1. UNIT – 7
FINAL ACCOUNTS

2. Final accounts Structure Introduction and Objectives
Adjustments before preparing final accounts
Trading account
Preparation of Trading account
Financial Accounting

3. Final accounts Profit and Loss Account
Preparation of Profit and Loss Account
Balance Sheet – Meaning
Preparation of Balance Sheet
Introduction
Financial Accounting

4. Introduction and Objectives
Final Accounts are those prepared at the end of Accounting period and the last leg of the entire Accounting trail.
Final Accounts For Manufacturing Concerns
Manufacturing Account
Trading Account
P & L Account
Balance Sheet
Financial Accounting

5. Introduction and Objectives
Final Accounts For Trading Concerns
Trading Account
P & L Account
Balance Sheet
Financial Accounting

6. Introduction and Objectives
Final Accounts For Non-Trading Concerns
Receipts & Payments Account
Income & Expenditure Account
Balance Sheet
Objectives:
Financial Accounting

7. Introduction and Objectives
To know the meaning and purpose of final accounts
To identify the items of Trading Accounts
To identify the items of Profit and Loss Account.
To identify the items of assets and liabilities of Balance Sheet
Financial Accounting

8. Introduction and Objectives
To know the adjustments such as RBD, Reserve for discount, depreciation, closing stock, stock destroyed by fire, used for personal purposes, prepaid and outstanding items etc.,
Financial Accounting

9. Introduction and Objectives
To prepare Balance Sheet without any adjustments from the trial balance.
To prepare Balance Sheet with adjustments
Financial Accounting

10. Adjustments before preparing final accounts
GAAP (Generally Accepted Accounting Principles) recognizes the accrual basis of accounting
So revenue is recognized when it is earned, whether received or not and expenses are recognized when they are incurred whether paid or payable.
Financial Accounting

11. Adjustments before preparing final accounts
Adjustments are more internal transactions and they include:
Outstanding Expenses
Prepaid expenses
Outstanding Incomes/ Accrued income
Pre-received Incomes
Financial Accounting

12. Adjustments before preparing final accounts
Depreciation on assets
Reserve for bad and doubtful debts
Reserve for discount on debtors
Reserve for discount on creditors
Stock used for personal purposes
Closing stock valuation
Financial Accounting

13. Adjustments before preparing Final Accounts – Outstanding Expenses
Expenses incurred but not paid are regarded as Outstanding Expenses
Outstanding expenses should be considered for calculating profit because they are incurred before the end of accounting period
The entry in the journal proper is
Financial Accounting

14. Adjustments before preparing Final Accounts – Outstanding Expenses
Concerned Expense account Dr
To Outstanding Expenses account
(Being outstanding expense amount brought into account)
The outstanding portion of the expense is added to the concerned expense account in P & L A/c.
Outstanding expense account is shown as a liability in the balance sheet
Financial Accounting

15. Adjustments before preparing Final Accounts – Outstanding Expenses
Example: Salaries payable for the year 2005 Rs.60,000. Actual payment made is Rs.48,000.
The salary account shows only Rs.48,000 because it is paid and recorded in cash account.
So, the outstanding amount is Rs.12,000 (60,000 – 48,000).
The entry is
Financial Accounting

16. Adjustments before preparing Final Accounts – Outstanding Expenses
Salary account Dr 12,000
To outstanding expenses account 12,000
(Being salary due to be paid brought into account)
In the Profit and Loss Account, the outstanding salary is added and in the balance sheet, the outstanding salary Rs.12,000 appears as liability, since it shows credit balance.
Financial Accounting

17. Adjustments before preparing Final Accounts – Prepaid Expenses
Meaning: Prepaid expenses are those which are paid in advance in the current accounting period even though they relate to the next accounting period.
Eg: Taxes paid in advance, Rent paid in advance, Insurance premium paid in advance
Adjusting Entry in the Journal Proper:
Prepaid expenses account Dr
Financial Accounting

18. Adjustments before preparing Final Accounts – Prepaid Expenses
To Concerned expense account
Treatment in Accounts:
Deduct prepaid portion of the expense from the concerned expense account in the final accounts.
Prepaid portion of the expense is shown as an asset in the balance sheet, since it shows debit balance.
Financial Accounting

