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Write a note on final accounts.
The accounts prepared at the end of the year to know profitability of financial position of business is called final accounts. It consists of two statements.
(a) Income Statement/ Profitability Statement trading and profit and loss a/c.
(b) Position Statement / Balance Sheet/ Statement of assets and liabilities
(a) Income Statement/ Profitability Statement trading and profit and loss a/c:
The statement prepared to find out the profit or loss of a business at the end of the financial year is called incomestatement or profit and loss A/c. It is nominal a/c all the expenses are debited and incomes are credited. It is havingtwo parts.
- a) Trading a/c which is prepared to find out gross or gross loss.
- b) Profit and loss a/c which is prepared to find out net profit or net loss.
- a) Trading Account: The account prepared to find out gross profit or loss is called trading A/c. Itis nominal A/c. Itis prepared by trading concerns where the cost of goods produced compared with net sales.
What is cost of goods sold?
The cost incurred on goods to bring them into saleable condition is called cost of goods sold.
Cost of goods sold = Opening stock + Purchase+ Direct expenses-Closing stock or Cost of goods sold is thedifference between sales and gross profit ( Net Sales -Gross profit).
What is Gross Profit?
Excess of sales revenue over cost of goods sold is called gross profit. It is calculated by preparing trading account.Gross Profit = Net Sales – Cost of goods sold.
What is Gross Loss?
Excess of cost of goods sold over sales is called gross loss. Gross loss = Cost of goods sold- Net Sales.
Features of Trading Account.
(i) It is a nominal A/c. (ii) Itcompares sales revenue with cost of goods sold.
(iii) Itascertains gross profit or gross loss. (iv) It is the first stage of profit & loss A/c.
(v) Balance of this account is carriedforward to P&L A/c to find out net profit/ net loss.
Objectives of Trading Account:
(i) It ascertains gross profit or gross loss.
(ii) To provide information about the directexpenses like carriage,freight, wages other manufacturing expenses.
(iii) To measure the efficiency or performanceof the business.
Advantages of Trading Account:
(i)To ascertains the gross profit or gross loss as a result of buying and selling ofgoods during the current year.
(ii) To facilitate the comparison of the trading result of the current year with that ofthe previous year.
b) Profit and Loss Account:
It is the account which shows the net profit or net loss of a business.
Profit and Loss Account define according to Carter“A Profit and Loss Account is an account into which all gainsand losses are collected in order to ascertain the excess of gains over the losses or vice-versa”.
Features of Profit and loss account:
(i) Profit and loss a/c is a nominal a/c. All the revenue expenses, losses aredebited and revenue incomes & gains are credited.
(ii) Incomes and expenses relating to current year are recordedin this account.
(iii) It is prepared at the end of an accounting period.
(iv) It starts with gross profit or gross loss.
Need or importance of profit and loss A/c:
(i) Knowledge of net profit or net loss.
(ii) Comparison of profits.
(iii)Control over expenses.
(iv) Future planning.
(v) Income tax.
(vi) Helpful in the preparation of balance sheet.
Items not shown in profit and loss account:
(i) Life insurance premium
(ii)Income tax
(ii) Domestic expenses.
Difference between Trading Account and Profit and Account.
| Trading Account | Profit and Loss Account |
| It is prepared to find out gross profit or gross loss. | It is prepared to find out net profit or net loss. |
| Direct income and direct expenses are shown in it. | Indirect incomes and indirect expenses are shown in it. |
| Errors in trading a/c affect profit and loss account. | Errors in profit and loss a/c affect capital a/c. |
| Trading a/c is prepared before preparing profit and loss a/c. | Profit & loss a/c is prepared after the preparation of trading a/c. |
| Opening stock & closing stock of goods are shown inthis a/c | Opening stock & closing stock of goods are not shown in this a/c |
| The balance in trading a/c is transferred to P/L a/c. | The balance in profit & loss a/c is transferred tobalance sheet. |
Difference between Gross profit and Net profit:
|
Gross profit |
Net profit |
| Gross profit=Net Sales-Cost of goods sold. | Net profit= Gross profit-Operating expenses. |
| Gross profit can be ascertained by preparing trading. | Net profit can be ascertained by preparing profit andaccount. |
| Direct expenses & direct incomes are the componentsof Gross profit. | Indirect expenses & incomes are the components of Net Profit. |
| Gross profit is transferred to profit and loss Account. | Net profit is transferred to capital account. |
Balance Sheet or Position Statement:-
The statement which shows all the assets and liabilities and equities of a business at the end of an accounting yearis called Balance sheet. It is the positional statement. It has two sides, left hand side is liabilities side and right handside is assets side.
