LESSON

3
FINAL ACCOUNTS

CONTENTS
3.0 Aims and Objectives
3.1 Introduction
3.2 Trading Account
3.2.1 Balancing Process
3.3 Profit & Loss Account
3.4 Balance Sheet
3.4.1 Cash Method of Accounting
3.4.2 Mercantile Method of Accounting
3.5 Let us Sum up
3.6 Lesson-end Activity
3.7 Keywords
3.8 Questions for Discussion
3.9 Suggested Readings

3.0 AIMS AND OBJECTIVES

In this lesson we shall discuss about final accounts. After going through this lesson you
will be able to:
(i) analyse trading account
(ii) discuss profit and loss account and balance sheet

3.1 INTRODUCTION
The preparation of Final accounts the business firm involves two different stages viz Preparation
of Accounting and Positional Statements of the enterprise. The preparation of Accounting
statements involve two different categories viz Trading account and Profit & Loss account.
The preparation of the positional statement involves only one statement viz Balance
sheet. In this chapter the accounting statements as well as Balance sheet will be elaborately
discussed to the tune of adjustments. First the trading account contents and format are
discussed to determine the Profit and Loss under the trading account of the business
firm, i.e. Gross profit.
Second part of this chapter deals with the preparation of Profit & Loss account in order
to determine the operating profit & loss of the enterprise.
Third part of the chapter involves in the preparation of financial position of the enterprise
in terms of Liabilities and Assets.

3.2 TRADING ACCOUNT

This is first financial statement prepared by the owner of the enterprise to determine the
gross profit during the year through the matching concept of accounting. The gross
Accounting and Finance profit of the enterprise is calculated through the comparison of purchase expenses,
for Managers
manufacturing expenses, and other direct expenses with the sales.
It is prepared normally for one year in accordance with accounting period concept i.e.,
operating cycle of the enterprise which should not exceed 15 months with reference to
the Companies Act 1956.
Dr Trading Account for the year ended ………………. Cr
To Opening Stock XXXX By Cash Sales XXXX
To Cash Purchases XXXX Add Credit Sales XXXX
Add Credit Purchases XXXX By Total Sales XXXX
To Total Purchases XXX Less Sales Return XXX
Less Purchase Return XXX By Net Sales XXXX
To Net Purchases XXXX By Closing Stock XXXX
To Wages XXXX By Gross Loss C/d** XXXX
To Carriage Inward XXXX
To Factory lighting XXXX
To Fuel, Coal, Oil XXXX
To duty on Import of Materials XXXX
To Octroi duty XXXX
To Gross Profit* C/d XXXX

3.2.1 Balancing Process

* Gross profit is the resultant of an excess of the credit side total over the total of debit
side. It means that the gross profit is the excess of incomes in the credit side over the
expenses in the debit side.
Gross Profit = [INCOMES (CREDIT)> EXPENSES(DEBIT)]

** Gross Loss is the outcome of an excess of the debit side total over the total of credit
side. It means that the gross loss is the excess of expenses in the debit side over the
incomes in the credit side.
Gross Loss = [EXPENSES (DEBIT)> INCOMES(CREDIT)]

Illustration 1 with no opening stock and closing stock

Prepare the trading account for M/s Shan &Co Ltd., for the year ended 31st Mar, 2006
Total Purchases during the year Rs. 10, 000
Total Sales during the year Rs. 15, 000
In this problem, the Gross profit is simply found by deducting the sales volume from the
purchases.
Gross profit = Sales – Purchases
First step open the Trading account for the year ended 31st Mar, 2006
Solution 1
Trading Account for the ended 31st Mar, 2006
Dr Rs Rs Cr
To Purchases 10,000 To Sales 15,000
To Gross profit c/d 5,000*
Balancing figure(Rs.15,000-Rs.10,000)

*Gross profit Rs. 5, 000 is the resultant of excess income over the expenses.
The total of the credit side more than the debit side total of the trading account.
Illustration 2 with Opening stock, various kinds of purchases and sales, Closing
stock
From the following information, prepare the trading account for the year ended 31st
48 Mar, 2006.
 Rs. Final Accounts