19. Adjustments before preparing Final Accounts – Prepaid Expenses
Example: Insurance premium paid from to , Rs.18,000.
The accounting year is from to
Therefore the prepaid portion is for 3 months – Jan, Feb and Mar 2006 – Rs.4,500 (18000 X 3 / 12)
The Adjusting Entry:
Financial Accounting

20. Adjustments before preparing Final Accounts – Prepaid Expenses
Prepaid Insurance A/c Dr 4,500
To Insurance Premium A/c 4,500
Treatment:
A. Deduct the prepaid portion of insurance Rs.4,500 from Insurance paid in P & L Account
Show the prepaid portion of insurance as an asset in the Balance Sheet
Financial Accounting

21. Meaning: Accrued Income is an income which is earned but not received.
Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income
Meaning: Accrued Income is an income which is earned but not received.
Adjusting Entry
Accrued Income A/ c Dr
To Concerned Income A/c
Financial Accounting

22. Accounting Treatment:
Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income
Accounting Treatment:
Add the outstanding portion to the concerned item of income in Final accounts
Show the accrued portion of income as an asset in the Balance Sheet
Financial Accounting

23. Rent receivable for 12 months 1-1-2006 to 31-12-2006 is Rs.72,000
Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income
Example:
Rent receivable for 12 months to is Rs.72,000
Rent received for only 9 months up to 30th September, 2006 is Rs.54,000
Rent accrued but not received before is Rs.18,000
Financial Accounting

24. Outstanding Rent account Dr 18,000 To Rent account 18,000
Adjustments before preparing Final Accounts – Outstanding Income / Accrued Income
The adjusting entry is
Outstanding Rent account Dr ,000
To Rent account ,000
Treatment is
Financial Accounting

25. Adjustments before preparing Final Accounts – Income Received In Advance
Add Rs.18,000 to rent received account Rs.54,000 to make it Rs.72,000 in P & L Account.
Show the outstanding rent account as an asset in the Balance Sheet on
Financial Accounting

26. Example: Rent received in advance. Adjusting entry in Journal Proper:
Adjustments before preparing Final Accounts – Income Received In Advance
Meaning : Income actually received in the current accounting period but relating to the next accounting period
Example: Rent received in advance.
Adjusting entry in Journal Proper:
Concerned Income account Dr
To Pre-received Income account
Financial Accounting

27. Accounting Treatment:
Adjustments before preparing Final Accounts – Income Received In Advance
Accounting Treatment:
Deduct pre-received portion of the income from the concerned item of income in final accounts.
Show the pre- received amount of the income as a liability in the Balance Sheet
Financial Accounting

28. Royalty actually received during the year is Rs.1,25,000
Adjustments before preparing Final Accounts – Income Received In Advance
Example:
Royalty actually received during the year is Rs.1,25,000
Royalty relating to next year included in the above is Rs.25,000
Adjusting Entry
Royalty account Dr 25,000
Financial Accounting

29. To Pre-received Income account 25,000 Treatment in Accounts:
Adjustments before preparing Final Accounts – Income Received In Advance
To Pre-received Income account 25,000
Treatment in Accounts:
Deduct Rs.25,000 from Rs.1,25,000 in the Profit and Loss Account
Show Rs.25,000 as a liability
in the Balance Sheet
Financial Accounting

30. Adjustments before preparing Final Accounts – Depreciation on assets
Meaning : Depreciation is reduction in the value of an asset as a result of wear and tear or constant use. It is a loss and charged against profit of the business.
Accounting Entries :
Depreciation account Dr
To Concerned Asset account
Profit and Loss Account Dr
To Depreciation account
Financial Accounting

31. Adjustments before preparing Final Accounts – Depreciation on assets
Accounting Treatment:
Charge depreciation against gross profit in P & L Account
Deduct depreciation amount from the concerned asset account if depreciation appears outside T.B.
Methods of Depreciation
Fixed Installment Method
Reducing Balancing Method
Financial Accounting

32. To Sundry debtor’s account (Being bad debts taken to account)
Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts
Meaning: Bad Debts are the debts which can not be recovered and represent total loss to the business.
Accounting Entries:
Bad Debts account Dr
To Sundry debtor’s account
(Being bad debts taken to account)
Profit and Loss Account Dr
Financial Accounting

