E-LESSON-10-11 OK

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BBA/BCOM 2 All right are reserved with CU-IDOL Basic Accounting Course Code: BBA/BCOM 101 Semester: 1 SLM Unit: 10-11 E-Lesson 9 www.cuidol.in Unit 10-11(BBA /BCOM-101)

Basic Accounting 33 OBJECTIVES INTRODUCTION To make students aware of the basic concepts of In this unit we are going to learn about the Final Accounts. Final Account and its concept of applicability. To develop an understanding of methods of Under this you will learn and understand the Accounting of Final Accounts and its relevance for accounting methods of Profit & Loss Account companies. and Balance sheet . To make students understand how to make In this unit you will learn the scope & adjustments in final accounts. compliance of adjustment of final accounts. . www.cuidol.in Unit 10-11((BBBAA//BBCCOOMMA-110011)) INSTITUTE OF DAISllTArNigChEt AarNeDreOsNeLrIvNeEdLwEAitRhNCINUG-IDOL

Topics To Be Covered 4  Introduction  Meaning of Final Account.  Meaning of Trading Account  Meaning of Profit & Loss A/c  Accounting Treatment of Final Account  Adjustment in Final Accounts. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Concept of Expenditure 5  The use of goods and services in order to earn revenue is the expense.  Hendriksen opines, \"expenses are the using or consuming of goods and services in the process of obtaining revenues\".  \"Expense is the expired cost, directly or indirectly related to given fiscal period, of the flow of goods or services into the market and of related operations.\" www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Introduction- Final Accounts 6  Final Accounts is the last step in the accounting process.  Trial Balance is prepared at the end of all the accounting year to know the balances of all the accounts & to test the arithmetic accuracy of accounts.  But the basic objective of accounting is to know about the profit or loss during the previous year & present financial position.  This can be known only if Trading account and Profit & Loss account and Balance Sheet are prepared at the end pf year.  These are also known as FINANCIAL STSTEMENT which are prepared. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Process of Making Final 7 Account From Trial Balance. Final Accounts include the preparation of : 1) Trading and Profit & Loss account and 2) Balance Sheet as these two statements are prepared to give the final results of the business, both of these are collectively called as final accounts. Accounting cycle finally ends with these statements as shown in next slide www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Meaning of Accounting Cycle 8 The accounting cycle is the holistic process of recording and processing all financial transactions of a company, from when the transaction occurs, to its representation on the financial statements, to closing the accounts. One of the main duties of a bookkeeper is to keep track of the full accounting cycle from start to finish. The cycle repeats itself every fiscal year as long as a company remains in business. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

ACCOUNTING CYCLE 9 www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Steps in the accounting cycle 10 1. Transactions : Financial transactions start the process. If there were no financial transactions, there would be nothing to keep track of. Transactions may include a debt payoff, any purchases or acquisition of assets, sales revenue, or any expenses incurred. 2. Journal Entries With the transactions set in place, the next step is to record these entries in the company’s journal in chronological order. In debiting one or more accounts and crediting one or more accounts, the debits and credits must always balance. 3. Posting to the General Ledger (GL)The journal entries are then posted to the general ledger where a summary of all transactions to individual accounts can be seen. 4. Trial Balance: At the end of the accounting period (which may be quarterly, monthly, or yearly, depending on the company), a total balance is calculated for the accounts. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Steps in the accounting cycle 11 5. Worksheet: When the debits and credits on the trial balance don’t match, the bookkeeper must look for errors and make corrective adjustments that are tracked on a worksheet 6. Adjusting Entries : At the end of the company’s accounting period, adjusting entries must be posted to accounts for accruals and deferrals. 7. Financial Statements : The balance sheet, income statement, and cash flow statement can be prepared using the correct balances. 8. Closing: The revenue and expense accounts are closed and zeroed out for the next accounting cycle. This is because revenue and expense accounts are income statement accounts, which show performance for a specific period. Balance sheet accounts are not closed because they show the company’s financial position at a certain point in time. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Types of Financial Statement 12 Final accounts or financial statements can be divided in two parts:- 1) Trading and Profit & Loss Account 2) Balance Sheet www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Trading Account 13 Trading account is prepared by trading concerns i.e., concerns which purchase and sell finished goods, to know the gross profit or gross loss incurred by them from buying and selling of goods during a particular period of time. Gross profit or gross loss is the difference between the cost of goods sold and the proceeds of their sale. If the sale proceeds exceed the cost of goods sold , gross profit is made. Otherwise, gross loss is made. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Ascertainment of Cost of 14 Goods Sold Opening Stock ………. Add: Purchases ……. Less: Purchase Return ……. ……… Goods Available for Sales ………. Add: Direct Expenses ………. Less: Closing Stock ………. Cost of Goods Sold ………. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Specimen Performa of Trading 15 Account Dr Trading Account of …….. For the year ending……... Cr Particulars Amt. Particulars Amt. To Opening Stock By Sales To Purchases Less: Returns Less: Returns By Closing Stock To Direct Expenses: Carriage Inward By Gross Loss c/d* Wages Wages & salaries Fuel & power Coal, water & gas Octroi www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Import Duty 16 Custom Duty Excise Duty Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL Consumable Store Factory Rent, Rates, and Taxes Foreman/ Works Manager’s Salary Royalty on manufactured goods To Gross Profit c/d* www.cuidol.in

