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Corporate AccountingUnit-3
Final Accounts of a Company:
Trading and P&L A/c and Balance sheet are prepared at the end of the year or at end of the part. So it is called Final Account.
1. Trading and Profit and Loss A/c is prepared to find out Profit or Loss.2. Balance Sheet is prepared to find out financial position a if concern.
Revenue account of trading concern is divided into two-part i.e.1. Trading Account and
2. Profit and Loss Account.
(A) Trading accountTrading is the basic process of business. Manufacturing companies, for example, buy in raw materials and use them to make products for sale, whereas retail companies buy in finished goods for sale at a higher price; this is the basis of their trade. The trading account for either of these types of business shows how much profit the firm makes by this basic business process, ignoring other expenses the company may incur. It simply looks at how profitably the firm makes goods or processes them for sale to customers. The profit earned by this process is known as the gross profit.
Items appearing in the Debit side of Trading Account.1. Opening Stock: Stock on hand at the commencement of the year or period is termed as the Opening Stock.2. Purchases: It indicates total purchases both cash and credit made during the year.3. Purchases Returns or Returns out words: Purchases Returns must be subtracted from the total purchases to get the net purchases. Net purchases will be shown in the trading account.4. Direct Expenses on Purchases: Some of the Direct Expenses are.
i. Wages: It is also known as productive wages or Manufacturing wages.ii. Carriage or Carriage Inwards:
iii. Doctroi Duty: Duty paid on goods for bringing them within municipal limits.iv. Customs duty, dock dues, clearing charges, Import duty etc.v. Fuel, Power, Lighting charges related to production.
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Final Accounts
Trading & Profit and Loss A/c Balance sheet
Corporate AccountingUnit-3
vi. Oil, Grease and Waste.vii. Packing charges: Such expenses are incurred with a view to put the goods in the Saleable
Condition.Items appearing on the credit side of Trading Account
1. Sales: Total Sales (Including both cash and credit) made during the year.2. Sales Returns or Return Inwards: Sales Returns must be subtracted from the Total Sales to get Net sales. 3. Closing stock: Generally, Closing stock does not appear in the Trial Balance. It appears outside the Trial balance. It represents the value of goods at the end of the trading period.
(B) Profit and loss accountTrading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account.Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of accounting year.
Items appearing on Debit side of the Profit & Loss A/cThe Expenses incurred in a business is divided in too parts. i.e. one is Direct expenses are recorded in trading A/c., and another one is Indirect expenses, which are recorded on the debit side of Profit & Loss A/c. Indirect Expenses are grouped under four heads:1. Selling Expenses: All expenses relating to sales such as Carriage outwards, travelling Expenses, Advertising etc.,2. Office Expenses: Expenses incurred on running an office such as Office Salaries, Rent, Tax, Postage, Stationery etc.,3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs and Renewals, Depreciation etc.4. Financial Expenses: Interest Paid on loan, Discount allowed etc., are few examples for Financial Expenses.
Item appearing on Credit side of Profit and Loss A/cGross Profit is appeared on the credit side of P & L. A/c. Also other gains and incomes of the business are shown on the credit side. Typical of such gains are items such as Interest received, Rent received, Discounts earned, Commission earned.
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Corporate AccountingUnit-3
(C) Balance sheet
The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and Liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date.”On the left hand side of this statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be equal. Capital arrives Assets exceeds the liabilities.
Objectives of balance sheet:1. It shows accurate financial position of a firm.2. It is a gist of various transactions at a given period.3. It clearly indicates, whether the firm has sufficient assents to repay its liabilities.4. The accuracy of final accounts is verified by this statement5. It shows the profit or Loss arrived through Profit & Loss A/c.
Major headings of the assets and liabilities-side of a company’s balances sheet as per Schedule VI, Part I.
Major headings of Assets side
i. Fixed Assets ii. Investments
iii. Current Assets, Loans and Advances: Current Assets, Loans and Advances iv. Miscellaneous Expenditures v. Profit & Loss Account (Loss in Business)
Major headings of Liabilities side
i. Share Capital ii. Reserves and Surplus
iii. Secured Loans iv. Unsecured Loans v. Current Liabilities and Provisions
a. Current Liabilities b. Provisions
What is contingent liability?