33. To Bad debts account (Being bad debts charged to P&L account)
Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts
To Bad debts account
(Being bad debts charged to P&L account)
Occurrence of Bad debts:
Case I : Bad debts deducted from debtors and brought to the account and trial balance.
Case II: Bad debts are accounted after the preparation of trial balance
Financial Accounting

34. Accounting Adjustment:
Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts
Accounting Adjustment:
First case: Transfer the bad debts to P&L Account and Sundry Debtors need not be reduced.
Second Case:
Transfer the bad debts to P&L Account and
Reduce the sundry debtors by the amount of bad debts.
Financial Accounting

35. Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts
Third Case: If there is any reserve for bad debts maintained, then bad debts should be set off against such reserve and later if there is uncovered bad debts, then charge them against P&L Account
Financial Accounting

36. Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts
Purpose of Provision for Bad Debts: To cover the risk of bad debts that may arise in future. It is a charge against profits of the business. This is also known as Reserve for bad and doubtful debts.
Adjusting Entries:
Financial Accounting

37. Profit and Loss Account Dr To Reserve for Bad Debts account
Adjustments before preparing Final Accounts – Bad debts and Provision for Bad Debts
Profit and Loss Account Dr
To Reserve for Bad Debts account
(Being provision made for bad and doubtful debts)
Reserve for Bad Debts account Dr
To Bad debts account
(Being bad debts incurred set off against RBD)
Financial Accounting

38. Accounting treatment:
Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts
Accounting treatment:
Charge P & L Account by the amount of RBD to the extent it is needed.
Show the balance of RBD as liability in the Balance Sheet OR deduct RBD from Good Debtors.
Financial Accounting

39. Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts
Deduct bad debts from RBD in case there is adequate balance is available
The amount to be transferred to P&L Account towards RBD is calculated by applying the formula
Financial Accounting

40. New RBD required – (Old RBD + Bad Debts )
Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts
New RBD required – (Old RBD + Bad Debts )
Calculation of RBD: RBD is calculated at a fixed percentage of good debtors and basing on the past experience of business man.
Good debtors = Total debtors – Bad debts unadjusted. (As given outside the trial balance)
Financial Accounting

41. Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts
Illustration:
Debtors on Rs.2,00,000; RBD balance on : Rs.10,000; Bad debts incurred during the year 2005 Rs.9,000; RBD should be at 5% on debtors. Debtors on Rs.3,00,000. Draw ledger accounts and show in the balance sheet.
Answer:
Financial Accounting

42. Reserve for Bad and Doubtful Debts Account
Adjustments before preparing Final Accounts – Bad Debts and Provision for Bad Debts
Reserve for Bad and Doubtful Debts Account
Rs Rs
To Bad debts( )
To balance c/d( )
9,000
15,000
24,000
By balance b/d ( )
By P & L A/c ( )
By balance b/d( )
10,000
14,000
Financial Accounting

43. Reserve for Bad and Doubtful Debts (Continued)
I Method
Balance Sheet for the year ending Balance Sheet for the year ending
Liabilities Assets Liabilities Assets
R B D , Sundry Debtors 2,00, R B D , Sundry Debtors 3,00,000
II Method
Balance Sheet for the year ending Balance Sheet for the year ending
Liabilities Assets Liabilities Assets
S.Debtors ,00, Debtors ,00,000
Less RBD , Less RBD ,000
1,90, ,85,000
Financial Accounting

44. Nature and purpose of Discount
Adjustments before preparing Final Accounts - Reserve for Discount on Debtors
Nature and purpose of Discount
Discounts are of two types – Trade discount and cash discount.
Trade discount is allowed to retain the customer ship and does not get reflected in the accounts
Financial Accounting

45. Need for Reserve for Discount on Debtors:
Adjustments before preparing Final Accounts - Reserve for Discount on Debtors
Cash discount is to encourage prompt and regular payment of cash by the customers to whom goods are sold on credit. It appears in Cash book. Discount allowed is business expense and discount received is business income.
Need for Reserve for Discount on Debtors:
To cover the risk of discount allowable to debtors
Financial Accounting

