unit1part 3 coas

8/18/2019 Unit1part 3 COAS

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BINAYAK ACADEMY,Gandhi Nagar 1st Line, Near NCC Ofce,

Berhampur Trial balance proves the arithmetical accuracy of the business transactions, but it is notthe end. The businessman is interested in knowing whether the business has resulted inprot or loss and what the nancial position of the business is at a given period. In short,he wants to know the protability and the nancial soundness of the business. The tradercan ascertain these by preparing the nal accounts.

The nal accounts are prepared at the end of the year from the trial balance. Hence thetrial balance is said to be the connecting link between the ledger accounts and the nalaccounts.

Final Accounts

Trading and alance !heet

"rot and #oss Account

arts !" #ina$ Acc!unts

The nal account of business concern generally includes two parts. The rst part is Tradingand "rot and #oss Account. This is prepared to nd out the net result of the business. Thesecond part is alance !heet which is prepared to know the nancial position of thebusiness. However manufacturing concerns, will prepare a $anufacturing Account prior tothe preparation of trading account, to nd out cost of production.

%rading Acc!unt

Trading means buying and selling. The trading account shows the result of buying andselling of goods.

Need

At the end of each year, it is necessary to ascertain the net prot or net loss. For thispurpose, it is rst necessary to know the gross prot or gross loss. The trading account is

prepared to ascertain this. The di%erence between the selling price and the cost price of the goods is the grossearning of the business concern. !uch gross earning is called as gross prot. However,when the selling price is less than the cost of goods purchased, the result is gross loss.

#!rmat%rading Acc!unt "!r the &ear ending '1st March ())'

&r. 'r."articulars ( ( ( (

To )pening !tock

To "urchases

#ess *eturns

To +ages

To Freight

To 'arriage inwards

To 'learing charges

To "acking charges

To &ock dues

To Factory power

To )ctroi duty

To ross prot c-d

transferred to "/# A-c0

111

111

111

111

111

111

111

111

111

111

111

111

111

y !ales

#ess *eturns

y 'losing stock

y ross #oss c-d

transferred to "/#

A-c0

111

111 111

111

111

111 111

Items appearing in the de*it side

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Berhampur2. Opening st!c+ !tock on hand at the beginning of the year is termed as openingstock. The closing stock of the previous accounting year is brought forward as openingstock of the current accounting year. In the case of new business, there will not be anyopening stock.

3. urchases "urchases made during the year, includes both cash and credit purchasesof goods. "urchase returns must be deducted from the total purchases to get netpurchases.

4. Direct E-penses 56penses which are incurred from the stage of purchase to the stageof making the goods in saleable condition are termed as direct e6penses. !ome of thedirect e6penses are7

i. .ages It means remuneration paid to workers.

ii. Carriage !r carriage in/ards It means the transportation charges paid to bringthe goods from the place of purchase to the place of business.

iii. Octr!i Dut& Amount paid to bring the goods within the municipal limits.

iv. Cust!ms dut&, d!c+ dues, c$earing charges, imp!rt dut& etc0 These e6pensesare paid to the overnment on the goods imported.

v. Other e-penses Fuel, power, lighting charges, oil, grease, waste related toproduction and packing e6penses.

Items appearing in the credit side

i. a$es This includes both cash and credit sale made during the year. 8et sales is derivedby deducting sales return from the total sales.

ii. C$!sing st!c+ 'losing stock is the value of goods which remain in the hands of thetrader at the end of the year. It does not appear in the trial balance. It appears outside thetrial balance. As it appears outside the trial balance, rst it will be recorded in the creditside of the trading account and then shown in the assets side of the balance sheet0.

C$!sing Entries

#ike ledger accounts, trading account will be closed by transferring the gross prot orgross loss to the prot and loss account.

i. If gross prot

Trading A-c ............. &r 6 6 6

To prot and loss account 6 6 6

ross "rot transferred to

"rot and loss A-c0

ii. If gross loss.

"rot and loss A-c ......... &r 6 6 6 To Trading A-c 6 6 6

ross #oss transferred to

"rot and loss A-c0

r!2t and L!ss Acc!unt

After calculating the gross prot or gross loss the ne6t step is to prepare the prot and lossaccount. To earn net prot a trader has to incur many e6penses apart from those spent forpurchases and manufacturing of goods. If such e6penses are less than gross prot, theresult will be net prot. +hen total of all these e6penses are more than gross prot theresult will be net loss.

