FINAL ACCOUNT

Financial accounting is a well-defined sequential activity which begins with Journal

(Journalising), Ledger (Posting), and preparation of Trial Balance (Balancing and
Summarisation at the first stage). The next step is the preparation of financial statement.
Financial Statements:- It has been emphasised that various users have diverse
informational requirements. Instead of generating particular information useful for specific
users, the business prepares a set of financial statements, which in general satisfies the
informational needs of the users.
The basic objectives of preparing financial statements are:
(i). To present a true and fair view of the financial performance of the business;
(ii).To present a true and fair view of the financial position of the business;

For this purpose, the firm usually prepares the following financial statements:
 Trading and Profit and Loss Account
 Balance Sheet

Trading and Profit and Loss account, also known as Income statement, shows the
financial performance in the form of profit earned or loss sustained by the business. Balance
Sheet shows financial position in the form of assets, liabilities and capital. These are prepared
on the basis of trial balance and additional information, if any.
Meaning of Final Accounts:
• Final accounts gives an idea about the profitability and financial position of a business
to its management, owners, and other interested parties. ... The term "final accounts"
includes the trading account, the profit and loss account, and the balance sheet.
Objectives of Final Accounts:
• The following are the main objectives of final accounts: - To determine gross profit and
net profit of the business during the year. To present true financial position of the
business on a given date. To make effective control on financial activities of the
business.
• Financial managers make final accounts as well as corporate balance sheets in order to
get a clear and summarizing picture of the current financial condition of the company.
Final accounts, as well as balance sheets, assist shareholders to recognize an
organization's financial viability

ITEMS TO KNOW BEFORE PREPARATION OF FINANCIAL STATEMENT:

i) Expenditures: Whenever payment and/or incurrence of an outlay are made for a

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 purpose other than the settlement of an existing liability, it is called expenditure. The
expenditures are incurred with a viewpoint they would give benefits to the business.
The benefit of an expenditure may extend up to one accounting year or more than one
year. If the benefit of expenditure extends up to one accounting period, it is termed as
revenue expenditure. If the benefit of expenditure extends more than one accounting
period, it is termed as capital expenditure.
ii) Receipts: The similar treatment is given to the receipts of the business. If the receipts
imply an obligation to return the money, these are capital receipts. If a receipt does not
incur an obligation to return the money or is not in the form of a sale of fixed asset, it
is termed as revenue receipt.
iii) Usually Trading and Profit and Loss account includes revenue incomes and
expenditures and Balance sheet includes capital incomes and expenditures.
iv) Closing Entries: The preparation of trading and profit and loss account requires that
the balances of accounts of all concerned items are transferred to it for its compilation.
 Opening stock account, Purchases account, Wages account, Carriage inwards account
and direct expenses account are closed by transferring to the debit side of the trading
and profit and loss account. This is done by recording the following entry:

Trading A/c Dr.

To Opening stock A/c

To Purchases A/c

To Wages A/c

To Carriage inwards A/c

To All other direct expenses A/c

 The purchases returns or return outwards are closed by transferring its balance to the
purchases account. The following entry is recorded for this purpose:

Purchases return A/c Dr.

To Purchases A/c
 The sales returns or returns inwards account is closed by transferring its balance to the
sales account as:

Sales A/c Dr.

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 To Sales return A/c

 The sales account is closed by transferring its balance to the credit side of the trading
and profit and loss account by recording the following entry:

Sales A/c Dr.

To Trading A/c

 Items of expenses, losses, etc. are closed by recording the following entries:

Profit and Loss A/c Dr.

To Expenses (individually) A/c

To Losses (individually) A/c

 Items of incomes, gains, etc. are closed by recording the following entry:

Incomes (individually) A/c Dr.

Gains (individually) A/c Dr.

To Profit and Loss A/c

TRADING AND PROFIT AND LOSS ACCOUNT

Trading accounting is an account prepared to ascertain the trading results of a business

i.e., the gross profit earned or gross loss incurred from buying and selling of goods during a
particular period. The excess of net sales [total sales less returns] over cost of goods sold is
termed as gross profit.
Trading and Profit and Loss account is prepared to determine the profit earned or loss
sustained by the business enterprise during the accounting period. It is basically a summary of
revenues and expenses of the business and calculates the net figure termed as profit or loss.
The trading and profit and loss can be seen as combination of two accounts, viz. Trading
account and Profit and Loss account. The trading account or the first part ascertains the gross
profit and Profit and loss account or the second part ascertains net profit.

