Afm Research Assignment

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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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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

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