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Thursday, April 22, 2010

Additional notes while prepaing Final Accounts

  1. Any reserves or fund account given in the in the trial balance should be shown in the balance sheet only.
  2. Any transfer to Employees Provident Fund and other Staff Welfare Fund like pension fund should be debited to P/L account as a charge to profit rather than an appropriation and shown in the balance sheet as "Provision".
  3. Declaration of dividend at a certain percentage should be calculated on the paid up capital.
  4. Premium paid on redemption of preference share should be written off against the existing share premium account. In its absence, the profit and loss account should be debited.
  5. Investment should be shown at cost price.
  6. Interest on investment should be calculated on face value of investment.
  7. No dividend is paid on calls in advance and call-in-arrears.
  8. In case of the transfer of amount from reserve or funds to P/: appropriation account i.e., withdrawl of reserve, should be shown in credit side of P/L Appropriation Account.
  9. In case of preference and equity shares, only proposal to pay dividend on preference shares is made before making any proposal for equity dividend.
  10. Provision for tax of current year may be shown in P/L Appropriation Account.
  11. Tax paid in the current year represents either tax paid of previous year or advance (prepaid) tax paid of current year.
  12. Finished goods must always be valued at the lowest of the cost, or replacement or market price. However, raw materials and stores are valued at cost price.
  13. Domestic and household expenses of proprietor as rent for the dwelling house, drawing etc, are not debited to the profit and loss account and they should be debited to the capital account.
  14. Income tax paid by the proprietor on his income is also his private expense and should not be debited to the profit and loss account and should be debited to capital account. (The treatment is different in case of the final account of company).

List of Important Adjustments

  1. Outstanding Expenses
  2. Prepaid Expenses
  3. Accrued Income
  4. Advance Income
  5. Closing Stock
  6. Depreciation on Fixed Assets
  7. Interest on Capital
  8. Interest on Drawing
  9. Bad Debts
  10. Provision for Bad Debts
  11. Provision for Discount on Debtors
  12. Provision for Discount on Creditors
  13. Goods Lost by Accident
  14. Drawing in Goods
  15. Goods used in Business
  16. Interest on Loan
  17. Commission Payable to Managers
  18. Taxation

Adjustment in Final Accounts

Those transactions given mostly outside the trial balance like expenses paid in advance, income received in advance, income accrued but not received, bad debts, provisions for bad debts, depreciation on assets etc. may be unrecorded; such transactions are called adjustments. They have to be adjusted before the preparation of final accounts for true and real determination of profit and to present the true picture of financial position of the firm.

An adjustment has two sides effect i.e., may be recorded in Trading and Profit and Loss Account or in Trading and Balance Sheet or in Profit and Loss Account and Balance Sheet or on both sides of Balance Sheet.

Marshalling of Assets and Liabilities

The arrangement of assets and liabilities in the balance sheet is known as marshalling of assets and liabilities. The marshalling of assets and liabilities can be done either in order of liquidity or in order of permanency.

In order of liquidity, liquid assets and current liabilities are shown first in the balance sheet. But in order of permanency, those assets and liabilities which are permanent nature are shown first.

Notes on preparing Balance Sheet

  • All the real and personal accounts having debit balances (given in debit side of trial balances) should be shown on the asset side of balance sheet.
  • All the real and personal accounts having credit balances (given in credit side of trial balances) should be shown on the liability side of balance sheet.

Tuesday, April 20, 2010

Liability side of Balance Sheet

It is the amount of money invested by the businessman into the business. Net profit earned increases the amount of capital whereas net loss and drawing decrease the capital.

Long term liabilities:
Those liabilities which are spend after long period say after 5 or 10 years are called long term liabilities. Examples of such liabilities are:
  • Bank loan
  • Debentures
  • Bonds
  • Mortgage
Current liabilities:
These liabilities are to be repaid within a short period usually within an accounting year such as;
  • Creditors
  • Bills payable
  • Bank overdraft
  • Outstanding expenses
  • Provision for dividend and taxation
  • Advance income
  • Short term loan.

