Financial Statement

Trial balance proves the arithmetical accuracy of the business transactions, but it is not the end. The businessman is interested in knowing whether the business has resulted in profit or loss and what the financial position of the business is at a given period. The trader can ascertain these by preparing the final accounts. The final accounts are prepared at the end of the year from the trial balance.

Con…

Parts of Final AccountsThe final accounts of business concern generally include two parts. The first part is Trading and Profit and Loss Account. This is prepared to find out the net result of the business. The second part is Balance Sheet which is prepared to know the financial position of the business.

Con…

Trading AccountTo know the gross profit or gross loss the trading account is prepared.Format of Trading AccountTrading Account for the year ending __________ Dr. Cr.

Particulars Amount(SR) Particulars Amount(SR)

To Opening Stock To Purchases Less: Returns outward_______ To WagesTo Freight

x x x

x x x x x x x x x

By Sales Less :Returns Inward______ By Closing stock

x x xx x x

To Carriage InwardsTo Clearing chargesTo Packing chargesTo Dock duesTo Power (factory)To Octroi DutyTo Gross Profit c/d (transferred to P&L

x x xx x xx x xx x xx x xx x xx x x

_________

By Gross Loss c/d (transferred to P&L a/c)

x x x

___________

Items appearing in Trading account1. Opening stock: Stock on hand at the beginning of the year is termed as opening stock. 2. Closing stock: Closing stock is the value of goods which remain in the hands of the trader at the end of the year. It does not appear in the trial balance. It appears outside the trial balance. (As it appears outside the trial balance, first it will be recorded in the credit side of the trading account and then shown in the assets side of the balance sheet).

Con…

Example 1From the following information, prepare a Trading Account for the year ended 31.12.2012.2012 Jan 1 Opening stock SR. 15,0002012 Dec 31 Purchases SR. 16,500Sales SR. 30,600Closing stock SR. 13,500Solution:

Trading Account for the year ending 31.12.2012

Particulars Amount(SR) Particulars Amount(SR)

To Opening stockTo PurchasesTo Gross profit c/d(transferred to P&L a/c)

15,00016,50012,600

________44,100

By SalesBy Closing stock

30,60013,500

________44,100

Example 2Prepare Trading Account for the year ending 31st March 2012 from the following information.Opening stock SR. 1,70,000 Purchases return SR. 10,000Sales SR. 2,50,000 Wages SR. 50,000 Sales return SR. 20,000 Purchases SR. 1,00,000Carriage inward SR. 20,000 Closing stock SR. 1,60,000

Solution:Trading Account for the year ending 31st March, 2012.

Particulars Amount(SR) Particulars Amount(SR)

To Opening stockTo Purchases 100000Less Purchases return -10000To WagesTo Carriage inwardsTo Gross profit c/d (transferred to P&L a/c)

1,70,000

90,00050,00020,00060,000

________3,90,000

By Sales 250000Less Sales return -20000By closing stock

2,30,0001,60,000

________3,90,000

Profit and Loss AccountAfter calculating the gross profit or gross loss the next step is to prepare the profit and loss account. The aim of profit and loss account is to ascertain the net profit earned or net loss suffered during a particular period.Format of Profit and Loss AccountProfit and Loss Account for the year ended.................. Dr. Cr.

Particulars Amount Particulars Amount

To Balance b/d (Gross Loss)To SalariesTo Rent & ratesTo Stationeries

x x xx x xx x xx x x

By Balance b/d (Gross profit)By Commission earned By Rent received

x x x

x x xx x x

To Postage expenses To InsuranceTo RepairsTo Trading expenses To Office expenses To Interest paidTo Bank charges To Sundry expenses To Commission paid To Discount allowed To Advertisement To Carriage outwards To Travelling expenses

x x xx x xx x xx x xx x xx x xx x xx x xx x xx x xx x xx x xx x x

By Interest received By Discount received By Net Loss (Transferred to Capital a/c)

x x xx x xx x x

To Distribution expenses To Repacking charges To Bad debtsTo DepreciationTo Net Profit (transferred to Capital a/c)

x x x

x x xx x xx x xx x x

_______ _________

Example 3Prepare Profit and Loss Account, from the followingbalances of Mr. Fazil for the year ending 31.12.2011.