46. 7.2.7. Adjustments before preparing Final Accounts - Reserve for Discount on Debtors
Accounting Entries:
When reserve for discount on debtors is created: P & L Account Dr
To Reserve for discount on Drs a/c
When discount is allowed to Debtors: Discount allowed account Dr
To Sundry debtor’s a/c
When Discount on debtors is set off against Reserve: Reserve for Discount A/c Dr
To discount allowed a/c
Financial Accounting

47. Accounting Treatment:
Adjustments before preparing Final Accounts - Reserve for Discount on Debtors
Accounting Treatment:
Show Reserve for discount on debtors either as a liability in the balance sheet or deduct the same from good debtors on the asset side of the balance sheet. The later is the popular practice
Financial Accounting

48. Any excess reserve is present, transfer it to P & L Account as income.
Adjustments before preparing Final Accounts - Reserve for Discount on Debtors
Important Note:
Reserve for discount on debtors is computed on the amount of debtors minus new RBD, at a fixed percentage.
Any excess reserve is present, transfer it to P & L Account as income.

49. 7.2.8.Adjustments before preparing Final Accounts – Reserve for Discount on Creditors
Nature and purpose: Discounts are allowed by creditors when we pay them promptly and in time. Discount is thus received and treated as income. Anticipating such income, a reserve is maintained in the business.
Financial Accounting

50. 7.2.8.Adjustments before preparing Final Accounts – Reserve for Discount on Creditors
Accounting entries
1. Whenever discount is received: Creditors Account Dr
To Discount received account
2. When Discount received is transferred to P&L: Discount received a/c Dr
(Reserve for discount is not available) To P & L Account
3. When Discount received is set off against Discount received a/c Dr
Reserve for Discount on Debtors : To Reserve for discount on creditors a/c
4. When Reserve is created in P&L A/c : Reserve for Discount on Creditors a/c Dr
To Profit and Loss Account
Financial Accounting

51. 7.2.8.Adjustments before preparing Final Accounts – Reserve for Discount on Creditors
Accounting Treatment
1. Reserve for discount on creditors shows debit balance and it is an asset. But it is deducted from the amount of creditors on the liability side of balance sheet.
2. The amount of reserve for discount on creditors is computed basing on total creditors.
Financial Accounting

52. 7.2.9. Adjustments before preparing Final Accounts – Stock used for personal purposes
Situation:
Goods of the business might be used for personal purpose of the proprietor and this is not sale transaction.
The stock of goods in the business is reduced, but cash is not received in return.
Financial Accounting

53. 7.2.9. Adjustments before preparing Final Accounts – Stock used for personal purposes
Accounting Treatment
This transaction is treated as similar to drawings for personal purposes.
The cost of goods so used is either deducted from the purchases or shown on the credit side of Trading account.
The capital of the proprietor is reduced by the amount of drawings of goods in the balance sheet.
Financial Accounting

54. 7.2.9. Adjustments before preparing Final Accounts – Stock used for personal purposes
Accounting entries
1. When goods are used for personal purpose: Drawings account Dr
To goods account / purchases account
2. When drawings are transferred to capital A/c: Capital account Dr
To drawings account
Financial Accounting

55. 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
Meaning:
Closing stock is the stock of goods - finished, semi-finished or raw material – at the end of accounting period, lying unsold.
Its valuation is important to calculate trading profit / loss.
Financial Accounting

56. 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
Closing stock does not appear in the trial balance because the closing stock is taken only after the closing of books of accounts.
Valuation
Financial Accounting

57. 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
Closing stock is valued either at cost price at which it was purchased or at market price on the date of valuation which ever is lower. This is as per conservatism principle.
Accounting treatment
1. To bring closing stock into account, the entry is
Closing Stock A/c Dr
To Trading Account
Financial Accounting

58. 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
2. Closing stock is taken to the credit side of Trading account
3. Closing stock being an asset appears on the asset side of balance sheet.
4. Closing stock of the current year automatically becomes opening stock of the coming year.
Financial Accounting

59. 7.2.10.Adjustments before preparing Final Accounts – Closing Stock
5. Opening stock shows debit balance and it is transferred to Trading account to close it. The entry is
Trading Account Dr
To Opening stock account.
Financial Accounting

