UNIT – 7 FINAL ACCOUNTS.

Presentation on theme: "UNIT – 7 FINAL ACCOUNTS."— Presentation transcript:

1 UNIT – 7 FINAL ACCOUNTS

2 Final accounts Structure Introduction and Objectives
Adjustments before preparing final accounts Trading account Preparation of Trading account Financial Accounting

3 Final accounts Profit and Loss Account
Preparation of Profit and Loss Account Balance Sheet – Meaning Preparation of Balance Sheet Introduction Financial Accounting

4 Introduction and Objectives
Final Accounts are those prepared at the end of Accounting period and the last leg of the entire Accounting trail. Final Accounts For Manufacturing Concerns Manufacturing Account Trading Account P & L Account Balance Sheet Financial Accounting

5 Introduction and Objectives
Final Accounts For Trading Concerns Trading Account P & L Account Balance Sheet Financial Accounting

6 Introduction and Objectives
Final Accounts For Non-Trading Concerns Receipts & Payments Account Income & Expenditure Account Balance Sheet Objectives: Financial Accounting

7 Introduction and Objectives
To know the meaning and purpose of final accounts To identify the items of Trading Accounts To identify the items of Profit and Loss Account. To identify the items of assets and liabilities of Balance Sheet Financial Accounting

8 Introduction and Objectives
To know the adjustments such as RBD, Reserve for discount, depreciation, closing stock, stock destroyed by fire, used for personal purposes, prepaid and outstanding items etc., Financial Accounting

9 Introduction and Objectives
To prepare Balance Sheet without any adjustments from the trial balance. To prepare Balance Sheet with adjustments Financial Accounting

10 Adjustments before preparing final accounts
GAAP (Generally Accepted Accounting Principles) recognizes the accrual basis of accounting So revenue is recognized when it is earned, whether received or not and expenses are recognized when they are incurred whether paid or payable. Financial Accounting

11 Adjustments before preparing final accounts
Adjustments are more internal transactions and they include: Outstanding Expenses Prepaid expenses Outstanding Incomes/ Accrued income Pre-received Incomes Financial Accounting

12 Adjustments before preparing final accounts
Depreciation on assets Reserve for bad and doubtful debts Reserve for discount on debtors Reserve for discount on creditors Stock used for personal purposes Closing stock valuation Financial Accounting

13 Adjustments before preparing Final Accounts – Outstanding Expenses
Expenses incurred but not paid are regarded as Outstanding Expenses Outstanding expenses should be considered for calculating profit because they are incurred before the end of accounting period The entry in the journal proper is Financial Accounting

14 Adjustments before preparing Final Accounts – Outstanding Expenses
Concerned Expense account Dr To Outstanding Expenses account (Being outstanding expense amount brought into account) The outstanding portion of the expense is added to the concerned expense account in P & L A/c. Outstanding expense account is shown as a liability in the balance sheet Financial Accounting

15 Adjustments before preparing Final Accounts – Outstanding Expenses
Example: Salaries payable for the year 2005 Rs.60,000. Actual payment made is Rs.48,000. The salary account shows only Rs.48,000 because it is paid and recorded in cash account. So, the outstanding amount is Rs.12,000 (60,000 – 48,000). The entry is Financial Accounting

16 Adjustments before preparing Final Accounts – Outstanding Expenses
Salary account Dr 12,000 To outstanding expenses account 12,000 (Being salary due to be paid brought into account) In the Profit and Loss Account, the outstanding salary is added and in the balance sheet, the outstanding salary Rs.12,000 appears as liability, since it shows credit balance. Financial Accounting

17 Adjustments before preparing Final Accounts – Prepaid Expenses
Meaning: Prepaid expenses are those which are paid in advance in the current accounting period even though they relate to the next accounting period. Eg: Taxes paid in advance, Rent paid in advance, Insurance premium paid in advance Adjusting Entry in the Journal Proper: Prepaid expenses account Dr Financial Accounting

