Final Accounts: Trading, Profit & Loss, Balance Sheet Accounting
Final Accounts and Financial Statements
Final accounts are the financial statements prepared at the end of an accounting period to ascertain the financial performance (profit or loss) and the financial position (assets and liabilities) of a business. Final accounts typically consist of the Trading Account, the Profit & Loss Account, and the Balance Sheet.
Trading Account — Gross Profit or Loss
The Trading Account is prepared to ascertain the gross profit or gross loss resulting from buying and selling goods. It incorporates all direct expenses related to the purchase of goods and making them ready for sale.
| Debit (Expenses) | Amount (₹) | Credit (Income) | Amount (₹) |
|---|---|---|---|
| To Opening Stock | XXX | By Sales (Net) | XXX |
| To Purchases (Net) | XXX | By Closing Stock | XXX |
| To Direct Expenses: | |||
| • Wages | XXX | ||
| • Carriage Inwards | XXX | ||
| • Manufacturing Expenses | XXX | ||
| To Gross Profit (Transferred to P&L A/c) | XXX | By Gross Loss (if any) | XXX |
| Total | XXX | Total | XXX |
Note: Gross profit is transferred to the credit side of the Profit & Loss Account.
Profit & Loss Account — Net Profit or Loss
The Profit & Loss (P&L) Account is prepared to ascertain the net profit or net loss of the business. It starts with the gross profit and incorporates all indirect expenses and indirect incomes for the period.
| Debit (Indirect Expenses / Losses) | Amount (₹) | Credit (Income / Gains) | Amount (₹) |
|---|---|---|---|
| To Gross Loss b/d (if any) | XXX | By Gross Profit b/d (from Trading A/c) | XXX |
| To Office & Administrative Expenses: | By Indirect Incomes: | ||
| • Salaries | XXX | • Rent Received | XXX |
| • Rent, Rates, & Taxes | XXX | • Discount Received | XXX |
| • Insurance | XXX | • Commission Earned | XXX |
| To Selling & Distribution Expenses: | • Interest Received | XXX | |
| • Carriage Outwards | XXX | ||
| • Advertising | XXX | ||
| To Financial Expenses: | |||
| • Interest on Loan | XXX | ||
| To Other Expenses & Losses: | |||
| • Depreciation | XXX | ||
| • Bad Debts (New & Provision Adjustment) | XXX | ||
| To Net Profit (Transferred to Capital A/c) | XXX | By Net Loss (if any, Transferred to Capital A/c) | XXX |
| Total | XXX | Total | XXX |
Note: Net profit is transferred to the Capital Account in the Balance Sheet.
Balance Sheet — Statement of Financial Position
The Balance Sheet is a statement (not an account) that shows the financial position of the business on a specific date. It adheres to the fundamental accounting equation.
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital (Owner’s Equity): | Non-Current Assets (Fixed Assets): | ||
| Opening Capital | XXX | • Land and Building | XXX |
| • Add: Interest on Capital | XXX | • Plant and Machinery | XXX |
| • Add: Net Profit (from P&L A/c) | XXX | • Less: Depreciation | (XXX) |
| • Less: Drawings | (XXX) | Current Assets: | |
| • Less: Interest on Drawings | (XXX) | • Closing Stock | XXX |
| Closing Capital | XXX | • Debtors / Accounts Receivable | XXX |
| Non-Current Liabilities (Long-term): | • Less: Provision for Doubtful Debts | (XXX) | |
| • Long-term Loans | XXX | • Prepaid Expenses | XXX |
| • Debentures | XXX | • Accrued Income | XXX |
| Current Liabilities: | • Cash and Bank Balances | XXX | |
| • Creditors / Accounts Payable | XXX | ||
| • Outstanding Expenses | XXX | ||
| • Unearned / Advance Income | XXX | ||
| • Bank Overdraft | XXX | ||
| Total | XXX | Total | XXX |
Common Adjustments in Final Accounts
Adjustments are necessary to comply with the accrual and matching concepts, ensuring that the financial statements reflect all revenues and expenses for the specific accounting period. Every adjustment has a dual effect (debit and credit) in the final accounts.