60. 7.3. Trading Account Form of Trading Account Financial Accounting
Purpose of Trading Account:
Trading Account gives the over all result of trading, i.e.., purchasing and selling of goods.
It takes into account the cost of goods sold and the value at which they have been sold
If the sale value is more than cost of goods sold, it is gross profit. Otherwise it is gross loss
It is prepared by both Manufacturing and trading organizations.
Trading A/c is a revenue account.
Closing entries are:
1. Trading Account Dr
To Opening stock a/c
To Purchases etc.,
(Being trade expenses, op.stock etc transferred to
Trading A/c)
2. Sales a/c Dr
Closing Stock a/c Dr
To Trading Account
(Being closing stock and sales transferred to Trading A/c)
3. Trading Account Dr
To P & L Account
(Being gross profit transferred to P&L Account)
Form of Trading Account
Debit Rs
Credit (Rs)
To Opening Stock
To Purchases less
Purchase returns less
stock personally used
To wages
To carriage inwards
To local tax paid
To royalty paid on raw material extraction
To Freight, cartage
To customs & import duty
To gas electricity & water
To other direct expenses
To Gross profit transferred to Profit and Loss Account
By Sales less sales returns
By Closing stock
By gross loss transferred to Profit and Loss Account
Financial Accounting

61. 7.4. Preparation of Trading Account
Steps to prepare Trading Account
1. Take Opening stock of goods on the debit side and Closing stock to the credit side of Trading Account
2. Identify all expenses of trade, purchase and direct expenses and show them on debit side
Financial Accounting

62. 7.4. Preparation of Trading Account
3. Give effect to adjustments like outstanding and prepaid items and drawings of goods etc., .to the relevant accounts
4. Show sales less returns and closing stock on the credit side of Trading account
Financial Accounting

63. 7.4. Preparation of Trading Account
5. If there is excess of credit, treat it as Gross Profit and transfer it to P&L Account
6. If there is excess of debit, over credit, treat it as Gross Loss and transfer it to P & L Account
Illustration
Financial Accounting

64. From the following balances extracted from Trial balance, prepare Trading Account. The closing stock at the end of the period is Rs56000
Financial Accounting

65. Particulars Amount in Rs. Stock on 1-1-2004 Returns inwards
Returns outwards
Purchases
Debtors
Creditors
Carriage inwards
Carriage outwards
Import duty on materials received from abroad
Clearing charges
Rent of business shop
Royalty paid to extract materials
Fire insurance on stock
Wages paid to workers
Office salaries
Cash discount
Gas, electricity and water
Sales
70700
2000
3000
102000
56000
45000
5000
4000
6000
7000
12000
10000
8000
1000
250000
Financial Accounting

66. Solution Particulars TRADING ACCOUNT FOR THE YEAR ENDING - - - - Dr Cr
To stock on
To Purchases
Less Returns
Outwards
To Carriage inwards
To import duty
To Clearing charges
To Royalty
To Fire Insurance
To Wages
To Gas, electricity, water
To P & L Account (GP)
70700
99000
5000
6000
7000
10000
2000
8000
4000
91300
By sales
Inwards
By Closing stock
24700
56000
303000

67. 7.6. Profit and Loss Account
Nature and Salient features:
P&L Account is a revenue account, showing all revenue expenses and incomes
The result is net profit or net loss, transferred to Capital account
Office, administrative, selling and distribution expenses are transferred to debit of P&L Account
Financial Accounting

68. 7.6. Profit and Loss Account
Revenue losses such as bad debts, depreciation, loss on sale of certain assets, loss as a result of calamities are also taken to debit side of the account.
All incomes such as rent received, interest received, discount received etc., are taken to credit side.
Reserves and provisions are charged against profit by taking them on debit side.
Financial Accounting

69. 7.6. Profit and Loss Account
Adjustments in the nature of outstanding, prepaid, accrued, incomes received in advance etc., are incorporated.
The Transferring entries are:
1. P & L Account Dr
To All expenses, reserves & Losses a/c
(Being all revenue expenses, provisions etc., transferred to P&L A/C)
Financial Accounting

70. 7.6. Profit and Loss Account
2. All Incomes Accounts Dr
To P & L Account
(Being incomes of revenue in nature are taken to P & L account)
3. P & L Account Dr
To Capital Account
(Being Net profit transferred to Capital Account)
Financial Accounting

