Prpeaparation and

UNIT 1 PREPARATION AND ANALYSIS OF Analysis of Final Account

FINAL ACCOUNTS
Structure Page Nos.
1.0 Introduction 5
1.1 Objectives 5
1.2 Trading Account 6
1.2.1 Opening/Closing Stock
1.2.2 Net Purchases
1.2.3 Direct Expenses
1.2.4 Net Sales
1.3 Profit and Loss Account 8
1.4 Difference between Trading and Profit & Loss Account 11
1.5 Balance Sheet 11
1.6 Constructing a Balance Sheet 13
1.7 Classification of Balance Sheet’s Items 15
1.8 Adjustment Entries 21
1.8.1 Closing Stock
1.8.2 Depreciation
1.8.3 Bad Debts
1.8.4 Provision for Bad and Doubtful Debts
1.8.5 Outstanding Expenses (Assets)
1.8.6 Prepaid Expenses (Assets)
1.8.7 Accrued Income
1.8.8 Income Received in Advance (Liability)
1.9 Summary 26
1.10 Key Words 26
1.11 Solutions/Answers 27
1.12 Further Readings 29

1.0 INTRODUCTION
The primary function of accounting is to accumulate accounting data in order to
calculate the profit and loss made by the business firm during and also to understand
the financial position of the business on a given date. A business can ascertain this by
preparing the Final Accounts. Preparation of final accounts from a trial balance is the
final phase of the accounting process. Final accounts include the preparation of
Trading and Profit and Loss Account and the Balance Sheet, although the Balance
Sheet is not an account but only a statement. Trading and Profit and Loss Account is
simply one account which is usually divided into two sections. The first section is
called the Trading Account and the second section the Profit and Loss Account. In
case of manufacturing concerns, Final Accounts also include the Manufacturing
Account.

1.1 OBJECTIVES
After going through this unit, you should be able to:

• define Final Account;

• understand their objectives and preparation of Trading and Profit and Loss
Account;
• conclude the difference between Trading Account and Profit and Loss Account,
Gross Profit and Net Profit;
• understand and explain the terms used in a balance sheet;

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Understanding and Analysis • apply simple principles of valuation of assets;
of Financial Statements
• role of depreciation in valuation and determining the proper profit of a firm;
• understand Adjustment entries; and
• the importance of adjustment entries to ascertain the financial position of a
business firm.

1.2 TRADING ACCOUNT

Trading account is prepared to ascertain the Gross Profit and Loss of a firm, where
Gross Profit is the excess of net revenue over cost of goods sold (the credit side of the
trading account exceeds the debit side). Similarly, Gross Loss is the excess of cost of
goods sold over net revenue (the debit side of the trading account exceeds the credit
side).

Gross Profit = Net Sales Revenue – Cost of Goods Sold

Gross Loss = - (Net Sales Revenue – Cost of Goods Sold)

Where:

Net Sales Revenue = Cash Sales + Credit Sales – Sales Returns

Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing
Stock

Net Purchase = Cash Purchases + Credit Purchases – Purchases Returns.

Trading Account is generally prepared in ‘T’ form. In this case, opening stock,
purchases and direct expenses are shown on the debit side and sales and closing stock
on the credit side of the trading account. The format of the Trading Account is
explained along with the format of Profit and Loss Account.

1.2.1 Opening/Closing Stock

The Opening Stock of goods is the stock of goods in hand at the beginning of an
accounting year. This may include stock of raw material, work-in-progress and
fininshed goods. This appears in the debit column of the trial balance. In the Trading
Account this is the first entry on the debit side. The valuation is usually done at cost or
market price which ever is lower. The Stock of goods in hand at the end of accounting
year is called Closing Stock. Similarly, closing stock may include stock of raw
material, work-in-progress and finished goods. The closing stock is shown on the
credit side of the Trading Account. Closing stock is usually not given in the trial
balance but is given by way of additional information.

1.2.2 Net Purchases

These include goods purchased only for production and selling purposes. Goods used
as assets and not- for- sale are not included in this head. Net purchase is the difference
between purchases and the purchase return, where purchase is the sum of cash and
credit purchase. Note that sometimes, purchased return is known as Return Outward.

1.2.3 Direct Expenses

Direct expenses include all those expenses incurred in bringing the goods to the place
of business or trade or in-production process until the goods are placed in a saleable
position. The following expenses may be considered as direct expenses:
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1. Wages paid to workers engaged in production are debited to the trading account Prpeaparation
Preparation and of
and Analysis
Analysis of Final Account
Final Accounts
provided the manufacturing account is not prepared separately.

2. Carriage/freight inwards are transportation expenses incurred to bring the goods

or raw material to the place of the business or to the firm’s godown/factory. Such
expenses, whether paid or outstanding, are debited to trading account.

3. Octroi is paid when goods enter municipal limits. Octroi paid on goods purchased
is a direct expense and is debited to trading account.

4. Custom duty paid on importing goods for selling purposes is debited to trading
account. If the duty is paid on sales export, it amounts to selling expenses and is
shown in the profit and loss account.

5. Factory rent, insurance, lighting & power and heating are the expenses
incurred to convert raw material into finished goods. Such expenses are debited to
trading account.

1.2.4 Net Sales

It includes both cash and credit sales of goods. From this figure of total sales, sales
return (also called Returns Inward), if any, is deducted in the inner column and the net
sales amount is shown in the outer column on the credit side of the Trading Account.
Sales of assets are not credited to the Trading Account. It should be noted, if goods
have been sold but not yet dispatched, these should not be shown under sales but are
included in closing stock if the property/ownership in the goods has not passed to the
customer. But if the property/ownership in the goods has passed to the customer
goods sold but not yet dispatched it will not be included in closing stock but will be
treated as sales.

Following is the proforma of the Trading Account:

Trading Account
For the Year Ended
Debit Credit
Particular Rs. Particulars Rs.
Opening Stock: Net sales:
Raw Material Sales
Work-in-Progress Less: Sales Return
Finished Goods
Closing Stock:
Net Purchase: Raw Material
Purchase Work-in-Progress
Less: Purchase Returns Finished Goods
Direct Expenses
Direct Material Transfer to Profit & Loss
Direct Labour Account
Profit & Loss Account (If Gross Loss)
(If Gross Profit)

Illustration 1

Prepare the Trading Account from the following details:

Opening stock Rs.25,000; Purchases Rs. 80,100; Carriage Inward Rs. 12,000; Stock at
the end Rs. 15,000; Carriage Outward Rs. 2,000; Office Rent Rs. 5,000;
Sales Rs. 1,40,000; Sales Return Rs. 2,000; Purchases Return Rs. 100.