18 Adjustments before preparing Final Accounts – Prepaid Expenses
To Concerned expense account Treatment in Accounts: Deduct prepaid portion of the expense from the concerned expense account in the final accounts. Prepaid portion of the expense is shown as an asset in the balance sheet, since it shows debit balance. Financial Accounting

19 Adjustments before preparing Final Accounts – Prepaid Expenses
Example: Insurance premium paid from to , Rs.18,000. The accounting year is from to Therefore the prepaid portion is for 3 months – Jan, Feb and Mar 2006 – Rs.4,500 (18000 X 3 / 12) The Adjusting Entry: Financial Accounting

20 Adjustments before preparing Final Accounts – Prepaid Expenses
Prepaid Insurance A/c Dr 4,500 To Insurance Premium A/c 4,500 Treatment: A. Deduct the prepaid portion of insurance Rs.4,500 from Insurance paid in P & L Account Show the prepaid portion of insurance as an asset in the Balance Sheet Financial Accounting

21 Meaning: Accrued Income is an income which is earned but not received.
Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income Meaning: Accrued Income is an income which is earned but not received. Adjusting Entry Accrued Income A/ c Dr To Concerned Income A/c Financial Accounting

22 Accounting Treatment:
Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income Accounting Treatment: Add the outstanding portion to the concerned item of income in Final accounts Show the accrued portion of income as an asset in the Balance Sheet Financial Accounting

23 Rent receivable for 12 months 1-1-2006 to 31-12-2006 is Rs.72,000
Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income Example: Rent receivable for 12 months to is Rs.72,000 Rent received for only 9 months up to 30th September, 2006 is Rs.54,000 Rent accrued but not received before is Rs.18,000 Financial Accounting

24 Outstanding Rent account Dr 18,000 To Rent account 18,000
Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income The adjusting entry is Outstanding Rent account Dr ,000 To Rent account ,000 Treatment is Financial Accounting

25 Adjustments before preparing Final Accounts – Income Received In Advance
Add Rs.18,000 to rent received account Rs.54,000 to make it Rs.72,000 in P & L Account. Show the outstanding rent account as an asset in the Balance Sheet on Financial Accounting

26 Example: Rent received in advance. Adjusting entry in Journal Proper:
Adjustments before preparing Final Accounts – Income Received In Advance Meaning : Income actually received in the current accounting period but relating to the next accounting period Example: Rent received in advance. Adjusting entry in Journal Proper: Concerned Income account Dr To Pre-received Income account Financial Accounting

27 Accounting Treatment:
Adjustments before preparing Final Accounts – Income Received In Advance Accounting Treatment: Deduct pre-received portion of the income from the concerned item of income in final accounts. Show the pre- received amount of the income as a liability in the Balance Sheet Financial Accounting

28 Royalty actually received during the year is Rs.1,25,000
Adjustments before preparing Final Accounts – Income Received In Advance Example: Royalty actually received during the year is Rs.1,25,000 Royalty relating to next year included in the above is Rs.25,000 Adjusting Entry Royalty account Dr 25,000 Financial Accounting

29 To Pre-received Income account 25,000 Treatment in Accounts:
Adjustments before preparing Final Accounts – Income Received In Advance To Pre-received Income account 25,000 Treatment in Accounts: Deduct Rs.25,000 from Rs.1,25,000 in the Profit and Loss Account Show Rs.25,000 as a liability in the Balance Sheet Financial Accounting

30 Adjustments before preparing Final Accounts – Depreciation on assets
Meaning : Depreciation is reduction in the value of an asset as a result of wear and tear or constant use. It is a loss and charged against profit of the business. Accounting Entries : Depreciation account Dr To Concerned Asset account Profit and Loss Account Dr To Depreciation account Financial Accounting

31 Adjustments before preparing Final Accounts – Depreciation on assets
Accounting Treatment: Charge depreciation against gross profit in P & L Account Deduct depreciation amount from the concerned asset account if depreciation appears outside T.B. Methods of Depreciation Fixed Installment Method Reducing Balancing Method Financial Accounting