Profit & Loss Account 17  For non-corporate business organisation Profit & Loss account is second part of income statement.  It is prepared to know the net loss of business during a particular period.  Every businessman has to spend on expenses other than on manufacture or purchase of goods which are called indirect expenses.  There can be other incomes except sales.  So gross profit or loss is adjusted keeping in view these indirect expenses and other incomes to find out net profit or net loss. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Particulars Performa of Profit & Loss Amt 18 Account Amt Particulars To Gross Loss b/d By Gross Profit b/d To Establishment Charges By other incomes To Administrative Charges By Net Loss To Selling & Distribution (transferred to capital account) expenses To Financial Charges To Depreciation & Provisions To Abnormal Losses To Net Profit (transferred to Capital Account) www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Balance Sheet 19  Balance Sheet is a component of financial statements which shows balances of capital, liabilities & assets.  All nominal accounts are closed by transferring these to Trading & Profit & Loss Account. Only personal & real accounts are left.  Balance Sheet is the final phase in accounting cycle. It is a ‘mirror’ which reflects the true position of the assets & liabities of the business on a particular date.  “A statement of financial position of economic unit disclosing as at a given moment of time its assets, liabilities & ownership equities. Eric L.kohler www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Balance Sheet as on …………………… Liabilities Assets Amt 20 Capital Amt Add: Net Profit Less: Drawings Fixed Assets: All right are reserved with CU-IDOL Fixed Liabilities: Goodwill Long term loan Land and Buildings Public deposits Plant & Machinery Current Liabilities: Motor Vehicles Unexpired Income Furniture Short Term Loans Patents & Trade Marks Trade Creditors Live Stock Bank Overdraft Loose Tools Bill Payable Investments Outstanding Expenses Current Assets: Closing Stock www.cuidol.in Prepaid Expenses Accrued Income Debtors Bill Receivable Cash at Bank Cash in hand Unit 10-11(BBA /BCOM-101)

ADJUSTMENTS 21 CLOSING STOCK The unsold goods lying in store at the end of accounting year. Treatment: Stock a/c Dr. To Trading a/c Two fold effect of adjustment will be :- 1) Show on Credit side of the Trading account 2) On asset side of Balance Sheet www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

OUTSTANDING EXPENSES 22 Those expenses which have been incurred & not yet paid. Treatment: Expenses a/c Dr To outstanding expenses Two fold effect: 1.Will be shown on debit side of trading & profit & loss a/c by way of addition to particular expense. 2. Will be shown on liabities side of Balance Sheet. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

PREPAID EXPENSES 23 Those expenses which have been paid in advance i.e., whose benefit will be available in future is called prepaid expenses. Treatment: Prepaid Expenses a/c Dr To Expenses a/c Two fold effect: 1.Will be shown in profit & loss a/c by way deduction from particular expense. 2. Will be shown on asset side of Balance Sheet. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

ACCRUED INCOME 24 That income which has been earned but not received during the accounting year is called accrued income. Treatment: Accrued Income a/c Dr To Income a/c Two fold effect: 1.Will be shown on credit side of P & L a/c 2. Will be shown on asset side of Balance Sheet www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

INCOME RECEIVED IN ADVANCE 25 Income received but not earned during accounting year is called income received in advance. Treatment: Income a/c Dr To Income Received in advance Two fold effect: 1.Will be shown on credit side of P & L a/c by the way of deduction from particular income. 2. Will be shown on liabilities side of Balance Sheet. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

DEPRECIATION 26 Depreciation is the reduction in the value of fixed asset due to its use, wear & tear. Treatment: Depreciation a/c Dr To Asset a/c Two fold effect: 1.Is shown on debit side of P & L a/c 2.Is shown on the Asset side of the Balance Sheet by way of deduction from value of concerned asset www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