7
Understanding and Analysis Solution
of Financial Statements Trading Account
For the year ending
Particulars Rs. Particulars Rs.

Opening Stock: 25,000 Net sales:

Raw Material Sales 1,40,000
Work-in-Progress Less: Sales Return 2,000 1,38,000
Finished Goods
Closing Stock: 15,000
Net Purchase: Raw Material
Purchase 80,100 80,000 Work-in-Progress
Less: Purchase Returns 100 Finished Goods
48,000
Profit & loss Account
(Transferred to) 1,53,000 1,53,000

& Check Your Progress 1

1) Prepare the Trading Account from the following figures:
Opening Stock 40,000 Power 6,000
Purchases 1,80,000 Octroi 11,000
Carriage Inward 4,000 Freight 8,000
Wages 42,000 Sales 3,20,000
Return Outwards 7,000 Sales Return 10,000

Closing Stock Rs. 60,000.

2) How is Purchases different from Net Purchases?

3) How are Net Sales different from Sales?

1.3 PROFIT AND LOSS ACCOUNT

Profit and Loss Account is prepared in order to discern whether the firm has made net
profit or suffered net loss for a given accounting period. This account deals with
indirect expenses such as administrative, selling and distribution expenses and the
like. Profit and Loss Account starts where trading account ends; in other words it
starts with gross profit on the credit side brought forward from the trading account. In
case of gross loss brought forward from the trading account, profit and loss account
begins with gross loss as the first item on the debit side.

All the indirect/running expenses, incurred on selling and distribution of the goods
and the general administration of the business, are listed on the debit side while all
the items of income and gain are listed on the credit side. When the credit side
(revenue) exceeds the debit (expenses) side, the difference is net profit. But, if the
debit side exceeds the credit side, the difference is net loss. Profit and loss account is
balanced by transferring net profit to the capital account(s) in the balance sheet and
net profit thus increases the capital; the net loss is deducted from the capital
account(s) in the balance sheet and thus decreases the capital.

The following items are debited in the profit and loss account:

1. Administrative Expenses including Office Salaries, Office Rent, Office Lighting,

Printing, Director’s Fees, Telephone Rent, Postage, Insurance, etc.
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2. Sales and Distribution Expenses including Salesmens salary, Commission, Prpeaparation
Preparation and of
and Analysis
Analysis of Final Account
Final Accounts
Travelling expenses, Advertising, Packing expenses, Royalty, etc.
3. Financial Expenses including Interest on loan/Capital, Cash Discount Allowed,
Bad Debts, Bank Charges, etc.
4. Depreciation of Assets and various provisions.
5. Other Expenses and Losses including Loss on Sales of Fixed Assets, Loss by Fire,
by Theft, by Accident, etc.
6. Taxes including Sales Taxes, Income Taxes etc.
The following items are credited in the Profit and Loss Account:
1. Cash Discount Received
2. Interest Received
3. Rent Received
4. Gain on Sale of Fixed Assets
5. Apprentice Premium
6. Dividend Received.
Note: The household and personal expenses of the proprietor paid by the firm do not
appear in the profit and loss account. Rather these are treated as personal drawings of
the proprietor and are deducted from the capital in the balance sheet.
The Following is the proforma of Trading and Profit & Loss Account:
PROFIT AND LOSS ACCOUNT
For the year ended…
Debit Credit
Particulars Rs. Particulars Rs.
Trading Account Trading Account
(For Gross Loss) (For Gross Profit)
Indirect / office Running
Income and Gain
Expenses
Cash Discount Received
Rent
Interest Received
Lighting
Rent Received
Salaries
Gain on Sale
Insurance
Bonus Received
Sundry /General Expenses
Income on Investment etc.
Printing and Stationery
Repair
Capital Account
Advertising
(Transfer of Net Loss)
Commission Paid
Cash Discount Allowed
Motor Expenses
Warehouse Rent/ Insurance
Packing Expenses
Depreciation
Provision for Doubtful Debts
Interest on Loan
Loss on Sale etc.
Capital Account
(Transfer of Net Profit)
Total Total

Note: 1. Either gross profit or gross loss as opening balance will be reflected.
2. Similarly, the ending balance will also reflect either net profit or net loss.

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Understanding and Analysis Illustration 2:
of Financial Statements
The Following figures from trial balance has been extracted from the books of
M/s. Naina Prepare the Trading and Profit & Loss Account for the year ended
31 March 2004.

Debit (Rs.) Credit (Rs.)

Drawings 35,000
Building 60,000
Debtors and Creditors 50,000 80,000
Returns 3,500 2,900
Purchases and Sales 3,00,000 4,65,000
Discount 7,100 5,100
Life Insurance 3,000
Cash 30,000
Stock (Opening) 12,000
Bad Debts 5,000
Reserves for Bad Debts - 17,000
Carriage Inwards 6,200
Wages 27,700
Machinery 8,00,000
Furniture 60,000
Salaries 35,000
Bank Commission 2,000
Bills Receivable/Payable 60,000 40,000
Trade Expenses/Capital 13,500 9,00,000
Adjustment: Stock on 31st March 2004 was valued at Rs. 50,000.

Solution
M/s. Naina
Trading and Profit & Loss Account
For the Year Ending on 31st March, 2004
Debit Credit
Particulars Rs. Particulars Rs.

To Opening Stock 12,000 By Sales 4,65,000

To Purchases 3,00,000 Less: Return 3,500
Less: Return 2,900 4,61,500
2,97,100
To Wages 27,700
To Carriage Inward 6,200 By Closing Stock 50,000
To Gross Profit 1,68,500
5,11,500
5,11,500
7,100
To Discount Paid 3,000
1,68,500
To Life Insurance 35,000 By Gross Profit
5,100
To Salaries 2,000 By Discount Received
17,000
To Bank Commission 13,500 By Reserve for Bad Debts
To Trade Expenses 5,000
To Bad Debts 1,25,000
To Net Profit 1,90,600 1,90,600

Note: Balance Sheet of this Illustration is given on under topic “Balance Sheet”

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 Prpeaparation
Preparation and of
and Analysis
1.4 DIFFERENCE BETWEEN TRADING AND Analysis of Final Account
Final Accounts
PROFIT AND LOSS ACCOUNT
1. Trading account is prepared in order to calculate gross profit/loss, while the
function of the profit and loss account is to disclose net profit/loss.

2. Trading account deals with the sales and cost of goods sold which includes direct
expenses. But the profit and loss account deals with indirect expenses such as
administrative and financial expenses and the same is charged against gross profit
and other revenues.