32 To Sundry debtor’s account (Being bad debts taken to account)
Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts Meaning: Bad Debts are the debts which can not be recovered and represent total loss to the business. Accounting Entries: Bad Debts account Dr To Sundry debtor’s account (Being bad debts taken to account) Profit and Loss Account Dr Financial Accounting

33 To Bad debts account (Being bad debts charged to P&L account)
Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts To Bad debts account (Being bad debts charged to P&L account) Occurrence of Bad debts: Case I : Bad debts deducted from debtors and brought to the account and trial balance. Case II: Bad debts are accounted after the preparation of trial balance Financial Accounting

34 Accounting Adjustment:
Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts Accounting Adjustment: First case: Transfer the bad debts to P&L Account and Sundry Debtors need not be reduced. Second Case: Transfer the bad debts to P&L Account and Reduce the sundry debtors by the amount of bad debts. Financial Accounting

35 Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts
Third Case: If there is any reserve for bad debts maintained, then bad debts should be set off against such reserve and later if there is uncovered bad debts, then charge them against P&L Account Financial Accounting

36 Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts
Purpose of Provision for Bad Debts: To cover the risk of bad debts that may arise in future. It is a charge against profits of the business. This is also known as Reserve for bad and doubtful debts. Adjusting Entries: Financial Accounting

37 Profit and Loss Account Dr To Reserve for Bad Debts account
Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts Profit and Loss Account Dr To Reserve for Bad Debts account (Being provision made for bad and doubtful debts) Reserve for Bad Debts account Dr To Bad debts account (Being bad debts incurred set off against RBD) Financial Accounting

38 Accounting treatment:
Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts Accounting treatment: Charge P & L Account by the amount of RBD to the extent it is needed. Show the balance of RBD as liability in the Balance Sheet OR deduct RBD from Good Debtors. Financial Accounting

39 Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts
Deduct bad debts from RBD in case there is adequate balance is available The amount to be transferred to P&L Account towards RBD is calculated by applying the formula Financial Accounting

40 New RBD required – (Old RBD + Bad Debts )
Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts New RBD required – (Old RBD + Bad Debts ) Calculation of RBD: RBD is calculated at a fixed percentage of good debtors and basing on the past experience of business man. Good debtors = Total debtors – Bad debts unadjusted. (As given outside the trial balance) Financial Accounting

41 Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts
Illustration: Debtors on Rs.2,00,000; RBD balance on : Rs.10,000; Bad debts incurred during the year 2005 Rs.9,000; RBD should be at 5% on debtors. Debtors on Rs.3,00,000. Draw ledger accounts and show in the balance sheet. Answer: Financial Accounting

42 Reserve for Bad and Doubtful Debts Account
Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts Reserve for Bad and Doubtful Debts Account Rs Rs To Bad debts( ) To balance c/d( ) 9,000 15,000 24,000 By balance b/d ( ) By P & L A/c ( ) By balance b/d( ) 10,000 14,000 Financial Accounting

43 Reserve for Bad and Doubtful Debts (Continued)
I Method Balance Sheet for the year ending Balance Sheet for the year ending Liabilities Assets Liabilities Assets R B D , Sundry Debtors 2,00, R B D , Sundry Debtors 3,00,000 II Method Balance Sheet for the year ending Balance Sheet for the year ending Liabilities Assets Liabilities Assets S.Debtors ,00, Debtors ,00,000 Less RBD , Less RBD ,000 1,90, ,85,000 Financial Accounting

44 Nature and purpose of Discount
Adjustments before preparing Final Accounts - Reserve for Discount on Debtors Nature and purpose of Discount Discounts are of two types – Trade discount and cash discount. Trade discount is allowed to retain the customer ship and does not get reflected in the accounts Financial Accounting

45 Need for Reserve for Discount on Debtors:
Adjustments before preparing Final Accounts - Reserve for Discount on Debtors Cash discount is to encourage prompt and regular payment of cash by the customers to whom goods are sold on credit. It appears in Cash book. Discount allowed is business expense and discount received is business income. Need for Reserve for Discount on Debtors: To cover the risk of discount allowable to debtors Financial Accounting

