Chapter 8: Final Accounts
8.1 Concept, Objectives, and Components of Final Accounts
Final Accounts are the financial statements prepared at the end of an accounting period (usually on the last day of Ashadh, the end of Nepal’s fiscal year, though some businesses close their books on the last day of Chaitra) from the balances of the Trial Balance and Additional Adjustments to determine the operating results (Gross Profit/Loss and Net Profit/Loss) and the true financial position (Assets and Liabilities) of a business enterprise.
Three Components Prepared in Sequential Order
- Trading Account → Determines Gross Profit or Gross Loss.
- Profit and Loss Account → Determines Net Profit or Net Loss.
- Balance Sheet → Shows the financial position (Capital & Liabilities = Assets) on the closing date.
8.2 Trading Account
Meaning and Purpose
The Trading Account is the first step of Final Accounts prepared to find out the Gross Profit or Gross Loss resulting from buying/manufacturing and selling goods during a fiscal year.
- Debit Side (Direct Expenses): Opening Stock, Net Purchases (Purchases - Purchase Return / Return Outwards), and all Direct Factory/Purchase Expenses incurred to bring goods into the godown/factory and make them ready for sale:
- Wages / Productive Wages
- Carriage Inwards / Freight Inwards / Cartage
- Customs Duty, Import Duty, Octroi, Clearing Charges
- Factory Rent, Factory Lighting, Factory Insurance, Motive Power, Coal, Gas, Fuel, Royalty on Production.
- Credit Side (Direct Revenues): Net Sales (Sales - Sales Return / Return Inwards) and Closing Stock, plus any abnormal loss of goods (by fire/theft).
- Formula:
- If Credit Total > Debit Total → Gross Profit c/d (transferred to Cr. side of P/L Account).
- If Debit Total > Credit Total → Gross Loss c/d (transferred to Dr. side of P/L Account).
8.3 Profit and Loss Account
Meaning and Purpose
The Profit and Loss Account is prepared immediately after the Trading Account to ascertain the Net Profit or Net Loss of the business after charging all Indirect Expenses and adding all Indirect Incomes.
- Debit Side (Indirect Expenses & Losses):
- Office & Administrative Expenses: Salaries, Office Rent, Printing & Stationery, Postage, Telephone/Internet, Audit Fee, Legal Charges, Office Electricity/Water, General Expenses, Insurance Premium.
- Selling & Distribution Expenses: Carriage Outwards, Advertisement, Salesmen’s Commission/Salary, Showroom Rent, Packing Charges, Bad Debts, Discount Allowed.
- Financial & Other Expenses/Losses: Interest on Bank Loan, Bank Charges, Depreciation on Fixed Assets, Repair & Maintenance, Loss on Sale of Fixed Assets, Loss by Fire/Theft (uninsured portion).
- Credit Side (Indirect Incomes & Gains): Gross Profit b/d, Commission Received, Rent Received, Interest on Investment/Deposit, Discount Received, Dividend Received, Bad Debts Recovered, Appreciation on Land/Building, Gain on Sale of Fixed Assets.
- Formula:
- If Credit Total > Debit Total → Net Profit (added to Capital in Balance Sheet).
- If Debit Total > Credit Total → Net Loss (deducted from Capital in Balance Sheet).
8.4 Balance Sheet
Meaning and Purpose
A Balance Sheet is not a ledger account (it has no Dr. or Cr. sides and does not use “To” or “By”); it is a Statement of Financial Position prepared on the last day of the fiscal year showing Capital and Liabilities on the Left-Hand Side and Assets and Properties on the Right-Hand Side.