1) Trading Account:- The trading account ascertains the result from basic operational
activities of the business. The basic operational activity involves the manufacturing,
purchasing and selling of goods. It is prepared to ascertain whether the selling of goods
and/or rendering of services to customers have proved profitable for the business or not.
Purchases is one of the main constituents of expenses in business organisation. Besides
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 purchases, the remaining expenses are divided into two categories, viz. direct expenses
and indirect expenses. Direct expenses means all expenses directly connected with the
manufacture, purchase of goods and bringing them to the point of sale. Direct expenses
include carriage inwards, freight inwards, wages, factory lighting, coal, water and fuel,
royalty on production, etc. Similarly, sales constitute the main item of revenue for the
business. The excess of sales over purchases and direct expenses is called Gross Profit.
If the amount of purchases including direct expenses is more than the sales revenue, the
resultant figure is Gross Loss. The computation of gross profit can be shown in the
form of equation as:

Gross Profit = Sales – (Purchases + Direct Expenses)

2) Profit and Loss account:-

Accounting to Prof. Carter “Profit and loss account is an account into which all gains and
losses are calculated in order to ascertain the excess of gains over the losses or vice versa”.
Profit and loss account is an account which prepared to calculate the final profit or loss of the
business. All operating expenses and other non-operating income and expenditures and losses
are charged to profit and loss account to find out the net profit.
The gross profit or the gross loss is transferred to profit and loss account. The indirect
expenses are transferred to the debit side of the second part, viz. profit and loss account.
All revenue/gains other than sales are transferred to the credit side of the profit and loss
account. If the total of the credit side of the profit and loss account is more than the total
of the debit side, the difference is the Net Profit for the period of which it is being
prepared. On the other hand, if the total of the debit side is more than the total of the
credit side, the difference is the Net Loss incurred by the business firm.
Objectives of P/L Accounts
 To know the trading result
 To Identify Net Profit or Loss
 To know the relation between profits and turnover
 To Know components of Income & Expenditure
 To determining efficiency
 To Control over expenses
 To prepare future profit planning

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Items on the debit side

Debit Side
I. Operating expense
• Office & Admn. Expense
• Selling, distb. Expense
• Financial expense
• Maintenance Expense
II. Non Operating expense
• Losses
• Written off of fictitious assets
Credit Side
I. Operating Income
• Interest, commission, discount
II. Non operating income
• Profit sale of assets
• Refund tax
• Rent received
In an equation form, it is shown as follows:

Net Profit = Gross Profit + Other Incomes – Indirect Expenses

Net profit or net loss so computed is transferred to the capital account in the balance
sheet by way of the following entry:

i) For transfer of net profit

Profit and Loss A/c Dr.

To Capital A/c

ii) For transfer of net loss

Capital A/c Dr.

To Profit and Loss A/c

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 Relevant Items in Trading and Profit and Loss Account

The different items appearing in the trading and profit and loss account are explained
hereunder:

(i). Opening stock: It is the stock of goods in hand at the beginning of the accounting year.
This is the stock of goods which has been carried forward from the previous year and
remains unchanged during the year and appears in the trial balance. In the trading
account it appears on the debit side because it forms the part of cost of goods sold for
the current accounting year.
(ii). Purchases less returns: Goods, which have been bought for resale appears as
purchases on the debit side of the trading account. They include both cash as well as
credit purchases. Goods which are returned to suppliers are termed as purchases return.
It is shown by way of deduction from purchases and the computed amount is known as
Net purchases.
(iii). Wages: Wages refer to remuneration paid to workers who are directly engaged in
factory for loading, unloading and production of goods and are debited to trading
account.
(iv). Carriage inwards/Freight inwards: These expenses are the items of transport
expenses, which are incurred on bringing materials/goods purchased to the place of
business. These items are paid in respect of purchases made during the year and are
debited to the trading account.
(v). Fuel/Water/Power/Gas: These items are used in the production process and hence are
part of expenses.
(vi). Packaging material and Packing charges: Cost of packaging material used in the
product are direct expenses as it refers to small containers which form part of goods
sold. However, the packing refers to the big containers that are used for transporting the
goods and is regarded as an indirect expense debited to profit and loss account.
(vii). Salaries: These include salaries paid to the administration, godown and warehouse staff
for the services rendered by them for running the business. If salaries are paid in kind
by providing certain facilities (called perks) to the employees such as rent free
accommodation, meals, uniform, medical facilities should also be regarded as salaries
and debited to the profit and loss account.