46 7.2.7. Adjustments before preparing Final Accounts - Reserve for Discount on Debtors
Accounting Entries: When reserve for discount on debtors is created: P & L Account Dr To Reserve for discount on Drs a/c When discount is allowed to Debtors: Discount allowed account Dr To Sundry debtor’s a/c When Discount on debtors is set off against Reserve: Reserve for Discount A/c Dr To discount allowed a/c Financial Accounting

47 Accounting Treatment:
Adjustments before preparing Final Accounts - Reserve for Discount on Debtors Accounting Treatment: Show Reserve for discount on debtors either as a liability in the balance sheet or deduct the same from good debtors on the asset side of the balance sheet. The later is the popular practice Financial Accounting

48 Any excess reserve is present, transfer it to P & L Account as income.
Adjustments before preparing Final Accounts - Reserve for Discount on Debtors Important Note: Reserve for discount on debtors is computed on the amount of debtors minus new RBD, at a fixed percentage. Any excess reserve is present, transfer it to P & L Account as income.

49 7.2.8.Adjustments before preparing Final Accounts – Reserve for Discount on Creditors
Nature and purpose: Discounts are allowed by creditors when we pay them promptly and in time. Discount is thus received and treated as income. Anticipating such income, a reserve is maintained in the business. Financial Accounting

50 7.2.8.Adjustments before preparing Final Accounts – Reserve for Discount on Creditors
Accounting entries 1. Whenever discount is received: Creditors Account Dr To Discount received account 2. When Discount received is transferred to P&L: Discount received a/c Dr (Reserve for discount is not available) To P & L Account 3. When Discount received is set off against Discount received a/c Dr Reserve for Discount on Debtors : To Reserve for discount on creditors a/c 4. When Reserve is created in P&L A/c : Reserve for Discount on Creditors a/c Dr To Profit and Loss Account Financial Accounting

51 7.2.8.Adjustments before preparing Final Accounts – Reserve for Discount on Creditors
Accounting Treatment 1. Reserve for discount on creditors shows debit balance and it is an asset. But it is deducted from the amount of creditors on the liability side of balance sheet. 2. The amount of reserve for discount on creditors is computed basing on total creditors. Financial Accounting

52 7.2.9. Adjustments before preparing Final Accounts – Stock used for personal purposes
Situation: Goods of the business might be used for personal purpose of the proprietor and this is not sale transaction. The stock of goods in the business is reduced, but cash is not received in return. Financial Accounting

53 7.2.9. Adjustments before preparing Final Accounts – Stock used for personal purposes
Accounting Treatment This transaction is treated as similar to drawings for personal purposes. The cost of goods so used is either deducted from the purchases or shown on the credit side of Trading account. The capital of the proprietor is reduced by the amount of drawings of goods in the balance sheet. Financial Accounting

54 7.2.9. Adjustments before preparing Final Accounts – Stock used for personal purposes
Accounting entries 1. When goods are used for personal purpose: Drawings account Dr To goods account / purchases account 2. When drawings are transferred to capital A/c: Capital account Dr To drawings account Financial Accounting

55 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
Meaning: Closing stock is the stock of goods - finished, semi-finished or raw material – at the end of accounting period, lying unsold. Its valuation is important to calculate trading profit / loss. Financial Accounting

56 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
Closing stock does not appear in the trial balance because the closing stock is taken only after the closing of books of accounts. Valuation Financial Accounting

57 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
Closing stock is valued either at cost price at which it was purchased or at market price on the date of valuation which ever is lower. This is as per conservatism principle. Accounting treatment 1. To bring closing stock into account, the entry is Closing Stock A/c Dr To Trading Account Financial Accounting

58 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
2. Closing stock is taken to the credit side of Trading account 3. Closing stock being an asset appears on the asset side of balance sheet. 4. Closing stock of the current year automatically becomes opening stock of the coming year. Financial Accounting