BAD DEBTS 27 Debts which are definitely irrecoverable are called Bad Debts. Treatment: Bad Debts A/c Dr To Sundry Debtors a/c Two fold effect: 1. Is shown on debit side of P & L a/c. 2. 2. Is shown on assets side of Balance Sheet by way of deduction from Sundry Debtors. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

INTEREST ON CAPITAL 28 To see whether the business is really earning profit or not ,interest on capital at a certain rate is provided. Treatment : Interest on capital A/c To capital A/c TWO FOLD EFFECT : 1.It will be shown on debit side of Profit and Loss A/c 2.Shown on liabilities side of Balance Sheet by way of addition to the capital. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

INTEREST ON DRAWINGS 29 Interest on drawings is charged from proprietor ,as drawings reduce capital. Treatment: Drawings A/c To Interest on Drawings A/c Two fold effect will be: 1.It will be shown on credit side of Profit and Loss Account. 2.On liabilities side of Balance Sheet by way of addition to the drawings which are ultimately deducted from the capital. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

PROVISION FOR DOUBTFUL DEBTS 30 It is a provision created to cover any possible loss on account of bad-debts likely to occur in future. Treatment: Profit and Loss A/c To Provision for Doubtful Debts A/c Two effected accounts will be: 1.On debit side of Profit and Loss A/c or by way of addition to Bad Debts. (Old provision for doubtful debts at the beginning of the year will be deducted). 2.Shown on assets side of Balance Sheet by way of deduction from Sundry Debtors (deducting further bad debts if any). www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

PROVISION FOR DISCOUNT ON 31 DEBTORS If sales are made by the merchant on condition that if the amount of sales is paid within a certain period , he will allow a certain percentage of discount . Treatment : Profit and Loss A/c To Provision for Discount on Debtors A/c Two-fold effect will be: 1.Shown on debit side of Profit and Loss A/c 2.Shown by way of deduction from Sundry Debtors (after deduction of further bad debts and provision for doubtful debts) on assets side of Balance Sheet. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

RESERVE FOR DISCOUNT ON 32 CREDITORS Firm may have chance to receive discount on last date of accounting year, if the payment is made within the scheduled period .These are anticipated profit and therefore this account is made. Treatment: Reserve for Discount on Creditors A/c To Profit & Loss A/c Two fold effect will be: 1.It is shown on the credit side of Profit &Loss A/c 2.Shown on liabilities side of Balance Sheet by way of deduction from sundry creditors. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

DEFERRED REVENUE 33 EXPENDITURE The expenditure done in initial stage but the benefit of which will also be available in subsequent years is called deferred revenue expenditure. Treatment: Profit &loss A/c To advertisement A/c The two fold effect will be: 1.It is show on the debit side of Profit &loss A/c 2.Shown on assets side by way of deduction from capitalised expenditure. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

LOSS OF STOCK BY FIRE 34 Loss of stock may occur due to fire. The position of business may be: a) All the stock is fully insured. b) The stock is partly insured. c) The stock is not insured at all. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

IF THE STOCK IS FULLY INSURED 35 The whole loss will be claimed from the insurance company. Entry:- Insurance Co. A/c Dr. To Trading A/c Effect:- 1.It will be shown on credit side of Trading A/c. 2.It is shown on Assets Side of Balance Sheet. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

IF STOCK IS PARTLY INSURED 36 The loss of stock covered by insurance policy will be claimed from the insurance company and the rest of amount will be loss for the business. Entry : Insurance Co. A/c Dr. Profit & Loss A/c Dr. To Trading A/c Effect of this entry: 1.Shown on credit side of Trading A/c with the value of stock & shown on debit side of P& L A/c for that part of the stock which is not insured. 2.Loss of stock Fire is shown on asset side of the Balance sheet which amount is to be realised from the insurance company. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

IF STOCK IS NOT INSURED 37 Whole loss will be borne by the firm. Entry:- Profit & Loss A/c Dr. To Trading A/c Effect of this entry :- 1.It is shown on the credit side of Trading A/c. 2.It is shown on the debit side of P&L A/c www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

