FINANCIAL ACCOUNTING

ABE (Diploma in Business Management)

Lecturer : M. M. Ahsan Email : ahsan6960@gmail.com

Session : 01 Week : 04

Lecture No : 04 Date : 07/02/2012

Buckingham College of London

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Final accounts and Balance sheet

Unit 03

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Elements of Final Accounts

• Manufacturing Account• Trading Account• Profit and Loss Account• Appropriation Account• Balance sheet

Note : You will often see manufacturing, trading and profit & loss accounts present together and headed simply ‘Income Statement’.

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Format for Trading AccountParticulars £ £ £

SalesLess : Sales return Net sales

Less : cost of good sold

Opening inventoryPurchasesLess : Purchase returnAdd : Carriage inwardsLess : Closing inventory Cogs

XxxXxx

(xxx)Xxx

(xxx)

xxxxxx

Xxx

xxx

Gross Profit/(Loss) xxx

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Example (a) From the following balances extracted from the ledger of H&M Com On 31st December,2010. Prepare the trading account of the business for the year ended December 31, 2010 :

(b) In what way would the trading account of H & M be different if the proprietor had withdrawn goods for his own use valued at £500 selling price?

Details Amount

Purchases 24,720

Sales 40,830

Purchase return 1,230

Sales return 1,460

Carriage inwards 2,480

Inventory as at Dec 1, 2010 6,720

Inventory at the end of the year 7,630

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Elements of Profit & Loss Account

Credit :• Discount received• Rents received in respect of property let.• Interest & dividend received• Bad debts recovered• Other items of profit or gain, other than of a

capital nature, including profits on the sale of assets.

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Elements of Profit & Loss Account

• Administrative expense :Rent, rates, lighting, heating, repair of office building; director’s remuneration & fees, salaries of the employee.

• Selling and distribution expense :Travellers commission, sales staff salaries, wages for driver & packers, warehouse rent, advertising, bad debt.

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Elements of Profit & Loss A/C

• Financial expenses :Bank charges; interest on loans, hire purchase agreement, debentures, mortgages, bank overdraft;

Note : Capital expenses will not be debited to profit & loss account.

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Items requiring special attention• Bad debts• Bank charges• Debenture interest• Depreciation• Discount• Dividends paid(Limited company only)• Drawings (Partnership or sole trader ship)• Goodwill• Preliminary expenses(Limited company only)• Provision for bad debt• Provision for discount allowable• Expenses paid in advance or arrears(Prepaid and Accrual)

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Difference between Trial balance & Balance sheet

• A trial balance is a list of all the ledger balances, not only assets & liabilities but also gains or losses.A balance sheet is a list of a part only of the ledger balances i.e. Those remaining after the profit and loss items have been dealt with, the assets and liabilities.

• A trial balance is prepared before the revenue accounts are compiled.A balance sheet is prepared after the revenue accounts have been dealt with.

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Functions of the Balance sheet

• Financial position of the business

• Arithmetical accuracy of accounts

• Bridge between financial years

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Elements of Balance Sheet

Non-current asset• Goodwill• Patents, trademarks etc• Freehold land & Building• Leasehold land & buildings• Plant & machinery• Motor vehicles• Furniture & fittings• Long term investments

Current asset• Work in progress• Inventory in trade• Trade receivables• Payment in advance• Temporary investments• Bank deposit account• Cash at bank• Cash in hand

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Elements of Balance Sheet

• Internal Liabilities :- Liabilities to proprietors

• External liabilities :- Long term liabilities- Current liabilities- Secured liabilities- Unsecured liabilities- Preferential liabilities- Contingent liabilities

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Distinction between capital and revenue

• Capital expenditure• Revenue expenditure• Capital receipts• Revenue receipts

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Format of Balance SheetParticulars Amount Amount

Non current asset :Freehold premisesFixture & fittingsCurrent assets :Trading inventoryTrade receivable xxxLess : provision for bad debts (xxx)Insurance prepaidCash Less : Current liabilitiesTrade payableAccrued expenses

Net current assetTotal asset less current liabilities

Less : Long-term liabilitiesMortgage on freehold

Xxx

XxxXxxXxx

(xxx)(xxx)

XxxXxx

XxxXxx

(xxx)xxx

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Format of Balance SheetParticulars £ £

Capital accountBalance brought forwardAdd : net profit for the year

Less : drawings

XxxXxxXxx

(xxx)xxx

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Example

From the following balances appearing in the ledger of the new manufacturing com on Dec 31,2010. Draw up the profit and loss account for the year ended 31 December :

Details £ £

Discount allowedDiscount receivedGross profit brought from trading accountSalariesBank chargesSundry office expensesRent and ratesBad debts written offCarriage outwardsPlant and machinery

32--

44,261193

1,36119,421

9375,971

50,000

267127,881

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Example

Notes/Adjustments :

• Write off 10% depreciation on plant and machinery.

• Rent owing on 31st december amounted to £2,000.

• An insurance premium amounting to £500 was paid in july in the current year for the year to 30 june of the following year. The £500 is included in sundry office expenses.

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ExampleThe following balances remain in william dean’s books after he has completed his profit and loss account for the year ended 31May,year 2 :

Set out williams deans balance sheet as at 31 May, year 2.

Particulars £ £

Capital 1 june, year 1Net profit for year ended 31 may, year 2Loan from john dean(repaying in 10 years time)Trade payablesPremisesInventoryTrade receivablesBalance at bankCash in handDrawings(taken out of business for private use)

110,00025,000

2,6001,400

2010,000

124,00013,570

9,5001,950

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