3. The result of the trading account in the form of gross profit/loss is transferred to
profit and loss account while the result of profit and loss account in the net
profit/loss is transferred to capital account.

& Check Your Progress 2

1) List all the items debited or credited in the Profit and Loss account.

2) Explain the difference between Trading Account and Profit & Loss Account.

3) Explain the difference between Gross Profit and Net Profit.

4) Prepare Trading and Profit and Loss Account for the year ended 2005.

Particulars Dr. (Rs.) Cr. (Rs.)

Capital 1,00,000
Building 15,000
Drawing 18,000
Furniture 7,500
Motor Car 25,000
Interest Paid for Loan 900
Loan from Ashok @ 12% 15,000
Purchases and Sales 75,000 1,00,000
Opening Stock 25,000
Establishment Ex. 15,000
Wages 2,000
Insurance 1,000
Commission 7,500
Debtors and Creditors 28,100 10,000
Bank Balance 20,000
Closing Stock Rs. 32,000.

1.5 BALANCE SHEET

Balance sheet is concerned with reporting the financial position of an entity at a
particular point in time. This position is conveyed in terms of listing all the things of
value owned by the entity as also the claims against these things of value i.e.
Liabilities. The position as represented by i.e., Assets. The balance sheet is valid only
until another transaction is carried out by the entity.
The above statement can be elaborated by an example:

I want to purchase a car costing Rs. 8,00,000. To do so, I have to borrow

capital/money. A bank agrees to finance me if I can invests. 3,00,000 on my own.

11
Understanding and Analysis Now let us follow the sequence of events when I approach the bank with the proposal.
of Financial Statements Granting my ability to repay the loan, the banker will ask two specific questions:
1. What are the things of value you own?
2. How much do you owe, and to whom?
In other words, the banker would like to know what I am worth in material terms. My
replies to the questions could be tabulated as follows:

Claims against things of value Things of value owned by me

Rs. Rs.
Personal loan from friend 1,00,000 Balance with bank 3,50,000
Fixed deposits 1,50,000
Other personal belongings 5,00,000

1,00,000 10,00,000

This implies I own Rs. 10,00,000 worth things of value, Rs. 3,50,000 of this could be
withdrawn at any time in cash. We say I have Rs. 3,50,000 in liquid form. Another
Rs. 1,50,000 is in monetary investment and the remaining Rs. 5,00,000 is in
non-monetary property. Further, I owe Rs. 1,00,000 to friend of mine. In other words,
he has got a claim against the things of value owned by me to the extent of
Rs. 1,00,000. In brief, we can say I am worth Rs. 10,00,000, claim against my worth
is Rs. 1,00,000 and hence my net worth is Rs. 9,00,000. This implies Rs. 9,00,000 is
my own claims against the things of value owned by me or my net worth.
Now I can present my financial position in the following form:

Financial Position Statement 1

Amount owned by me Things of value owned by me

Rs. Rs.
Personal loan from friend 1,00,000 Balance with bank 3,50,000
Own claim or net worth 9,00,000 Fixed deposits 1,50,000
Other personal belongings 5,00,000

10,00,000 10,00,000

Now that the bank grants me the loan of Rs. 5,00,000 and I buy the car for
Rs.8,00,000. After purchase of the car my financial position statement will change as
follows:
Financial Position Statement 2

Claims against things of value Things of value owned

Rs. Rs.
Personal loan from friend 1,00,000 Balance with bank 50,000
Mortgage loan from bank 5,00,000 Fixed deposit 1,50,000
Own claim or net worth 9,00,000 Car 8,00,000
Other personal belongings 5,00,000
––––––––– –––––––––
15,00,000 15,00,000

Now, as a result of this transaction my worth has increased from Rs. 10,00,000 to
Rs.15,00,000. However, since there is also an equal increase in claims against my
worth in the form of mortgage loan from the bank, my net worth remains the same.
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Things of monetary value possessed by an entity are referred to as assets. Accountants Prpeaparation
Preparation and of
and Analysis
Analysis of Final Account
Final Accounts
use the term assets to describe things of value measurable in monetary terms.
The amount owed by an entity or individual which represent claims against it or his
assets by outsiders are liabilities. It is the claims of outsiders which are legally
enforceable claims against an individual or entity that are referred to as liabilities.
The assets owned by the entity, less liabilities or outsider’s claims, is the net worth.
Since the net worth represents the claims of owner(s) in case of an entity, it is referred
to as owner’s equity.
Now we can understand that the financial position statement is a summary of the
assets, liabilities and net worth of a firm at a specific point in time.

1.6 CONSTRUCTING A BALANCE SHEET

Having examined the conceptual basis of the balance sheet we will now try to study
the balance sheet itself. We have seen that every transaction affects the financial
position. Since it is not feasible to draw up a balance sheet after every transaction, it
is prepared at the end of a specified period, usually, a year. This period is referred to
as accounting period or fiscal year or financial year. This period as a convention
has become one calendar year, though, there is no accounting justification for it.
Balance sheet preparation is the arrangement of the assets and liabilities of a firm in a
proper or in a systematic way. The balance sheet as prepared at the end of the
accounting period shows the year-end status of each of the assets of the firm and the
various claims on these assets. We could also say that the balance sheet shows the
year-end balance in the asset, liability and capital accounts. It may be clarified that
there are two conventions of preparing the Balance sheet. The American and the
English. According to the American convention, assets are shown on the left hand side
and the liabilities and the owner’s equity on the right hand side. The English
convention is just the opposite. i.e., assets are shown on the right hand side of the
Balance Sheet and the liabilities and the owner’s equity on the left hand side. In India,
generally the English conventions are followed. The format given below is the format
of the balance sheet in the order of liquidity, i.e., ease of conversion of the assets into
cash. The more liquid assets is shown first and then the less liquid one appear on the
pro-forma. Similarly, on the liabilities side, current liabilities in order of payment are
shown first, then fixed or long-term and lastly, the capital of the proprietor.
Balance Sheet as on _________
Liabilities Rs. Assets Rs.
Current Liabilities Current Assets
Creditors Cash in Hand
Bills Payable Cash at Bank
Bank Overdraft Stock-in-Trade
Outstanding Expenses Debtors
Income Received in Advance Bills Receivable
Prepaid Expenses
Fixed Liabilities Fixed Assets
Loan Furniture and Fixtures
Mortgage Plant Machinery
Capital Land
Goodwill

The assets of a business can also be shown in the balance sheet in order of
permanence, i.e., in order of the desire to keep them in use.

13
Understanding and Analysis Balance Sheet as on _________
of Financial Statements
Liabilities Rs. Assets Rs.

Capital Goodwill
Mortgage Patents and Trade Marks
Bank Overdraft Furniture and Fittings
Outstanding Expenses Plant and Machinery
Income Received in Advance Unexpired Expenses
Creditors Stock-in-Trade
Bills Payable Sundry Debtors
Loan Investments
Bills Receivable
Cash in Bank
Cash in Hand

Now, let us examine how the ideas what we have learnt so far could be used in a
business situation. Please recall that based on the entity principle we shall be dealing
with the ‘business’ as distinct and separate from the owners. We shall demonstrate
this by means of an illustration. Following is the Balance sheet of the above
mentioned profit and loss account:
M/s. Naina
Balance Sheet as on 31st March, 2004
Liabilities Rs. Assets Rs.

Capital 9,00,000 Building 60,000

+ Net profit 1,25,000 Machinery 8,00,000
- Drawings 35,000 9,90,000 Furniture 60,000
Bills Payable 40,000 Debtors 50,000
Creditors 80,000 Stock 50,000
Cash 30,000
Bills Receivable 60,000

11,10,000 11,10,000

The following Accounting Concepts would enable us to evaluate the balance sheet:
• The dual aspect principle has particular relevance to balance sheet. As per this
principal, every transaction is related as one which has dual effects and hence, it
is recorded on debit side as well as credit side. Due to this, we ensure the
equality of assets to liabilities and owner’s equity.
• All the figures are expressed in monetary units irrespective of its nature. In our
example we had cash, merchandise inventory and shop premises all expressed in
monetary quantities.
• All the transactions we reflected were in respect of only the business entity,
and as such, the balance sheet represents the financial position of the business
entity and not that of the owners.
• All the valuations were based on the assumption of a going concern, and not
based on liquidated value. As a consequence, the total value of the assets is
written off over a period through a mechanism known as depreciation.
• All the assets were based on historical cost as the basis of valuation.
14
 Prpeaparation and of
& Check Your Progress 3 Preparation
Analysis
and Analysis
of Final Account
Final Accounts
Complete the following blanks:

1) Balance sheet is prepared at the end of a specified period. This period in

accounting is variously referred to as:
a) ___________________________ __________________________
b) ___________________________ __________________________
c) ___________________________ __________________________

2) Balance sheet prepared at the end of an year summarises the balances in:
a) __________________ Accounts b) _________________ Accounts
c) __________________ Accounts.

3) Assets on a balance sheet are usually grouped together as:

a) ___________________assets b) ________________ equipment
c) ___________________assets.

4) Claims against the assets on the balance sheet are summarised as:
a) ___________________ liabilities b) ________________ liabilities
c) ___________________equity.

1.7 CLASSIFICATION OF BALANCE SHEET’S

ITEMS
The balance sheet lists assets, liabilities and capital separately. It is an accepted
convention that the assets and liabilities are shown into sub-groups and listed in the
order of their liquidity/Permanence.
The balance sheet in our example/format is presented in the T account form. That is
the assets are listed on one side and liabilities and owners’ equity on the other.
Another commonly used way of presentation is the report form where liabilities and
capital are listed above the assets. However, the presentation matters very little since
the balance sheet represents the equality between assets, liabilities and capital.
Current Assets
Current assets are assets, which will normally be converted into cash within a year or
within the operating cycle. The operating cycle is the duration in time taken by a unit
to convert raw material into finished goods, plus time to sell it and finally, plus time to
get cash from debtors to whom goods are sold. For example, in a simple trading
operation, we use cash to buy merchandise and sell it to recover cash. The operating
cycle in such a situation will consist of the period for which, merchandise inventory,
and receivables are held. The cycle starts with cash and ends with the collection of
cash. Current Assets are liquid and current liabilities can be met from the realisation
of them.
Cash
Cash is usually taken to include currency (legal tender), cheques or any other
document that circulates as cash. Cash is usually classified as a current asset when it is
available for a firm’s day-to-day operations . It includes cash kept in the cash chest as
also deposits on call on current accounts with banks. If cash is specifically earmarked
for any purpose and not available for transactions it is better classified as other assets.

15
Understanding and Analysis Accounts Receivable
of Financial Statements
Accounts receivable are amounts owed to the company by debtors. This is the reason
why we also use the term sundry debtors to denote the amounts owed to the firm.
This represents amounts usually arising out of normal commercial transactions. In
other words, ‘accounts receivable’ or sundry debtors represent unpaid customer
accounts. In the balance sheet illustration these represent amounts owed to the firm by
customers on the balance sheet date. These are also known as trade receivables, since
they arise out of normal trading transactions. Trade receivables arise directly from
credit sales and as such provide important information for management and outsiders.
In most situations these accounts are unsecured and have only the personal security of
the customer.

It is normal that some of these accounts default and become uncollectable. These
collection losses are called bad debts. It is not possible for the management to know
exactly which accounts and what amount will not be collected. However, based on
past experience, it is possible for the management to estimate the loss on the
receivable or sundry debtors as a whole. Such estimates reduce the gross value of
accounts receivable to their estimated realisable value. For instance:

Accounts Receivable 7,50,000

Less: Estimated collection loss at 10% 75,000
––––––––
Net realisable value of accounts receivable 6,75,000
––––––––

The estimated collection loss is variously referred to as provision for doubtful debts,
provision for bad debts or provision for collection losses.

It is a usual practice for debts to be evidenced by formal written promises to pay or

acceptance of an order to pay. These formal documentary debts represent Promissory
Notes, Receivable or Bills Receivable. These instruments used in trade are negotiable
instruments and hence enable the trader to assign any of his/her receivables to another
party or a bank for realising immediate liquidity.
It is also usual for accounts receivables to be pledged or assigned mostly to banks
against short-term credits in the form of cash credits or overdrafts.
Inventory
In a trading firm, inventory is merchandise held for sale to customers in the ordinary
course of business. In case of manufacturing firms, inventory would mainly consist of
materials required to manufacture the products, namely, raw materials, materials
remaining with the factory at various stages of completion i.e., work in process and
goods ready for sale or finished goods. Apart from these there may be inventory of
stores and supplies. Thus we have raw material inventory, work in process inventory,
finished goods inventory and stores and supplies inventory.
It is common to refer to inventory as stock-in-trade and thus we could come across
stock of raw materials, stock of work in process and stock of finished goods.
Inventory is usually valued on the basis of “lower of cost or market price”. Market
price is taken to mean the cost of replacement either by purchase or by reproduction of
the material in question. As a general principle, inventory cost includes all normal
costs incurred to make the goods available at the place where it can be sold or used
are, treated as costs of inventory.
In trading firms, inventory costs include freight-in, transit insurance costs, import or
entry levies as also the invoice cost. Warehouse costs, handling costs, insurance costs
in storage and interest costs are not included as costs. They are treated as expenses of
a period of the firm.
16
In case of manufacturing units, the valuation of inventory costs is more complex and Prpeaparation
Preparation and of
and Analysis
Analysis of Final Account
Final Accounts
involved. As a general rule all costs of materials, labour and plant facilities used for
manufacturing the goods are included in the valuation of inventory.

In valuing inventory at lower of cost or market price, care should be taken to see that
the valuation does not exceed the realisable value or selling price in the ordinary
course of business.

Prepaid Expenses

In many situations, as a custom, some of the item of expenses are usually paid in
advance such as rent, taxes, subscriptions and insurance. The rationale of including
these prepayments as current assets is that if these prepayments were not made they
would require use of cash during the period.

Fixed Assets

Fixed assets are tangible, relatively long-lived items owned by the business. The
benefit of these assets are available not only in the accounting period in which the cost
is incurred but over several accounting periods. Current assets provide benefits to the
organisation by their exchange into cash. In the case of fixed assets, value addition
arises by facilitating the process of production or trade. In other words, benefits from
fixed assets are indirect rather than direct.

All man made things have limited life. In accounting we are concerned with the useful
life of the assets. Useful life is the period for which a fixed asset could be
economically used. This implies that the benefits from the fixed assets will flow to the
organisation throughout its useful life. Another aspect of this is that the cost incurred
in the period of purchase of the asset will be providing benefits over the useful life of
the asset.

Valuation of the fixed assets is usually made on the basis of original cost. However,
since assets have limited life the cost will be expiring with the expiration of the life.
Thus, valuation of the asset is reduced by an amount proportionate to the expired life
of the asset. Such expired cost is referred to as depreciation in accounting.

Fixed assets normally include assets such as land, building, plant, machinery and
motor vehicles. All these items, with the exception of land, are depreciated. Land is
not subject to depreciation and hence shown separately from other fixed assets.

Intangible and Other Assets

Intangible assets are assets or things of value without physical dimensions. They
cannot be touched, they are incorporeal, representing intrinsic value without material
being. One of the most common of these assets is goodwill. Goodwill reflects the
ability of a firm to earn profits in excess of normal return. Almost all firms may have
some goodwill. However, they appear in the books and balance sheet only when it has
been purchased. Usually, when a going concern is purchased, the purchase price paid
in excess of the fair value of the assets is considered goodwill. The amount is
classified as another asset ‘goodwill’ on the balance sheet. Like fixed assets, the value
of intangible assets should also be expired over a period of time. Such an expiration
cost is called amortisation, similar to depreciation.

Current Liabilities

We have studied that liabilities are claims of outsiders against the business. In other
words, these are amounts owed by the business to people who have lent money or

17
Understanding and Analysis provided goods or services on credit. If these liabilities are due within an accounting
of Financial Statements period or the operating cycle of the business, they are classified as current liabilities.
Most of such liabilities are incurred in the acquisition of materials or services forming
part of the current assets. As was the case with current assets, current liabilities are
also listed in the order of their relative liquidity.

Accounts Payable

Accounts Payable or sundry creditors are usually unsecured debts owed by the firm.
These are also referred to as payables on open accounts. They may not be evidenced
by any formal written acceptance or promise to pay. They represent credit purchase of
goods or services for which payment has not been made as on the date of the balance
sheet.

Accrued Liabilities

Accrued liabilities represent expenses or obligations incurred in the previous

accounting period but the payment for the same will be made in the next period. In
many cases where payments are made periodically, such as wages, rent and similar
items, the last month’s payment may appear as accrued liabilities (especially if the
practice is to pay the same on the first working day of a month). This obligation
shown on the balance sheet indicates that the firm owed the said amount on the
balance sheet date.

Provisions or Estimated Liabilities

Where the liabilities are known but the amounts cannot be precisely determined, we
estimate the liability and provide for it as a liability. A common example is income
tax payable. Unless the tax liability is determined the amount payable cannot be
accurately determined. There could be other examples too, such as product warranty
expenses to be met and so on. The common practice is to estimate these liabilities
based on past experience and make a provision for the same which is shown as a part
of liabilities.

Contingent Liabilities

Contingent liabilities should be distinguished from estimated liabilities. Estimated

liabilities are known liabilities where the amount is uncertain. Contingent liabilities on
the other hand are not liabilities at the current moment. They may become liabilities
only on the happening of a certain event. In other words, both the amount and the
liability (or obligation) are uncertain till the specified event occurs in future. These
may include items like a claim against the company contested in a court. Only if the
court gives an unfavourable verdict, it becomes a liability. They are not listed as
liabilities in the body of the balance sheet. However, if the firm wishes, it may make
same provision for the same.

Long-Term Liabilities

Long-term liabilities are usually for more than one year. They cover almost all the
outsider’s liabilities not included in the current liabilities and provisions. These
liabilities may be unsecured or secured. Security for long-term loans, are usually the
fixed assets owned by the firm assigned to the lender by a pledge or mortgage. All
details such as interest rate, repayment commitment and nature of security are
disclosed in the balance sheet. Usually, such long-term liabilities include debentures
and bonds, borrowings from financial institutions and banks.

18
Capital Prpeaparation
Preparation and of
and Analysis
Analysis of Final Account
Final Accounts
We have seen earlier in this unit that the fundamental accounting equality states:
assets = liabilities + owners equity. From the example of balance sheet we can easily
establish this. See Ms. Naina’s balance sheet:

Total assets Rs. 1,00,00,000

Total liabilities Rs. 60,00,000
Owner’s equity Rs. 40,00,000

We also know that the owner’s equity consists of the contributed capital and the
retained earnings of the firm. Therefore, capital is that part of owner’s equity which is
contributed by the owners. If Ms. Naina were an individual proprietorship business,
the owner’s equity will be reflected directly as:

Capital Rs 40,00,000

If ‘M/s. Naina’ were a partnership firm with four partners W, X, Y and Z all sharing
equally, the capital would be represented as:

Capital Partner W Rs. 10,00,000

Partner X Rs. 10,00,000
Partner Y Rs. 10,00,000
Partner Z Rs. 10,00,000
––––––––––––
Total Rs. 40,00,000
––––––––––––

Reserves and Surplus

Reserves and surplus or retained earnings normally arise out of profitable operations.
It is a surplus not distributed by the firm as dividends. In other words, these are
profits that are to be retained within the business. When a firm starts its operations it
has no retained earnings. If in the first year it earns say Rs. 10,000 profit and decides
to distribute Rs. 5,000 as dividends, the reserves and surplus at the end of the year will
be Rs. 5,000. During its second year of operation if the firm makes a loss of
Rs. 3,000 then the retained earnings at the end of the year will be Rs. 2,000. Retained
earnings (or reserves and surplus) are in the nature of earned capital for the firm. We
have seen earlier that the dividends are limited to retained earnings. This implies that
at no point in time the original capital of the firm can be distributed as dividend. In
other words, the capital originally contributed is to be maintained intact.