Stock on 1st April 2005 (Opening stock) 4, 000

Purchases
i. Cash purchases 20, 000
ii. Credit purchases 50, 000
Sales
i. Cash sales 20, 000
ii. Credit sales 60, 000
Stock on 31st Mar, 2006 (Closing Stock) 6, 000
In this problem, the sales and purchases are given in two different categories viz. cash
and credit. The credit and cash purchases and sales of a firm should be added to
determine the total volume of purchases and sales made during the year.
The purpose of crediting the closing stock in the trading account is to find out the materials
or goods consumed for trading purposes. In order to find out the total amount of goods or
materials consumed during a year, three different components to be separately considered.
l Opening Stock
l Purchases and
l Closing Stock
Opening Stock: It is a stock of goods or raw materials available at the opening of the
accounting period, which is nothing but a closing stock of the yester accounting period
utilized for trading during the current year.
Purchases: Purchase of goods or raw materials is either for resale or manufacturing.
Closing Stock: It is a stock nothing but an outcome of lesser volume of sales than the
aggregate of opening stock and purchases
Material consumed could be calculated
Material consumption=Opening stock + Purchases - Closing stock
The closing stock is credited in the trading account in stead of deducting it directly from
the aggregate of opening stock and purchases during the year. The posting of the closing
stock under the credit side of the trading account not only facilitates the firm to find out
the consumption during the year as well as reduces the cost of goods sold incurred
during the year.
Solution
Trading Account for the year ended 31st Mar, 2006
Dr Rs Rs Cr
To Opening stock 4,000 By Credit sales 20,000
To Credit purchases 20,000 By Cash sales 60,000
To Cash purchases 50,000 By Total sales 80,000
To Total purchases 70,000 By Closing stock 6,000
To Gross profit c/d 12,000
86,000 86,000
By Gross profit B/d 12, 000
Illustration 3
Prepare trading account of M/s Sundar & Sons as on 31st Mar, 2005 from the following
information extracted from the book of accounts
Rs
Opening stock on 1st April 12004 50, 000
49
Purchases
Accounting and Finance Cash 1, 20, 000
for Managers
Credit 1, 00, 000
Sales
Cash 40, 000
Credit 1, 00, 000
Purchase Returns 20, 000
Carriage Inwards 10, 000
Marine insurance on purchase 6, 000
Other direct expenses 4, 000
Sales Returns 30, 000
Stock as on 31st Mar, 2005 10, 000
In this problem, Return out wards and in wards are given in addition to cash and credit
purchases and sales of a firm to find out the Net purchases and the Net sales of the
firm.
Net Sales = Cash Sales + Credit Sales - Sales Returns
Net Purchases = Cash Purchases + Credit Purchases - Purchase Returns
Solution
Trading Account for the year ended 31st Mar, 2005
Dr Rs Rs Cr
To opening stock 50,000 By Cash sales 40,000
To Cash Purchaes 1,20,000 Add:Credit Sales 1,00,000
Add: Credit purchase 1,00,000 By total Sales 1,40,000
To total purchase 2,20,000 Less: Sales Return 30,000
Less: Purchase Return 20,000 By Net Sales 1,10,000
To Net Purchase 2,00,000 By Closing stock 10,000
To carriage Inwards 10,000 By Gross Loss c/d 1,50,000
To Marine Insurance 6,000
To other direct expenses 4,000
2,70,000 2,70,000

To Gross Loss B/d 1, 50, 000

Gross Loss is due to en excess of the debit side total over the credit side total

3.3 PROFIT & LOSS ACCOUNT

It is a second statement of accounting in connection with the earlier to determine the Net
profit/loss of the enterprise out of the early found Gross profit/loss. This is an accounting
statement matches the administrative, selling and distribution expenses with the gross
profit and other incomes of the enterprise.
This is an account prepared for one operating cycle of the firm i.e. 12 months in period.
The transactions are recorded in accordance with golden rules of nominal account. In
the profit & loss account, the expenses and losses are debited and incomes and gains
are credited. The reason for bringing down the gross loss /gross profit of the trading
account into the debit and credit side of Profit & Loss A/c respectively, are only to the
tune of nominal accounting ruling with reference to debit all expenses and losses and
credit all incomes and gains.
The expenses which are matched with the credit total of the profit and loss account.
Classified into various categories
50 i. Administrative Expenses
ii. Selling & Distribution Expenses Final Accounts

iii. Financial Expenses

iv. Legal Expense.
Profit and Loss Account for the year ended………………..
Dr Rs Rs Cr
To Gross Loss B/d XXXX By Gross Profit B/d XXXX
Balancing figure
Office and Administrative Expenses
To Salaries
To Rent , Rates and Taxes By Rent received
To Office Lighitng
To Printing and Stationery
To Insurance premium
To postage
To General expenses
To miscellaneous expenses
Selling and Distribution Expenses
To Salary to sales staff
To commission charges By commission received
To Advertising expenses
To Carriage outward
To Bad debts
To Packing expenses
Financial Expenses
To interest on capital By interest on drawings
To interest on loans By interest on investments
To trade discount allowed By trade discount received
To cash discount allowed By cash discount received
Maintenance Expenses
To Depreciation on Fixed assets

