Preparation of Final Accounts
Final Accounts are the accounts, which are prepared at the end of a fiscal year. It gives only a precise data/idea of the financial position of the business/organization to the owners, management, or other interested parties. Financial statements are primarily recorded in a journal; then transferred to a ledger; and thereafter, the final account is prepared.
The Trial Balance is a statement of ledger account balances as on a particular instance.
The trial balance is prepared to check/ensure the arithmetical accuracy of accounting. Preparation of Trial Balance is not an act that forms a part of the activities involved in the regular accounting cycle.
Final Accounting can be completed without the preparation of the Trial Balance also.
The trial balance is generally prepared at a time when all the ledger accounts are balanced like at the
end of the accounting period. Theoretically, the trial balance can be prepared as and when needed. In this mechanised (computerised) accounting systems, trial balance is a statement that can be
automatically derived as and when needed.
There might be a number of accounting transactions which might not have been taken into
consideration by the time the Trial Balance has been prepared. Some of the reasons for the presence of such transactions are
• Transactions which do not occur in the normal course of business
There are a number of transactions relating to the business which do not occur in the normal course of business. These transactions unless deliberately recorded do not get into the books of accounts.
Examples for such transactions
Stock taken away by the proprietor for personal use Abnormal loss of stock
• Transactions which have to be recorded only towards the end
There are a number of transactions relating to the business which have to be recorded only at the end of the accounting period. If the trial balance has been prepared before all such transactions into consideration have been taken into consideration, then they stay unrecorded in the books of accounts.
Depreciation on Assets
Expenses – Outstanding/Prepaid
Incomes – Outstanding/Pre-received
• Transactions relating to Error Rectifications
The agreement of a Trial Balance is not a conclusive proof of absence of errors in accounting. Even in
case where the trial balance agrees, there may still be errors existing in the books of accounts. These errors if identified subsequent to the preparation of the Trial Balance, need to be rectified which needs journal entries to be passed for rectification.
The transactions which have not yet been journalised, appended to the trial balance are what we call adjustments. Thus we can say that Adjustments are transactions relating to the business which have not been journalised by the end of the accounting period. Since adjustments are also transactions relating to the business, we need to bring them into the accounting books by journalising them.
Accounting for the Transactions
Recording the transactions represented by adjustments normally would result in the existing balance in the affected ledger accounts to either increase or decrease.
Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.
This represents an error of principle whereby an expenditure that was to be debited in a particular account has been debited to another account.
To bring the effect of this transaction into books, the journal entry to rectify this error has to be recorded.
Effect of the Transaction
The effect of the journal entry to be recorded in the above case can be analysed as
(−) From Salaries on the debit side of P/L a/c
The Salaries a/c which already has a debit balance is credited which will result in a decrease in the existing debit balance.
To bring the effect of this transaction, the amount involved in the transaction (Rs. 43,000) is deducted from the Salaries a/c balance (Rs. 1,53,000) shown on the debit side of the “Profit & Loss a/c”.
(+) To Wages on the debit side of Trading a/c
The Wages a/c which already has a debit balance is debited resulting in an increase in the existing debit balance.
To bring the effect of this transaction, the amount involved in the transaction (Rs. 43,000) is added to the Wages a/c balance (Rs. 18,000) shown on the debit side of the “Trading a/c”.
These are the adjustments to be made to bring the affect of the above transaction into the books of accounts.
Trading account is a part of final accounts prepared by a business firm which shows gross profitability of business activities during a particular period. In other words, trading account shows total sales, total purchases and all direct expenses relating to purchase and sales.
Trading account is prepared by manufacturing companies and trading companies only because the sales and purchases of goods are done in these types of business firms only.
Trading Account is like a statement which is divided in two parts i.e. Income part and Expenditure Part.
In income part, we show the following details:-
Sales of goods Less Sales Returns
Closing Stock of goods
In Expenditure part, we show the following accounts:-
Opening stock of goods
Purchases of goods Less Purchase Returns
All direct expenses relating to purchase, sale and manufacturing of goods like Cartage & Freight
Expenses, Rent for godown or factory, Electricity and Power expenses, wages of workers and
supervisors, Packing expenses etc.
Profit & Loss Account
Profit & Loss Account is part of final accounts, prepared by a business firm to know the net profit of the
business activities during a particular period.
Profit and Loss Account is different from Trading Account because Trading account shows only the gross
profit while profit and loss account shows net earnings of the business firm. In profit and loss account all
indirect expenses and indirect incomes are shown.
Profit and Loss Account is prepared with the help of Trial Balance. Profit and Loss Account is just like
Trading Account which is divided in two parts i.e. Income part and Expenditure Part.
In income part, we show the following accounts:-
Gross Profit brought forward.
Indirect Income i.e. interest received, commission received, rent received etc. In other words indirect
income means which is not directly related to purchase or sales.
In Expenditure part, we show the following details:- Gross Loss brought forward
All indirect Expenses i.e. any expenses which arr not related to purchase and sales.
Balance Sheet is part of Loss Account final accounts, prepared by a business firm to know its financial
position on a particular date for a particular period. Balance sheet shows the total liabilities and total
assets of a business firm on a particular date.
Balance Sheet can be prepared on monthly basis or quarterly basis or half yearly basis or yearly basis
according to its requirement. For example all the companies registered with stock exchanges furnish
monthly details relating to sale, profits, liabilities and assets of listed companies. Therefore these
companies have to prepare the Trading account, Profit and Loss Account and balance sheet on monthly basis. But if we talk in general then it is prepared at the end of the financial year.
Balance Sheet is prepared with the help of Trial Balance. Balance sheet is divided in two parts i.e.
Liabilities and Assets.
In Liabilities, we show the following details:-
Current Liabilities and Provisions
Profit and Loss Account (Balance of Profit)
In Assets, we show the following accounts:-
Current Assets, Loans and Advances
Profit and Loss Account (Balance of losses)
**** Be continue… Unit-15