Financial Accountancy Final Accounts Meaning of Final Accounts:- Final Accounts show final Results of trading in the form

of profit or loss. These Accounts are usually prepared at the close of year & known as Final Accounts. Final Accounts involves the preparation of:A) Trading Account:Need for preparing Trading A/c 1. To collect information about gross profit / gross loss 2. To collect information about direct expenses 3. To compare closing stock with those of the previous years. 4. To compare sales wit those of previous years. 5. To provide information to safeguard against possible losses.
B) Profit & Loss Account:-

Need of Profit & Loss A/c 1. To ascertain the net profit / Net loss. 2. To compare with previous years profits. 3. To exercise control over expenses 4. To create Reserves 5. To help in the preparation of Balance sheet C) Balance Sheet. Need of Preparing Balance Sheet 1. Ascertainment of financial position 2. Information about the exact amount of capital 3. Information about the solvency of the Business 4. Ascertaining of nature &cost of various assets & liabilities 5. Helpful in preparation of books of Account in the next year Need for preparing Final Accounts 1. To ascertain the true profit or loss made by the business during the financial year. 2. To find out gross financial results of the business i.e. gross profit or gross loss. 3. To find out net financial results of the business i.e. net profit or net loss. 4. Ascertain the true financial position of the business. 5. To check arithmetical accuracy of books of Accounts. 6. To detect errors & mistakes that have taken place.

7. To complete legal formalities at the government level. 8. To find out the amount of fax payable to the government on the ret profits earned. 9. To have effective management & control over the financial operations. Meaning of trading Account: - The Account which is prepared to know the result of buying & selling of the goods is called trading Account. Meaning of Gross profit:- Gross profit is the profit Generated from carrying on the basic activity of a business. Gross profit is the excess of net sales over the cost of goods sold. Gross profit= Net sales cost of goods sold Net sales = Sales Sales Return Cost of goods sold = opening stock + purchases closing stock Net Purchases = Purchases Purchase Returns OR Cost of goods sold = opening stock + purchases + Direct expenses closing stock Profit & Loss Account Meaning:- When the trading Account has been completed & Gross profit ascertained, next step is to prepare profit & loss Account. Trading Account does not show net profit earned by a merchant or net loss suffered by him during particular period. Very essential to ascertain net Results of business operation in form of net profit or net loss. For this purpose P & L Account its prepared. Net profit = operating profit non operating exp + Non operating income OR Net profit = Net sales + Non operating incomes (Cost of goods sold + Operating exp + non operating exp) Balance sheet Is a statement which is prepared on a specified date. It depicts the financial position of a business. It contains capital & Liabilities on one hand & on the other hand assets. Important points to be kept in mind while preparing Financial Accounts. Final Accounts are prepared after the preparation of trail balance. Trial balance contains the balances of all accounts from the Ledger. It includes the accounts of all expenses, incomes, assets, Liabilities, Capital & drawings. 1) Debit balances usually represent either expenses, losses, assets or drawings and these items always appear in the left hand side of the Trial balance. 2) Credit balances usually represent income, Liabilities, Capital, Reserves. These items always appear on the credit side of Trial Balance. 3) If the question is not given in the form of trial balance. It should be prepared before preparing Final Accounts because the Balance sheet will not agree if the trail balance does not agree. If there is difference in the Trial Balance difference should be placed to suspense A/c & shown in the Balance sheet in order to get the balance sheet agreed.

4) All items which appear in the trial Balance should be shown only once for the same amount whereas which appear outside the Trial Balance, known as adjustments have to be shown at two places. 5) Items which appear on the debit side of the trial balance is shown on the dibit side of trading Account or on the debit side of profit & loss account or on the assets side of Balance sheet depending on the nature of Account. Item such as Return inward which appear on the debit side of the trial Balance shown on the Credit side of trading Account as deduction from sales. Drawings account although appears on the debit side of the trial Balance is shown as a deduction from capital on Liabilities side of the Balance sheet. 6) Items which appear on the credit side of trial balance is shown on the credit side of Trading Account or on the credit side of profit & loss A/c or on the liabilities side of the Balance sheet depending on the nature of Account. Return outward account although shows credit balance & appears on the credit side of the trial balance is shown on the debit side of trading A/c as a deduction from purchases. 7) Direct expenses are shown on the debit side of the trading A/c & indirect expenses are shown on the debit side of profit & loss A/c & other incomes are shown on the credit side of the profit & loss A/c. 8) Remaining Accounts will be the Accounts of Assets, Liabilities, Capital & Drawings will be shown in the Balance sheet. 9) Additional information or adjustments given by way of notes are the matters which have not been recorded in the books of Account. These are to be considered by adjusting the items of expenses, assets, drawings, Incomes, liabilities or capital as applicable while preparing final Accounts. Adjustments require both debit & credit entry which is usually effected by entering them in both Trading & P & L A/c & B/Sheet depending on the nature of adjustment. Sometimes an adjustment may have effects on both sides of Balance sheet only. 10) No column for Ledger folio and date is Required to be given in final Accounts. 11) Total of Both sides of Balance sheet will always be Equal.