71. FORMAT Dr PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDING --- Cr
Particulars Rs
To Trading Account (GL)
To Salaries + Out standing –Prepaid salaries as per adjustments
To Rent of the premises
To Travelling expenses
To Rates and Taxes
To Printing and stationery
To Postage and Telegram
To Telephone charges
To Insurance –Prepaid amount as per adjustment
To Interest paid
To Discount allowed
To Sundry expenses
To Advertisement
To Commission
To Carriage outwards
To Bad Debts
To Reserve for Bad debts
To Reserve for discount on Debtors
To Depreciation
To Legal charges
To Audit fee
To Interest on Capital
To Capital Account (Net Profit)
By Trading account (GP)
By Interest earned + Accrued interest as per adjustments
By Commission earned
By discount earned
By Rent received
By Bad debts recovered
By Interest on drawings
By Reserve for discount on Creditors
By Dividends received
By Royalty Received
By Capital Account( Net Loss)
Financial Accounting

72. Rs Particulars Illustration
The following Trial Balance is extracted from the books of a merchant on
Particulars Rs
Furniture and fittings
Motor Vehicles
Buildings
Capital Account
Bad Debts
Provision for Bad debts
Sundry Debtors
Sundry Creditors
Stock on
Purchases
Sales
Bank Over Draft
Sales Returns
Purchase Returns
Advertising
Interest on Bank Over Draft
Commission
Cash
Taxes and Insurance
General Expenses
Salaries
640
6250
7500
12500
125
200
3800
2500
3460
5475
15450
2850
450
118
375
650
1250
782
3300
Financial Accounting

73. The following adjustments are to be made.
Stock in hand on was Rs3250
Depreciate Buildings at the rate of 5%, Furniture and 10% and Motor 20%.
Rs.85 is due for interest on bank overdraft.
Financial Accounting

74. Salaries of Rs.300 and taxes Rs.120 are outstanding.
Insurance amounting to Rs.100 is prepaid
One-third of the commission received is in respect of work to be done next year
Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors.
Prepare Trading Account and Profit and Loss Account.
Financial Accounting

75. Dr Trading Account for the year ending 31-12-2004 Cr
Particulars Rs
To Stock on
To Purchases
Less returns
To P & L A/C (GP)
3460
5350
9690
By Sales
Les Returns 200
By Closing Stock
15250
3250
Total
18500
Profit and Loss Account for the year ending
Dr Cr
Particulars Rs
To Salaries
Add Outstanding
To Advertising
To Interest on OD
Add Outstanding Int
To Taxes and Insurance
Add Out standing tax
1370
Less Prepaid Insurance
To General expenses
To bad debts
To RBD(New)
Less old RBD balance
To Depreciation:
On Bldgs @ 5%
On FF @ 10%
On M
To Capital Account (NP)
3600
450
203
1270
782
125
270
1689
1551
By Trading Account (GP)
By Commission
Less Pre-received 125
9690
250
Total
9940
Note: 70

76. Note:
Sundry Debtors are Rs.3800 and there have been bad debts outside TB Rs100. The good debtors are Rs The new RBD is 10% of 3700, i.e.Rs370. The old RBD unspent is Rs100 ( ). Therefore RBD to be charged against profit is Rs270
Financial Accounting

77. 7.7. Balance Sheet Meaning:
Balance Sheet is a statement of assets and liabilities of a business as on a certain date
Assets are stated on right hand side and liabilities on the left hand side, in case Balance Sheet is prepared horizontally.
Financial Accounting

78. 7.7. Balance Sheet
If balance sheet is prepared vertically, assets are mentioned first (Application of funds) and later the liabilities are mentioned (Sources of funds)
The assets and liabilities are arranged in the liquidity order, i.e.., more liquid assets come first and those that can not be readily converted come next.

