final account-[formats]-and explanations

Preparation of final account

final account formats

Table of Content

  1. Definitions of accounting
  2. Primary objectives of Accounting
  3. Limitations of financial Accounting
  4. Advantage of financial Accounting
  5. All Assets are explained
  6. what is the trading Account
  7. what is the profit and loss Account
  8. what is the balance sheet

1.definitions of accounting

  1. accounting is the art of recording ,classifying and summarising, in a significant manner and in terms of money, transactions and event which are in part at least of a financial character, and interpreting the results thereof_ american  institute of certified public accountants(AICPA)
  2. )the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by the users of the information ___American accounting association
  3. accounting is the science of recording and classifying business transactions and events, primarily of a financial character,and the art of making significant summaries, analysis and interpretations of these transaction and event and communicating the result to person who must make decisions or form judgement:  __

final account formats

2.primary objectives of accounting

  1.  to maintain accounting records: due to large volume of transaction, it is not possible to remember them,hence ,the object of accounting is to keep a systematic record of all financial transaction , assets and liabilities written record are always better than oral record , since they can be used by different for making rational decisions and serve as evidence of transactions :
  2. to calculate the results of operations : at the end of the accounting period the income statement or profit and loss account is prepared to calculate net profit or loss this is done to know the result of the operations of an organisations .A systematic record of income and expenses facilitates the preparations of the income statement:
  3. to ascertain the financial positions : A position statement (also called balance sheet) is  prepared os on the last date of the accounting period to know the financial position of an organisation the  balance sheet shows various resources /assets owned by the organisation and claim against them. the claim of the outsiders against the assets are called liabilities and claim of the owner against the assets  is called capital.A systematic record of various assets and liabilities facilitates the preparations of a positions statement :

3.limitations of financial accounting:

  1.  records only monetary transactions: financial accounting records only those transactions which can be measured in monetary terms. it has no place for recording non-monetary or non-financial transactions ,through these matters also have a significant role in affecting the soundness of the business, for example , efficiency of the management , political situations , government policy market competition , etc do affect the financial results and financial position of a business , but these are not at all recorded in accounting ,
  2. no consideration of price level changes: accounting accepts the cost concept and hence does not consider the change in the price level from time to time this is a very serious limitation of financial accounting 
  3. no realistic information: accounting information may not be realistic as accounting statements are prepared by following basic concepts and conventions , for example , going concern concept gives us an idea that the business will continue and asset are to be recorded at cost but the book value of the asset shown,  may not be actually realisable.
  4. window dressing in balance sheet: when an accountant resorts to window dressing in the balance sheet, the balance sheet cannot exhibit the true and fair view of the state of the business:

final account formats

4.ADVANTAGE OF FINANCIAL  ACCOUNTING:

  1. maintenance of business record: all financial transactions are recorded in a systematic manner in the book of accounts so that there is no need to rely on memory .human memory is limited by its very nature , accounting helps to overcome this limitation .
  2. preparation of financial statements: systematic records enable the accountants to prepare the financial statement :
  3. comparison of results: systematic maintenance of business records enables the accountant to compare profit of the current year with those of the earlier years and know the significant facts about the change 
  4. acts as legal evidence: proper books of accounts maintained in a  systematic manner act as legal evidence in case of  disputes: 

final account formats

5.All Assets are Explained

  1. fixed assets: assets that are held for a long-term in the business are referred to as fixed assets. fixed assets are held for the purpose of earning revenues and not for the purpose of re sale land and building, plant and machinery ,furniture are some of the example of these assets, fixed assets may be (a)tangible (b) intangible 
  2. tangible assets: are generally defined as the assets having a physical existence. the for example :land and building ,plant and machinery, etc
  3. intangible assetsare the fixed assets having no physical existence intangible fixed assets are those which cannot be seen and touched these represent right ,privileges and competitive advantages owned by a business the example of intangible assets are goodwill, trademark  copyrights, etc
  4. current assets: assets that are already in the form of cash or can be converted into cash within a short period of one year are referred to as current assets the example of current asset: cash in hand, cash at bank , stock , debtors , prepaid expenses , bills receivable ,etc
  5. fictitious assets: these are the intangible properties which are not represented by anything concrete the examples of fictitious asset are preliminary expense , accumulated ,losses ,and so on  these also include deferred revenue expenditure.
  6. wasting assets: assets such as mines ,quarries etc. that become exhausted or reduce in value by their working are called wasting asset”
  7.  liquid assets: these are the cash or such items as marketable securities which can be converted into cash quickly,
  8. contingent assets: these are the asset the existence , value and ownership of which depend upon the occurrence or non  occurrence of a specific event ,suppose a firm has filed a suit for some property now in the possession of someone else, if the suit is decided in favour if the firm,the firm will get the propery .at the moment, it is a contingent asset