To Repairs and maintenance of

Productive assets

To loss on sale of assets To profit on sale of assets

Other Expenses
To Provision for debts
To Net profit c/d* By Net loss c/d**

The balancing process of the profit and loss account leads to two different categories
*Net profit is the resultant of excess of income in the credit side over the expenses in
the debit side of the Profit and Loss account
** Net Loss is an outcome of excess of expenses in the debit side over the incomes in
the credit side
Illustration 4
From the following information, Prepare the Profit and Loss account
Debit Credit
Rs Rs
Gross profit from the trading account 1, 00, 000
Manager Salary 30, 000
Office lighting 5, 000
Office Rent 15, 000
Local Taxes 1, 000
Salary paid to salesmen 20, 000 51
Accounting and Finance Commission charges paid 10, 000
for Managers
Legal charges paid 3, 000
Bad debts 1, 500
Advertising charges 25, 000
Package charges 7, 500
Discount allowed 3, 000
Discount received 4, 000
Dividend received 2, 000
Rent received 1, 000
Depreciation charges 10, 000
Repairs and Maintenance 2, 500
Interest on loans 1, 500 500
Dr Profit and Loss account for the year ended …………………………… Cr
Rs Rs
To Manager Salary 30,000 By Gross profit B/d 1,00,000
To Office lighting 5,000 By Discount received 4,000
To Office Rent 15,000 By Dividend received 2,000
To Salary paid salesman 20,000 By Rent received 1,000
To commission charges 10,000 By Interest received 500
To Legal charges 3,000 By Net Loss c/d* 24,500
To Bad debts 1,500
To Advertising charges 25,000
To Package charges 7,500
To Depreciation charges 10,000
To Repairs and maintenance 2,500
To Interest on loan 1,500
To Local taxes 1000
1,32,000 1,32,000
* Net loss is the excess of the expenses total in the debit side Rs. 24, 500 over the
incomes total in the credit side of the profit and loss account.

3.4 BALANCE SHEET

Balance sheet is the third financial statement which reveals the financial status of the
enterprise through the total amount of resources raised and applied in the form of assets.
This is the fundamental statement of the firm which explores the firm financial stature
through the resources mobilized and investments applied i.e. Liabilities and Assets
respectively. From the early, according to double entry concept or Duality concept, the
balance sheet can be divided into two distinct sides, known as liabilities and assets.
The balance sheet can be disclosed in two different orders
(i) in the order of long lastingness - permanence
(ii) in the order of liquidity
Proforma Balance Sheet as on dated…………………….
(In the order of Long lastingness)

52
 Final Accounts
Liabilities Rs Assets Rs
Capital XXXX Land & Building XXXX
Less: Drawings XXX Plant & Machinery XXXX
Add: Net profit XXXX Furniture& fittings XXXX
XXXX Fixtures& tools XXXX
Long-term borrowings XXXX Marketable securities XXXX
Sundry creditor XXX Closing stock XXXX
Bills payable XXX Sundry debtors XXXX
Bank overdraft XXX Bills receivable XXXX
Outstanding expenses XXX Pre paid expenses XXXX
Pre received income XXX Cash at Bank XXXX
Cash in hand XXXX
Total liabilities XXXX Total Assets XXXX
Cash in hand XXXX
Total liabilities XXXX Total Assets XXXX
The downward arrow shows the order / arrangement of the assets and liabilities on the
basis of permanence or long lastingness
The upward arrow shows the order /arrangement of the assets and liabilities on the
basis of liquidity.
Methods of determining the accounting income includes:
i. Cash method of accounting
ii. Mercantile method of accounting

3.4.1 Cash Method of Accounting

Under this method, cash receipts are matched with the cash payments irrespective of
the time period in order to determine the income.

3.4.2 Mercantile Method of Accounting

Under this method, time period is given greater importance than the actual receipts and
payments. It records the receipts and expenses pertaining to the specified period whether
them are actually received /paid or not. The receipts as well as payments of the other
periods should be ignored /eliminated in determining the income of the stipulated duration.
It is popularly known in other words as "Accrual Accounting System".
Next stage is to classify the types of income of the enterprise:
To determine income of the business, what should be in character ? Either in accounting
income or taxable income.
Taxable income can be computed from the transactions of the enterprise but they are
subject to frequent modifications on the tax provisions from one year to another year.
This cannot be uniquely found out unlike the accounting income. The accounting income
should have to be found out only to the tune of accounting principles and concepts.
The process of final accounts diagram is illustrated in the next page for easier
understanding not only to adopt the mercantile system of accounting but also to implement
the duality principle of accounting throughout the transactions.

Check Your Progress

1. Why land and building is given greater priority under the order of permanence?
2. Why cash in hand is given greater priority under the order of liquidity?
Adjustment entries
The adjustment entries are classified into three segments viz on expenses, incomes and others. 53
Accounting and Finance On expenses
for Managers
The adjustment entries on expense can be classified into two categories
(i) Outstanding Expenses: These are incurred expenses but not paid in cash
E.g. Rent of the office is Rs. 22, 000 for 11 months only The enterprise has failed
to remit the payment of last month rent amounted Rs. 2, 000. According to mercantile
system of accounting, the rent of the office, whether fully paid or not, it should be
totally considered for the entire duration to determine the income of the enterprise.
Finally, what is to be done ? The amount of actual rental should be added with the
rent which has not been paid by the enterprise i-e (Rs. 22, 000+Rs. 2, 000=Rs. 24,
000)
Treatment of the transaction
Debit the expense account
Credit the liability i-e of the person to whom the amount to be paid
Profit &Loss A/c:- Add the outstanding amount with the total expenses already paid
Balance sheet:-Include it as an item of responsibility under the liabilities side

(ii) Prepaid expenses: Normally, some of the expenses paid for availing the services
are not fully extracted during the term; which left / unused should be normally
carried forward to the next term. It means that the expense which is paid in
advance to make use of the service for forthcoming period to whom is known as
debtor; the person who keeps the money of the enterprise for the definite duration
is nothing but an asset.
Debit the asset - Advance payment for service
Credit
Profit the expense
&Loss A/c:- Deduct the prepaid amount from the total expenses already paid
Balance sheet:-Include it as an item of application under the assets side