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(viii). Rent paid: These include office and godown rent, municipal rates and taxes, factory
rent, rates and taxes. The amount of rent paid is shown on the debit side of the profit
and loss account.
(ix). Interest paid: Interest paid on loans, bank overdraft, renewal of bills of exchange, etc.
is an expense and is debited to profit and loss account.
(x). Commission paid: Commission paid or payable on business transactions undertaken
through the agents is an item of expense and is debited to profit and loss account.
(xi). Repairs: Repairs and small renewals/ replacements relating to plant and machinery,
furniture, fixtures, fittings, etc. for keeping them in working condition are included
under this head. Such expenditure is debited to profit and loss account.
(xii). Miscellaneous expenses: Though expenses are classified and booked under different
heads, but certain expenses being of small amount clubbed together and are called
miscellaneous expenses. In normal usage these expenses are called Sundry expenses or
Trade expenses.

Items on the credit side

(i). Sales less returns: Sales account in trial balance shows gross total sales (cash as well
as credit) made during the year. It is shown on the credit side of the trading account.
Goods returned by customers are called return inwards and are shown as deduction
from total sales and the computed amount is known as net sales.
(ii). Other incomes: Besides salaries and other gains and incomes are also recorded in the
profit and loss account. Examples of such incomes are rent received, dividend received,
interest received, discount received, commission received, etc.
(iii). Closing stock: It may be noted that closing stock does not normally form part of trial
balance and is brought into books with the help of the following journal entry :

Closing stock A/c Dr.

To Trading A/c
This entry opens a new account of asset, which is transferred to the balance sheet. The
closing stock shall be an opening stock for the next year and shall be sold during the
year.

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BALANCE SHEET

The balance sheet is a statement prepared for showing the financial position of the
business summarising its assets and liabilities at a given date. The assets reflect debit balances
and liabilities (including capital) reflect credit balances. It is prepared at the end of the
accounting period after the trading and profit and loss account have been prepared. It is called
balance sheet because it is a statement of balances of ledger accounts that have not been
transferred to trading and profit and loss account and are to be carried forward to the next year
with the help of an opening entry made in the journal at the beginning of the next year.
According to Howard, a Balance sheet may be defined as – ‘a statement which reports
the values owned by the enterprise and the claims of the creditors and owners against these
properties’.
It is showing the financial position of the concern as on the last day of the accounting
year. It comprises of a list of assets, liabilities and capital.
Balance Sheet Equation:
• Assets = Liabilities + Capital
• Capital = Assets – Liabilities
Objectives and Functions of Balance Sheet
 To identify the financial position of a company
 To know the liquidity picture of the concern
 To know the solvency position of the concern
 To identify nature and value of assets
 To get Nature and extent of liabilities and actual capital

Preparing Balance Sheet

All the account of assets, liabilities and capital are shown in the balance sheet. Accounts
of capital and liabilities are shown on the left hand side, known as Liabilities. Assets and other
debit balances are shown on the right hand side, known as Assets. There is no prescribed form
of Balance sheet, for a proprietary and partnership firms. (However, Schedule VI Part I of the
Companies Act 1956 prescribes the format and the order in which the assets and liabilities of a
company should be shown). The horizontal format in which the balance sheet is prepared is
shown below.

