Final Accounts

Trail Balance to P & L A/c & Balance Sheet

There are accounts:

three

components

of

final

Trading A/c Profit and Loss A/c Balance Sheet

All the incomes and expenses are transferred to trading and P & L A/c. All the assets and liabilities are transferred to balance sheet.

Trading A/c

Under the trading account all incomes and expenses relating to goods and production of good are recorded. The profit or loss found out from trading A/c is called gross profit or gross loss respectively. The gross profit or gross loss is transferred to P & l A/c.

Profit and loss A/c

All the incomes and expenses relating to office or administration, sales and distribution and interest are recorded in P &L A/c. The profit or loss found out from P & L A/c is called net profit or net loss respectively. The net profit / loss is transferred to the balance sheet by adding / deducting it from the capital of the owner.

Understanding a Few Important Concepts

Capital and Revenue Expenses and Receipts

Capital expenditure means those expenses whose benefit accrues over a long period of time i.e. is more than a year. eg: expenses made on fixed assets.

Revenue expenses are those whose benefit expires within a year. eg: purchase
Similarly there are capital receipts and revenue receipts. eg: loans, capital, etc. are capital receipts & sales is a revenue receipt.

Mercantile system of accounting

All transactions are recognized at the time of their occurrence i.e. when they accrue & not when they are paid or received. Thus they are recorded in the financial statements in the corresponding period of occurrence.

Outstanding Expenditure

If an expenditure is outstanding for the given year, then it will be added to the given years expenditure in the P & L A/c. Such outstanding expense is a liability and thus would be recorded as liability in the balance sheet.

Expenses made in advance

If some expense is made for next year in advance, then it would be deducted from the given years expense in the P & L A/c. Such advance expenses are an asset for the firm and recorded so in the balance sheet.

Income due but not received

If some income is due in the given year but not yet received, then it is added to the given years income in P & L A/c. Such income yet to be received is an asset & recorded so in the balance sheet.

Income received in advance

If some income for next year is received in the given year, then it is deducted from that years income in the P & L A/c. Income received in advance is a liability & recorded so in the balance sheet.

Interest on Capital & Interest on Drawings

A business enterprise is a separate legal entity from its owners. Thus, the business enterprise pays interest on capital to the owner for using its capital. Similarly, the business enterprise charges interest on drawings from the owner for reducing capital to that extent.

Interest on Capital & Interest on Drawings

Interest on capital ~ Expense ~ Debit of P & L A/c

Interest on Drawings ~ Income ~ Credit of P & L A/c.

Effect on Balance Sheet:

Liabilities Capital + Int on Capital + N.P or N.L -Drawings - Int on Drawings

Assets

Bad Debts

When a debtor becomes insolvent or is unable to pay his dues, it is known as bad-debts. Bad-Debts (BD) ~ Expense ~ P & L A /c debit Bad Debts Reserve (BDR) is a provision that is created in anticipation for bad debts in future. Corresponding effect of BD & BDR are to be made in debtors in the balance sheet.

Bad Debts in P & L A/c

To, B D (old) + B D (new) + B D R (new) - B D R (old)

Depreciation

Depreciation is the loss in value of asset because of use, passage of time & obsolescence. Depreciation ~ Expense ~ P & L A/c debit. Corresponding effect of depreciation is made in the asset A/c in the balance sheet.