Next major segment in the adjustment entry is on Incomes

l Income Outstanding
l Perceived Income
(iii) Income outstanding: It happens during the enterprise then and there ; which means
income earned but not received. It happens in the case of certain income of dividend
on shares, interest on loans granted not yet received. The income earned but not
received is also an income that should be credited in the income account to know
the total volume of the income pertaining to the accounting period. The income
earned but not received is nothing but an asset not yet received. The income not
yet received from whom should be debited as an asset due to the enterprises'
money income with the other person / institution.
Profit &Loss A/c:- Add the income outstanding amount to the total incomes already received
Balance sheet:-Include it as an item of unrealized income under the assets side i.e the firms’ money
with the others
(iv) Income received in advance: Any income received in advance cannot be considered
as an income which should be calculated and deducted from the total income
received; known as advance receipt. It is the income of the other period; should be
eliminated from the income received in accordance with the mercantilist accounting
system in determining the income. The income which is received in advance
pertaining to the period of non rendered service should removed from the total
income received, in order to determine the original income of the period should be
known exactly. The amount received in advance of non rendered service is the
54
responsibility to return nothing but the liability of the firm.
Debit the Income account Final Accounts

Credit the Income received in advance - Liability of the balance sheet

Profit &Loss A/c:- Deduct the Income received in advance from the total incomes which were
already received.
Balance sheet:-Include it as an item of responsibility for non rendered service under the liabilities
side

(v) Bad debts: Bad debts is the result of credit sales which only due to the inability of
customers / consumers to settle the overdue. The inability may be due to poor
repaying capacity or insolvent during the moment of the sales. The bad debt due to
the inability cannot be deducted from the sales volume which was already transacted.
The debts cannot be recovered has to be treated as a loss of the firm.
Debit all losses of the firm. The losses due to bad debts should be appropriately
effected as well as adjusted in the individuals' account i-e in the consumers' account
who received the goods on credit
Profit &Loss A/c:- Non recovery of credit sales is deemed to be a losses – should be debited to
Profit & Loss A/c
Balance sheet:-Non recovery of credit sales should be deducted from the volume of credit sales
transacted by the firm under the Assets side in order to determine the original amount of credit
outstanding

Check Your Progress

1. If the closing stock is given, the effect of the entry is

(a) Profit & Loss A/c –Credit Balance Sheet- Liabilities

(b) Profit & Loss A/c-Debit Balance Sheet- Liabilities

(c) Trading A/c- Credit Balance Sheet-Assets

(d) Trading A/c- Debit Profit & Loss A/c- Credit

2. The income received in advance is
(a) Asset of the enterprise

(b) Income of the enterprise

(c) Liability of the enterprise

(d) Expense of the enterprise

3. The depreciation charge is only to the tune of
(a) Convention of consistency

(b) Time period concept

(c) Business entity concept

(d) Convention of conservatism

4. The value of the asset shown in the balance sheet is
(a) Book Value

(b) Market value

(c) Realisable value

(d) Original value

5. Rent paid in advance is to be effected 55
Contd...
Accounting and Finance (a) Deduct the amount from the Original rent paid – P&L A/c
for Managers
(b) Include the rent paid in advance as an item of current asset- Balance sheet

(c) Deduct the rent paid in advance in the Trading A/c

(d) Both (a) & (b)

Illustration 5
From the following information extracted from the books of Jain & Co, Prepare Trading,
Profit & Loss A/c for the year ended and Balance sheet as on that date.
Particulars Debit Rs Credit Rs
Purchase 90,300
Sales 1,37,200
Return inward 2,200
Stock 1.1.96 40,000
Drawing 5,000
Building 30,000
Machinery 20,000
Furniture 8,000
Debtors 25,000
Wages 3,000
Carriage inwards 2,000
Rent and Rates 1,500
Bad debts 1,000
Cash 3,500
Investment 10,000
Postages 2,500
Insurance 2,000
Return outwards 1,300
Capital 50,000
Creditors 24,000
Interest 500
Commission 3,250
Provision Bad debts 750
Bank O/d 40,000
Salaries 11,000
Total 2,57,000 2,57,000
Additional Information:
1. Value of the stock on 31. 12. 96 Rs. 65, 000
2. Goods worth Rs 800 for his personal use of the proprietor
3. Rs. 400 of insurance paid is nothing but advance payment
4. Salary Rs. 1000 for the month of Dec 1996 has not yet paid outstanding
5. Charge depreciation
a. Building 2% per annum
b. Machinery 10% per annum
c. Furniture 15% per annum
6. Maintain provision for doubtful debts @ 5% on sundry debtors. Prepare Trading
and Profit & Loss Account of Jain & Co for the year ended 1995-96
Dr Rs Rs Rs Rs Cr
To Opening stock 40,000 By Sales 1,37,200
To Purchases 90,300 (-) Return Inward 2,200
(-)Purchase Return 1,300 1,35,000
(-) Goods taken by 800 By Closing Stock 65,000
56 proprietor
Contd...
 To Net purchases 88,200 Final Accounts
To Wages 3,000
To Carriageinward 2,000
To Gross Profit c/d 66,800
(Balancing figure)
2,00,000 2,00,000
To Rent & Rates 1,500 By Gross profit B/d 66,800
To Bad Debts 1000 By Commission 3,250
To Postages 2,500 By Interest 500
To Insurance 2,000
(-) Prepaid 400
1,600
To Salaries 11,000
(+)O/s of Salary 1,000
12,000
To New Provision 5% 1,250
on Sundry Debtors-
Rs.25,000
(-)Old Provision 750
500
To Depreciation
Building 2% 600
Machinery 10% 2,000
Furniture15% 1,200 3,800
To Net profit c/d 47,650
(Balancing figure)
70,550 70,550

