Final Accounts

 

Financial Statement

Financial statement or Final accounts are statements use to conveying the profitability and financial position of the business to management, owners and interested outsiders. It is the end process of accounting which gives clear and brief accounting information of a particular accounting year after the period is over. Generally financial statements contain two parts:

1.     Income statement

2.     Balance Sheet

INCOME STATEMENT:

Income statement is prepared to ascertain the profitability position of the business. Income statement is divided into two sections:

A.    Trading Account

B.     Profit and Loss Account

A. Trading Account

Trading account is prepared to ascertain the trading results of a business. This means how much Gross profit/loss the business has earned from buying and selling during a particular period. The difference between the sales and cost of goods sold is Gross profit/loss, i.e.

Gross Profit         =  Net Sales – Cost of Goods Sold.

Net Sales             =  Sales – Sales Return.

Cost of

Goods Sold        =  Opening Stock + Net Purchases +

                                 Direct Expenses – Closing Stock.

Net Purchases   =  Purchases – Purchases Returns

 

Direct Expenses

All those expenses which have been incurred in purchasing the goods (raw materials), bringing them to the business premises and make them fit for sales.

Generally following are the direct expenses:

Carriage inwards, Cartage , Royalty, Freight, wages, Customs duty, Import duty, Dock duty, Octroi, Electricity, Water, Fuel, Power, Primary packing materials, Factory cleaning, Consumable stores ( cotton waste, Grease, Engine oil, Soft soap etc.), Factory expenses ( Factory rent, factory insurance, factory lighting and factory heating).

Trading results can also be ascertained by using an accounting form as follows:

Trading Account for the year ended………………………….

B. Profit and Loss Account

Profit and loss account is an extension of trading account. This account is prepared to calculate the net profit of the business. This account begins with the Gross profit/loss b/d from the trading account.All the indirect expenses like Selling and Distribution expenses, Management expenses, Depreciation and maintenance, Financial expenses and Extra ordinary expenses are debited in this account. This account is credited with all the Incomes and Gains other than sales.

Following is a proforma of Profit and Loss Account:

Profit and Loss Account

for the year ended............

 

1. Selling and distribution Expenses:

This expenses includes Advertisement, Traveller’s salaries, expenses and commission, Bad debts, Godown rent, Export expenses, Carriage outwards, Bank charges, Agent’s commission,Up keeping of motor lorries,etc.

2. Management Expenses:

This expenses includes Rent, rates and taxes, Heating and lighting, Office salaries, Printing and stationary, Postage and telegrams, Telephone charges, Legal expenses, Audit fees, Insurance, General expenses, etc.

3. Depreciation and Maintenance:

This expenses includes Depreciation of various assets, repairs and maintenance.

4. Financial Expenses:

This expenses includes discount allowed, Interest on capital, Interest on loans, Discount on bills discounted, etc.

5. Extraordinary Expenses:

This expense includes loss by fire not recovered by insurance, etc.

6. Other Incomes and Gains:

This item includes Interest received, Discount received, Commission received,  Rent received, Income from investment, Bad debts recovered,Income from any other sources, Miscellaneous revenue receipts etc.

BALANCE SHEET:

A Balance Sheet is a statement prepared with a view to measure the financial position of a business on a certain fixed date. It is also described as a ‘Statement showing the sources and application of capital”.  It is a statement and not an account and prepared by using the balancing figures in the Assets , Liabilities and Capital accounts.

Balance sheet has two parts. On the left hand side Liabilities and Capital are recorded and on the right hand side all the assets are recorded.

Marshalling of Assets and Liabilities

The arrangements of assets and liabilities in certain groups and in a praticular order is called grouping and marshalling of assets anf liabilities. We can arrange assets and liabilities in the balancesheet in two ways.

i.  In the order of liquidity

ii. In the order of permanence

i.  In the order of liquidity

When assets and liabilities are arranged according to their realizability and payment preferences, such an order is called liquidity order.

Following is an example for the arrangement of balance sheet in the order of liquidity:

 

ii.  In the order of permanence

When the order of reversed from that what is followed in case of liquidity is called order of permanence. This order is compulsory for companies.

Following is an example for the arrangement of balance sheet in the order of permanence:

 Final Accounts with adjustments