PREPARATION OF FINAL ACCOUNTS
The
final account of business concern generally includes two parts. The first part is trading and profit and loss account. This is prepared to find out the net result of the business. The second part is the balance sheet which is prepared to know the financial position of the business. However, manufacturing concern, will prepare a manufacturing account prior to the preparation of trading account, to find out the cost of production.
TRADING ACCOUNT
Trading account is a part of final accounts prepared by a business firm which shows gross profitability of business activities during a particular period. In other words,
trading account shows total sales, total purchases and all direct expenses relating to purchase and sales. Trading means buying and selling. The
trading account shows the result of buying and selling of goods.
Trading account is prepared by manufacturing companies and trading companies only because the sales and purchases of goods are done in these types of business firms only. It can be prepared by a business firm on any particular date. It can be prepared on monthly basis or quarterly basis or half yearly basis or yearly basis according to its requirement. For example all the companies registered with stock exchanges furnish monthly details relating to sale, and profits. Therefore these companies have to prepare the
Trading account on monthly basis. The
trading account shows the income from sales and the direct costs of making those sales. It includes the balance of stocks at the start and end of the year.
ITEMS APPEARING IN THE DEBIT SIDE
1. Opening stock, 2. Purchases, 3. Direct expenses-wages, 4. Carriage inwards, 5. Octroi duty, 6. Custom duty, 7. Dock dues, 8. Clearing charges, 9. Import duty, 10. other expenses, etc.
ITEMS APPEARING IN THE CREDIT SIDE
1. Sales, 2. Closing stock.
You can prepare a Balance Sheet by following the format below:
PROFIT AND LOSS ACCOUNT
After calculating the gross profit or gross loss, the next step is to prepare the
profit and loss account. A
profit and loss account provides information on a company’s financial position during a specific time period, usually annually or quarterly. It generally gives an outline of revenue, the costs of running the business and the profits or losses generated. Along with the balance sheet, which provides a snapshot of a company’s finances on a certain date, the profit and loss account gives investors the information they need to make informed decisions on their investments. Companies typically issue P&L reports monthly. It is customary for the reports to include year-to-date figures, as well as corresponding year-earlier figures to allow for comparisons and analysis. A profit and loss account shows how much money the business has made (over the period that the accounts cover) and how much money it cost the business to do so. The
profit and loss accounts cover an accounting period; usually one year. The
profit and loss account is opened with gross profit transferred from the trading account (or with gross loss which will be debited to
profit and loss account). After this all expenses and losses (which have not been dealt in the trading account) are transferred to the debit side of the profit and loss account. If there are any incomes or gains, these will be credited to the profit and loss account. The excess of the gain over the losses is called the net profit and that of the loss over the gain is called the net loss. The account is closed by transferring the net profit or loss to capital account of the trader.
ITEMS APPEARING IN THE DEBIT SIDE
1. Office and administrative expenses. 2. Repairs and maintenance expenses. 3. Financial expenses. 4. Selling and distribution expenses.
ITEMS APPEARING IN THE CREDIT SIDE
1. Interest received on investment. 2. Interest received on fixed deposits.3 Discount earned. 4. Commission earned. 5. Rent received.
You can prepare a Balance Sheet by following the format below:
BALANCE SHEET
Balance sheet is defined as, “a statement which sets out the assets and liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date. A
balance sheet is one of a business' main financial statements, along with the income statement and cash flow statement. It summarises the financial position of your business at a point in time, by providing a snapshot of how much you own and how much you owe.
A financial report stating the total assets, liabilities, and owners' equity of an organization at a given date, usually the last day of the accounting period. The credit side of the balance sheet states assets, while the debit side states liabilities and equity, and the two sides must be equal, or balance.
Assets include cash in hand and cash anticipated (receivables), inventories of supplies and materials, properties, facilities, equipment, and whatever else the company uses to conduct business. Assets also need to reflect depreciation in the value of equipment such as machinery that has a limited expected useful life.
Liabilities include pending payments to suppliers and creditors, outstanding current and long-term debts, taxes, interest payments, and other unpaid expenses that the company has incurred.
Subtracting the value of aggregate liabilities from the value of aggregate assets reveals the value of owners' equity. Ideally, it should be positive. Owners' equity consists of capital invested by owners over the years and profits (net income) or internally generated capital, which is referred to as "retained earnings"; these are funds to be used in future operations.
You can prepare a
Balance Sheet by following the format below: