History proved the arithmetical
accuracy of ledger by means of trial balance , we should proceed to ascertain
our profit and loss for a period, in order to determine the profit and loss of
a business and its financial position, final account at the end of a particular
period are prepared.
accuracy of ledger by means of trial balance , we should proceed to ascertain
our profit and loss for a period, in order to determine the profit and loss of
a business and its financial position, final account at the end of a particular
period are prepared.
The term final accounts means
statements which are finally prepared to show the profit earned or loss
suffered by the firm and financial state of affairs of the firm at the end of
the period concerned. In order to know the profit or loss earned by the firm,
income statement is also called statement of operations.
statements which are finally prepared to show the profit earned or loss
suffered by the firm and financial state of affairs of the firm at the end of
the period concerned. In order to know the profit or loss earned by the firm,
income statement is also called statement of operations.
Final account of an organisation is
made up of the following;
made up of the following;
1. Trading Account
2. Profit and loss account
3. Balance sheet
Trading
Account:
Account:
A trading account is an account
which contains “in summary form all the transactions occurring throughout the
trading period in commodities in which he deals” and which gives the gross
trading result.
which contains “in summary form all the transactions occurring throughout the
trading period in commodities in which he deals” and which gives the gross
trading result.
Items of
Trading Account
Trading Account
Debit side
1. The value of operating
stock
stock
2. Net purchase made (i.e.
purchase less return)
purchase less return)
3. Direct expenses if any
Credit side
1. Total sales made during
the period less the value of returns (i.e. net sales)
the period less the value of returns (i.e. net sales)
2. The value of closing
stock.
stock.
Profit and
Loss Account
Loss Account
Profit and loss is the account
hereby a trader determines the net result of his business transactions. It is
the account which reveals the net profit (or net loss) of the trader.
hereby a trader determines the net result of his business transactions. It is
the account which reveals the net profit (or net loss) of the trader.
The profit and loss account is
opened with gross profit transferred from the trading account or with gross
loss which will be debited to Profit and loss. The excess of the gain over
losses is called net profit and that of the loss over the gain is called net
loss. The account is closed by transferring the net profit or loss to capital account
of the trader.
opened with gross profit transferred from the trading account or with gross
loss which will be debited to Profit and loss. The excess of the gain over
losses is called net profit and that of the loss over the gain is called net
loss. The account is closed by transferring the net profit or loss to capital account
of the trader.
Balance
Sheet
Sheet
A balance sheet is a statement drawn
up at the end of each trading period stating therein all the assets and
liabilities of a business arranged in the customary order to exhibit the true
and correct state of affairs of the concern as on a given date.
up at the end of each trading period stating therein all the assets and
liabilities of a business arranged in the customary order to exhibit the true
and correct state of affairs of the concern as on a given date.
A balance sheet is prepared from a
trial balance after the balances of norminal accounts are transferred to the
trading account or to the profit and loss account. The remaining balances of
personal or real accounts represent either asset or liabilities at the closing
date.
trial balance after the balances of norminal accounts are transferred to the
trading account or to the profit and loss account. The remaining balances of
personal or real accounts represent either asset or liabilities at the closing
date.
Classification
of Assets
of Assets
v
Fixed
assets: They are acquired not for sale but for permanent use e.g. Land and
buildings, plant and machinery, furniture e.t.c.
Fixed
assets: They are acquired not for sale but for permanent use e.g. Land and
buildings, plant and machinery, furniture e.t.c.
v
Current
assets: These assets are held for sale or to be converted into cash after
sometime e.g. sundry debtors, bills receivable, stocks of goods e.t.c.
Current
assets: These assets are held for sale or to be converted into cash after
sometime e.g. sundry debtors, bills receivable, stocks of goods e.t.c.
v
Liquid
asset: Assets that can be converted to cash easily (asset which are with us in
cash) e.g. cash in hand, cash at bank, investment e.t.c.
Liquid
asset: Assets that can be converted to cash easily (asset which are with us in
cash) e.g. cash in hand, cash at bank, investment e.t.c.
Classification
of Liabilities
of Liabilities
v
Fixed
liabilities: These are liabilities which are payable immediately or in near future.
These liabilities are payable after a long period e.g. long term loans
Fixed
liabilities: These are liabilities which are payable immediately or in near future.
These liabilities are payable after a long period e.g. long term loans
v
Current
liabilities: These are the liabilities which are payable immediately or in the
near future such as creditors, bank loans e.t.c.
Current
liabilities: These are the liabilities which are payable immediately or in the
near future such as creditors, bank loans e.t.c.