It is possible to allocate profits earned and accumulated as reserves or retained

earnings to be earmarked for specific purposes. The earmarked reserves are not
distributed. Only non-earmarked or free reserves are available for distribution as
dividends.

& Check Your Progress 4

Fill in the blanks:

1) As a convention, items appearing on the balance sheet are listed in the order of
their relative ______________

2) Balance sheet could be presented either in

a) _________________ from, or
b) _____________________________

19
Understanding and Analysis 3) Operating cycle is the duration __________________________________
of Financial Statements
4) Inventories are valued in the balance sheet by applying the principle of
_________________________
5) Accounts receivable are also referred to as ______________________________

6) Expired cost with respect to a fixed asset is referred to as

____________________ expense.

7) Expiration of cost of intangible assets is referred to as

______________________

8) Sundry creditors are also referred to as _________________,

________________
9) We judge an item as a current asset if it is converted into cash during an _______

10) Liquidity refers to nearness of an item to _______________

11) Items classified as current assets are usually listed in the order of their relative
________________

12) The basis of valuation as applied to temporary investment is ________________

13) Asset losses expected out of non-collection of receivables are called __________

14) Formal written/documented debts refer to______________________________

15) Items commonly referred to as inventory include (i) _______, (ii) __________
and (iii) _____________

16) Fixed Assets are valued on the basis of _______________________________

17) Balance sheet is a statement of________________________________________

18) ____________________ represents the owners’ claim against assets of a

business.
19) _____________________ are claims of outsiders against the business.

20) _____________________________________________ increase owners’ equity.

21) Amounts owed by a business on account of purchase of inventory are usually

called __________________ or ________________________.

22) Amounts receivable by a firm against credit sales are usually called __________

23) As a general rule all assets are valued at their __________________ to the
business.

24) Owner’s equity could be understood as comprising two parts: ____________ and
_________________
25) The dual aspect principle ensures an important equality reflected by balance
sheet __________________________

26) All valuations specially those of fixed assets in a balance sheet are based on an
important assumption about the entity as a _____________________________.
20
 Prpeaparation
Preparation and of
and Analysis
1.8 ADJUSTMENT ENTRIES Analysis of Final Account
Final Accounts

Accounts are prepared as per accounting concepts, conventions and principles. Since
final accounts are prepared on accrual basis, it becomes necessary to subtract all those
expenses, which are basically paid during the current financial year although
applicable to other accounting period(s). And to add all those expenses, which benefit
the current accounting period either the payment was made or not. Similarly in case of
earnings subtract all those revenue items, received in the current accounting period but
applicable to other accounting period (s). Add all those revenue items, which have
been earned currently but not yet been received. The above stated corrections in the
final account are called Adjustments, which are made with the help of adjusting
entries. Adjustments ensure a proper matching of costs and revenue for obtaining
correct profit or loss for the given accounting period.
Let us see the treatment and impact of some adjustments on final account.
1.8.1 Closing Stock
The value of unsold stock. The stock is valued at cost or market price whichever is
lower. Generally, the closing stock is not given in the trial balance but is given in
adjustments. Closing stock will appear on the credit side of the trading account and
will also appear on the assets side of the balance sheet.

1.8.2 Depreciation
It is the amount charged because of the usage and passage of time. Fixed assets are
used for earning revenue. Therefore, a decrease in their value is considered to be the
operational expenses of business. In order to ascertain true profits and to show the true
value of the assets in the balance sheet, depreciation has to be charged. Depreciation
account is debited while individual asset account is credited and then the profit and
loss account is debited and the while depreciation accounts is credited.
1.8.3 Bad Debts
Bad debts are losses on account of uncollectable debts. When the amount due from
debtors is irrecoverable, it is called bad debts. Bad debts, being loss are closed by
transferring them to the debit side of the profit and loss account. The amount of bad
debts is also deducted from debtors in the balance sheet. If the same appears in the
trial balance, no adjustment entry is needed. In this case, debtors appear at their
adjusted figure.

1.8.4 Provision for Bad and Doubtful Debts

A provision should be made in advance for those debts whose recovery is doubtful
and to writing off bad debts. All enterprises, based on their past experience, create a
provision for doubtful debts to meet such a loss when it happens. This is done for the
purpose of reflecting the debtors in the balance sheet at their true value. Provisions for
bad and doubtful debts appear on the debit side of the profit and loss account and at
the credit side of the provision for bad debts account.

1.8.5 Outstanding Expenses (Liabilities)

Expenses are generally recorded only when they are paid. The failure to record an
unpaid expenses in the accounts results in an understatement of that expense and also
an understatement of a liability. In order to avoid understatement of these expenses
and liabilitie, an adjustment entry is passed by debiting the expense account and,
crediting the personal account of the party to whom such amount is to be paid. If
outstanding expenses appear on the credit side of the trial balance, then they will be
taken to the liability side of the balance sheet.

21
Understanding and Analysis 1.8.6 Prepaid Expenses (Assets)
of Financial Statements
Expenses paid in advance of their use or consumption are known as prepaid expenses.
At the end of the year, a part of the payment remains unconsumed and is treated as an
asset, because its benefit is to be availed of in future. For prepaid expense, the
adjustment entry is made by debiting prepaid expense account and crediting expense
account. If this item appears on the debit side of the trial balance, it will be shown
only on the assets side of the balance sheet. It will not appear in Profit &Loss Account
at all.

1.8.7 Accrued Income (Assets)

Accrued income is an amount earned but not actually received during the accounting
period or till the date of preparation of final accounts for the period concerned. The
first effect of accrued income is to credit the profit and loss account and to show the
same in the assets side of the balance sheet.

1.8.8 Income Received in Advance (Liability)

It is the income received but not earned during the accounting period. In other words,
it is the income for which services are to be rendered in future. This income is
deducted from the concerned income in the credit side of profit and loss account and
is also shown as a liability in the balance sheet.