A possible future liability, which depends on the happenings of certain uncertain event, is called contingent liability. These liabilities are not shown in the total of liability side, but are shown as a footnote to the balance sheet.
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Corporate AccountingUnit-3
The following are some examples of contingent liabilities: -
i. Uncalled liabilities on partly paid shares ii. Liabilities under Guarantee
iii. Arrears of dividends on cumulative preference shares iv. Claim against the company now acknowledged as debts v. Liabilities on Bills Receivable discounted but not matured.
Difference between a trial balance and a balance sheet
Trial Balance Balance Sheet1. It shows the balances of all ledger accounts. 2. It is prepared after the completion of the ledger accounts or arrival of the balances.3. Its object is to check the arithmetical accuracy.4. Items shown in the Trial balance are not in order.5. It shows the opening stock 6. It has the headings, debitand credit.
1. It shows the balances of personal and real accounts only.2. It is prepared after the completion of Trading and P&L A/c.3.Its object is to reveal the financial position of the business4. But in the B/S, the items shown must be in order.5. It shows the closing stock6.It has the heading of Assets and Liabilities
Example- under what headings will you shows the following items in the balance sheet of a company:
i. Goodwill ii. Unclaimed Dividends
iii. Provision for Tax iv. Share Premium Account v. Loose Tools
Answer:
Items Headings Sub-headings
Goodwill Fixed Assets —
Unclaimed Dividend
Current Liabilities and Provisions
Current Liabilities
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Corporate AccountingUnit-3
Provision for Tax
Current Liabilities and Provisions
Provisions
Share Premium A/c
Reserves and Surplus —
Loose Tools Current Assets, Loans and Advances
Current Assets
Example- Give the headings under which the following items will be shown in a company’s balance sheet as per Schedule VI, Part I:
i. Sundry Creditors ii. Debentures Sinking Fund
iii. Bills Receivable iv. Discount on Issue of Debentures v. Motor Car
Answer:
Items Headings Sub-headings
Sundry Creditors Current Liabilities and Provisions
Current Liabilities
Debentures Sinking Fund Reserves and Surplus —
Bills Receivable Current Asset, Loans and Advances
Loans and Advances
Discount on Issue of Debentures
Miscellaneous Expenditures —
Motor Car Fixed Assets —
Example- Give the headings under which any four of the following items will be shown in Company’s Balance Sheet.
i. Debentures ii. Interest accrued on investment
iii. Goodwill iv. Preliminary Expenses v. Bills of Exchange
Answer:
Items Headings Sub-headings
Debentures Secured Loans —
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Corporate AccountingUnit-3
Interest accrued on Investment
Current Assets, Loans and Advances
Current Assets
Goodwill Fixed Assets —
Preliminary Expenses Miscellaneous Expenditures —
Bills of Exchange Current Assets, Loans and Advances
Loans and Advances
Form of Balance Sheet
Part 1 to Schedule VI of the Indian Companies Act, 1956 gives the format in which the balance sheet is to be prepared. The schedule gives 2 types of formats, the horizontal format and the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under:
BALANCE SHEET
As on…………….
(Horizontal Form)
Liabilities Assets(a) Share Capital (a) Fixed assets(b) Reserves and surplus (b) Investmentsc) Loans c) Current assets, loans and advancesd) Current liabilities & Provisions (d) Miscellaneous expenditure
(e) Profit & Loss Account
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Corporate AccountingUnit-3
Format of balance sheet (in horizontal form) according to the requirements of
Schedule VI of the Companies Act 1956.
Balance Sheet
As on—-
Liabilities
(Rs.)
Amount
(Rs.)
Assets
(Rs.)
Amount
(Rs.)
