Preparation of Final Account

Final account is the combination of income statement and balance sheet. The final account is prepared at the end of every year which may be a calendar year or other also. Normally final account includes the following items. 1. Trading Account 2. Profit and loss Account 3. Profit and loss Appropriation Account 4. Balance Sheet

Concept Of Trading Account

The first step of final account is trading account.Trading account is nominal account which is prepared at the end of accounting year. Trading account helps to find out gross profit or gross loss during the accounting period. Trading account consists of two sides 'debit and credit' . All direct expenses are debited and direct incomes are credited in trading account.Trading account contains mainly purchase of goods , sale of goods and expenses relating to the daily operation of factory.

Importance Of Trading Account

It is very important to find out gross profit or loss for the business to know whether purchasing, manufacturing and sales are sufficient for earning or not.The main objectives or important of trading account are as follows. 1.Trading account helps to know gross profit or loss. 2.Trading account provides information about the direct expenses. 3.Trading account provides safety against possibilities of loss. 4.Trading account helps in comparison of closing stock with last year's stock

Advantages Of Trading Account

Here are the following advantages of trading account 1. Trading account shows the relationship between gross profit and sales that helps to measure profitability position. 2. Trading account shows the ratio between cost of good sold and gross profit. 3. Trading account gives the information about efficiency of trading activities. 4. Trading account helps to compare between cost of good sold and gross profit. 5. Trading account provides information regarding stock and cost of good sold.

Items included in the debit side of the trading account

Followings are the items which are include in the debit side of the trading account

1. Opening Stock: Opening stock consists of raw materials , work in progress and finished goods depending upon the nature of business. In merchandising business , the opening stock consists of finished goods. In manufacturingconcern , opening stock consists of raw materials. 2. Purchase Purchase includes both credit purchase and cash purchase. Purchase is available in trial balance. 3. Purchase Returns Purchase returns is appear in the credit side of trial balance. Purchase returns may be shown by deduction from purchases. 4. Direct Expenses Direct expenses means all the expenses which are directly attributable to the purchase of goods. These are the some examples of direct expenses. a. Direct labour or direct wages. b. Freight on purchase. c. Carriage on purchase. d. Fuel , power and lighting expenses. e. Packing charges. f. Manufacturing expenses. g. Commission on purchase. h. Royality.

Items included in the credit side of the trading account

Followings are the items which are included in the credit side of the trading account. 1.Sales Both cash sales and credit sales are included in trading account. 2.Sales returns Sales returns must be deducted from total sales and to be shown in the credit side of trading account. Sales returns are the sold goods which are returned from customers. 3.Closing stock Closing stock means the value of goods which are remain unsold in a particularaccounting period. Closing sock may be in the form of raw materials ,. work in progress or finished goods. Closing stock is valued at cost or market price.

Concept Of Profit And Loss Account

Profit and loss account is prepared after the preparation of trading account.The main objective of preparing profit and loss account is to achieve the operatingresults of a company at the end of accounting period. Profit and loss account is a nominal account having debit side and credit side. All

the indirect expenses are recorded in the debit side of the profit and loss account and all the incomes except salesand closing stocks are recorded in the credit side of the profit and loss account. In profit and loss account if debit side is excess the credit side , the difference is called net loss. If the credit side of profit and loss account is excess than the debit side ,the difference is called net profit. Net profit amount of profit and loss account is transferred to the credit of profit and loss appropriation account and net loss of profit and account is transferred to the debit side of profit and loss appropriation account. Profit and loss account helps to ascertain net profit or net loss from business operation.

Advantages Of Profit And Loss Account

The main advantages of profit and loss account are as follows: 1.Profit and loss account gives the actual information about net profit or net loss of the business for an accounting period. 2. Profit and loss account gives the actual information about indirect expenses. 3. Profit and loss account serves to determine the ratio between net profit to sales. 4. Profit and loss account helps in determining the ratio between net profit to operating expenses. 5.Profit and loss account helps in controlling indirect expenses.

Items Included In The Dedit Side Of Profit And Loss Account

Followings are the items which are included in the debit side of profit and loss account. 1. Gross Loss Gross loss is the debit balance of trading account whichtransferred to the profit and loss account. 2. Selling and distribution expenses Expenses incurred for the promotion of sales and distribution of sold goods are selling and distribution expenses. Packing charge, carriage , freight outward, sales tax, forwarding charge , export duty , travelling expenses etc are the examples of selling and distribution expenses. 3.Administrative Expenses Administrative expenses are those expenses which are incurred for day to day running of office management. 4. Financial Expenses Financial Expenses are incurred for arranging fund to run the business. Cash discount allowed, interest on capital, interest on loan discount on bill etc. are the examples of financial expenses. 5. Maintenance Expenses

Expenses incurred for maintaining the fixed assets are called fixed expenses. Repair and renewable depreciation of assets are some examples of maintenanceexpenses. 6. Abnormal Losses Abnormal losses are those losses which are incurred due to the carelessness of the management. Loss on sale of asset , stock lost by fire etc are the examples of abnormal losses.

Items Include In The Credit Side Of Profit and loss Account

Following items are included in the credit side of profit and loss account 1. Gross Profit Gross profit is transferred from trading account and it is the beginning item of profit and loss account. 2. Non-trading Income Interest received from bank,incomes received from outside investments like share and debenture are known as non-trading incomes. 3.Other incomes Those incomes other than income from sale of goods are called other income. Discounts or commission received are the examples of other income.

Profit And Loss Appropriation Account

Profit and loss appropriation account shows the distribution of net profit amongst the shareholders in the form of dividend and transfer of profit to various reserves and issue of bonus share. profit and loss appropriation account is prepared after the preparation of profit and loss account. Profit and loss account provides the information about adjustment relating to last year. Profit and loss appropriation account also provides the information about the appropriation of dividend out of available profit. Profit and loss appropriation account is prepared after profit and loss account and before the preparation of balance sheet. Profit and loss appropriation account is a vital item of final account.

Balance Sheet As The Last Step Of Final Account

Balance sheet is the last step of final account. Balance sheet is prepared after the preparation of profit and loss appropriation account. Balance sheet is statement not an account. Therefore balance sheet is also known as "Position Statement". Balance sheet is defined as accounting statement of financial position of a company presented at specific point of time usually at the end of the accounting period. Balance shows assets on one side and liabilities on other side. Balance sheet may be prepared in the horizontal or in the vertical form.

Balance sheet discloses the financial position of a company at a specific point of time and for a fixed period. Hence, even a single transaction will change assets and liabilities.