| Capital and Liabilities — Left Side | Assets and Properties — Right Side |
|---|---|
| 1. Owner’s Capital: Opening Capital (+) Net Profit (or (-) Net Loss) (+) Interest on Capital (-) Drawing 2. Reserves & Funds: General Reserve, Reserve Fund, Pension Fund 3. Long-Term Liabilities: Bank Loan, Mortgage Loan, Debentures 4. Current Liabilities: • Sundry Creditors / Accounts Payable • Bills Payable • Bank Overdraft • Outstanding / Unpaid Expenses • Advance / Unearned Income | 1. Fixed / Non-Current Assets: • Goodwill, Patent, Trademark, Copyright (Intangible) • Land and Building (less Depreciation / add Appreciation) • Plant and Machinery (less Depreciation) • Furniture and Fixtures (less Depreciation) • Vehicles / Computers (less Depreciation) 2. Investments: Shares, Govt. Bonds, Fixed Deposit 3. Current Assets: • Closing Stock • Sundry Debtors (less New Bad Debts & Provision) • Bills Receivable • Prepaid / Unexpired Expenses • Accrued / Receivable Income • Cash at Bank & Cash in Hand |
8.5 Master Table of Final Account Adjustments
Golden Rule: Every item inside the Trial Balance appears ONCE (either in Trading, P/L, or Balance Sheet). Every item given outside the Trial Balance as an Adjustment must be recorded TWICE (once in Trading or P/L Account, and once in the Balance Sheet) to maintain double-entry balance!
| S.N. | Adjustment Item (Given Outside Trial Balance) | First Effect (Trading or P/L Account) | Second Effect (Balance Sheet) |
|---|---|---|---|
| 1 | Closing Stock | Show on Cr. side of Trading Account | Show on Assets side of Balance Sheet |
| 2 | Outstanding / Unpaid / Due Expenses (e.g., Wages, Salary, Rent) | Add (+) to the concerned expense on Dr. side of Trading or P/L A/C | Show on Liabilities side of Balance Sheet |
| 3 | Prepaid / Unexpired / Advance Expenses (e.g., Prepaid Insurance/Rent) | Deduct (-) from the concerned expense on Dr. side of Trading or P/L A/C | Show on Assets side of Balance Sheet |
| 4 | Depreciation on Fixed Assets (e.g., 10% on Machinery/Furniture) | Show Depreciation amount on Dr. side of P/L Account | Deduct (-) from the concerned Fixed Asset on Assets side of Balance Sheet |
| 5 | Appreciation on Land & Building | Show Appreciation amount on Cr. side of P/L Account | Add (+) to Land & Building on Assets side of Balance Sheet |
| 6 | Accrued / Receivable / Earned but not received Income | Add (+) to the concerned income on Cr. side of P/L Account | Show on Assets side of Balance Sheet |
| 7 | Advance / Unearned Income received | Deduct (-) from the concerned income on Cr. side of P/L Account | Show on Liabilities side of Balance Sheet |
| 8 | Further Bad Debts / Provision for Doubtful Debts | Show on Dr. side of P/L Account (or add to existing Bad Debts) | Deduct (-) from Sundry Debtors on Assets side of Balance Sheet |
| 9 | Interest on Capital | Show on Dr. side of P/L Account | Add (+) to Capital on Liabilities side of Balance Sheet |
8.6 Comprehensive Solved SEE Long Question (8 Marks)
Question: From the following Trial Balance of Bagmati Trading Concern as on 30th Chaitra 2082, prepare Trading Account, Profit and Loss Account for the year ended 30th Chaitra 2082, and a Balance Sheet as on that date:
| Debit Particulars | Amount (Rs.) | Credit Particulars | Amount (Rs.) |
|---|---|---|---|
| Opening Stock | 40,000 | Capital | 2,50,000 |
| Purchases | 2,10,000 | Sales | 3,85,000 |
| Wages | 25,000 | Purchase Return | 10,000 |
| Carriage Inwards | 5,000 | Commission Received | 12,000 |
| Salaries | 44,000 | Sundry Creditors | 45,000 |
| Office Rent | 18,000 | 10% Bank Loan | 50,000 |
| Insurance Premium | 8,000 | ||
| Machinery | 1,20,000 | ||
| Furniture | 50,000 | ||
| Sundry Debtors | 80,000 | ||
| Cash at Bank | 1,42,000 | ||
| Sales Return | 5,000 | ||
| Interest on Bank Loan | 5,000 | ||
| Total | 7,52,000 | Total | 7,52,000 |
Additional Information (Adjustments):
- Closing Stock was valued at Rs. 60,000.
- Outstanding Salary for one month amounted to Rs. 4,000 and Outstanding Wages Rs. 3,000.
- Prepaid Insurance was Rs. 2,000.
- Depreciate Machinery by 10% and Furniture by 5%.
- Create a Provision for Bad and Doubtful Debts at 5% on Sundry Debtors.