Or Balance Sheet is a mirror which reflects the financial position of a business.
Definitions of Balance sheet: Freeman, “A Balance sheet is an itemised list of the assets, liabilities andproprietorship of business or an individual on a certain date.”
Characteristics of Balance Sheet:
(i) A Balance sheet is only a statement and not an account. tt has no debit orcredit sides. The headings of the two sides are assets and liabilities.
(ii) It shows liabilities on left hand side andassets on the right hand side.
(iii) It is Prepared at a particular date and not for a particular period.
(iv) Itcan be prepared only after preparingprofit and loss a/c.
(v) A balance sheet is a summary of balances of thoseledger accounts.
Need for the preparation of balance sheet:
(i) To ascertain the nature and value of assets of a business.
(ii) To ascertain the nature and amount of liabilities of a business.
Contents of Balance Sheet:
(A) Items to be shown on right hand side assets side 1. Fixed assets (Tangible fixedassets, intangible fixed assets.) 2. Current assets. 3. Investment.
Asset:Assets are properties,possessions and rights owned by a business have monetary value is called assets.
Or An asset is any physcial object (Tangible) or right (intangible) having a money value is called asset.
Assets= Capital + Liabilities
Fixed Assets:
Assets which are acquired and held permanently in the business and are used for carrying on the business of the enterprise and not intended for saleis called fixed assets. Ex: Plant and Machinery, Land and Building.
Tangible Fixed Assets:
Those fixed assets which have physical existence and which can be seen and touched areknown as tangible fixed assets e.g. building, machinery.
Intangible Fixed Assets:
The fixed assets which have no physical existence and which cannot be seen or touchedare known as intangible fixed assets e.g. goodwill, patents, trademarks etc.
Wasting Assets:
Wasting assets are those fixed assets which lose their value by wear and tear e.g. mines, forests,leasehold property, oil wells etc.
Non Wasting Assets:
Non wasting assets are those fixed assets which do not lose their value by wear and tear or by the passage of time or through being worked
Current Assets:
Current assets are those assets which can be easily converted into cash within a short period of time generally one Year. Ex Cash in hand, Bills receivable.
Fictitious Assets:
Fictitious asset is that asset which is not actual assets but is shown in the asset side of balance sheet Ex: Preliminary expenses, Discount on issue of shares and debentures. Profit and loss (Dr). Deferred revenue expenditure.
Contingent Assets:
A contingent asset is one the existence of which depends upon the happening of a certain event which may or may not happen. Ex: Claim for a breach of contract, A claim for income tax refund.
Floating or Circulating Assets:
Those temporarily held assets which are meant for resale or which frequently undergo change e.g. cash, stock, stores, debtors and bills receivable. Floating assets are again sub-divided into two parts, liquid asset and non liquid assets.
Liquid Assets:
Liquid assets are those assets which can be converted intocash within a very short period without any loss of value. Cash in hand, Cash at bank.
Non-Liquid Assets:
Non-liquidassets are those assets which cannot be converted into cash within a very short period or not without any loss orvalue. EX: stock, stores.
Liabilities:
All claims against the enterprise is known as liability. The claims may be owner’s claims and outsiders claim. The claim of the owner against the enterprise is termed as owner’s equity and claim of outsiders against the enterprise is termed as outsider’s equity.
Fixed Liabilities:
All those liabilities which are payable only on the termination of the business are called fixed liabilities. Ex. C.A.
Long-term Liabilities:
Liability which is not payable within the next accounting period but will be payable within next five to ten years is called long term liabilities. Ex: debentures, long-term loans etc.
Current Liabilities:
Current liabilities are those obligations which are payable within a short period of generally one year. Ex: Outstanding expenses, Creditors, bills payable
Contingent Liabilities:
A contingent liability is one which is not an actual liability but which will become an actual one on the happening of some event which is uncertain.
Deferred Liabilities:
Deferred liabilities are those liabilities which are repayable within one year but more than one month.
Liquid or Quick Liabilities:
Debts which are repayable within a period of one month are called quick or liquidly abilities. Ex: Outstanding expenses, Creditors, bills payable
Trade Liability:
Liability which is incurred for goods and services supplied or an expense incurred is called trade liability. Ex: Sundry Creditors, Bill payable.
Marshalling of Balance Sheet:
Arrangement of assets and liabilities in a balance sheet either in the order of liquidity or in the order of permanence is called marshalling of balance sheet
Or The sequence or order of assets and liabilities to be shown in the balance sheets called marshalling.