Relevant Items in the Balance Sheet

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 Items which are generally included in a balance sheet are explained below:

1) Current Assets: Current assets are those which are either in the form of cash or a can
be converted into cash within a year. The examples of such assets are cash in hand/bank,
bills receivable, stock of raw materials, semi-finished goods and finished goods, sundry
debtors, short term investments, prepaid expenses, etc.
2) Current Liabilities: Current liabilities are those liabilities which are expected to be
paid within a year and which are usually to be paid out of current assets. The examples
of such liabilities are bank overdraft, bills payable, sundry creditors, short-term loans,
outstanding expenses, etc.
3) Fixed Assets: Fixed assets are those assets, which are held on a long-term basis in the
business. Such assets are not acquired for the purpose of resale, e.g. land, building, plant
and machinery, furniture and fixtures, etc. Sometimes the term ‘Fixed Block’ or ‘Block
Capital’ is also used for them.
4) Intangible Assets: These are such assets which cannot be seen or touched. Goodwill,
Patents, Trademarks are some of the examples of intangible assets.
5) Investments: Investments represent the funds invested in government securities, shares
of a company, etc. They are shown at cost price. If, on the date of preparation the
balance sheet, the market price of investments is lower than the cost price, a footnote
to that effect may be appended to the balance sheet.
6) Long-term Liabilities: All liabilities other than the current liabilities are known as
long-term liabilities. Such liabilities are usually payable after one year of the date of the
balance sheet. The important items of long term liabilities are long-term loans from
bank and other financial institutions.
7) Capital: It is the excess of assets over liabilities due to outsiders. It represents the
amount originally contributed by the proprietor/ partners as increased by profits and
interest on capital and decreased by losses drawings and interest on drawings.
8) Drawings: Amount withdrawn by the proprietor is termed as drawings and has the
effect of reducing the balance on his capital account. Therefore, the drawings account
is closed by transferring its balance to his capital account. However it is shown by way
of deduction from capital in the balance sheet.

OPENING ENTRY
The balances of various accounts in balance sheet are carried forward from one
accounting period to another accounting period. In fact, the balance sheet of an accounting

10
 period becomes the opening trial balance of the next accounting period. Next year an opening
entry is made which opens these accounts contained in the balance sheet. The opening entry
with various assets and liabilities will be recorded as follows:
Fixed assets A/c Dr.
Current assets A/c Dr.
Fictitious assets A/c Dr.
Investments A/c Dr.
To Capital A/c
To Long-term liabilities A/c
To Current liabilities A/c

FINAL ACCOUNT FORMAT

Dr. Trading account for the year ended . . . Cr.

Particulars Amount Amount Particulars Amount Amount
To Opening stock xxx By Sales xxx
Less:
To Purchases xxx Sales returns xxx Xxx

Less: By Closing stock xxx

Purchases returns xxx xxx

To Direct expenses: By Gross loss c/d* xxx

Carriage/ xxx
Freight inwards xxx

Wages xxx
Dock charges xxx
Octroi xxx
Royalty xxx
Import duty xxx
To Gross profit c/d* xxx

xxx xxx

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 Profit and loss account for the year ended …….
Dr. Cr.
Particulars Amount Particulars Amount
To Gross loss b/d xxx By Gross profit b/d xxx
To Office and administrative By Indirect incomes:
expenses:
Salaries xxx Rent earned xxx
Rent, rates and taxes xxx Discount received xxx
Printing and stationery xxx Commission earned xxx
Postage xxx Interest on investments xxx
Legal charges xxx Dividend on shares xxx
Audit fees xxx Bad debts recovered xxx
Establishment expenses xxx Profit on sale of fixed xxx
assets
Trade expenses xxx Apprenticeship xxx
premium
General travelling expenses xxx Miscellaneous receipts xxx
Lighting xxx By Net loss* xxx
Insurance premium xxx (transferred to capital
account)
To Selling and distribution
expenses:
Carriage outwards xxx
Advertisement xxx
Commission xxx
Brokerage xxx
Bad debts or provision for bad xxx
debts
Export duty xxx
Packing charges xxx
To Other expenses and losses:
Repairs xxx
Depreciation xxx
Interest charges xxx
Discount allowed xxx
Provision for discount on debtors xxx
Bank charges xxx
Interest on capital xxx
Donation and charity xxx
Loss on sale of fixed assets xxx
Abnormal loss due to fire, theft xxx
etc. not covered by insurance xxx
To Net profit* xxx
(transferred to capital account)
xxx xxx

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 Balance sheet of ... as on...
Liabilities Amount Assets Amount Amount

