Final Accounts

Introduction

Final Accounts (Financial Statements) are prepared at the end of the accounting period to ascertain the profit or loss and the financial position of the business.

They consist of:

Trading Account: Determines Gross Profit/Gross Loss.
Profit and Loss Account: Determines Net Profit/Net Loss.
Balance Sheet: Shows Financial Position (Assets & Liabilities).

1. Trading Account

Prepared to ascertain the result of trading activities (buying and selling of goods). It records Direct Expenses and Direct Incomes.

Debit Side: Opening Stock, Purchases (Net), Direct Expenses (Wages, Carriage Inwards, Fuel, Power, Factory Rent).
Credit Side: Sales (Net), Closing Stock.
Result: Gross Profit (Credit > Debit) or Gross Loss (Debit > Credit).

Gross Profit is transferred to the Credit side of P&L Profit & Loss Account.

2. Profit and Loss Account

Prepared to ascertain the net result of business operations. It records Indirect Expenses and Indirect Incomes.

Debit Side: Gross Loss (if any), Office & Admin Expenses (Salaries, Rent), Selling & Distribution Expenses (Advt, Carriage Outwards), Financial Expenses (Interest, Bad Debts), Depreciation.
Credit Side: Gross Profit (from Trading A/c), Other Incomes (Interest received, Discount received, Commission received).
Result: Net Profit (Credit > Debit) or Net Loss (Debit > Credit).

Net Profit is added to Capital in the Balance Sheet. Net Loss is deducted from Capital.

3. Balance Sheet

A statement showing the financial position of assets and liabilities on a specific date. It is NOT an account.

Liabilities Side (Left): Capital (+ Net Profit - Drawings), Loans, Sundry Creditors, Bills Payable.
Assets Side (Right): Fixed Assets (Land, Building), Current Assets (Cash, Bank, Stock, Debtors), Intangible Assets (Goodwill).

The totals of both sides MUST agree (Assets = Liabilities + Capital).

Marshalling of Assets & Liabilities

The arrangement of assets and liabilities in a specific order.

Order of Liquidity: Most liquid assets first (Cash, Bank... Fixed Assets last). Used by Sole Traders/Partnerships.
Order of Permanence: Most permanent assets first (Goodwill, Land... Cash last). Used by Companies (As per Companies Act 2013).

Adjustments

Items given outside the Trial Balance are called Adjustments. Every adjustment has a dual effect (Two places in Final Accounts).

Adjustment	Treatment 1 (Trading/P&L)	Treatment 2 (Balance Sheet)
Closing Stock	Credit side of Trading A/c	Asset Side
Outstanding Exp	Add to concerned Exp (Dr. P&L)	Liability Side
Prepaid Exp	Deduct from concerned Exp (Dr. P&L)	Asset Side
Accrued Income	Add to concerned Income (Cr. P&L)	Asset Side
Income in Advance	Deduct from concerned Income (Cr. P&L)	Liability Side
Depreciation	Debit side of P&L A/c	Deduct from Asset
Bad Debts (New)	Add to Bad Debts (Dr. P&L)	Deduct from Debtors

Cost of Goods Sold (COGS)

Formula:

COGS = Opening Stock + Net Purchases + Direct Expenses - Closing Stock

COGS = Net Sales - Gross Profit

Numericals & PYQs - Final Accounts

Part A: Numericals (10 Questions)

Q1. Calculate Cost of Goods Sold (COGS): Opening Stock ₹10,000, Purchases ₹50,000, Wages ₹5,000, Closing Stock ₹15,000.

COGS = Op Stock + Purchases + Direct Exp - Cl Stock

COGS = 10,000 + 50,000 + 5,000 - 15,000 = ₹50,000.

Q2. Calculate Gross Profit: Sales ₹1,00,000, Sales Return ₹5,000, COGS ₹60,000.

Net Sales = 1,00,000 - 5,000 = 95,000.

Gross Profit = Net Sales - COGS.

GP = 95,000 - 60,000 = ₹35,000.

Q3. Operating Profit Calc: Gross Profit ₹50,000. Rent ₹5,000, Salaries ₹10,000, Interest on Loan Paid ₹2,000.

Operating Profit = GP - Operating Expenses

Op Exp = Rent + Salaries = 15,000. (Interest is Financial/Non-operating).

Op Profit = 50,000 - 15,000 = ₹35,000.

Q4. Capital ₹1,00,000. Net Profit ₹20,000. Drawings ₹5,000. Calculate Closing Capital.

Closing Capital = Op Capital + NP - Drawings.

Cl Cap = 1,00,000 + 20,000 - 5,000 = ₹1,15,000.

Q5. Debtors ₹50,000. Adjustment: Write off ₹2,000 as bad debts and create Provision @ 5%.

1. Deduct Bad Debts: 50,000 - 2,000 = 48,000.

2. Provision 5% on 48,000 = 2,400.

Value of Debtors in Balance Sheet = 48,000 - 2,400 = ₹45,600.

Q6. Manager's Commission: Net Profit before commission ₹22,000. Commission @ 10% on Net Profit AFTER charging such commission.

Commission = NP x Rate / (100 + Rate)

Commission = 22,000 x 10 / 110 = ₹2,000.

Q7. Rent paid ₹10,000 includes ₹2,000 for next year. Treatment in P&L and BS?

Prepaid Rent = ₹2,000.

P&L: Debit Rent 8,000 (10k - 2k).

Balance Sheet: Asset Side (Prepaid Rent) ₹2,000.

Q8. Goods distributed as free samples ₹1,000. Treatment?

1. Deduct from Purchases in Trading A/c.

2. Show as Advertisement Expenses in P&L A/c Debit side.

Q9. Loss by fire ₹5,000. Insurance claim admitted ₹3,000.

Trading A/c: Credit Purchases/Stock by 5,000 (Total Loss).

P&L A/c: Debit Loss by Fire (Net) = 5,000 - 3,000 = ₹2,000.

Balance Sheet: Asset Side (Insurance Co.) = ₹3,000.

Q10. Calculate Net Purchases: Cash Purchase ₹10,000, Credit Purchase ₹20,000, Purchase Return ₹2,000.

Total Purchase = 10k + 20k = 30k.

Net Purchase = 30k - 2k = ₹28,000.

Part B: Previous Year Questions (PYQs) (10 Questions)

Q11. Closing stock is valued at: (JKSSB FAA)

Cost or Market Price (Net Realizable Value), whichever is lower (Prudence Principle).

Q12. Goodwill is an:

Intangible Asset.

Q13. Wages and Salaries appearing in Trial Balance are shown in:

Trading Account Debit Side (Direct Expense).

Q14. Salaries and Wages appearing in Trial Balance are shown in:

Profit & Loss Account Debit Side (Indirect Expense).

Q15. Outstanding Expenses are shown on which side of Balance Sheet?

Liabilities Side.

Q16. Preliminary Expenses are an example of:

Fictitious Asset.

Q17. Which of the following is not a Current Asset?

Machinery/Building (Fixed Assets).

Q18. Balance Sheet is a:

Statement of Assets and Liabilities (Not an Account).

Q19. Pre-paid insurance appears in the Balance Sheet as:

Current Asset.

Q20. Gross Profit is transferred to:

Profit and Loss Account (Credit Side).

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