Rectification of Errors Meaning of error:- Two sides of the trial balance must agree of the totals of both the sides of trial balance do not agree, there have been definitely some mistakes in the accounts. Difference indirectes about the errors. The Books of accounts do not appear correct and true till there are mistakes. Meaning of Rectification of errors:- It is necessary to find out and remove the errors from the books of Accounts. This is called rectifying the errors. Until the errors are rectified, the books of a business cannot be said correct. Some special types of Journal entries are made in the books to rectify the errors which are called Rectifying entries. Kinds of errors

A) On the Basis of Book Keeping

B) On the Basis of Trial Balance

C) On the Basis of Rectification

Errors of Errors of Compen- Errors Omission Commission sating of princierrors ples

Single sided errors

Double sided error

Errors disclosed Errors not disclosed by Trial Balance by Trial Balance

Errors of Trial Balance

Following steps will be useful in locating the errors 1) Two columns of the Trial balance should be totaled again list of the accounts should be checked & totaled again. 2) It should be seen that cash & Bank Balances have been written in the trial Balance. 3) Exact difference in the trial Balance should be established & the ledger should be gone through. It is possible to a balance equal to the difference has been omitted from the Trial Balance.

4) Difference of Trial Balance should also be halved. It is possible that balance equal to hay the difference has been written in the wrong column. 5) Ledger Accounts should be balanced again. 6) Difference of Rs.1, Rs. 10, Rs. 100 etc is specially required to be checked again total of subsidiary books. 7) If there is still a difference in trial Balance, Complete checking will be necessary. Suspense Account:- After the errors have been located, they must be rectified immediately and thus the two sides of trial Balance should be tallied. But some times after trying many efforts errors are not located & difference between the two sides exists which are essentially be removed. This done by transferring the difference into special account called suspense Account. It is temporary & fictitious account opened to agree the trial balance. Rectification of errors After locating the errors, they must be properly rectified. Following are three ways, 1) By striking off the previous entry. 2) By Rectifying the error direct in the Account. 3) By passing new correct Journal Entry. Rectification of error:- Its a process through which errors or mistakes in the books of Accounts are corrected. Should be kept in mind that errors should never be corrected by overwriting, erasing because it reduces the authenticity of accounting records & gives the impression that something is being concealed. Types of errors & Rectification point of view 1) One side error 2) Two side error

Bank Reconciliation Statement Meaning:- Strictly there should be no difference between the balance shown by the pass book & cash book. This will be so if all the entries are recorded in both on a certain date it is possible that some entries may have been recorded in the cash book but not in the pass book. That is why that there may be different balances between the cash book & pass book on a particular date. This disagreement between the both book will be because of some of the reasons. At the end of each month of two balances should be compared and if there is disagreement, exact reasons for it should be found out. In the other words the two balances must be fully reconciled. For the purpose a statement reconciling two balances is prepared. This statement is called Bank Reconciliation Statement.

Bank Reconciliation statement is prepared to know the exact reasons of disagreement of balances shown by cash book & pass book at a particular date. For this all the entries of pass book should be tallied with the entries of cash book, Those entries which are down in both the books are ticked with the sign of right. There are certainly some entries which are recorded in pass book but not yet recorded in the cash book by the trader or recorded in cash book but not yet recorded in pass book by the Bank. Only these entries are responsible for the difference in the balances shown by pass book & cash book. These entries must be chosen & a reconciliation statement is prepared keeping these entries. Need for Bank Reconciliation Statement 1. It reflects the actual Bank Balance position (i.e. plus or minus) 2. It helps to detect any mistake in the cash book & in the pass book 3. It prevents frauds in recording the banking transactions. 4. It explains any delay in the collection of cheques. 5. It identifies valid transactions recorded by one party and not recorded by other party. Reasons for difference in Bank Balance as per Cash book & Balance as per pass book Reasons may be divided into three groups:a) Differences arising from banks actions, about which we have not been notified. b) Difference arising from time lag which is inevitable whenever cheques are sent in payment of debts, or are received & paid into the bank for clearing through the bankers clearing hours errors ether by bank or by our own cashier.

