Afm Research Assignment

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  • 7/28/2019 Afm 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 Teachers name: Ms. Nidhi Sharma

    Date of submission: 08.10.2012

  • 7/28/2019 Afm Research Assignment




    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 lossaccount, 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


    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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    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 beenentered 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 thematerials. 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.



    3. Direct Expenses- Direct Expenses are those expenses which are incurred on the goodspurchased 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 theyear. 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


    2. Closing stock- Closing stock means the stock of unsold goods which includes rawmaterials, 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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    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




    DR. CR.


    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.


    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


    2. Selling and distribution expenses- It include the following-Salesmans 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 ofarranging 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 arereceived 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 themain 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 alsotreated as an indirect expense and therefore, it is transferred to the profit and loss


  • 7/28/2019 Afm Research Assignment


  • 7/28/2019 Afm Research Assignment


    To loss by fire, theft

    To commission

    To freight & carriage


    To establishment


    To office lighting

    To legal charges

    To audit fee

    To trade or general


    To advertising

    To packing expenses

    To warehousing


    To net profit*















    By income from any

    other source

    By net loss*





    *Either net profit or net loss shall appear.