To see the impact of adjustment entries’ on the final account (financial condition of
the business firm) let’s take the same illustration of Ms. Naina again only including
the some common adjustments in it. And let us check its impact practically by
comparing the transactions of both the illustrations (with or without adjustment
entries).

Revised Illustration 2:

The following figures from the trial balance has been extracted from the books of
M/s. Naina Prepare the Trading and Profit & Loss Account for the year ended
31 March 2004.
Debit (Rs.) Credit (Rs.)
Drawings 35,000
Building 60,000
Debtors and Creditors 50,000 80,000
Returns 3,500 2,900
Purchases and Sales 3,00,000 4,65,000
Discount 7,100 5,100
Life Insurance 3,000
Cash 30,000
Stock (Opening) 12,000
Bad Debts 5,000
Reserves for Bad Debts - 17,000
Carriage Inwards 6,200
Wages 27,700
Machinery 8,00,000
Furniture 60,000
Salaries 35,000
Bank Commission 2,000
Bills Receivable/Payable 60,000 40,000
Trade Expenses/Capital 13,500 9,00,000

Adjustment:
1. Stock on 31st March 2004 was valued at Rs. 50,000.
2. Depreciation of building 5%; furniture and machinery is 10% p.a.
3. Trade expenses Rs. 2,500 and wages Rs. 3,500 have not been paid as yet.
22
4. Allow interest on capital at 5% p.a. Prpeaparation
Preparation and of
and Analysis
Analysis of Final Account
Final Accounts
5. Make provision for doubtful debts at 5%.
6. Machinery includes Rs. 2,00,000 of a machinery purchased on 31st December
2003. Wages include Rs. 5,700 spent on the installation of machine.
Solution
M/s. Naina
Trading and Profit & Loss Account
For the year ending on 31st March, 2004
Rs. Rs.
To Opening Stock 12,000 By Sales 4,65,000
To Purchases 3,00,000 Less: Return 3,500 4,61,500
Less: Return 2,900 2,97,100

To Wages 27,700
Less: Installation Charges 5,700 By Closing Stock
Add: Outstanding 3,500 25,500 50,000
To Carriage Inward 6,200
To Gross Profit c/d 1,70,700
5,11,500 5,11,500
By Gross Profit b/d

By Discount Received 1,70,700

To Discount 7,100
By Reserve for Bad and Doubtful 5,100
To Life Insurance 3,000
Debts 17,000
To Salaries 35,000
To Bank Commission 2,000
To Trade Expenses 13,500
Add: Outstanding 2,500
16,000
To Bad Debts 5,000
To Interest on Capital 45,000
To Provision for Doubtful Debts 2,500
To Depreciation on: 3,000
Building 65,143
Machine 6,000
Furniture 3,057
To Net Profit 1,92,800 1,92,800

Ms. Naina
Balance Sheet as on 31st March, 2002
Liabilities Rs. Assets Rs.

Capital 9,00,000 Building 60,000

+ Net profit 3,057 − Dep. @ 5% 3,000 57,000
+ int. on Capital 45,000
− Drawings 35,000 9,13,057 Machinery 8,00,000
+ Wages 5,700
Creditors 80,000 − Dep. 65,143 7,40,557
Outstanding Wages 3,500
Bills Payable 40,000 Furniture 60,000
Outstanding Trade Exp. 2,500 − Dep. 6,000 54,000

Debtors 50,000
− Provision 2,500 47,500

Stock 50,000
Cash 30,000
Bills Receivable 60,000

10,39,057 10,39,057

23
Understanding and Analysis
of Financial Statements Analyses of the above two Examples

Particular Illustration 2 Revised Illustration 2

Wages 27,700 25,500

Gross Profit 1,68,500 1,70,700
Trade Expenses 13,500 16,000
Depreciation Nil 74,570
Net Profit 1,11,000 2,630
Building 60,000 57,000
Machinery 8,00,000 7,40,557
Furniture 60,000 54,000
Debtors 50,000 47,500
Capital 9,90,000 9,12,630

The above table is self-explanatory. It shows clearly the importance of adjustment

entries for a business firm and for all concerned parties of the same to ascertain the
correct financial position of the enterprise.

& Check Your Progress 5

1) What is Trading Account? Distinguish between Trial Balance and Profit and Loss
Account

2) Write short note on Final Accounts and Adjustments Entries.

3) What are Adjustments? What is the need of making adjustments while preparing
Final Account?

4) Show the treatment of the following adjustments:

a. Outstanding Expenses
b. Depreciation
c. Bad Debts

5) Prepare the trading account from the following figures of Mr. Deep on 31st March
2004.
Opening Stock 34,200
Purchases 1,02,000
Wages 34,500
Returns Outwards 1,740
Power 1,280
Factory Lighting 950
Manufacturing Ex. 9,500
Freight on Purchases 1,860
Sales 2,50,850
Sales Return 3,100

24
5) The following is the trial balance of Mr. Virat as at 31.03.2005 Prpeaparation
Preparation and of
and Analysis
Analysis of Final Account
Final Accounts

Debit (Rs.) Credit (Rs.)

Fixed Assets 3,00,000

Debtors 75,000
Opening Stock 2,05,000
Bills Receivables 10,000
12% Investments (1.7.1998) 50,000
Cash in Hand 5,000
Cash in Bank 10,000
Drawings 10,000
Purchases 5,25,000
Sales Return 10,000
Carriage Inwards 5,000
Carriage Outwards 2,000
Rent 3,000
Insurance 3,600
Office Expenses 13,200
Discount Allowed 2,000
Bad Debts 5,000
Interest 2,500
Selling Expenses 15,800
Creditors 1,00,000
Bills Payable 5,600
Loan from Bank 4,000
Sales 6,30,000
Purchase Return 5,000
Discount 1,000

Adjustment:

1. Stock on 31st March 2005 was valued at Rs. 42,000.

2. Rent is payable at the rate of Rs. 300 p.m.
3. Insurance premium was paid for the year ending 30th June, 2005.
4. Interest on investment is payable half yearly on 30th June and 31st December.
5. Write off further bad debts Rs. 5000. Also create a provision for doubtful debts
@ 10% on debtors and provision for discount on debtors @ 2%.
6. Create a reserve for discount on creditors @ 2%.
7. Provide for depreciation on fixed assets @ 10%.
Prepare the Trading and Profit and Loss Account for the year ended and Balance
Sheet as on 31st March 2005.

6) On 31st March 2004 the following trial balance of Sanjeev Tomar was taken out.
Prepare final account for the year after making the following adjustments.