Solution:
Bagmati Trading Concern
Trading and Profit & Loss Account
For the year ended 30th Chaitra 2082
| Dr. Particulars (Expenses/Losses) | Details (Rs.) | Amount (Rs.) | Cr. Particulars (Incomes/Gains) | Details (Rs.) | Amount (Rs.) |
|---|---|---|---|---|---|
| To Opening Stock | 40,000 | By Sales | 3,85,000 | ||
| To Purchases | 2,10,000 | Less: Sales Return | (5,000) | 3,80,000 | |
| Less: Purchase Return | (10,000) | 2,00,000 | By Closing Stock | 60,000 | |
| To Wages | 25,000 | ||||
| Add: Outstanding Wages | 3,000 | 28,000 | |||
| To Carriage Inwards | 5,000 | ||||
| To Gross Profit c/d | 1,67,000 | ||||
| Total | 4,40,000 | Total | 4,40,000 | ||
| To Salaries | 44,000 | By Gross Profit b/d | 1,67,000 | ||
| Add: Outstanding Salaries | 4,000 | 48,000 | By Commission Received | 12,000 | |
| To Office Rent | 18,000 | ||||
| To Insurance Premium | 8,000 | ||||
| Less: Prepaid Insurance | (2,000) | 6,000 | |||
| To Interest on Bank Loan | 5,000 | ||||
| To Depreciation on Machinery (10%) | 12,000 | ||||
| To Depreciation on Furniture (5%) | 2,500 | ||||
| To Provision for Bad Debts (5% of 80,000) | 4,000 | ||||
| To Net Profit (transferred to Capital) | 83,500 | ||||
| Total | 1,79,000 | Total | 1,79,000 |
Bagmati Trading Concern
Balance Sheet
As on 30th Chaitra 2082
| Capital and Liabilities | Details (Rs.) | Amount (Rs.) | Assets and Properties | Details (Rs.) | Amount (Rs.) |
|---|---|---|---|---|---|
| Capital | 2,50,000 | Machinery | 1,20,000 | ||
| Add: Net Profit | 83,500 | 3,33,500 | Less: Depreciation (10%) | (12,000) | 1,08,000 |
| 10% Bank Loan | 50,000 | Furniture | 50,000 | ||
| Sundry Creditors | 45,000 | Less: Depreciation (5%) | (2,500) | 47,500 | |
| Outstanding Salaries | 4,000 | Sundry Debtors | 80,000 | ||
| Outstanding Wages | 3,000 | Less: Provision for Bad Debts (5%) | (4,000) | 76,000 | |
| Closing Stock | 60,000 | ||||
| Prepaid Insurance | 2,000 | ||||
| Cash at Bank | 1,42,000 | ||||
| Total | 4,35,500 | Total | 4,35,500 |
8.7 CDC Textbook Exercises & SEE Practice Questions
Group A: Very Short Answer Questions (1 Mark Each)
- Why is a Trading Account prepared?
- How do you record outstanding salary expenses at the end of a year in the Final Accounts?
- What is a Balance Sheet?
Group C: Long Answer Numerical Practice (8 Marks)
- Practice Problem: From the following Trial Balance of Gokarneshwor Traders as on the last day of Ashadh 2083, prepare Trading Account, Profit & Loss Account, and Balance Sheet:
- Debit Balances: Opening Stock Rs. 30,000; Purchases Rs. 1,50,000; Wages Rs. 15,000; Custom Duty Rs. 5,000; Salaries Rs. 35,000; Rent Rs. 12,000; Land & Building Rs. 2,00,000; Equipment Rs. 60,000; Debtors Rs. 50,000; Cash in Hand Rs. 43,000 (Total = Rs. 6,00,000).
- Credit Balances: Capital Rs. 2,20,000; Sales Rs. 3,10,000; Creditors Rs. 40,000; Commission Received Rs. 10,000; Bank Overdraft Rs. 20,000 (Total = Rs. 6,00,000).
- Adjustments: (i) Closing Stock Rs. 45,000; (ii) Outstanding Rent Rs. 3,000; (iii) Appreciate Land & Building by 10% and Depreciate Equipment by 10%.
- (Expected Answers: Gross Profit = Rs. 1,55,000; Net Profit = Rs. 1,29,000; Balance Sheet Total = Rs. 4,12,000).
Worked answers to these exercises are in Chapter 8 Solutions.