Fixed assets:
Capital xxx i) Intangible
assets:
Add: Net profit/ Less: Net xxx Goodwill xxx
loss
xxx Patent rights xxx
Less: Drawings xxx Copy rights xxx
xxx Trade marks xxx
Reserves xxx Computer software xxx
Long term loans xxx ii) Tangible assets:
Current liabilities: Land xxx
Bank overdraft, Cash credit xxx Buildings xxx
Outstanding expenses xxx Less: Depreciation xxx xxx
Unearned income xxx Plant and xxx
machinery
Short term loans from banks xxx Less: Depreciation xxx xxx
Sundry creditors xxx Vehicles xxx
Bills payable xxx Less: Depreciation xxx xxx
Provisions: Furniture and xxx
Fittings
Provision for employee xxx Less: Depreciation xxx xxx
benefits
Provision for tax xxx Investments xxx
xxx Current assets:
Stock xxx
Advances given xxx
Sundry debtors xxx
Bills receivable xxx
Prepaid expenses xxx
Accrued income xxx
Cash at bank xxx
Cash in hand xxx
Fictitious assets:
Preliminary xxx
expenses
Miscellaneous xxx
expenses
xxx xxx

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Example 1

Following are the balances extracted from the books of Manish Gupta on 31st March, 2018:

₹ ₹
Capital 1,90,000 Cash at Bank 26,000
Drawing 7,000 Salaries 8,000
Plant and 1,20,000 Repairs 1,900
Machinery
Delivery 26,000 Stock on 1st April, 2017 16,000
Vehicle
Sundry 36,000 Rent 4,500
Debtors
Sundry 26,000 Manufacturing Expenses 1,500
Creditors
Purchases 20,000 Bills Payable 23,500
Sales 42,000 Bad Debts 5,000
Wages 8,000 Carriage 1,600

Prepare Trading and Profit and Loss Account and balance Sheet as at 31st March, 2018
after following adjustments are made:
(i) Closing Stock was ₹ 16,000.
(ii) Depreciate Plant and Machinery @ 10% and Delivery Vehicle @ 15%.
(iii) Unpaid Rent amounted to ₹ 500.
Solution 1

Trading Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Opening stock 16,000 Sales 42,000
Purchases 20,000 Closing Stock 16,000
Wages 8,000
Manufacturing Expenses 1,500
Carriage 1,600
Gross Profit (Balance Figure) 10,900
58,000 58,000

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 Profit and Loss Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Salaries 8,000 Gross Profit 10,900
Repairs 1,900 Net Loss (Balancing 24,900
Figure)
Rent 4,500
Add: Unpaid Rent 500 5,000
Bad Debts 5,000
Depreciation on:
Plant and machinery 12,000
Delivery Vehicle 3,900 15,900

35,800 35,800

Balance Sheet
as on March 31, 2018
Amount Amount
Liabilities Assets
(Rs) (Rs)
Capital 1,90,000 Fixed Assets
Less: Drawings (7,000) Plant and Machinery 1,20,000
Less: Net Loss (24,900) Less:10% (12,000) 1,08,000
Deprecation
1,58,100 Delivery Vehicle 26,000
Less:15% (3,900) 22,100
Depreciation
Current Liabilities
Sundry Creditors 26,000 Current Assets
Bills Payable 23,500 Closing Stock 16,000
Unpaid Rent 500 Sundry Debtors 36,000
Cash at Bank 26,000
2,08,100 2,08,100

Example 2

Prepare Trading and Profit and Loss Account and Balance Sheet from the following balances
relating to the year ended 31st March, 2018:

₹ ₹
Capital 1,00,000 Wages 50,000
Creditors 12,000 Bank 10,000
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 Returns 5,000 Repairs 500
Outward
Sales 1,64,000 Stock on 1st April, 2017 20,000
Bills Payable 5,000 Rent 4,000
Plant and 40,000 Manufacturing Expenses 8,000
Machinery
Sundry 24,000 Trade Expenses 7,000
Debtors
Drawing 10,000 Bad Debts 2,000
Purchases 1,05,000 Carriage 1,500
Returns 3,000 Fuel and Power 1,000
Inward

Additional Information:

(i) Closing Stock was valued at ₹ 14,500.

(ii) Depreciate Plant and Machinery by ₹ 4,000.

(iii) Write off Bad Debts ₹ 5,000.

(iv) A sum of ₹ 400 is due for repairs.