59 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
5. Opening stock shows debit balance and it is transferred to Trading account to close it. The entry is Trading Account Dr To Opening stock account. Financial Accounting

60 7.3. Trading Account Form of Trading Account Financial Accounting
Purpose of Trading Account: Trading Account gives the over all result of trading, i.e.., purchasing and selling of goods. It takes into account the cost of goods sold and the value at which they have been sold If the sale value is more than cost of goods sold, it is gross profit. Otherwise it is gross loss It is prepared by both Manufacturing and trading organizations. Trading A/c is a revenue account. Closing entries are: 1. Trading Account Dr To Opening stock a/c To Purchases etc., (Being trade expenses, op.stock etc transferred to Trading A/c) 2. Sales a/c Dr Closing Stock a/c Dr To Trading Account (Being closing stock and sales transferred to Trading A/c) 3. Trading Account Dr To P & L Account (Being gross profit transferred to P&L Account) Form of Trading Account Debit Rs Credit (Rs) To Opening Stock To Purchases less Purchase returns less stock personally used To wages To carriage inwards To local tax paid To royalty paid on raw material extraction To Freight, cartage To customs & import duty To gas electricity & water To other direct expenses To Gross profit transferred to Profit and Loss Account By Sales less sales returns By Closing stock By gross loss transferred to Profit and Loss Account Financial Accounting

61 7.4. Preparation of Trading Account
Steps to prepare Trading Account 1. Take Opening stock of goods on the debit side and Closing stock to the credit side of Trading Account 2. Identify all expenses of trade, purchase and direct expenses and show them on debit side Financial Accounting

62 7.4. Preparation of Trading Account
3. Give effect to adjustments like outstanding and prepaid items and drawings of goods etc., .to the relevant accounts 4. Show sales less returns and closing stock on the credit side of Trading account Financial Accounting

63 7.4. Preparation of Trading Account
5. If there is excess of credit, treat it as Gross Profit and transfer it to P&L Account 6. If there is excess of debit, over credit, treat it as Gross Loss and transfer it to P & L Account Illustration Financial Accounting

64 From the following balances extracted from Trial balance, prepare Trading Account. The closing stock at the end of the period is Rs56000 Financial Accounting

65 Particulars Amount in Rs. Stock on 1-1-2004 Returns inwards
Returns outwards Purchases Debtors Creditors Carriage inwards Carriage outwards Import duty on materials received from abroad Clearing charges Rent of business shop Royalty paid to extract materials Fire insurance on stock Wages paid to workers Office salaries Cash discount Gas, electricity and water Sales 70700 2000 3000 102000 56000 45000 5000 4000 6000 7000 12000 10000 8000 1000 250000 Financial Accounting

66 Solution Particulars TRADING ACCOUNT FOR THE YEAR ENDING - - - - Dr Cr
To stock on To Purchases Less Returns Outwards To Carriage inwards To import duty To Clearing charges To Royalty To Fire Insurance To Wages To Gas, electricity, water To P & L Account (GP) 70700 99000 5000 6000 7000 10000 2000 8000 4000 91300 By sales Inwards By Closing stock 24700 56000 303000

67 7.6. Profit and Loss Account
Nature and Salient features: P&L Account is a revenue account, showing all revenue expenses and incomes The result is net profit or net loss, transferred to Capital account Office, administrative, selling and distribution expenses are transferred to debit of P&L Account Financial Accounting

68 7.6. Profit and Loss Account
Revenue losses such as bad debts, depreciation, loss on sale of certain assets, loss as a result of calamities are also taken to debit side of the account. All incomes such as rent received, interest received, discount received etc., are taken to credit side. Reserves and provisions are charged against profit by taking them on debit side. Financial Accounting

69 7.6. Profit and Loss Account
Adjustments in the nature of outstanding, prepaid, accrued, incomes received in advance etc., are incorporated. The Transferring entries are: 1. P & L Account Dr To All expenses, reserves & Losses a/c (Being all revenue expenses, provisions etc., transferred to P&L A/C) Financial Accounting

