1. FINANCIAL ACCOUNTING ABE (Diploma in Business Management) Lecturer :M. M. AhsanEmail : ahsan6960@gmail.com Session : 01Week : 04 Lecture No : 04Date : 07/02/2012 Buckingham College of London

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3. Final accounts and Balance sheet Unit 03

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5. Elements of Final Accounts Manufacturing Account Trading Account Profit and Loss Account Appropriation Account Balance sheet Note : You will often see manufacturing, trading and profit & loss accounts present together and headed simply ‘Income Statement’.

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7. Format for Trading Account Particulars£££ Sales Less : Sales return Net sales Less : cost of good sold Opening inventory Purchases Less : Purchase return Add : Carriage inwards Less : Closing inventory Cogs Xxx (xxx) Xxx (xxx) xxx Xxx xxx Gross Profit/(Loss)xxx

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9. Example (a) From the following balances extracted from the ledger of H&M Com On 31 st December,2010. Prepare the trading account of the business for the year ended December 31, 2010 : (b) In what way would the trading account of H & M be different if the proprietor had withdrawn goods for his own use valued at £500 selling price? DetailsAmount Purchases24,720 Sales40,830 Purchase return1,230 Sales return1,460 Carriage inwards2,480 Inventory as at Dec 1, 20106,720 Inventory at the end of the year7,630

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11. Elements of Profit & Loss Account Credit : Discount received Rents received in respect of property let. Interest & dividend received Bad debts recovered Other items of profit or gain, other than of a capital nature, including profits on the sale of assets.

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13. Elements of Profit & Loss Account Administrative expense : Rent, rates, lighting, heating, repair of office building; director’s remuneration & fees, salaries of the employee. Selling and distribution expense : Travellers commission, sales staff salaries, wages for driver & packers, warehouse rent, advertising, bad debt.

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15. Elements of Profit & Loss A/C Financial expenses : Bank charges; interest on loans, hire purchase agreement, debentures, mortgages, bank overdraft; Note : Capital expenses will not be debited to profit & loss account.

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17. Items requiring special attention Bad debts Bank charges Debenture interest Depreciation Discount Dividends paid(Limited company only) Drawings (Partnership or sole trader ship) Goodwill Preliminary expenses(Limited company only) Provision for bad debt Provision for discount allowable Expenses paid in advance or arrears(Prepaid and Accrual)

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19. Difference between Trial balance & Balance sheet A trial balance is a list of all the ledger balances, not only assets & liabilities but also gains or losses. A balance sheet is a list of a part only of the ledger balances i.e. Those remaining after the profit and loss items have been dealt with, the assets and liabilities. A trial balance is prepared before the revenue accounts are compiled. A balance sheet is prepared after the revenue accounts have been dealt with.

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21. Functions of the Balance sheet Financial position of the business Arithmetical accuracy of accounts Bridge between financial years

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23. Elements of Balance Sheet Non-current asset Goodwill Patents, trademarks etc Freehold land & Building Leasehold land & buildings Plant & machinery Motor vehicles Furniture & fittings Long term investments Current asset Work in progress Inventory in trade Trade receivables Payment in advance Temporary investments Bank deposit account Cash at bank Cash in hand

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25. Elements of Balance Sheet Internal Liabilities : - Liabilities to proprietors External liabilities : - Long term liabilities - Current liabilities - Secured liabilities - Unsecured liabilities - Preferential liabilities - Contingent liabilities

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27. Distinction between capital and revenue Capital expenditure Revenue expenditure Capital receipts Revenue receipts

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29. Format of Balance Sheet ParticularsAmount Non current asset : Freehold premises Fixture & fittings Current assets : Trading inventory Trade receivable xxx Less : provision for bad debts (xxx) Insurance prepaid Cash Less : Current liabilities Trade payable Accrued expenses Net current asset Total asset less current liabilities Less : Long-term liabilities Mortgage on freehold Xxx (xxx) Xxx (xxx) xxx

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31. Format of Balance Sheet Particulars££ Capital account Balance brought forward Add : net profit for the year Less : drawings Xxx (xxx) xxx

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33. Example From the following balances appearing in the ledger of the new manufacturing com on Dec 31,2010. Draw up the profit and loss account for the year ended 31 December : Details££ Discount allowed Discount received Gross profit brought from trading account Salaries Bank charges Sundry office expenses Rent and rates Bad debts written off Carriage outwards Plant and machinery 32 - 44,261 193 1,361 19,421 937 5,971 50,000 267 127,881

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35. Example Notes/Adjustments : Write off 10% depreciation on plant and machinery. Rent owing on 31 st december amounted to £2,000. An insurance premium amounting to £500 was paid in july in the current year for the year to 30 june of the following year. The £500 is included in sundry office expenses.

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37. Example The following balances remain in william dean’s books after he has completed his profit and loss account for the year ended 31May,year 2 : Set out williams deans balance sheet as at 31 May, year 2. Particulars££ Capital 1 june, year 1 Net profit for year ended 31 may, year 2 Loan from john dean(repaying in 10 years time) Trade payables Premises Inventory Trade receivables Balance at bank Cash in hand Drawings(taken out of business for private use) 110,000 25,000 2,600 1,400 20 10,000 124,000 13,570 9,500 1,950

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