RESERVE FUND 38 Reserve is created out of profit & Loss A/c and thus is an appropriation of net profit for strengthening the financial position of the business. Treatment : Profit & Loss A/c Dr. To Reserve Fund A/c Two fold effect will be: 1.It is shown on debit side of P&L A/c. 2.It shown on the liabilities side of Balance. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Illustration 1:- 39 Show how you will record the following items in the Profit and Loss Account and the Balance Sheet. The Trial Balance showed the following balances as on December 31, 1987: Particulars Amount in Rs. Salaries 10000=00 Wages 20000=00 Rent Received 6600=00 Commission Received 2000=00 Interest on Investments 6000=00 Additional Information: 1. Salaries amounting to Rs.2,000 are Outstanding. 2. Wages include Rs.1,500 paid in Advance. 3. Interest on Investment include Rs.1,200 for the months of January, February and March, 1988 4. Rent for the month of December amounting to Rs.600 is not yet received. Gross Profit for the year is Rs.40,000 and other expenses amounted to Rs.10,000. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Profit and Loss Account for the year ended December 31, 1987 40 Dr. Cr. Particulars Amount in Rs. Amount in Rs. Particulars Amount in Rs. Amount in Rs. To Salaries Add: Outstanding 10,000 12,000 By Gross Profit b/d 40,000 2,000 18,500 To Wages ------------- 10,000 By Rent Received 6,600 7,200 Less: Prepaid 20,000 13,500 Add: Outstanding 600 2,000 1,500 ------------ To Other Expenses ------------- By Commission Received 4,800 ___________ To Net Profit By Interest on 6,000 (Transferred to Capital Investments 54,000 A/c) Less: Received in Advance ___________ 1,200 ------------ ___________ 54,000 ___________ www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Balance Sheet as on December 41 31, 1987 Liabilities Amount in Rs. Assets Amount in Rs. Current Liabilities: 2,000 Current Assets: 1,500 Salaries Outstanding 1,200 Wages Prepaid 600 Interest Received in Advance Rent Outstanding www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Summary 42  Final Accounts: It is popularly used in respect of two basic financial statements namely Profit and Loss Account and the Balance Sheet.  Trading Account :The account which is prepared to determine the gross profit or gross loss of a business concern is called trading account.  Balance sheet :A statement showing the assets, liabilities, and capital of a business. is a list of the accounts having debit balance or credit balance in the ledger. On one side it shows the accounts that have a debit balance and on the other side the accounts that have a credit balance. The purpose of a balance sheet is to show a true and fair financial position of a business at a particular date. Every business prepares a balance sheet at the end of the account year.  Profit and Loss Account :-The account through which annual net profit or loss of a business is ascertained, is called profit and loss account. Gross profit or loss of a business is ascertained through trading account and net profit is determined by deducting all indirect expenses (business operating expenses) from the gross profit through profit and loss account. Thus profit and loss account starts with the result provided by trading account www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Multiple Choice Questions 1.What is the main objective of financial accounting? 43 [A] preparing profit and loss account only [B] Preparing balance sheet only [C] Preparing both P & L account and balance sheet [D] Preparing Trial balance only 2.Profit and loss account starts with [A] net profit [B] net loss [C] gross profit [D] none of the above 3. In profit and loss account, if debit is more than the credit, the difference is [A] net profit [B] net loss [C] gross profit [D] none of the above 4. Which option gives a review report on the firm’s financial status at a specified date? [A] Income & Expenditure Account [B] Balance Sheet [C] Cash Flow Statement [D] Profit & Loss Account 5.The unfavourable balance of Profit and Loss account should be [A] Subtracted from liabilities [B]Subtracted from capital [C]Subtracted from current assets [D]Added in liabilities Answers: 1. [C] 2. [C] 3. [A] 4. [B] 5.[B] www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

Frequently Asked Questions Q.1 What is a Balance Sheet? 44 Ans: A balance sheet records time and furnishes a basis for calculating rates of return and assessing its capital substructure. It is a financial statement that furnishes a print of what a company possesses and incurs, and the amount invested by investors. Q.2 Which are the statement that is included in the financial statement? Ans: The statement that is included in the financial statement are. • Balance Sheet • Trading and Profit and Loss A/c Q.3 Difference between Profit & Loss Account and Balance Sheet? Ans: The Balance Sheet reveals the entity's financial position, whereas the Profit & Loss account discloses the entity's financial performance, i.e. profit earned or loss suffered by the business for the accounting period. Q.4 How are expenses on acquiring goods treated? Ans: Expenses on acquiring goods are treated as direct expenses and appear in the trading account of the final accounts and are critical to ascertain gross profit. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

REFERENCES 45 1. Gupta, R.L., Radhaswamy,M.(2012). Advanced Accountancy. New Delhi: Sultan Chand&Sons. 2. Maheswari S.N.,(2018). Introduction to Accounting.New Delhi: Vikas Publishing House. 3. Shukla, M.C.,Grewal, T.S.,Gupta S.C.(2007). Advanced Accounts.New Delhi:S.Chandand Company Ltd. www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL

46 THANK YOU For queries Email: [email protected] www.cuidol.in Unit 10-11(BBA /BCOM-101) All right are reserved with CU-IDOL