Balance Sheet as on 31st Dec, 1996

Liabilities Rs Rs Assets Rs Rs
Capital 50,000 Building 30,000
(+)Net Profit 47,650 (-)Depreciation 2% 600
transferred from
P&L Account
(-)Drawings 29,400
Cash + Goods 5,800
Rs5000+Rs.800
91,850 Machinery 20,000
Bank OD 40,000 (-)Depreciation 10% 2,000
Creditors 24,000 18,000
Salary O/s 1,000 Furniture 8,000
(-)Depreciation 15% 1,200
6,800
Debtors 25,000
(-)Provision 1,250
23,750
Investment 10,000
Closing stock 65,000
Prepaid Insurance 400
Cash in hand 3,500
1,56,850 1,56,850

Illustration 6
From the following information drawn from the books of M/s Sundaran & Co prepare
Trading, Profit & Loss account for the year ended 31st Mar, 2004 and Balance sheet as
on dated
Particulars Debit (Rs.) Credit (Rs.)
Sundaran’s Capital 1,81,000
Sundaran’s Drawings 36,000
Plant and Machinery Balance on 1st April 2003 1,20,000
Plant and machinery additions on 1st Oct,2003 25,000
Stock opening 95,000
Purchases 7,82,000
Return Inwards 12,000 57
Contd...
Accounting and Finance Sundry debtors 20,600
for Managers Furniture & Fixture 15,000
Freight duty 2,000
Rent Rate and Taxes 24,600
Printing stationery 3,800
Trade expenses 5,400
Sundry creditors 40,000
Sales 9,80,000
Return outwards 3,000
Postage & Telegsundaram 800
Provision for bad debts 400
Discounts 1,800
7,200
Rent of the premises sub let for the year upto 30th Sept2004
Insurance charge 2,700
Salaries & wages 31,300
Cash in hand 6,200
Cash at bank 30,500
Carriage outwards 500
Total 12,13,400 12,13,400

Additional Information
1. Stock on 31st Mar, 2004 Rs. 94, 600
2. Write off Rs. 600 as bad debts
3. Provision for doubtful debts 5%on debtors
4. Create a provision on for discount on debtors & Reserve for creditors 2%
5. Provide a depreciation on furniture and fixture at 5% per @
6. Plant machinery depreciation 20%
7. Insurance unexpired Rs. 100
8. A fire occurred on 25th Mar 2004 in God own and the stock of the value of the 5000
destroyed fully insured the insurance admitted claim fully yet to be paid.
Trading account M/s. Sundaran &Co for the year ended 2003-04
Dr Rs Rs Rs Rs Cr
To opening stock 95,000 By sales 9,80,000
To Purchase 7,82,000 (-) Return 12,000 9,68,000
(-)Returns 3000 Closing stock 94,600
To Net purchases 7,79,000 Goods 5,000
destroyed by
fire
Freight Duty 2,000
To Gross Profitc/d 1,91,600
10,67,600 10,67,600
Profit & Loss Account of M/s. Sundaran &Co for the year ended 2003-04
Dr Rs Rs Rs Rs Cr
To Carriage Outwards By Gross profit B/d 1,91,600
500 Transferred from trading
account
To rent, rate and taxes 24,600 By discount 1,800
To painting & 3,800 By Rent of Sublet 7,200
stationery
Trade expenses 5,400 (-) Advance receipt rent of 3,600
sublet for 6 months:7,200/12
monts= Rs.600 P.M
For 6 months
Postage and telegram 800 3,600
Insurance charge 2,700 By 2% reserve on sundry 800
58 creditors
Contd...
 (-) unexpired 100 Final Accounts

2,600
Salaries and wages 31,300
ToDepreciation 750
Furniture and Fixture
@5% on Rs.15,000
Plant and machinery 24,000
1st April 2003@20%
on Rs.1,20,000 (12
months)
Plant and machinery 2,500
1st Oct,2003 @20% on
Rs.25,000(6 months)
26,500
To Bad debts write off 600
To New provision 1000
(-)Old provision 400
To provision to be 600
created
To discount on debtors 380
2%
To Net profit c/d 99,970
Transferred to Balance
sheet
1,97,800 1,97,800

