Final Accounts of a Company

Corporate Accounting Unit-3 Final Accounts of a Company:

Final Accounts

Trading & Profit and Loss A/c

Balance sheet

Trading and P&L A/c and Balance sheet are prepared at the end of the year or at end of the part. So it is called Final Account. 1. Trading and Profit Pro fit and Loss A/c is prepared to find out Profit Profit or Loss. Lo ss. 2. Balance Sheet is prepared to find out financial position a if concern. Revenue account of o f trading concern is divided into two-part i.e. 1. Trading Account and 2. Profit and Loss Account. (A) Trading account Trading is the basic process of business. Manufacturing companies, for example, buy in raw materials and use them to make products for sale, whereas retail companies buy in finished goods for sale at a higher price; this is the basis of their trade. The trading account for either of these types of business shows how much profit the firm makes by this basic business process, ignoring other expenses the company may incur. It simply looks at how profitably the firm makes goods or processes them for sale to customers. The profit earned by this process is known as the gross profit . Items appearing in the Debit side of Trading Account.

1. Opening Stock: Stock on hand at the commencement of the year or period is termed as the Opening Stock. 2. Purchases: It indicates total purchases both cash and credit made during the year. 3. Purchases Returns or Returns out words: Purchases Returns must be subtracted from the total purchases to get the net purchases. Net purchases will be shown in the trading account. 4. Direct Expenses on Purchases: Some So me of the Direct Expenses are. i. Wages: It is also known as productive wages or Manufacturing wages. ii. Carriage or Carriage Inwards: iii. Doctroi Duty: Duty paid on goo ds for bringing them within municipal limits. iv. Customs duty, dock dues, clearing charges, Import duty etc. v. Fuel, Power, Lighting charges related re lated to production. Rama Mittal

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Corporate Accounting Unit-3

vi. vii.

Oil, Grease and Waste. Packing charges: Such expenses are incurred with a view to put the goods in the Saleable Condition. Items appearing on the credit side of Trading Account 1. Sales: Total Sales (Including both bot h cash and credit) made during the year. 2. Sales Returns or Return Inwards: Sales Returns must be subtract ed from the Total Sales to get Net sales. 3. Closing stock: Generally, Closing stock does not appear in the Trial Balance. It appears outside the Trial balance. It represents the value of goods at the end of the trading period. (B) Profit and loss account Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Pro fit fit Loss Account. Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of accounting year. Items appearing on Debit side of the Profit & Loss A/c

The Expenses incurred in a business is divided in too parts. i.e. one is Direct expenses are recorded in trading A/c., and another one is Indirect expenses, which are recorded on the debit side of Profit & Loss A/c. Indirect Expenses E xpenses are grouped under four heads: 1. Selling Expenses: All expenses relating to sales such as Carriage outwards, travelling Expenses, Advertising etc., 2. Office Expenses: Expenses incurred on running an office such as Office Salaries, Rent, Tax, Postage, Stationery etc., 3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs and Renewals, Depreciation etc. 4. Financial Expenses: Interest Paid on loan, Discount allowed etc., are few examples for Financial Expenses. Item appearing on Credit side of Profit and Loss A/c

Gross Profit is appeared on the credit side of P & L. A/c. Also other gains and incomes of the business are shown on the credit side. Typical of such gains are items such as Interest received, Rent received, Discounts earned, Commissi Co mmission on earned.

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Corporate Accounting Unit-3 (C) Balance sheet

The Word µBalance Sheet¶ is defined as ³a 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.´ On the left hand side of this statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be equal. Capital arrives Assets exceeds t he liabilities. Objectives of balance sheet: 1. It shows accurate financial position of a firm. 2. It is a gist of various transacti tr ansactions ons at a given period. 3. It clearly indicates, whether the t he firm has sufficient assents to repay its liabilities. 4. The accuracy accurac y of final accounts is verified by this statement 5. It shows the profit or Loss arrived through P rofit & Loss A/c.

Major headings of the assets and liabilities-side of a company¶s balances sheet as per Schedule VI, Part I. Major headings of Assets side

i. ii. iii. iv. v.

Fixed Assets Investments Current Assets, Loans and Advances: Current Assets, Loans and Advances Miscellaneous Expenditures Profit & Loss Account (Loss in Business)

Major headings of Liabilities side

i. ii. iii. iv. v.