Need The aim of prot and loss account is to ascertain the net prot earned or net loss su%eredduring a particular period.

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Berhampur

#!rmat

"rot and #oss Account for the year ended......................

Items appearing in the de*it side

Those e6penses which are chargeable to the normal activities of the business are recordedin the debit side of prot and loss account. They are termed as indirect e-penses.

i. Ofce and Administrati3e E-penses 56penses incurred for the functioning of ano9ce are o9ce and administrative e6penses : o9ce salaries, o9ce rent, o9ce lighting,printing and stationery, postages, telephone charges etc.

ii. 4epairs and Maintenance E-penses These e6penses relates to the maintenance of assets ; repairs and renewals, depreciation etc.

iii. #inancia$ E-penses 56penses incurred on borrowings : Interest paid on loan.

iv. e$$ing and Distri*uti!n E-penses All e6penses relating to sales and distribution of goods ; advertising, travelling e6penses, salesmen salary, commission paid to salesmen,discount allowed, repacking charges etc.

Items appearing in the credit side

esides the gross prot, other gains and incomes of the business are shown on the creditside. The following are some of the incomes and gains.

i. Interest received on investment

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Berhampurii. Interest received on 6ed deposits.

iii. &iscount earned.

iv. 'ommission earned.

v. *ent *eceivedBa$ance heet

This forms the second part of the nal accounts. It is a statement showing the nancialposition of a business. alance sheet is prepared by taking up all personal accounts andreal accounts assets and properties0 together with the net result obtained from prot andloss account. )n the left hand side of the statement, the liabilities and capital are shown.)n the right hand side, all the assets are shown. alance sheet is not an account but it is astatement prepared from the ledger balances. !o we should not pre6 the accounts withthe words


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Berhampur

ii5 8ertica$ "!rm !" Ba$ance heetIn this, alance !heet is presented in a statement form.

alance !heet as on..............................

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Berhampur

C$assi2cati!n !" Assets and Lia*i$ities

Assets

Assets represents everything which a business owns and has money value. In other words,asset includes possessions and properties of the business. Asset are classied as follows7

Assets

Tangible Intangible Fictitious

Fi6ed 'urrent

a5 %angi*$e Assets

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BerhampurAssets which have some physical e6istence are known as tangible assets. They can beseen, touched and felt, e.g. "lant and $achinery. Tangible assets are classied into7

i. Fixed assets:

Assets which are permanent in nature having long period of life and cannot beconverted into cash in a short period are termed as 2-ed assets.

ii. Current assets:

Assets which can be converted into cash in the ordinary course of business and are heldfor a short period is known as current assets. This is also termed as 9!ating assets.For e6ample, cash in hand, cash at bank, sundry debtors etc.

*5 Intangi*$e Assets

The assets which have no physical e6istence and cannot be seen or felt. They help togenerate revenue in future, e.g. goodwill, patents, trademarks etc.

c5 #ictiti!us Assets

These assets are nothing but the unwritten o% losses or non;recoupable e6penses. Theyare really not assets but are worthless items. For e6ample, "reliminary e6penses.

Lia*i$ities

The amount which a business owes to others is liabilities. 'redit balance of personal andreal accounts together with the capital account are liabilities.

#iabilities

#ong Term 'urrent 'ontingent

a5 L!ng %erm Lia*i$ities

#iabilities which are repayable after a long period of time are known as L!ng %ermLia*i$ities. For e6ample, capital, long term loans etc.

*5 Current Lia*i$ities

'urrent liabilities are those which are repayable within a year. For e6ample, creditors forgoods purchased short term loans etc.

c5 C!ntingent $ia*i$ities

It is an anticipated liability which may or may not arise in future. For e6ample, liabilityarising for bills discounted. 'ontingent liabilities will not appear in the balance sheet, utshown as foot note.

Marsha$$ing !" Assets and Lia*i$ities

The term uidity or in the order of permanence.a5 In !rder !" $i:uidit&

#i>uidity means convertibility into cash. Assets will be said to be li>uid if it can beconverted into cash easily, they are placed at the top of the balance sheet. #iabilities arearranged in the order of their urgency of payment. The most urgent payment to be madeis listed at the top of the balance sheet.

*5 In !rder !" permanence

This order is e6actly the reverse of the above. Assets and liabilities are recorded in theorder of their life in the business concern.

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unit1part 3 coas

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