Balance sheet of M/s. Sundaran &Co as on dated 31st Mar, 2004

Rs Rs Rs Rs
Liabilities Assets
Capital 1,81,000 Furniture & fixture 15,000
(+)Net profit 99,970 Depreciation @ 5% 750
(-)Drawings 36,000 14,250
2,44,970 Plant Machinery 1,20,000

Sundry creditors 40,000 Depreciation 24,000 96,000

@ 20%
(-)2% Reserve 800 Plant Machinery 25,000
39,200 Depreciation @20% 2,500
for 6 months
Pre received rental 3,600 22,500
income
Closing stock 94,600
Insurance unexpired 100
Sundry debtors 18,620
Goods fire –insurance 5,000
Cash at bank 30,500
Cash in hand 6,200
2,87,770 2,87,770

Illustration 7
From the following figures extracted from the books of M/s Amal &Vimal 31st Mar, 02
Particulars Debit(Rs) Credit (Rs)
Opening stock 30,000
Purchases 1,10,000
Sales 2,50,000
Building 55,000
Wages 23,000
Carriage inwards 3,000
Bills payable 10,000
Furniture 9000
Salaries 42,000
59
Advertisement 24,000
Contd...
Accounting and Finance Coal and coke 2,000
for Managers Cash at bank 14,000
Pre paid wages 1,000
Depreciation fund investment 25,000
Machinery at cost(Rs.10,000 New) 60,000
Sundry debtors 20,000
Bad debts 3,000
Depreciation fund 25,000
Sundry creditors 24,000
Rent rate and taxes 4,000
Trade expense 4000
Capital Amal 50,000
Vimal 40,000
Petty expenses 4,000
Provision for doubtful debts 1,000
Gas and water 1,200
Cash in hand 800
Outstanding rent 400

Bank loan 34,600

4,35,000 4,35,000

Adjustment entries:
a. The partners share profit and losses Amal 2/5 and Vimal 3/5
b. closing stock Rs. 15, 000
c. stock valued at Rs. 10, 000 was destroyed by fire but insurance company admitted
a claim of 8, 500 only and the claim is not yet paid.
d. Wages include Rs. 2, 000 for installation of anew machinery on 1st Dec., 2005
e. Depreciate the machinery at 10% per annum
Trading account of M/sVimal & Amal & Co for the year ended 2001-02
Dr Rs Rs Rs Rs Cr
To opening stock 30,000 By sales 2,50,000
To purchases 1,10,000 By closing stock 15,000
To wages 23,000 By goods destroyed 10,000
(-)Erection 2,000
21,000
To Coal and coke 2,000
To Gas and water 1,200
To Carriage inwards 3,000
To Gross profitc/d 1,07,800
2,75,000 2,75,000

Profit & Loss account of M/s Vimal& Amal &Co for the year ended 2001-02
Dr Rs Rs Rs Rs Cr
To Salaries 42,000 By Gross 1,07,800
profitB/d
To Advertisement 24,000
To Bad debts 3,000
To Trade expenses 4,000
To Rent, rates & Taxes 4,000
To Depreciation(d) 5,400
To Insurance Loss 10,000
Admitted claim 8,500
1,500
To petty expenses 4,000
To Net profit l
Amal 7,960
Vimal 11,940
19,900
60 Total 1,07,800 Total 1,07,800
 Balance sheet of M/s Vimal & Amal &Co as on dated 31st Mar, 2002 Final Accounts

Liabilities Rs .Rs Assets Rs Rs

Capital Amal 50,000 Depreciation 25,000
investment
(+) Net profit 7,960 Plant and Machinery 62,000
57,960 (-) Depreciation 5,400
Capital Vimal 40,000 56,600
(+) Net profit 11,940 Furniture 9,000
51,940 Building 55,000
Closing stock 15,000
Depreciation fund 25,000 Sundry debtors 20,000
Bank loan 34,600 Provision for bad 1000
debts
Sundry creditors 24,000 19,000
Out standing 8,500
Insurance claim
Outstanding rent 400 Pre paid wages 1000
Bills payable 10,000 Cash at bank 14,000
Cash in hand 800
2,03,900 2,03,900

SS Jain Bros for the year ended 31st Dec., 2003

Particulars Debit Rs Credit Rs
Capital 6,00,000
Drawings 12,000
Buildings 2,00,000
Furniture and fittings 30,000
Depreciation on Reserve
Buildings 10,000
Furniture 3,000
Depreciation for the year 13,000
Purchases 4,00,000
Sundry creditors 40,000
Sales 5,00,000
Debtors 1,20,000
Establishment charges 20,000
Electricity charges 6,575
Postage and telegram 1,284
Travelling and conveyance 3,816
Advance for sales commission 1,000
Insurance 2,500
Rent received 12,000
Motor van (purchased 1.1.03) 80,000
Motor van maintenance 23,425
Fixed deposit (1.9.2003) 1,00,000
Cash in hand 1,823
Cash at bank 1,47,977