Office rent SR. 30,000 Salaries SR. 80,000Printing expenses SR. 2,000 Stationeries SR. 3,000Tax, Insurance SR. 4,000 Discount allowed SR. 6,000Advertisement SR. 36,000 Travelling expenses SR.26,000Gross Profit SR. 2,50,000 Discount received SR. 4,000

Solution:Profit and Loss Account of Mr. Fazil for the year ending 31st Dec. 2011Dr. Cr.

Particulars Amount(SR) Particulars Amount(SR)

To SalariesTo Office rentTo StationeriesTo Printing expensesTo Tax, insuranceTo Discount allowedTo Travelling expensesTo AdvertisementTo Net profit (transferred to capital a/c)

80,00030,000

3,0002,0004,0006,000

26,00036,00067,000

_______2,54,000

By Balance b/d(Gross Profit)By Discount received

2,50,000

4,000

_________2,54,000

Example 4Prepare Trading and Profit Loss Account for the year ending 31st March 2012 from the books of Mr. Akram.

SR. SR.Stock (31.3.2011) 15,000 Carriage outwards 4,000Purchases 1,65,000 Wages 30,000Purchases return 10,000 Sales returns 5,000Postage 3,000 Salaries 20,000Discount received 5,000 Stationeries 2,000Bad debts 1,000 Interest 8,000Sales 3,00,000 Insurance 4,000Stock (31.3.2012) 80,000

Solution:Trading and Profit & Loss A/c of Mr. Akram for the year ended 31st March, 2012.Dr. Cr.

Particulars Amount(SR) Particulars Amount(SR)

To Opening stockTo Purchases 1,65,000Less Returns -10,000To WagesTo Gross profit(transferred to P&L a/c)

To SalariesTo PostageTo Bad debtsTo Carriage outwards

15,000

1,55,00030,000

1,75,000________3,75,000

20,0003,0001,0004,000

By Sales 3,00,000 Less returns -5,000By Closing stock

By Balance b/d (Gross profit)By Discount received

2,95,00080,000

________3,75,0001,75,000

5,000

To StationeriesTo InterestTo InsuranceTo Net profit (transferred to Capital a/c)

2,0008,0004,000

1,38,000

________1,80,000

________1,80,000

Question. 1.From the following trial balance of Mr. Ali, prepare Trading, Profit and Loss Account for the year ending 31.12.2013.Closing stock is valued at SR. 1,35,000.

Particulars Amount(Dr.) Particulars Amount(Cr.)

PurchasesSalaries & wagesOffice expensesTrading expensesFactory expenses Carriage inwardsReturns inwardDiscount allowedCommissionStock Income taxCash in hand

5,40,0003,50,000

4,0008,000

11,0008,000

12,0004,0002,000

60,00040,000

2,00,000________12,39,000

SalesReturns outwardDiscount receivedInterest receivedCapital

10,40,00012,000

6,0003,000

1,78,000

_________12,39,000

Balance SheetBalance sheet is a statement showing the financial position of a business. On the left hand side of the statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Format of Balance SheetBalance Sheet of............ as on............

Liabilities Amount Assets Amount

Sundry creditorsBills payableBank overdraftOutstanding expenses Mortgage loansReserve fund

x x xx x xx x xx x xx x xx x x

Cash in handCash at bankBills receivableSundry debtorsInvestmentsClosing stock

x x xx x xx x xx x xx x xx x x

Capital x x xAdd: Net profit x x x (or)Less: Net loss x x x Less: Drawings - x x x x x xLess: Income tax - x x x

x x x

_______x x x

Prepaid expensesFurniture & fittingsPlant & machineryLand & buildingsPatents & trade marks Goodwill

x x xx x xx x xx x xx x xx x x

_______x x x

Example 5From the following Trial Balance of Arshad, prepare trading and profit and loss account for the year ending on 31st March 2012 and the balance sheet as on the date:Trial Balance as on 31st March, 2012.Stock on 31st March 2012 was SR. 6,000.

