Final Accounts

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

Final Accounts

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 Account

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.

Trading Account Format

Name of Business

Trading Account

For the Period / Year ended ……

Example 1: Trading Account

Prepare Trading Account for the year ending 31^st 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

 Solution:

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.

Profit and Loss Account Format

Name of Business

Profit and Loss Account

For the Period / Year ended ……

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

Solution:

Balance Sheet

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 31^st March, 2017 and balance sheet as on the date:

Solution: 

Example 4: 

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 30^th September, 2018 was as follows:

Additional Information

(a)   Closing stock as on 30^th 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 1^st 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 30^th September, 2018 and also a Balance Sheet as on the same date.

Solution:

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         

Further Readings

Financial Accounting

Financial Accounting MCQs

Financial Accounting Problems

Financial Accounting Workbooks

Financial Accounting Papers