Order of liquidity:
In this system the assets which are more readily convertible in to cash come first and those which cannot be so readily convertible into cash come next and so on. Similarly these liabilities which are payable first come first and those payable later, come next and so on.
Order of Performance:
In this system assets which are more permanent come first, less permanent come next and so on. Similarly liabilities which are permanent come first, less permanent come next and so on.
Limitations of Balance Sheet:
i) Some of the current assets are valued on estimated basis, so the balance sheet isnot in a position to reflect the true financial position f the business.
ii) Fixed assets are shown in the balance sheet at original cost less depreciation up-to-the-date Thus, balance sheet does not show true value of fixed assets.(1I) Balance sheet can not reflect those assets which cannotbe expressed in monetary terms such as skill,
honesty and loyalty of workers. (IV) Intangible assets like goodwill are shown in the balance sheet at imaginaryfigures which may bear no relationship to the marketvalue.
Difference between Trial balance and Balance Sheet:
|
Trial Balance |
Balance Sheet |
| It is prepared to check the arithmetical accuracy in the books of account. | It is prepared to ascertain the financial position of a business. |
| It is not a part of the double entry book keeping system. | It is a part of double entry book keeping system. |
| The heading of the two columns are debit balances and credit balances. | The heading of the two sides are liabilities side and assets side. |
| The closing stock does not generally appear in the trial balance where as the opening stock appears. | Only the closing stock appears in the balance sheet. |
| Opening stock is shown in the trial balance. | Opening stock is not shown in balance sheet. |
| It is prepared at regular intervals e.g. mly, half-yly and yly. | It is prepared at the end of accounting period. |
| Trial balance is a list of real, personal and nominal account. | In balance sheet, only personal and real account balances are shown. |
| Trial balance does not help in the analysis of financial statements. | Balance sheet is of great use to analyse the financial position of business. |
| The preparation of trial balance is not compulsory. | The preparation of balance sheet is compulsory. |
| Trial balance is not a part of published accounts. | Balance sheet may be used as documentary evidence in the court. |
| Trial balance is not of any used for the outsiders. | Balance sheet id used by creditors, tax authorities, bankers, investors, etc. |
| Opening stock is shown in trial balance. | Opening stock is not shown in balance sheet. |
| There is no order for writing the items in trial balance. | The items of assets and liabilities may be written in order of liquidity or permanence. |
Different between Profit and Loss Account & Balance Sheet
|
Profit and Loss Account |
Balance Sheet |
| The object of preparing profit and loss account is to find out net profit or net loss. | The object of preparing balance sheet is to ascertain the financial position of business. |
| Profit and loss account is a nominal a/c. All expenses are recorded its debit side while all incomes are credited to this a/c. To and by words are used here. | Balance sheet is not an account. It is a statement. To and by words are not used here. |
| All nominal account are recorded here. | In balance sheet, real and personal a/c are recorded. |
| Profit and loss account is prepared for a particular period of time. It may be for a period of six month of one year. | Balance sheet is prepared on a particular date. |
| Profit and loss account is balanced. The difference of credit and debit is either net profit or net loss. | Balance sheet does not show any balance. The total of assets side is always equal to the total of liabilities side. |
| It has two sides i.e., debit and credit. | Its two sides are: assets side and liabilities side. |
| To prepare the profit and loss account, the figure of gross profit or loss is most. | The figure of gross profit or gross loss not directly used in balance sheet. |
Similarities in Trial Balance and Balance Sheet:
A trial balance has following similarities with balance sheet:
- Both trial balance and balance sheet are prepared with the help of balance drawn from drawn from ledger a/c.
- Both trial balance and balance sheet are statements and not ledger account.
- Both trial balance and balance sheet are preparedon a particular date.
- Both trial balance and balance sheet do not use the words To and by.
- Trial balance and balance sheet do not record those ledger accounts which do not have any balance.
The account having debit or credit balances are only dealt in these two statements.
Manufacturing Account: The account which is prepared to find out the cost of goods manufactured during a particular year. The balance i.e. cost of goods produced to be transferred to trading a/c.
Features of Manufacturing Account:
- i) It is prepared before preparing trading a/c by the manufacturing concern.
- ii) it is nominal A/c.
iii)It is debited with all the expenses incurred for production.
- iv) The scrap sold is credited to this A/c.
- v) It shows debit balance and taken as goods produced during the period and transferred to trading A/c.
| Trading Account |
Manufacturing Account |
| The purpose of trading A/c is to find out the gross profit/gross loss. | The purpose of manufacturing A/c is to find out the cost of production. |
| The balancing figure of this A/c is transferred to P/L A/c | The balance of this A/c is transferred to trading A/c. |