Particulars Amount (Dr.) Amount (Cr.)

Opening Stock (1.4.2011)PurchasesDiscount allowedWagesSalesSalariesTravelling expensesCommissionCarriage inwardAdministration expenses

5,00016,750

1,3006,500

2,000

400425275105

30,000

Trade expenses InterestBuildingFurnitureDebtorsCreditorsCapitalCash_____________________________________ TOTAL

600250

5,000200

4,250

2,045________

45,100

2,10013,000

_______45,100

Solution :Trading and Profit and Loss Account for the year ending 31st March, 2012.Dr. Cr.

Particulars Amount(SR) Particulars Amount(SR)

To Opening stockTo PurchasesTo WagesTo Carriage inwardTo Gross profit c/d (transferred to P&L a/c)

To DiscountTo SalariesTo Travelling expenses To Commission

5,00016,750

6,500275

7,475

__________36,000

1,3002,000

400425

By SalesBy Closing stock

By Balance b/d (Gross Profit)

30,0006,000

__________36,000

7,475

To Administration expensesTo Trade expensesTo InterestTo Net profit (transferred to capital a/c)

425

105600250

2,395_______

7,475_________

7,475

Balance Sheet as on 31st March, 2012.

Liabilities Amount(SR) Assets Amount(SR)

CreditorsCapital 13,000Add Net profit + 2,395

2,100

15,395

_______17,495

CashDebtorsStockFurnitureBuilding

2,0454,2506,000

2005,000

________17,495

Question.2.The trial balances of Mr. Abdullah shows the following balances on 31st March 2014. Prepare final accounts.Closing stock on 31st March 2014 was SR. 30,000.

Debit Balance Amount(SR) Credit Balance Amount(SR)

PurchasesSales returnsOpening stockDiscount allowedBank charges SalariesWagesFreight inwardsFreight outwardsRent, rates and taxesAdvertisingCash in handPlant and machinerySundry debtorsCash at bank

70,0005,000

20,0002,000

5004,5005,0004,0001,0005,0006,0001,000

50,00060,000

7,000__________

2,41,000

Capital accountSalesPurchase returnsDiscount receivedSundry creditors

56,0001,50,000

4,0001,000

30,000

___________2,41,000

REVIEW

A) Fill in the blanks:1. ____________ account enables the trader to find out gross profit

or loss.2. By preparing profit and loss account _________ can be find out.3. Closing stock is _______ in the trading account.4. All incomes are _____________ in the profit and loss account.5. Bad debt is a __________ expense.6. ‘Salaries and wages’ appear on the _______________account.

7. Balance sheet shows the ________ of a business.

[Answers: 1. Trading, 2. net profit or loss, 3. credited, 4. credited 5. selling, 6. profit and loss account, 7. financial position]

B) Choose the correct answer: 1. Trading account is prepared to find out a) gross profit or loss b) net profit or loss c) financial position 2. Opening stock is a) debited in trading account b) credited in trading account c) credit in profit and loss account 3. Balance sheet is a a) statement b) account c) ledger 4. Fixed assets have a) short life b) long life c) no life

5. Cash in hand is an example of a) current assets b) fixed assets c) current liability6. Capital is a) income b) assets c) liability7. Drawing must be deducted from a) net profit b) capital c) gross profit8. Current liabilities are recorded in the balance sheet on a) not recorded b) liability side c) assets side9. Net profit is added to a) gross profit b) drawings c) capital

[Answers: 1.(a), 2.(a), 3.(a), 4.(b), 5. (a), 6.(c), 7.(b), 8.(b), 9.(c)]