Due to the difference in the trial balance, an examination of the goods was conducted
which reveals following errors.
Rs. 25 paid to the conveyance was debited to motor van maintenance account
Rs. 2, 000 drawn from bank towards for establishment charges was omitted to posted in
to ledger.
Cash column in the cash book on the receipt side stands excess total by Rs. 400
Adjustment entries:
a. Establishment of charges have been paid only up to Nov & provision of Rs 2, 000
61
has to be made for Dec.
Accounting and Finance b. Electricity charges are O/s Rs. 25
for Managers
c. (½) commission on total sales is payable to salesmen, towards which Rs. 1000 as
paid in advance.
d. Fixed deposit earns interest at 9% per annum
e. Provide depreciation 20% per annum on motor car
f. Closing stock 31st Dec., 2003
To prepare the trial balance, the following necessary corrections should be made on the
respective accounting heads given.
I. Rs. 25 paid to the conveyance was debited to motor van maintenance account-
The errors to be rectified which is known as error without affecting the trial balance.
Rs. 25 should be deducted from the Motor maintenance account for the wrong
entry debited already but at the same time right entry has to be made under the
conveyance account through the addition of Rs. 25 i.e., Rs. 25 to be debited.
To put it in to nutshell, Rs 25 should be deducted from the total of Motor maintenance
account in order to cancel the wrong debit entry i.e.
Rs. 23, 425-Rs. 25=Rs. 23, 400
To effect the correct entry, Rs. 25 should be to the original conveyance account
i.e.
Rs. 3, 816+Rs. 25= Rs. 3, 841/-
II. Rs. 2, 000 was drawn from the bank omitted in the establishment charges account;
which is meant for the purpose. -
Rs. 2, 000 should be added to the establishment charges account total in order to
identify the total of establishment charges.
Total establishment charges = Rs. 22, 000+ Rs. 2000= Rs. 24, 000
III. Cash column in the cash book on the receipt side excess total Rs. 400 i.e. Rs. 400
excess total should corrected on the given balance of cash in hand in order to
determine the real volume of cash in hand.
Real volume of cash in hand = Rs. 1, 823-Rs. 400 = Rs, 1423
Now we have to illustrate the corrected trial balance by incorporating the above
given changes.
Particulars Trial Balance Debit Rs Credit Rs
Capital 6,00,000
Drawings 12,000
Buildings 2,00,000
Furniture & Fittings 30,000
Depreciation Reserve 13,000
Purchases 4,00,000
Sundry creditors 40,000
Sales 5,00,000
Debtors 1,20,000
Establishment charges Rs.20,000 22,000
Electricity charges 6,575
Postage & telegram 1,284
Traveling& Conveyance 3,841
Advance for salesmen commission 1,000
Insurance 2,500
62 Rent received 12,000
Contd...
 Motor van (purchased 1.1.2003 80,000 Final Accounts
Motor van maintenance 23,400
Fixed deposit 1,00,000
Cash in hand 1,423
Cash at bank 1,47,977
Depreciation 13,000
Total 11,65,000 11,65,000

Dr Trading account for the year ended 31st Dec, 2003 Cr

Rs Rs Rs Rs

To Purchases 4,00,000 By Sales 5,00,000

By Closing stock 1,00,000
To Gross profit c/d 2,00,000
6,00,000 6,00,000

Profit & Loss account for the year ended 31st Dec, 2003
To Insurance 2,500 By Gross 2,00,000
profitB/d
To motor 23,400 By Rent received 12,000
maintenance
To establishment 22,000 Interest received 3,000
charge
Dec provision 2,000
24,000
To Traveling & 3,841
conveyance
To Postage and 1,284
telegram
To electricity charges 6,575
O/s E.B charges 25
6,600
To depreciation 13,000
To sales commission 1,000
paid
To commission O/s 1,500
2,500
To Depreciation of 16,000
motor van @ 20%
To Net profit c/d 1,21,875
2,15,000 2,15,000

Balance sheet as on dated 31st Dec, 2003

Liablities Rs Rs Assets Rs Rs
Capital 6,00,000 Cash in hand 1,423
(+)Net profit 1,21,875 Cash at bank 1,47,977
7,21,875 Fixed Deposit 1,00,000
(-)Drawings 12,000 Interest 3,000
7,09,875 Motor van 64,000
Sundry creditors 40,000 Sundry debtors 1,20,000
Provision for 2,000 Building 2,00,000
establishment
charges
Electrical charges 25 (-)Reserve 10,000 1,90,000
O/s Commission 1,500 Furniture 30,000
(-) Reserve 3,000 27,000
Closing stock 1,00,000
7,53,400 7,53,400

63
Accounting and Finance Pandit Broths for the year ended 31st Mar, 2006
for Managers
Particulars Debit Rs Credit Rs
Capital A.Pandit 1,00,000
B.Pandit 1,00,000
Drawings A Pandit 16,000
B.Pandit 16,000
Buildings 80,000
Furniture & fittings 20,000
Purchases 2,00,000
Sales 3,00,000
Stock 1.4.2005 50,000
Wages & salaries 44,000
Rates & Taxes 1,600
Office expenses 60,000
Sundry debtors 25,000
Sundry creditors 12,000
Cash in hand 400
Cash at Bank O/D 29,000
Freight inwards 28,000
Total 5,41,000 5,41,000