70 7.6. Profit and Loss Account
2. All Incomes Accounts Dr To P & L Account (Being incomes of revenue in nature are taken to P & L account) 3. P & L Account Dr To Capital Account (Being Net profit transferred to Capital Account) Financial Accounting

71 FORMAT Dr PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING --- Cr
Particulars Rs To Trading Account (GL) To Salaries + Out standing –Prepaid salaries as per adjustments To Rent of the premises To Travelling expenses To Rates and Taxes To Printing and stationery To Postage and Telegram To Telephone charges To Insurance –Prepaid amount as per adjustment To Interest paid To Discount allowed To Sundry expenses To Advertisement To Commission To Carriage outwards To Bad Debts To Reserve for Bad debts To Reserve for discount on Debtors To Depreciation To Legal charges To Audit fee To Interest on Capital To Capital Account (Net Profit) By Trading account (GP) By Interest earned + Accrued interest as per adjustments By Commission earned By discount earned By Rent received By Bad debts recovered By Interest on drawings By Reserve for discount on Creditors By Dividends received By Royalty Received By Capital Account( Net Loss) Financial Accounting

72 Rs Particulars Illustration
The following Trial Balance is extracted from the books of a merchant on Particulars Rs Furniture and fittings Motor Vehicles Buildings Capital Account Bad Debts Provision for Bad debts Sundry Debtors Sundry Creditors Stock on Purchases Sales Bank Over Draft Sales Returns Purchase Returns Advertising Interest on Bank Over Draft Commission Cash Taxes and Insurance General Expenses Salaries 640 6250 7500 12500 125 200 3800 2500 3460 5475 15450 2850 450 118 375 650 1250 782 3300 Financial Accounting

73 The following adjustments are to be made.
Stock in hand on was Rs3250 Depreciate Buildings at the rate of 5%, Furniture and 10% and Motor 20%. Rs.85 is due for interest on bank overdraft. Financial Accounting

74 Salaries of Rs.300 and taxes Rs.120 are outstanding.
Insurance amounting to Rs.100 is prepaid One-third of the commission received is in respect of work to be done next year Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors. Prepare Trading Account and Profit and Loss Account. Financial Accounting

75 Dr Trading Account for the year ending 31-12-2004 Cr
Particulars Rs To Stock on To Purchases Less returns To P & L A/C (GP) 3460 5350 9690 By Sales Les Returns 200 By Closing Stock 15250 3250 Total 18500 Profit and Loss Account for the year ending Dr Cr Particulars Rs To Salaries Add Outstanding To Advertising To Interest on OD Add Outstanding Int To Taxes and Insurance Add Out standing tax 1370 Less Prepaid Insurance To General expenses To bad debts To RBD(New) Less old RBD balance To Depreciation: On Bldgs @ 5% On FF @ 10% On M To Capital Account (NP) 3600 450 203 1270 782 125 270 1689 1551 By Trading Account (GP) By Commission Less Pre-received 125 9690 250 Total 9940 Note: 70

76 Note: Sundry Debtors are Rs.3800 and there have been bad debts outside TB Rs100. The good debtors are Rs The new RBD is 10% of 3700, i.e.Rs370. The old RBD unspent is Rs100 ( ). Therefore RBD to be charged against profit is Rs270 Financial Accounting

77 7.7. Balance Sheet Meaning:
Balance Sheet is a statement of assets and liabilities of a business as on a certain date Assets are stated on right hand side and liabilities on the left hand side, in case Balance Sheet is prepared horizontally. Financial Accounting

78 7.7. Balance Sheet If balance sheet is prepared vertically, assets are mentioned first (Application of funds) and later the liabilities are mentioned (Sources of funds) The assets and liabilities are arranged in the liquidity order, i.e.., more liquid assets come first and those that can not be readily converted come next.