Friday, April 9, 2010

Fictitious Assets

Such assets are nominal in nature and do not have real value. They are either the past accumulated losses or expenses incurred once in the life of a business. Some examples are,
  • Preliminary expenses
  • Discount or loss on issue of shares and debentures
  • Deferred revenue expenditure e.g. advertisement expenses
  • Brokerage and share underwriting commission
  • Debit balance of profit and loss account.

Current Assets

Those assets which can be converted into cash through the normal course of business within a short time ordinarily in an accounting year. Some examples are:
  • Cash in hand
  • Cash at bank
  • Bills receivables
  • Debtors
  • Closing stock
  • Prepaid expenses
  • Short term investment
  • Accrued income etc.

Fixed assets

Those assets which are of a relatively permanent nature used in operation of business. They are for earning income but not for resale like;
  • Land and building
  • Plant and machinery
  • Furniture and fixture
  • Lease holds and freehold
  • Motor vehicles
  • Goodwill
  • Patent
  • Trademark etc.

Importance of Balance Sheet

  1. It shows the financial position of the organization for a certain period by showing details about capital, assets and liabilities.
  2. It helps to test the liquidity position of the organization by providing necessary infomation for the calculation of liquidity ratios.
  3. It also helps to know solvency position i.e., long term loan paying ability of a firm.
  4. It shows capital structure i.e. the position of owner's capital, shareholder's capital and borrowed capital of a firm.

Balance Sheet

Balance sheet is also known as the statement of assets and liabilities, which shows the financial position of the organization at a given date of accounting period. It is the last part of final accounts to be prepared with the help of trial balance after the preparation of profit and loss account.

According to Freeman,"A balance sheet is an item wise list of assets, liabilities and proprietorship of a business at a certain date."

Features of Balance Sheet:
  1. It shows the financial position of the business on a particular date.
  2. It gives the knowledge of assets and liabilities.
  3. It is a statement but not an account like trading and profit and loss account.
  4. Total figure of assets side is always equal to the total figure of liability side.

Items of credit side of Profit and Loss Account

  1. Gross profit transferred from trading account.
  2. Various incomes: Discount received, commission received, rent received, interest received, bad debt recovered, commission received etc.
After entering all the expenses and incomes in the debit and credit side of profit and loss account respectively, net profit is found on the debit side of profit and loss account if credit total figure is greater than debit total. But it will be net loss if the debit total is heavier than the credit total.

Items of debit side of Profit & Loss Account

  1. Gross loss transferred from trading.
  2. Office and administrative expenses: Office salaries, office rent, office lighting, printing and stationery, legal charges, general expenses, audit fees, insurance, postage etc.
  3. Financial expenses: Interest on loan, discount allowed, bank charges, interest on capital etc.
  4. Selling expenses: Salesman salaries and commission, advertising, brokerage commission, free samples, bad debts, traveling expenses etc.
  5. Distribution expenses: Carriage outwards, warehouse expenses, warehouse rent and insurance, delivery van expenses, packing expenses etc.
  6. Other items: Depreciation on fixed assets, provision for bad debts, repairs and renewable etc.

Profit and Loss Account

After the preparation of the Trading account, Profit and Loss Account is prepared. Profit and Loss account is taken as the second part of the final account. It is prepared to calculate the net profit or loss of the business made during a certain period. Profit and loss account contains all expenses or losses and incomes or gains that have not been dealt with while preparing the trading account.

According to Prof. Carter,''A profit and loss account is an account into which all gains and losses are collected, in order to ascertain the excess of gains over the losses or vice-versa.

Importance of Profit and Loss Account:
- It helps to determine the net profit or net loss made by a business during a year.
- It helps to determine the ratio between the indirect expenses and net profit.
- It is helpful to calculate the ratio between net profit and gross profit.

Saturday, April 3, 2010

Items shown on the Credit side of Trading Account

  1. Sales and sales return: Sales refers cash or credit sale of trading goods. It is credited to trading account. Sales return is deducted from the sales figure to get net sales. Sales of fixed assets are ignored.
  2. Closing stock: It denotes the goods in hand with the firm at the end of the accounting period. Closing stock also may include raw material or work-in-progress or finish goods. Generally, closing stock is given outside the trial balance which must be shown on the credit side of trading account and on the asset side of balance sheet. However, it is entered only in credit side of trading account if it is given inside the trial balance. Closing stock is valued at cost or market price which ever is lower in case of both prices.

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