Share Capital Reserves and Surplus Secured Loans Unsecured Loans Current Liabilities and Pro visions visions a. Current Liabilities b. Provisions

What is contingent liability?

A possible future liability, which depends on t he happenings of certain uncertain event, is called contingent liability. These liabilities are not shown in the tot al of liability side, but are shown as a footnote to the balance sheet. Rama Mittal

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The following are some examples o f contingent liabilities: i. ii. iii. iv. v.

Uncalled liabilities on partly paid shares Liabilities under Guarantee Arrears of dividends on cumulative preference shares Claim against the company now acknowledged as debts Liabilities on Bills Receivable discounted but not matured.

Difference between a trial balance and a balance balance sheet

Trial Balance 1. It shows the balances of o f all ledger accounts. 2. It is prepared after the completion of the ledger accounts or arrival of the balances. 3. Its object is to check t he arithmetical accuracy. 4. Items shown in the Trial Tr ial balance are not in order. 5. It shows the opening stock 6. It has the headings, de bit and credit.

Example-

Balance Sheet 1. It shows the balances of personal and real accounts only. 2. It is prepared after the completion co mpletion of Trading and P&L A/c. 3.Its object is to reveal the financial position of the business 4. But in the B/S, t he items shown must be in order. 5. It shows the closing stock 6.It has the heading of o f Assets and Liabilities

under what headings will you shows the following items in the balance sheet of a

company:

i. ii. iii. iv. v.

Goodwill Unclaimed Dividends Provision for Tax Share Premium Account Loose Tools

Answer: Items

Headings

Sub-headings

Goodwill

Fixed Assets

²

Unclaimed Dividend

Current Liabilities and Provisions

Current Liabilities

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Provision for Tax

Current Liabilities and Provisions

Provisions

Share Premium Reserves and Surplus A/c

²

Loose Tools

Current Assets

Current Assets, Loans and Advances

Example-

Give the headings under which the following items will be shown in a company¶s balance sheet as per Schedule V I, Part I:

i. ii. iii. iv. v.

Sundry Creditors Debentures Sinking Fund Bills Receivable Discount on Issue of Debentures Motor Car

Answer: Items

Headings

Sub-headings

Sundry Creditors

Current Liabilities Liabilities and Provisions

Current Liabilities

Debentures Sinking Fund Reserves and Surplus

²

Bills Receivable

Current Asset, Loans and Advances

Loans and Advances

Discount on Issue of Debentures

Miscellaneous Expenditures

²

Motor Car

Fixed Assets

²

Example-

Give the headings under which any four of the following items will be shown in Company¶s Balance Sheet.

i. ii. iii. iv. v.

Debentures Interest accrued on investment Goodwill Preliminary Expenses Bills of Exchange

Answer: Items

Headings

Sub-headings

Debentures

Secured Loans

²

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Interest accrued on Investment


Current Assets

Goodwill

Fixed Assets

²

Preliminary Expenses

Miscellaneous Expenditures

²

Bills of Exchange


Loans and Advances

Form of Balance Sheet

Part 1 to Schedule V I of the Indian Companies Act , 1956 gives the format in which the balance sheet is to be prepared. The schedule gives 2 types of formats, the horizontal format and the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under: BALANCE SHEET

As on«««««. (Horizontal Form)

Liabilities (a) Share Capital (b) Reserves and surplus c) Loans d) Current liabilities liabilities & Provisions

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Assets (a) Fixed assets (b) Investments c) Current assets, loans loans and advances (d) Miscellaneous expenditure (e) Profit & Loss Account

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Corporate Accounting Unit-3 Format of balance sheet (in horizontal form) according to the requirements of

Schedule VI of the Companies Act 1956. Balance Sheet

As on²Liabilities (Rs.)

Assets

Amount (Rs.)

(Rs.)

(1) Share Capital

(1) FIXED ASSETS:

Authorised Capital:

1. Goodwill

« Shares of Rs. « each

XXX 2. Land

3. Building

Issued Capital:

Amount

(Rs.)