79 7.7. Balance Sheet A balance sheet of a company form of organization, assets and liabilities are arranged on permanency order, i.e.., assets, which are more permanent come first and less permanent next. Format of a Balance Sheet is a Financial Accounting

80 7.7. Balance Sheet BALANCE SHEET OF FOR THE YEAR ENDING Capital and Liabilities Rs Assets Sundry Creditors Less Reserve for Discount on Creditors Bills Payable Bank Over Draft Loans Borrowed Outstanding Expenses Pre-received Incomes Capital (Opening) Add Additions to capital Add interest on capital if any Add Net profit as per P&L a/c Less personal drawings Less Net loss as per P&L A/C Cash in hand Cash at Bank Land and Building Add Additions if any Less depreciation Plant and Machinery less depreciation Furniture and Fixtures less depreciation Sundry debtors Less Bad debts out side Trial Balance Less Reserve for Bad Debts Less Reserve for discount on Debtors Bills Receivable Loans and advances given to others + Interest outstanding Investments + outstanding income on investments Other outstanding incomes Pre-paid expenses Closing stock Total

81 7.8. Preparation of Balance Sheet
Guidelines to prepare Balance Sheet 1. Check whether the given Trial Balance tallies or not. If it does not tally, make a note of the amount of difference. Financial Accounting

82 7.8. Preparation of Balance Sheet
2. Identify assets from the debit side of Trial balance and arrange them in liquidity order on the assets side of B/S 3. Identify liabilities from the credit side of Trial Balance and arrange them on the liabilities side of Balance Sheet Financial Accounting

83 7.8. Preparation of Balance Sheet
4. Note those items of adjustments, which are given out side Trial Balance. 5. Every adjustment should be recorded at two places, either Trading account or Profit and Loss Account and Balance Sheet. Invariably, an adjustment is recorded in Balance sheet. Financial Accounting

84 7.8. Preparation of Balance Sheet
For Example: Closing stock given in the adjustments, will be first recorded in the trading a/c and later on the asset’s side of balance sheet. Outstanding salaries first are added with salaries in P&L account and then on the liabilities side of balance sheet. Financial Accounting

85 7.8. Preparation of Balance Sheet
6. The difference in the trial balance, if any, should match with the difference between asset and liabilities side of balance sheet and accordingly interpret and incorporate. At the end , the balance sheet should tally. ILLUSTRATION: Financial Accounting

86 Prepare Balance Sheet from the following Trial Balance from the books of a merchant on 31-12-2004
Particulars Rs Furniture and fittings Motor Vehicles Buildings Capital Account Bad Debts Provision for Bad debts Sundry Debtors Sundry Creditors Stock on Purchases Sales Bank Over Draft Sales Returns Purchase Returns Advertising Interest on Bank Over Draft Commission Cash Taxes and Insurance General Expenses Salaries 640 6250 7500 12500 125 200 3800 2500 3460 5475 15450 2850 450 118 375 650 1250 782 3300

87 The following adjustments are to be made.
Stock in hand on was Rs3250 Depreciate Buildings at the rate of 5%, Furniture and 10% and Motor 20%. Rs.85 is due for interest on bank overdraft. Salaries of Rs300 and taxes Rs.120 are outstanding. Financial Accounting

88 Insurance amounting to Rs.100 is prepaid
One-third of the commission received is in respect of work to be done next year Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors. Financial Accounting

89 7.8. Preparation of Balance Sheet continued
Solution Capital and Liabilities Rs Assets Sundry Creditors Bank Over Draft Add interest due Commission received in advance Outstanding Taxes Outstanding Salaries Capital Add Net Profit 2500 2935 125 120 300 14051 Cash Building Less Depreciation Furniture and Fixtures 640 Less Depreciation Motor Vehicle Less Depreciation Sundry Debtors Less bad debts as per Adjustments Balance Less Reserve for Bad Debts(New) Closing Stock Pre-Paid Insurance 650 7125 576 5000 3330 3250 100 Total 20031 BALANCE SHEET OF THE MERCHANT AS ON

90 NOTE: Every adjustment given outside Trial Balance finds place in two accounts –Trading account / Profit and Loss Account and invariably in Balance Sheet. Financial Accounting