(1) Share Capital (1) FIXED ASSETS:
Authorised Capital: 1. Goodwill XXX
… Shares of Rs. … each XXX 2. Land XXX
Issued Capital: 3. Building XXX
… Equity Shares of Rs. … each XXX 4. Leaseholds XXX
… Preference Share of Rs. … each XXX 5. Railway Sidings XXX
Subscribed Capital: 6. Plant and Machinery XXX
Equity Shares of Rs. … each Rs. … Called up XXX
7. Furniture and Fittings XXX
Preference Share of Rs. … each Rs. … Called up XXX
8. Development of Property XXX
Less Calls Unpaid XXX 9. Patents, Trade Marks XXX
(i) By directors XXX 10. Live Stocks XXX
(ii) By Others XXX 11. Vehicles etc. XXX
Add Forfeited shares XXX XXX (2) INVESTMENTS: XXX
(2) RESERVES AND SURPLUS: (3) CURRENT ASSETS, LOANS AND ADVANCES:
1. Capital Reserve, not available for Dividend
XXX (A) Current Assets:
2. Capital Redemption Reserve XXX 1. Interest accrued on investments
XXX
3. Share Premium Account XXX 2. Stores and Spare parts XXX
4. Other Reserves specifying the nature of reserve and the amount in respect thereof.Less: Debit balance in Profit & Loss account (if any)
XXX 3. Loose Tools XXX
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Corporate AccountingUnit-3
5. Surplus, that is balance in Profit and Loss account after providing for proposed allocation
XXX 4. Stock in trade XXX
6. Proposed addition to reserves XXX 5. Work in progress XXX
7. Sinking Funds XXX 6. Sundry Debtors:
Less: Provision XXX
(3) SECURED LOANS: 7. (a) Cash balance in hand (b) Bank balance
XXX XXX
1. Debentures XXX (B) Loans and Advances:
2. Loans and Advances from Banks. XXX 8. (a) Advances and loans to subsidiaries(b) advances and loans to partnership firms in which the Company or any of its subsidiaries is a partner
XXX
3. Loans and Advances from subsidiaries
XXX 9. Bills of Exchange XXX
4. Other Loans and Advances XXX 10. Advances recoverable in cash or in kind (e.g. Rates, Taxes, Insurance, etc. prepaid)
XXX
5. Interest accrued and due on secured loans
XXX 11. Balances with customs, Port Trusts, and excise authorities etc.
XXX
(4) UNSECURED LOANS: (4) MISCELLANEOUS EXPENDITURE:
1. Fixed Deposits XXX 1. Preliminary Expenses XXX
2. Loans and Advances from subsidiaries
XXX 2. Expenses, including commission or Brokerage on under writing
XXX
3. Short Term Loans and Advances
a. From Banks b. From Others
XXX 3. Discount allowed on the issue of Shares or Debentures
XXX
4. Other Loans and Advances (From Bank or others)
XXX 4. Interest paid out of capital during construction period
XXX
(5) CURRENT LIABILITIES AND PROVISIONS:
5. Development expenditure XXX
(A) Current Liabilities: 6. Other sums (specifying XXX
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Corporate AccountingUnit-3
nature)
1. Acceptances XXX 5. PROFIT & LOSS ACCOUNT: (This is shown only when its debit balance count not be written off out of others reserves)
XXX
2. Sundry Creditors XXX
3. Subsidiary Companies XXX
4. Unclaimed Dividends XXX
5. Interest accrued but not due on loans
XXX
6. Advance payments and unexpired discounts
XXX
7. Other Liabilities (if any) XXX
(B) Provisions:
8. Proposed Dividends XXX
9. Provision for Taxation XXX
10. Provision for Provident Fund schemes
XXX
11. Provision for insurance, pension and similar staff benefit schemes.
XXX
12. Other Provisions XXX
Total XXX XXX
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Corporate AccountingUnit-3
In the vertical format, the various heads of liabilities and assets are arranged vertically and current liabilities are shown as deduction, from current assets. Whatever information is required to be given in the horizontal format must also be given in the vertical format. Summarized prescribed vertical form of balance sheet is given below:
Format of balance sheet (in vertical form) according to the requirements of
Schedule VI of the Companies Act 1956.
BALANCE SHEET
As on…………….
(Vertical Form)
Particulars Am. as on the last
date of current year
Am. as on the last
date of previousyearI. Sources of Funds
(1) Shareholders’ funds(2) Loan funds
Total ……… ………
II Application of Funds
(1) Fixed assets(2) Investments(3) Current assets, loans and advances
Less: Current liabilities & provisions(4) (a) Miscellaneous expenditure.
(b) Profit & Loss Account
Total
………
………
………
………
………
………
………
………
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