Accounting, CPT Chapter 6 CA PRATHAP SS

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1 Accounting, CPT Chapter 6 CA PRATHAP SS

2 INTRODUCTION Preparation of Final Accounts is the last phase of the Accounting Process.

3 INTRODUCTION The process of accounting starts from Transaction then entered in Journal then it is posted in Ledger and Summarized in Trial Balance The next step is the Preparation of Final Accounts.

4 INTRODUCTION Final Accounts is mainly divided into two parts Income Statement & Position Statement. The profit of the enterprise is obtained through the preparation of Income Statement. Financial position of the enterprise can be known through the preparation of the Position Statement.

5 PARTS OF FINAL ACCOUNTS Income Statement: Trading A/c Profit and Loss A/c Position Statement: Balance Sheet.

6 PREPARATION OF FINAL ACCOUNTS The principle function of final statements of account (T, P&L, B/S) is to exhibit truly and fairly the profitability and the financial position of the business.

7 INTER-RELATIONSHIP OF THE TWO STATEMENTS The two statements, the Profit and Loss Account and the Balance Sheet are thoroughly inter-related. The assets shown in the Balance Sheet are mostly the remainder of the expenditure incurred after a suitable amount has been charged to the Profit and Loss Account or the Trading Account.

8 TRADING A/C Following are the items appearing in the Trading A/c: Debit Side : Opening Stock Purchases less Purchase Return Carriage (or) Freight Inward Wages Credit Side : Sales less Sales Returns Closing Stock The Balancing figure will be Gross Profit / Loss Trading A/c is based on Matching Concept.

9 PROFIT AND LOSS A/C All Indirect expenses will appear on the Debit side of the Profit and Loss account. Indirect expenses are classified into two types. Administrative expenses and Selling and Distribution expenses

10 EXAMPLES OF ADMINISTRATIVE EXPENSES Salaries Rent Lighting in the office Legal expenses Audit Fees

11 EXAMPLES OF SELLING AND DISTRIBUTION EXPENSES Advertising Packing expenses Carriage outwards (i.e., on sales) Insurance Bad Debts

12 JOURNAL ENTRIES FOR ADJUSTMENTS

13 EXPENSES UNPAID / OUTSTANDING Eg : Rent for last month Rs.50,000 not yet paid Rent a/c Dr. 50,000 To Rent Outstanding a/c 50,000 (Being Rent due and not paid) This will be the Standard entry for all expenses incurred but not yet paid. Example : salary, Interest, Wages

14 INCOME EARNED BUT NOT RECEIVED Eg : On our Bank deposit of Rs.10,00,000, the Bank has not yet paid the interest earned of Rs.50,000 Interest Accrued a/c Dr. 50,000 To Interest a/c 50,000 (Being Interest earned but not yet received) In our B/S on the Asset side along with the Bank Deposits of Rs.10,00,000, the Interest Accrued of Rs.50,000 will have to be shown.

15 CARRYING FORWARD INCOMES AND PAYMENTS RECEIVED IN ADVANCE Eg : We have received a fee collection in advance of Rs.75,000 Fee collection a/c Dr. 75,000 To Fee Collection received in advance a/c 75,000 (Being Fees received in advance reduced from Fee Collection account and shown as a Liability) This will be the standard treatment for all Incomes received in advance, which will have to be shown on the Liability side of the Balance Sheet.

16 BAD DEBTS Eg. There is a bad debt of Rs.10,000. Bad Debts A/c Dr. 10,000 To Sundry Debtors A/c 10,000 (Being bad debts brought into accounts) Profit and loss a/c Dr. 10,000 To Bad Debts a/c 10,000 (Being transfer of bad debts to P&L a/c)

17 CREATION OF PROVISION FOR BAD AND DOUBTFUL DEBTS Profit & Loss A/c Dr. XXX To Prov. For Bad & Doubtful Debts A/c. XXX When a provision for Bad and Doubtful debts already exists and a bad debt occurs, then only the provision account will be debited and not the P&L a/c.

18 ABNORMAL LOSS BY FIRE Eg. Stock of Rs.90,000 was destroyed by fire. Abnormal loss A/c Dr. 90,000 To Purchases A/c 90,000 (Being stock destroyed by fire.) Profit & Loss A/c Dr. 90,000 To Abnormal loss A/c 90,000 (Being the abnormal loss booked in P&L a/c) When any stock is not available for sale in the shop then purchases a/c has to be reduced.

19 GOODS TRANSACTED OTHER THAN THROUGH SALE Charity : Eg. Goods of Rs.67,000 was distributed at an orphanage Charity A/c Dr. 67,000 To Purchases A/c 67,000 Personal use : Eg. Goods worth Rs.10,000 was taken for own use. Drawings A/c Dr. 10,000 To Purchases A/c 10,000

20 GOODS TRANSACTED OTHER THAN THROUGH SALE (CONTD...) Advertisement : Eg. Goods worth Rs.70,000 were distributed as free samples. Advertisement A/c Dr. 70,000 To Purchases A/c 70,000 Whenever the goods are not available for sale in the shop, then in the eyes of Accounts these goods were never purchased, so, Purchases a/c will have to be reduced.

21 BALANCE SHEET A statement which sets out the assets and Liabilities of a firm ( or ) an institution as at a certain date. The Balance Sheet is true only at a particular point of time / date. It is prepared on a particular date.

