounting figures can show its status. A balance sheet is prepared with a view to
measure the true financial position of a business at a particular point of time. It is a device to
show the financial position of a business in a systematic and standard form. By looking at the
balance sheet, one can know whether the firm is solvent or not. If the assets exceed liabilities
it is solvent. In other case it would be insolvent. It may serve as the basis for determining
purchase consideration of the business. The debit balances are shown on the assets side and
credit balances are shown on the liabilities side. The assets are shown on the right-hand side
and the liabilities and capital on the left-hand side. It is prepared after the preparation of the
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profit and loss account. The balance sheet is not an account but only a statement of assets and
liabilities. The total of the asset side must be equal to the total of liabilities side, that is, the
two sides of the balance sheet must have equal totals. If this is not the case, there is certainly
an error somewhere.
CLASSIFICATION OF ASSETS AND LIABILITIES-
Types of assets:-
1. Fixed assets- Fixed assets are those assets that are acquired for continued use and are
not meant for resale, though later it may be decided to sell a particular asset. They
may be tangible like land, building, plant & machinery, furniture & fixtures, etc., or
intangible like goodwill, patents, trademarks, etc. Fixed assets are valued at cost less
depreciation.
Investments represent capital expenditure on purchase of shares, bonds, etc., to earn interest,
dividend and other benefits. Investment is shown separately in the balance sheet.
Fictitious assets are not represented by anything concrete. The examples of fictitious assets
are- discount on issue of shares or debentures, profit and loss account (debit balance),
preliminary expenses, advertisement suspense, etc.
2. Current assets- Current assets are those assets of a firm which are kept temporarily for
resale or for converting into cash. These assets are temporary and may change. These
include cash, bank balance, bills receivable, debtors and readily marketable securities.
Types of liabilities:-
1. Fixed or long term liabilities- These liabilities are not payable by the business in the
next year. They mainly include long term loans, amount of debentures, etc. funds
from this source are used for purchase of fixed assets.
2. Current liabilities- These are liabilities payable by the business within a year.
Examples are- trade creditors, bills payable, expenses outstanding, bank overdraft,
etc.
3. Owner’s funds- The amount owning to the proprietors as capital is a class by itself. It
will include undistributed profits and reserves also. It is equal to the net assets of the
business and is defined as the difference between assets and liabilities.
4. Contingent liabilities- A Contingent liability is a liability that becomes payable on the
happening of an event. In case, the event does not happen, no amount is payable. Such
liabilities are not shown in the balance sheet. They are disclosed by way of a note.
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QUES. The following is the trial balance extracted from the books of Akhilesh
as on 30 September 2011:
Name of the account Debit
Amount(Rs.)
Credit Amount(Rs.)
Capital Account - 1,00,000
Plant and Machinery 78,000 -
Furniture 2,000 -
Purchases and Sales 60,000 1,27,000Returns 1,000 750
Opening stock 30,000 -
Discount 425 800
Sundry Debtors/ Creditors 45,000 25,000
Salaries 7,550 -
Manufacturing wages 10,000 -Carriage outwards 1,200 -
Provision for doubtful debts - 525
Rent, rates and taxes 10,000 -
Advertisements 2,000 -
Cash 6,900 -
Total 2,54,075 2,54,075
Prepare trading and profit and loss account for the year ended 30 September
2001 and a balance sheet on that date after taking into account the following
adjustments:
(a) Closing stock was valued at Rs, 34,220.
(b) Provision for doubtful debts is to be kept at Rs. 500.
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(c) Depreciate plant and machinery @ 10% p.a.
(d) The proprietor has taken goods worth Rs. 5,000 for personal use and
additionally distributed goods worth Rs. 1,000 as samples.
(e) Purchase of furniture Rs. 920 has been passed through purchases book.
SOLUTION-
TRADING ACCOUNT FOR THE YEAR ENDED 2010-11
PARTICULARS AMOUNT (RS.) PARTICULARS AMOUNT (RS.)
To opening stock
To purchases 60,000Less: purchases
return 750
Purchase of furniture
920
Drawings of goods
5,000
Samples
1,000
To wages
To Gross profit
30,000
52,330
10,000
67,890
1,60,220
--------------------------
By sales 1,27,000
Less: sales returns1,000
By closing stock
1,26,000
34,220
1,60,220
---------------------------
PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 2010-11
PARTICULARS AMOUNT (RS.) PARTICULARS AMOUNT (RS.)
To free samples
To rent, rates & taxes
To advertisement
To salaries
To carriage outward
To depreciation on
plant & machinery
To discount allowed
1,000
10,000
2,000
7,550
1,200
7,800
425
By Gross profit
By discount received
By provision for
doubtful debts (525-
500)
67,890
800
25