XXX XXX XXX

« Equity Shares of Rs. « each

XXX 4. Leaseholds

XXX

« Preference Share of Rs. « each

XXX 5. Railway Sidings

XXX

6. Plant and Machinery

XXX

Equity Shares of Rs. « each Rs. « Called up XXX

7. Furniture and Fittings

XXX

Preference Share of Rs. « each Rs. R s. « Called up XXX

8. Development of Property

XXX

9. Patents, Trade Marks

XXX

10. Live Stocks

XXX

11. Vehicles etc.

XXX

XXX (2) INVESTMENTS:

XXX

Subscribed Capital:

Less Calls Unpaid XXX (i) By directors XXX (ii) By Others XXX Add Forfeited shares XXX (2) R ESERVES AND SURPLUS:

(3) CURR ENT ASSETS, LOANS AND ADVANC ES:

1. Capital Reserve, not available for Dividend

XXX (A) Current Assets:

2. Capital Redemption Reserve

XXX 1. Interest accrued on

XXX

investments 3. Share Premium Account

XXX 2. Stores and Spare parts

XXX

4. Other Reserves specifying the nature of reserve and the amount in respect thereof.Less: Debit balance in Profit & Loss account (if any)

XXX 3. Loose Tools

XXX

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5. Surplus, that is balance in Profit and Loss account after providing for proposed allocation

XXX 4. Stock in trade

XXX

6. Proposed additi add ition on to reserves

XXX 5. Work in progress

XXX

7. Sinking Funds

XXX 6. Sundry Debtors:

(3) SECUR ED LOANS:

Less: Provision

XXX

7. (a) Cash balance in hand (b) Bank balance

XXX XXX

1. Debentures

XXX (B) Loans and Advances:

2. Loans and Advances from Banks.

XXX 8. (a) Advances and loans to

XXX

subsidiaries(b) advances and loans to partnership firms in which the Company or any of its subsidiaries is a partner 3. Loans and Advances from subsidiaries

XXX 9. Bills of Exchange

XXX

4. Other Loans and Advances

XXX 10. Advances recoverable in

XXX

cash or in kind (e.g. Rates, Taxes, Insurance, etc. prepaid) 5. Interest accrued and due on secured loans (4) UNSECUR ED LOANS:

XXX 11. Balances with customs,

XXX

Port Trusts, and excise authorities etc. (4) MISCELLANEOUS EXPENDITUR E:

1. Fixed Deposits

XXX 1. Preliminary Expenses

XXX

2. Loans and Advances from subsidiaries

XXX 2. Expenses, including

XXX

3. Short Term Loans and Advances

XXX 3. Discount allowed on the

commission or Brokerage on under writing XXX

issue of Shares or Debentures a. From Banks b. From Others 4. Other Loans and Advances (From Bank or others)

XXX 4. Interest paid out of capital

XXX

during construction period

(5) CURR ENT LIABILITIES AND PROVISIONS:

5. Development expenditure

XXX

(A) Current Liabilities: Liabilities:

6. Other sums (specifying

XXX

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nature) 1. Acceptances

XXX 5. PROFIT & LOSS

XXX

ACCOUNT: (This is shown only when its debit balance count not be written off out of others reserves)

2. Sundry Creditors

XXX

3. Subsidiary Companies

XXX

4. Unclaimed Dividends

XXX

5. Interest accrued but not due on loans

XXX

6. Advance payments and unexpired discounts

XXX

7. Other Liabili L iabilities ties (if any)

XXX

(B) Provisions: Provisions: 8. Proposed Dividends

XXX

9. Provision for Taxation

XXX

10. Provision for Provident Fund schemes

XXX

11. Provision for insurance, pension and similar staff benefit schemes.

XXX

12. Other Provisions

XXX

Total

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XXX

XXX

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In the vertical format, the various heads o f liabilities liabilities and assets are arranged vertically and current liabilities are shown as deduction, from current assets. Whatever information is required to be given in the horizontal format must also be given in the vertical format. Summarized prescribed vertical form of balance sheet is given below: Format of balance sheet (in vertical form) according to the requirements of

Schedule VI of the Companies Act 1956.

BALANCE SHEET

As on«««««.

(Vertical Form) Particulars

Am. as on the last

Am. as on the last

date of current year date of previousyear I.

Sources of Funds (1) Shareholders¶ funds (2) Loan funds

Total

«««

«««

«««

«««

«««

«««

«««

«««

«««

«««

II Application of Funds

(1) Fixed assets (2) Investments (3) Current assets, loans and advances Less: Current liabilities & provisions (4) (a) Miscellaneous expenditure. (b) Profit & Loss Account Total

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Final Accounts of a Company

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