Solution 2
Trading Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Opening stock 20,000 Sales 1,64,000
Purchases 1,05,000 Less: Return Inwards (3,000) 1,61,000
Less: Return out words (5,000) 1,00,000 Closing Stock 14,500
Wages 50,000 Gross Loss (Balancing Figure) 5,000
Manufacturing Expenses 8,000
Carriage 1,500
Fuel and Power 1,000
1,80,500 1,80,500

Profit and Loss Account

for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Gross Loss 5,000
Repairs 500
Add: outstanding 400 900

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 Rent 4,000
Miscellaneous Expenses 7,000
Bad Debts 2,000 Net Loss (Balancing Figure) 27,900
Add: Additional bad debts 5,000 7,000
Depreciation on Plant and 4,000
Machinery
27,900 27,900

Balance Sheet
as on March 31, 2018
Amount Amount
Liabilities Assets
(Rs) (Rs)
Capital 1,00,000 Fixed Assets
Less: Drawings (10,000) Plant and Machinery 40,000
Less: Net Loss (27,900) 62,100 Less: Depreciation (4,000) 36,000
Current Liabilities Current Assets
Creditors 12,000 Closing Stock 14,500
Bills Payable 5,000 Sundry Debtors 24,000
Outstanding Repairs 400 Less: Further Bad Debts (5,000) 19,000
Bank 10,000
79,500 79,500

Example 3

Following Trial Balance has been extracted from the books of M/s. Ram Prasad & Sons on 31st
March, 2018:

Dr. Cr.
Particulars Particulars
₹ ₹
Machinery 4,00,000 Capital 9,00,000
Cash at Bank 1,00,000 Sales 16,00,000
Cash in Hand 50,000 Sundry Creditors 4,50,000
Wages 1,00,000 Interest Received 30,000
Purchases 8,00,000
Stock on 1st 6,00,000
April, 2017
Sundry 4,40,000
Debtors
Bills 2,90,000
Receivable
Rent 45,000
Commission 25,000
General 80,000
Expenses
Salaries 50,000
29,80,000 29,80,000

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Additional Information:
(i) Outstanding salaries were ₹ 45,000.
(ii) Depreciate Machinery at 10%.
(iii) Wages outstanding were ₹ 5,000.
(iv) Rent prepaid ₹ 10,000.
(v) Provide for interest on capital 5% per annum.
(vi) Stock on 31st March, 2018 ₹ 8,00,000.
Prepare Trading and Profit and Loss Account for the year ended 31 st March, 2018 and Balance
Sheet as at that date.
Solution 3
Financial Statement of M/s. Ram Prasad & Sons
Trading Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Opening Stock 6,00,000 Sales 16,00,000
Purchases 8,00,000 Closing 8,00,000
Stock
Wages 1,00,000
Add: Outstanding Wages 5,000 1,05,000
Gross Profit (Balancing Figure) 8,95,000

24,00,000 24,00,000

Profit and Loss Account

for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(Rs) (Rs)
Rent 45,000 Gross Profit 8,95,000
Less: Prepaid Rent (10,000) 35,000 Interest Received 30,000
Commission 25,000
General Expenses 80,000
Salaries 50,000
Add: Outstanding 45,000 95,000
Salaries
Depreciation on Machinery 40,000
Net Profit (Balancing Figure) 6,50,000
9,25,000 9,25,000

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 Balance Sheet
as on March 31, 2018
Amount Amount
Liabilities Assets
(Rs) (Rs)
Capital 9,00,000 Fixed Assets
Add: Net Profit 6,50,000 15,50,000 Machinery 4,00,000
Current Liabilities Less: 10%
Depreciation (40,000) 3,60,000
Sundry Creditors 4,50,000 Current Assets
Outstanding Salary 45,000 Closing Stock 8,00,000
Outstanding Wages 5,000 Sundry Debtors 4,40,000
Bills Receivable 2,90,000
Prepaid Rent 10,000
Cash at Bank 1,00,000
Cash in Hand 50,000
20,50,000 20,50,000

Example 4

Following balances are taken from the books of Mr. Niranjan. You are required to prepare
Trading and Profit and Loss Account and Balance Sheet for the year ended 31st March, 2018:

Particulars ₹ Particulars ₹
Capital 1,20,000 Drawings 21,000
Opening 45,000 Plant and Machinery 24,000
Stock
Furniture 1,500 Purchases 2,95,000
Sales 4,35,000 Insurances 1,500
Purchases 4,000 Sales Return 7,000
Return
Rent 5,000 Trade Expenses 2,000
Salaries 24,000 Wages 40,000
Bad Debts 1,000 6% Investments 50,000
Sundry 40,000 Sundry Creditors 19,000
Debtors
Bills Payable 800 Cash 12,200
Advertisement 6,000 Miscellaneous Receipts 1,200
Expenses
Patents 4,800

Adjustments:
(i) Closing Stock ₹ 75,000.
(ii) Depreciate Machinery by 10% and Furniture by 20%.
(iii) Wages ₹ 5,000 and salaries ₹ 2,000 are outstanding.
(iv) Write off ₹ 5,000 as further Bad Debts and create 5% Provision for Doubtful Debts.
(v) Investments were made on 1st July, 2017 and no interest has been received so far.

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Solution 4
Financial statements of Mr. Niranjan
Trading Account
for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(₹) (₹)
Opening Stock 45,000 Sales 4,35,000
Purchases 2,95,000 Less: Sales (7,000) 4,28,000
Return
Less: Purchases Return (4,000) 2,91,000 Closing Stock 75,000
Wages 40,000
Add: Outstanding wages 5,000 45,000
Gross Profit (Balancing Figure) 1,22,000

5,03,000 5,03,000

Profit and Loss Account

for the year ended March 31, 2018
Dr. Cr.
Amount Amount
Particulars Particulars
(₹) (₹)
Rent 5,000 Gross Profit 1,22,000
Salaries 24,000
Add: Outstanding Salaries 2,000 26,000
Bad Debts 1,000 Interest Accrued on
Investment
Add: Further Bad Debts 5,000 (50,000 × 6% × 9/12) 2,250
Add: Provision for Doubtful 1,750 7,750 Miscellaneous Receipts 1,200
Debts
Advertisement expenses 6,000
Provision for discount on debtors 665
Insurances 1,500
Trade Expenses 2,000
Depreciation on:
Machinery 2,400
Furniture 300 2,700
Net Profit (Balancing Figure) 73,835
1,25,450 1,25,450

Balance Sheet
as on March 31, 2018
Amount Amount
Liabilities Assets
(₹) (₹)
Capital 1,20,000 Fixed Assets
Less: Drawings (21,000) Patents 4,800
Add: Net Profit 73,835 1,72,835 Plant and Machinery 24,000
Current Liabilities Less: 10% Depreciation (2,400) 21,600

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Sundry Creditors 19,000 Furniture 1,500
Wages Outstanding 5,000 Less: 20% Depreciation (300) 1,200
Salaries Outstanding 2,000 6% Investment 50,000
Bills Payable 800 Add: Accrued Interest 2,250 52,250
Current Assets
Closing Stock 75,000
Debtors 40,000
Less: Further Bad Debts (5,000)
Less: Provision for
(1,750)
Doubtful Debts
33,250
Less: Provision for (665) 32,585
Discount
Cash 12,200
1,99,635 1,99,635

WHAT IS A NONPROFIT ORGANIZATION?

These are those organisations which are established for a charitable or social purpose and not
with a view to earn profit. These also render services to their members and to the society on
voluntary basis. These non-profit seeking entities exist with a primary motive of providing
service. Such as, a club provides sports and recreational facilities; a hospital renders medical
services.
Characteristics/Features
SERVICE :- Such organisations are set up to provide service to a specific group or the public at
large such as education, health care, sports, entertainment etc. The main aim of these
organisations is to provide service either free of cost or at nominal rates and not to earn profit.
• FORM:- Since the basic objective of NPO is to render services such as social, religious,
educational, charitable, etc. so they take the form of clubs, schools, colleges, societies, trusts or
charitable bodies.
• SEPARATE LEGAL ENTITY:- As every organisation has distinct entity from its members,
so has the NPO. Its name and entity is different from the people who have contributed towards
its capital fund. It takes birth by law and winds up in the same way.
• MANAGEMENT BY ELECTED PERSONS:- Management of NPO is done by the people who
have been elected by its members called managing/ executive committee.
NO PROFIT MOTIVE:- These institutions do not operate with a view to earn profit rather their
aim is to promote education, sports, charity, religion, culture, etc.

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