Difference between Bank statement & Bank Reconciliation statement Bank Statement Bank Reconciliation Statement It is prepared by bank & sent to the account holder It is compulsory for a Bank to prepare bank statement It covers all the transactions taking place between the Bank and its account holder during particular period such as a week, a month etc Bank Balance on any day can be ascertained from it It is a copy of customers Account as appearing in the banks ledger It is prepared by customer or depositor Its preparation is optional generally prepared when there is any discrepancy in the bank balance as shown by the bank statement & the bank column of the cash book The transactions which cause disagreement between cash book and bank statement are considered while preparing this statement. Bank Balance on a particular day cannot be ascertained from it It is a statement prepared on a particular due to reconcile the balances shown by the bank column of cash book & Bank statement

Need of Bank reconciliation Statement 1) Helpful in locating errors in cash book & pass book. 2) Revealing the dealy in clearance of cheques. 3) Checking the accuracy of cash book. 4) Act as a moral check. 5) Helpful in preparation of revised cash book. Following points should be taken into consideration while preparing reconciliation statement. 1) Debit balance of Cash Book means the trader has deposit of money in the bank credit balance of pass book has some meaning. 2) Credit balance of cash book or debit balance of Pass Book shows an overdraft position. The trader has taken excess money from bank than that of his deposits in banks. 3) If the trader issues cheques to the parties for payment, it will be recorded in the credit sales of cash book & debit side of pass book. 4) Cheques, Bills, drafts, cash etc deposited in bank are recorded in the debit side of cash book & credit side of pass book. 5) Bank Reconciliation statement is prepared by taking base of any one balance either of cash book or pass book. 6) If the statement is prepared taking the base of cash book balance, pass book balance would be known. If the base of pass book balance is taken, cash book balance would be known. In nutshell the chart of Bank Reconciliation statement Items which have not been recorded Cash Book Pass Book Balance Debit Balance + + Credit Balance + + Debit Balance + + Credit Balance + + -

Cheques issued but not presented for payment. Bills, Cheques, drafts etc deposited for collection, but not collected till date Bank charges, commission, expenses, interest charged on overdraft, insurance, premium paid by bank, B/P etc Interest on deposit allowed by bank, dividend, interest collected on investments, sum deposited by customer directly in traders Account Bill discounted with the bank & dishonored on maturity Wrong entry in the credit side of pass book Cheque debited in cash book but forgot to send them to the bank Wrong entry in the debit side of pass book

+ -

+ + +

+ -

+ + +

Subsidiary Books Meaning:-In a business most of the transactions will relate to receipts & payments of cash purchase & sales of goods mostly transactions are of credit nature now-adays. Seems to have separate register for each such class of transactions. All these separate registers or books meant for each class of transactions are called subsidiary Books or books of original entries in other words main Journal is divided further into some subsidiary books. This is called subdivision of Journal or Subsidiary Journals Various special purpose Books are as:1. Cash Book:- Is kept for recording all cash transactions relating to cash or cheque (where cash book includes Bank columns) 2. Purchase book:- All credit purchases of goods are recorded in this Book. Goods means those articles which are purchase for resale. Details showing suppliers name & addresses, description of goods, prices, trade discount allowed if any are recorded in respective columns of this book. 3. Sales Books:- All credit of goods are recorded in this book goods means the things in which business deals in details showing customers name and addresses, description of goods prices, trade discount allowed if any are recorded in respective columns of this book. 4. Purchases Return Book:- Goods purchased or credit earlier & Returned to the supplier by the business is Recorded in this book Details particulars of goods Returned, suppliers name addresses, cost of goods etc are recorded in respective columns of this book. 5. Sales Return Book:- Goods sold on credit earlier & Returned by the customer to the business is recorded in this book. Details particulars of goods returned, Customers name, Selling price by goods are recorded in respective columns of this book. 6. Bills Receivable book:- In this book all Bills of exchange, promissory notes are received by the business from various parties are recorded. Details particulars of such bills regarding parties names, period by bill, date of maturity, amount of bill etc are recorded in this book. 7. Bill payable book:- In this book bills of exchange, promissory notes issued by the business to various parties are recorded. Details particulars of such bills regarding parties names, period of the bill, date of maturity etc are recorded in this column. 8. Journal Proper:- This book record all those transactions which cannot be conveniently recorded in any of other special purpose books or subsidiary books Maintenance of special books give rise to certain advantages:1. Easy Handling Books 2. Division of work according to 3. Increase in efficiency 4. Classified information 5. Saving of Time & labour 6. Convenience in posting

7. Fixation of responsibility 8. Speedy preparation of Final Account. Cash Book 1. Simple column Cash Book:- Is a cash which has only one column on both sides for recording only cash receipts & cash payments. This cash book is used when all receipts and payments are in cash only. 2. Double column Cash Book:- Is a cash book which has two columns for recording the amount on both sides. 3. Triple column Cash Book:- Is a cash book which has three columns on each side for recording Discount, cash & Bank transactions. This book facilitates. The discount column along with cash & discount transactions. The discount column on the debit side is called discount allowed column & the column on the credit side is called Discount Received column. Importance & use of three column Cash book A considerable amount of saving in clerical labour is made possible by the use of bank columns. Use of three column cash book removes the need of opening a bank A/c as the Bank column completes the need of this account. Three would be no need to post the transactions to any separate bank A/c.