1. Depreciation: 5% of plant and machinery and 10% of fixtures and fittings.

2. Reserve for bad debts 2.5% on Sundry Debtors
3. Insurance unexpired on 31st March 2004 Rs. 70
4. Outstanding wages Rs. 800 and Salaries Rs. 350.

25
Understanding and Analysis Trial Balance
of Financial Statements
Plant and Machinery 55,000
Fixtures and Fittings 1,720
Factory Fuel and Power 542
Office Salaries 3,745
Lighting (Factory) 392
Travelling Expenses 925
Carriage on Sales 960
Cash in Bank 2,245
Sundry Debtors 47,800
Purchases (Adjusted) 66,710
Wages 9,915
Rent and Taxes 1,915
Office Expenses 2,778
Carriage on Purchase 897
Discount 422
Drawings 6820
Stock 1 April 2003 21,725
Manufacturing Expenses 2,680
Sales Return 7,422
Insurance 570
Closing Stock 16,580
Rent Outstancing 150
Sanjeev’s Capital 93,230
Sales 1,26,177
Sundry Creditors 22,680
Purchase Return 3,172
Bills Payable 6,422

1.9 SUMMARY
Both the parts, Trading Account and Profit and Loss Account, of Final Account are
interdependent on each other. Gross Profit/loss plays a very special role in the
calculation of net Profit and loss figure. Trading and profit and loss account gives the
true picture of an organisation by showing its revenues and expenses. This account is
normally prepared at the end of the accounting period. Balance Sheet as we have seen
is one of the most important financial statements. It is a periodic summary of the
financial position of the business. It is the statement of assets, liabilities and owners’
capital at a particular point in time. This statement in itself does not reveal anything
about the details of the operations of the business. However, a comparison of two
balance sheets could reveal the changes in business position. A realistic understanding
of the operations of the business would require two other statements — Cash Flow
Statement and Funds Flow Statement. We shall take them up in subsequent units.

1.10 KEY WORDS

Asset: Anything, tangible or intangible, of monetary value to a business entity;
something which a business entity owns.
Current Assets: All the assets held by a firm with the objective of conversion to cash
within the operating cycle or within one year whichever is longer. Current Assets
include items such as cash, receivables, inventory and prepayments.

26
Current Liabilities: All those claims against the assets of the firm to be met out of Prpeaparation
Preparation and of
and Analysis
Analysis of Final Account
Final Accounts
cash or other current assets within one year or within the operating cycle, whichever is
longer. Usually include items such as accounts payable, tax or other claims payable,
and accrued expenses.
Contingent Liability: A liability which has not been recognised as such by the entity.
It becomes a liability only on the happening of a certain future event. An example
could be the liability which may arise out of a pending lawsuit.
Fixed Asset: Tangible long-lived asset. Usually having a life of more than one year.
Includes items such as land, building, plant, machinery, motor vehicles, furniture and
fixtures.

Intangible Assets: Any long-term assets useful to the business and having no
physical characteristics. Include items such as goodwill, patents, franchises, formation
expenses and copyrights.

Liability: Any amount owed by one person (the debtor) to another (the creditor). In a
balance sheet all those claims against the assets of the entity, other than those of the
owners.
Owner’s Equity: It is the owner’s claim against the assets of a business entity. It
could be expressed as total assets of an entity less claims of outsiders or liabilities,
including both contributed capital and retained earnings.

1.11 SOLUTIONS / ANSWERS

Check Your Progress 1
1) Gross Profit Rs. 86,000
2) Net purchase is the difference between purchases and the purchase return
3) Net sales is the difference between sales and the sales return

Check Your Progress 2

4) Gross Profit Rs. 30,000 and Net Profit Rs. 10,600

Check Your Progress 3

1) (a) accounting period (b) fiscal year (c) financial year
2) (a) asset (b) liability (c) capital

3) (a) current (b) property, plant (c) other

4) (a) current (b) long-term (c) shareholders.

Check Your Progress 4

1) Liquidity
2) (a) T account form (b) Report form

3) Is time taken by a unit to convert goods into sales and to collect money from
debtors?
4) Lower of cost or market price

5) Sundry debtors

27
Understanding and Analysis 6) Depreciation
of Financial Statements
7) Amortisation
8) Accounts payable

9) Operating cycle or accounting year

10) Cash

11) Liquidity

12) ‘Lower of cost or market price’.

13) Bad debts.

14) Promissory Notes receivable or bills receivable.

15) Raw material (ii) Work-in-Process (iii) Finished goods.

16) Historical cost, less Depreciation.

17) Assets, Liabilities and capital

18) Owners’ equity

19) Liabilities

20) Profits

21) Accounts payable or sundry creditors

22) Accounts receivable or sundry debtor

23) Original cost

24) Contributed capital and retained earnings

25) Assets = Liabilities + Owner’s Equity

26) Going concern.

Check Your Progress 5

4) a. Expense Account Dr. (It will go to trading or profit & loss A/c)
To Outstanding Expenses Account
b. Depreciation Account Dr.
To individual Asset Account
Profit and Loss Account Dr.
To Depreciation Account
c. Bad Debts Account Dr.
To Debtors Account

5) Gross Profit Rs. 62,000 and Net Loss Rs. 32,400

6) Gross Profit Rs. 62,000 and Net Loss Rs. 32,400

7) Balance Sheet total Rs. 1,19,366. Net Profit Rs. 2,554, Gross Profit Rs. 18,266.
28
 Prpeaparation
Preparation and of
and Analysis
1.12 FURTHER READINGS Analysis of Final Account
Final Accounts

1. Financial Accounting, Dr. R.K. Sharma and Dr. R.S. Popli, Kitab Mahal, 2005.

2. Basic Financial Accountinmng, J.R. Monga, Girish Ahuja, Mayur Paperbacks,

2001.

3. Financial Accounting, Horngren C.T. and Harrison, 01/23/2003, Prentice Hall:

New Delhi (Chapter 1).

4. Understanding Financial Statements, Fraser Lyn M. and Aileen Ormiston,

04/10/2003, Prentice Hall: New Delhi (Chapter 2).

5. Basic Accounting Practice, Glantier M. W. E., Underdown B. and A.C. Clark, 1979,
Arnold Hieneman: Vikas Publishing House, New Delhi (Chapter 5, Section 2).

6. Accounting For Management: Text and Cases, Bhattacharya, S. K. and John

Dearden, 1984. (2nd Ed) Vani: New Delhi. (Chapter 3, 10 and 11).

7. Management Accounting, Hingorani, N.L. and A. R. Ramanathan, 1986, Sultan

Chand: New Delhi. (Chapter 3).

29