79. 7.7. Balance Sheet
A balance sheet of a company form of organization, assets and liabilities are arranged on permanency order, i.e.., assets, which are more permanent come first and less permanent next. Format of a Balance Sheet is a
Financial Accounting

80. 7.7. Balance Sheet
BALANCE SHEET OF FOR THE YEAR ENDING
Capital and Liabilities Rs
Assets
Sundry Creditors
Less Reserve for Discount on
Creditors
Bills Payable
Bank Over Draft
Loans Borrowed
Outstanding Expenses
Pre-received Incomes
Capital (Opening)
Add Additions to capital
Add interest on capital if any
Add Net profit as per P&L a/c
Less personal drawings
Less Net loss as per P&L A/C
Cash in hand
Cash at Bank
Land and Building
Add Additions if any
Less depreciation
Plant and Machinery less depreciation
Furniture and Fixtures less depreciation
Sundry debtors
Less Bad debts out side Trial Balance
Less Reserve for Bad Debts
Less Reserve for discount on Debtors
Bills Receivable
Loans and advances given to others + Interest outstanding
Investments + outstanding income on investments
Other outstanding incomes
Pre-paid expenses
Closing stock
Total

81. 7.8. Preparation of Balance Sheet
Guidelines to prepare Balance Sheet
1. Check whether the given Trial Balance tallies or not. If it does not tally, make a note of the amount of difference.
Financial Accounting

82. 7.8. Preparation of Balance Sheet
2. Identify assets from the debit side of Trial balance and arrange them in liquidity order on the assets side of B/S
3. Identify liabilities from the credit side of Trial Balance and arrange them on the liabilities side of Balance Sheet
Financial Accounting

83. 7.8. Preparation of Balance Sheet
4. Note those items of adjustments, which are given out side Trial Balance.
5. Every adjustment should be recorded at two places, either Trading account or Profit and Loss Account and Balance Sheet. Invariably, an adjustment is recorded in Balance sheet.
Financial Accounting

84. 7.8. Preparation of Balance Sheet
For Example:
Closing stock given in the adjustments, will be first recorded in the trading a/c and later on the asset’s side of balance sheet.
Outstanding salaries first are added with salaries in P&L account and then on the liabilities side of balance sheet.
Financial Accounting

85. 7.8. Preparation of Balance Sheet
6. The difference in the trial balance, if any, should match with the difference between asset and liabilities side of
balance sheet and accordingly interpret and incorporate. At the end , the balance sheet should tally.
ILLUSTRATION:
Financial Accounting

86. Prepare Balance Sheet from the following Trial Balance from the books of a merchant on 31-12-2004
Particulars Rs
Furniture and fittings
Motor Vehicles
Buildings
Capital Account
Bad Debts
Provision for Bad debts
Sundry Debtors
Sundry Creditors
Stock on
Purchases
Sales
Bank Over Draft
Sales Returns
Purchase Returns
Advertising
Interest on Bank Over Draft
Commission
Cash
Taxes and Insurance
General Expenses
Salaries
640
6250
7500
12500
125
200
3800
2500
3460
5475
15450
2850
450
118
375
650
1250
782
3300

87. The following adjustments are to be made.
Stock in hand on was Rs3250
Depreciate Buildings at the rate of 5%, Furniture and 10% and Motor 20%.
Rs.85 is due for interest on bank overdraft.
Salaries of Rs300 and taxes Rs.120 are outstanding.
Financial Accounting

88. Insurance amounting to Rs.100 is prepaid
One-third of the commission received is in respect of work to be done next year
Write off a further sum of Rs.100 as bad debts and provision for bad and doubtful debts to be made equal to 10% on sundry debtors.
Financial Accounting

89. 7.8. Preparation of Balance Sheet continued
Solution
Capital and Liabilities Rs
Assets
Sundry Creditors
Bank Over Draft
Add interest due
Commission received in advance
Outstanding Taxes
Outstanding Salaries
Capital
Add Net Profit
2500
2935
125
120
300
14051
Cash
Building
Less Depreciation
Furniture and Fixtures 640
Less Depreciation
Motor Vehicle
Less Depreciation
Sundry Debtors
Less bad debts as per Adjustments
Balance
Less Reserve for Bad Debts(New)
Closing Stock
Pre-Paid Insurance
650
7125
576
5000
3330
3250
100
Total
20031
BALANCE SHEET OF THE MERCHANT AS ON

90. NOTE: Every adjustment given outside Trial Balance finds place in two accounts –Trading account / Profit and Loss Account and invariably in Balance Sheet.
Financial Accounting