Final accounts are containing financial information about an organization. The required financial statements are income statement, statement of owner Equity, balance sheet and cash flow statement. Companies that are publicly traded must provide shareholders with an annual report which always includes financial statements. In addition, the annual report includes the following information:
- Management Discussion and Analysis
- Notes to the Financial Statements
- Auditor’s Report
Popularly, the Trading and Profit & Loss Account and the Balance Sheet are together called the final accounts. The trading and profit & loss account is prepared to show the financial results of a business, may be in the form of profit or loss during an accounting period or year. Balance sheet is prepared to show the financial position or conditions of business in terms of position of assets and liabilities of a business as on a particular date.
Practice Final Accounts MCQs
Trading means buying and selling. The trading account shows the result of buying and selling of goods. End result of trading account is gross profit or gross loss. Following are format for Trading Account.
Example 1: Trading Account
Prepare Trading Account for the year ending 31st March 2018 for Precious Ltd.
Opening stock Rs. 170,000
Purchases return Rs. 10,000
Sales Rs. 250,000
Wages Rs. 50,000
Sales return Rs. 20,000
Purchases Rs. 100,000
Carriage inward Rs. 20,000
Closing stock Rs. 160,000
Profit and Loss Account
After calculating the gross profit or gross loss the next step is to prepare the profit and loss account. To earn net profit a trader has to incur many expenses apart from those spent for purchases and manufacturing of goods. If such expenses are less than gross profit, the result will be net profit. When total of all these expenses are more than gross profit the result will be net loss.
Example 2: Profit and Loss Account
Prepare Profit and Loss Account, from the following balances of Precious Ltd. for the year ending 31.03.2018:
Office rent Rs. 30,000
Salaries Rs. 80,000
Printing expenses Rs. 2,000
Stationeries Rs. 3,000
Tax, Insurance Rs. 4,000
Discount allowed Rs. 6,000
Advertisement Rs. 36,000
Travelling expenses Rs. 26,000
Gross Profit Rs. 250,000
Discount received Rs. 4,000
Balance sheet is prepared by taking up all personal accounts and real accounts (assets and properties) together with the net result obtained from profit and loss account. On the left hand side of the statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Balance sheet is not an account but it is a statement prepared from the ledger balances. Balance sheet is defined as ‘a statement which sets out the assets and liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date’.
Example 3: Trading and Profit and Loss Account; Balance Sheet
From the following trial balance of Abdul Rehman Khan & Brothers, prepare trading and profit and loss account for the year ending on 31st March, 2017 and balance sheet as on the date:
Let us look at another example of preparation of final accounts of a sole proprietor. Mr. Munir Ahmed runs a general store. His Trial Balance as on 30th September, 2018 was as follows:
(a) Closing stock as on 30th September, 2018 was 86,000.
(b) Provision for doubtful debts is to be maintained at 7% on debtors.
(c) Purchases include purchases of furniture worth Rs. 45,000.
(d) Insurance paid on Feb 1st for full year and outstanding wages of Rs. 7,000.
You are required to prepare the Trading Account and the Profit and Loss Account for the year ended 30th September, 2018 and also a Balance Sheet as on the same date.
Note 1: Insurance expense Rs. 24,000 i.e. 24,000/12 = 2,000 per month.
This accounting year contains eight month (Feb to September) = 2,000 * 8 = 16,000
So insurance expense is in this accounting year is Rs. 16,000 and Rs. 8,000 Prepaid insurance.
Note 2: Provision for doubtful debts = Bad Debts (T.B) + New Provision (Adj.) – Old Provision (T.B)
Provision for doubtful debts = 19,500 + [265,000 *7%] – 15,000
Provision for doubtful debts = 23,050