 6.what is the trading account:

trading account is an account that shows the result of buying and selling of goods and services during an accounting period 

final account formats

purpose of trading account :trading account is prepared to know the gross profit or gross loss during an accounting period .for ascertaining the gross profit ,it is necessary  (1) cost of goods sold and (2) net sales

(1) cost of goods sold  =  opening stock + net purchase(:. I, e cash purchase + credit purchase —                                         purchase returns) + direct expenses — closing stock 

(2) net sales   = cash sales + credit sales — sales returns

 gross profit     =  net sales–cost of goods sold

Items on the debit side of the trading account:

  1.  opening stock: it is the stock at the beginning of an accounting period 
  2.  purchase: purchase refer to purchase of those goods in which the enterprise deals in
  3. direct expenses: direct expenses refer to those expenses which are incurred to bring the inventories to their present location and condition (,,.  carriage inwards , freight , custom duty etc..)

Items on the credit side of the trading account:

  1.  sales: cash sales + credit sales -sales return
  2. closing stock : the stock at the end of an accounting period refers to the goods lying unsold at the end of an accounting period :
format of trading account

For the ending

Particulars AmountParticulars Amount
To opening stock
To purchase

Less: return outwards

Less: lost by fire

Less: personal use

To direct expense

To wages and salaries

To freight inwards

To carriage inwards

To cartage inwards

To gross profit ** transferred to profit &loss account*(balancing figure)
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By sales
Less :return inwards

Less : approval

By closing stock

By abnormal loss of stock

By gross loss * transferred to profit and loss account**

(balancing figure)
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7.what is the profit and loss account: 

profit and loss account is a part of final accounts which reveals the net profit .,. financial result of the business for a particulars accounting period . in this account (a) the gross profit and the other indirect incomes are matched against ,(b) indirect expense  like office and administration overheads , financial overheads , selling & distribution  overheads and other non-momentary items like provision to get the net financial result of a business unit:

 net profit: = excess of revenue income over revenue expense 

net loss  = excess of revenue expense over revenue incomes

 purpose of profit and loss account; the profit and loss account is prepared to ascertain the net, profit earned or the net loss incurred by the business entity during an accounting period    

final account formats

  format of profit and loss account

for the year

particulars Amount particulars Amount
To depreciation is
Furniture
Machinery
Building
To salary

Add: outstanding

Less: advance

To travelling expense

To carriage on sale

To bad debts

To provision for d/d

To further bad debts

To rent

Add: outstanding

Less: advance

To office expense

To discount

To insurance
Add: outstanding

Less: advance

To general expense

To commission

To charity

To printing & stationery

To net profit
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By gross profit
By old provision

By rent revenue

By discount receive

By insurance claim

By rent from tenants

By net loss
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8.what is the balance sheet:

balance sheet : may be defined as a statement of asset and liabilities exhibiting the financial position of a business concern at a given data balance sheet is a statement is a statement drawn up at the end of the trading or financial period ,, setting forth the various asset and liabilities of the concern as at that date,,, it may be defined as the dual financial picture of an enterprise which depicts, on the hand, the properties that it utilises and , on the other hand , the source of those properties: 

characteristics of a balance sheet ;

  1.  a balance sheet is only a statement and not an account ,it has neither debit side nor credit side , the heading of the two are ,, liabilities and assets:
  2. it is prepared at a particulars point of time and not for a particulars period 
  3. it is a summary of balances of those ledger account which have not been closed by the transfer to the trading and profit and loss account ;
  4.  it shown the nature and the value of the assets and the nature and the amount of the liabilities at a given date:

the purpose of preparing a balance sheet are as follow :

1) to ascertain the nature and value of the assets'(2)to ascertain the nature and value of the liabilities (3) to find out the financial solvency of an enterprise ‘an enterprise is considered to be solvent if its assets exceed its external liabilities ;

format of balance sheet 

as on

particulars Amountparticulars Amount
To capital
Less: drawing

Less: net loss

Add: net profit

Less: income tax

Less: life insurance

Fixed liabilities

To Long term. loans
Current liabilities

To Income received in advance

To Outstanding expense

To sundry expense

To bills payable

To bank overdraft

To reserve fund
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Fixed assets
By goodwill

By patents

By land & building

By plant & machinery

By furniture & fixture

Current assets
By accrued income

By prepaid expense

By closing stock

By sundry debtors

By short-term-investment

By bill receivable

By cash in hand

By cash in bank

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