22 ARRANGEMENT OF ASSETS & LIABILITIES Liquidity or Permanence. Liquidity : Cash in hand Cash at Bank S. Debtors Stock ASSET Machinery Furniture Patent Goodwill. Permanence : The reverse order of above. LIABILITIES Liability is arranged according to the urgency with which payment has to be made. There are two ways of arranging : (I) Capital Long term borrowings Short term borrowings. (II) Short term borrowings Long term borrowings Capital

23 PROVISIONS Provision means any amount written off ( or ) retained by way of providing for say Depreciation, Bad Debts. The provision for discount on debtors is calculated on debtors after deducting the provision for Doubtful Debts. Provisions are a charge on Profits.

24 LIMITATIONS OF FINANCIAL STATEMENTS Historical cost Intangible strengths and weakness. Perpetual continuity Different accounting policies Management policies.

25 IMPORTANT EXAM POINTS Profit or loss on sale of fixed asset is transferred to Profit and Loss A/c. Work in progress is shown in the Balance Sheet under the head current asset. Prepaid rent is current asset. If closing stock appears in the Trial Balance then it appears in Balance Sheet.

26 IMPORTANT EXAM POINTS (CONTD..) Sale of scrap of raw materials appearing in the trial balance are shown on the credit side of Manufacturing a/c. Full claim accepted by Insurance company on the loss of goods by fire is credited to Trading A/c. A surplus of revenue over cost is known as profit of business.

27 IMPORTANT EXAM POINTS (CONTD..) Fixed assets are kept in the business for use over a long time for earning income. Manufacturing account is prepared to ascertain the cost of the manufactured goods. Bonus given to employees is recorded in P&L a/c.

28 MCQ S

29 PREPAID RENT IS SHOWN AS : Current Asset Current Liability Fixed Asset Income Answer : A

30 IF CLOSING STOCK APPEARS IN THE TRIAL BALANCE THEN IT APPEARS IN : Trading A/c Profit & Loss A/c Balance Sheet Profit and Loss Appropriation Answer : C

31 SALE OF SCRAP OF RAW MATERIALS APPEARING IN THE TRIAL BALANCE ARE SHOWN ON THE CREDIT SIDE OF Trading A/c Profit and Loss A/c Manufacturing A/c None of these Answer : C

32 BONUS GIVEN TO EMPLOYEES IS RECORDED IN : Trading A/c Profit and Loss A/c Profit and Loss Appropriation A/c None of the above Answer : B

33 PROVISIONS ARE : Appropriation of profits Charge on profits Both None Answer : B

34 BILLS RECEIVABLE DISCOUNTED BUT NOT DUE TILL DATE OF FINAL ACCOUNTS IS SHOWN AS : Liabilities Assets P & L A/c Foot Notes Answer : D

35 THE PROVISION FOR BAD DEBTS IS CREATED BY DEBITING : Trading A/c Profit and Loss A/c Debtors Account Provision for Bad Debts A/c Answer : B

36 IN BOOKS OF MANUFACTURING CONCERN, OPENING STOCK CONSISTS OF : Raw materials Work in progress Finished goods All the above Answer : D

37 TRADING ACCOUNT IS A : Personal A/c Real A/c Nominal A/c None Answer : C

38 ONLY PERSONAL AND REAL ACCOUNTS ARE SHOWN IN : Trial Balance Balance Sheet Trading A/c Profit & Loss A/c Answer : B

39 FULL CLAIM ACCEPTED BY INSURANCE COMPANY ON THE LOSS OF GOODS BY FIRE IS CREDITED TO A/C Trading A/c P & L A/c Insurance company None Answer : B

40 IS A SUMMARY OF ALL ASSETS AND LIABILITIES ON A PARTICULAR DATE. Trial Balance Profit & Loss A/c Balance Sheet Funds flow Statement Answer : C

41 A SURPLUS OF REVENUE OVER COST IS KNOWN AS OF BUSINESS. Capital Profit Asset None Answer : B

42 BAD DEBT RECOVERED OF RS.2,000 WHICH WAS PREVIOUSLY WRITTEN OFF AS BAD DEBT WILL BE CREDITED TO A/C Bad Debt A/c Debtor A/c Bad debt recovered A/c Suspense A/c Answer : C

43 SELLING AND DISTRIBUTION EXPENSES DOES NOT INCLUDE : Godown rent Carriage outwards Insurance for stock of finished goods Carriage Inwards Answer : D

44 IF PURCHASES A/C IS NOT CREDITED IN CASE OF GOODS LOST IN TRANSIT THEN WHICH ACCOUNT CAN BE CREDITED : Goods lost in transit account Purchase Return Account Trading Account Sales Account Answer : C

45 POSTAL EXPENSES ACCOUNT IS SHOWN IN : P&L A/c Trading A/c Balance Sheet Manufacturing A/c Answer : A

46 WORK IN PROGRESS IS SHOWN IN THE BALANCE SHEET UNDER WHICH HEAD? Share Capital Current Asset Fixed Asset Current Liability Answer : B

47 SALES = + GROSS PROFIT Cost of Goods Sold Purchases Opening Stock None Answer : A

48 RETURN INWARD ARE DEDUCTED FROM Purchases Sales Return Inwards Closing Stock Answer : B

49 49 THANK YOU

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