Adjustment:
a. Closing stock Rs. 1, 14, 500
b. There was fire in the premises on 25th Nov, 2005, which damaged the portion of
the stock the loss was estimated Rs. 17, 500
c. A. Pandit is the in-charge of purchases of stock item & he is to be paid 2. 5% on
such purchases
d. A steel table purchased 1st Feb Rs. 3, 000 debited to purchase account
e. B. Pandit who looks after all aspect other than purchases is entitled to the
commission of 5% on Net profits of after charging commission
f. Depreciation is to be charged at 2. 5% per annum on building & 10% on furniture
fittings profits or losses or share equally for the partners.
Dr Trading account for the year ended 2005-06 Cr
Rs Rs Rs Rs
To Opening Stock 50,000 By Sales 3,00,000
Purchases 2,00,000 By Closing stock 1,14,500
(-)Purchase of table 3,000 By Goods Loss by fire 17,500
1,97,000
(+)Commission to 4,925
A.Pandit
2,01,925
To Carriage inwards 28,000
To Wages & Salary 44,000
To Gross profit 1,08,075
c/ d
Total 4,32,000 Total. 4,32,000

Dr Profit & Loss account for the ended 2005-06 Cr

To Rates & Taxes 1,600 By Gross profitB/d 1,08,075
To office expenses 60,000
To Depreciation Building 2,000
To Depreciation
Existing Furniture 2,000
64 20,000×10/100
Contd...
 New Furniture Final Accounts
3000×10/100×2/12 50
2050
To Loss on fire 17,500
To commission B.Pandit 1187
To Net profit C/d
A.Pandit 11,869
B.Pandit 11,869 23,738
1,08,075 1,08,075

Balance sheet as on dated 31st Mar, 2006

Liabilities Assets
Capital(A.Pandit) 1,00,000 Building 80,0000
(+) Commission 4,925 Depreciation 2.5% 2,000
1,04,925 78,000
(+)Net profit 11,869 Furniture 23,000
1,16,794 Depreciation 10% 2,050
(-)Drawings 16,000 20,950
1,00,794 Closing stock 1,14,500
Capital( B.Pandit) 1,00,000 Sundry Debtors 25,000
(+)Commission 1,187 Cash in hand 400
1,01,187
(+) Net profit 11,869
1,13,056
(-)Drawings 16,000 97,056
Bank overdraft 29,000
Sundry creditors 12,000
2,38,850 2,38,850

3.5 LET US SUM UP

Trading Account is first financial statement prepared by the owner of the enterprise to
determine the gross profit during the year through the matching concept of accounting.
The purpose of crediting the closing stock in the trading account is to find out the materials
or goods consumed for trading purposes. In order to find out the total amount of goods or
materials consumed during a year, three different components to be separately considered.
l Opening stock
l Purchases and
l Closing Stock
Profit & Loss Account is a second statement of accounting in connection with the earlier
to determine the Net profit/loss of the enterprise out of the early found Gross profit/loss.
Balance sheet is the third financial statement which reveals the financial status of the
enterprise through the total amount of resources raised and applied in the form of assets.

3.6 LESSON-END ACTIVITY

If it is uncertain whether an expenditure will benefit one or more than one accounting
period, or whether it will increase the capacity or useful life of an operational asset, most
firms will expense rather than capitalise the expenditure. Why?

3.7 KEYWORDS
Trading account: It is the accounting statement of revenues and expenses 65
Accounting and Finance Balance Sheet: It is nothing but a positional statement of assets and liabilities of the firm
for Managers
on a particular date
G. P- Gross profit: Resultant of excess of trading incomes over the expenses
G. L-Gross Loss: Resultant of excess of trading expenses over the incomes/ revenues
N. P- Net profit: Resultant of excess of Profit & Loss incomes /revenues over the
expenses
N. L-Net Loss: Resultant of excess of Profit & Loss expenses over the incomes

3.8 QUESTIONS FOR DISCUSSION

1. Illustrate the interrelationship in between the accounting statements and statement
of position.
2. Highlight the effect of the following entries in the
(a) Closing stock
(b) Interest received in advance
(c) Rent outstanding
3. Explain the various accounting concepts and conventions through additional
information or adjustments.
4. Illustrate various kinds of drawing and their treatment in the financial statements.

3.9 SUGGESTED READINGS

M. P Pandikumar “Accounting & Finance for Managers”, Excel Books, New Delhi.
R. L. Gupta and Radhaswamy, “Advanced Accountancy”
V. K. Goyal, “Financial Accounting”, Excel Books, New Delhi.
Khan and Jain, “Management Accounting”
S. N. Maheswari, “Management Accounting”
S. Bhat, “Financial Management”, Excel Books, New Delhi.
Prasanna Chandra, “Financial Management – Theory and Practice”, Tata McGraw
Hill, New Delhi (1994).
I. M. Pandey, “Financial Management”, Vikas Publishing, New Delhi.
Nitin Balwani, “Accounting & Finance for Managers”, Excel Books, New Delhi.

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