| Adjustment Item | Treatment 1: Trading / P&L Account | Treatment 2: Balance Sheet |
|---|---|---|
| Closing Stock | Credit side of Trading A/c. | Asset side (Current Asset). |
| Outstanding Expenses (Unpaid) | Added to the specific expense in the P&L/Trading A/c (e.g., Salaries + Outstanding). | Liability side (Current Liability). |
| Prepaid Expenses (Paid in Advance) | Deducted from the specific expense in the P&L A/c (e.g., Insurance – Prepaid). | Asset side (Current Asset). |
| Accrued Income (Earned but not Received) | Added to the specific income on the credit side of P&L A/c (e.g., Interest Received + Accrued). | Asset side (Current Asset). |
| Unearned Income (Received in Advance) | Deducted from the specific income on the credit side of P&L A/c (e.g., Rent Received – Unearned). | Liability side (Current Liability). |
| Depreciation on Fixed Assets | Debit side of P&L A/c (as an expense). | Deducted from the respective fixed asset on the Asset side (Asset – Depreciation). |
| Bad Debts (New) | Debit side of P&L A/c (as a loss / expense). | Deducted from Debtors on the Asset side (Debtors – Bad Debts). |
| Provision for Doubtful Debts (New) | Debit side of P&L A/c (adjusted with existing provision). | Deducted from Debtors on the Asset side (Debtors – Provision). |
| Interest on Capital | Debit side of P&L A/c (as an expense). | Added to Capital on the Liability side. |
| Interest on Drawings | Credit side of P&L A/c (as an income). | Deducted from Capital on the Liability side. |
Accounting for Non-Profit Organizations (NPOs)
Non-profit organizations (NPOs) or not-for-profit organizations are entities established for social, charitable, educational, or religious purposes. Their primary objective is service to society or members, not earning profit.
The accounting for NPOs differs from profit-seeking businesses primarily in the names and contents of their final statements.
Key Accounting Differences
| Feature | For-Profit Organization | Non-Profit Organization (NPO) |
|---|---|---|
| Primary Goal | Profit Maximization | Service / Mission Fulfillment |
| Owner’s Equity | Owner’s Capital / Shareholders’ Funds | Capital Fund or General Fund |
| Profit / Loss | Net Profit or Net Loss | Surplus or Deficit |
| Source of Income | Sales of Goods / Services | Subscriptions, Donations, Grants, Legacies |
NPO Financial Statements
NPOs prepare three main financial statements at the end of the accounting period:
- Receipts and Payments Account (R&P A/c):
- It is essentially a summary of the cash book.
- It records all cash and bank transactions (both revenue and capital nature) that occurred during the year.
- It begins with the opening cash / bank balance and ends with the closing cash / bank balance.
- Income and Expenditure Account (I&E A/c):
- It is the equivalent of the Profit & Loss Account, prepared on the accrual basis.
- It records only revenue items related to the current period.
- It determines the surplus (income > expenditure) or deficit (expenditure > income) for the period.
- Non-cash items like depreciation and provision for doubtful debts are included.
- Balance Sheet:
- It shows the financial position (assets and liabilities) on a specific date.
- The capital fund (or general fund) is the core component on the liabilities side.
- Any surplus is added to the capital fund, and any deficit is deducted.
- Specific funds (e.g., Building Fund, Endowment Fund) are shown separately on the liabilities side.
Consignment Accounts: Accounting Records
A consignment is a transaction where one person, the consignor (owner of the goods), sends goods to another person, the consignee (agent), to be sold on behalf of the consignor for a commission. Ownership of the goods remains with the consignor until the goods are sold to a third party.
1. Accounting Records in the Books of the Consignor
The consignor maintains a specific account called the Consignment Account to ascertain the profit or loss made on each consignment. The consignor also maintains a personal account for the consignee.
| Transaction | Journal Entry in Consignor’s Books |
|---|---|
| For Goods Sent on Consignment | Consignment A/c Dr. / To Goods Sent on Consignment A/c |
| For Expenses Paid by Consignor | Consignment A/c Dr. / To Cash / Bank A/c |
| For Advance Received from Consignee | Cash / Bank A/c or Bills Receivable A/c Dr. / To Consignee’s A/c |
| For Expenses Incurred by Consignee | Consignment A/c Dr. / To Consignee’s A/c |
| For Commission Due to Consignee | Consignment A/c Dr. / To Consignee’s A/c |
| For Sales Made by Consignee | Consignee’s A/c Dr. / To Consignment A/c |
| For Profit on Consignment | Consignment A/c Dr. / To Profit & Loss A/c |
| For Loss on Consignment | Profit & Loss A/c Dr. / To Consignment A/c |
2. Accounting Records in the Books of the Consignee
The consignee treats the goods received as stock held on behalf of the consignor. The consignee’s primary role is to record transactions related to the expenses, sales, and commission earned. The consignee maintains a personal account for the consignor.
| Transaction | Journal Entry in Consignee’s Books |
|---|---|
| For Receipt of Goods | No Entry (Goods are not their property) |
| For Expenses Paid by Consignee | Consignor’s A/c Dr. / To Cash / Bank A/c |
| For Advance Paid to Consignor | Consignor’s A/c Dr. / To Cash / Bank A/c or Bills Payable A/c |
| For Sales Made | Cash / Debtors A/c Dr. / To Consignor’s A/c |
| For Commission Earned | Consignor’s A/c Dr. / To Commission A/c |
| For Remittance of Final Balance | Consignor’s A/c Dr. / To Cash / Bank A/c |
Key Document: Account Sales
The consignee sends a statement called the Account Sales to the consignor, detailing:
- Gross sales proceeds.
- Expenses incurred by the consignee.
- Commission earned by the consignee.
- The final balance due to the consignor.
- The closing stock of unsold goods.