Preparation of Final Accounts

Part-2
 Closing Stock or Inventory

It is also referred as Inventory which means unsold goods at the end of the
accounting period which is carried forward to the next accounting period as
Opening Stock.
The closing stock is accounted in the Final Accounts as follows:-
1. On the credit side of Trading Account as a separate item and
2. On the asset side of Balance Sheet as a separate item under Current Assets.

Closing Stock will always appear in Balance Sheet but if Closing stock is shown
outside the trial balance it will be shown in Trading Account as well
 Cost of Goods Sold
Cost of goods sold (COGS) is the cost of merchandise that is sold to the customers.
It includes cost of raw materials purchased, direct expenses incurred, value of
opening stock, i.e., the value of the last year’s unsold stock and excludes closing
stock if any, i.e., the value of current year’s unsold stock.

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses − Closing Stock
Compute cost of goods sold for the year 2017 with the help of the following
information and prepare trading account Rs. Sales 20, 00,000 Purchases 15,
00,000 Wages 1, 00,000 Stock (Apr. 01, 2016) 3, 00,000 Stock (March 31,
2017) 4,00,000 Freight inwards 1,00,000
XYZ deal in readymade garments. On the basis of following information, calculate their
cost of sales:-
• Opening Stock of garments – Rs. 20,000
• Closing Stock of garments – Rs. 16,000
• Purchases made during the year – Rs. 200,000
• Carriage expenses on purchases – Rs. 4,000
• Wages paid to workers – Rs. 8,000

A. Rs. 216,000
B. Rs. 112,000
C. Rs. 189,000
D. None of these
 Suspense Accounts
• Suspense is the account to which the amount being the difference in
trial balance is placed.
• The suspense account is used in case of one – sided errors affecting
Trial Balance.
• If the total of debit side is short, Suspense A/c will show the debit
balance.
• If the total of credit side is short, Suspense A/c will show the credit
balance.
• Errors that do not affect the trial balance are not rectified by
Suspense Account.
• Suspense Account is not closed the balance is taken to the Balance
Sheet.
 Opening Entry
• This entry is the first entry in Journal and is passed to record
closing balance of the previous year. It is called Opening Entry.
• While passing an opening entry, all assets are debited and
liabilities and capital are credited.
• The entry is :-
Asset A/c Dr.
To capital A/c
To Liability A/c
 Trade Discount
• Trade Discount is a discount allowed by the seller on purchase of
goods in large quantity.
• It is normally allowed by the seller to the purchaser who further sells
good to the consumer.
• It is deducted in the invoice from sale price and is not recorded in
books of accounts.
• Sale (Cash + Credit) is recorded at the net value i.e. sale price less
trade discount.
 Cash Discount
• Cash Discount is a discount allowed by the seller of goods to encourage
prompt or early payment.
• It is allowed as percent of invoice value or payment.
• It is recorded in the books of account as “Discount Allowed or Discount
Received”.
 Bad Debts
In a business, if an amount is not realized, partially or fully, the amount not
realized is a loss and is termed as bad debts . Bad debt is account by
passing :-
Bad Debts A/c Dr.
To Debtors Personal A/c
Or
Bad Debts A/c Dr.
Cash or Bank A/c Dr.
To Debtors Personal A/c
 Bad Debts Recovered
• A debtor whose account was earlier written off as “Bad Debt” may pay
partly or fully.
• The amount so received is gain for the business because the amount
was earlier written as loss (Bad Debts). The entry will be:-
Cash or Bank A/c Dr.
To Bad Debts Recovered A/c
Prepare a trading account from the following particulars for the year ended
March 31, 2017: Rs. Opening stock 37,500 Purchases 1, 05,000 Sales 2,70,000
Wages 30,000
Prepare a trading account of M/s Prime Products from the following
particulars pertaining to the year 2016-17. Opening stock 50,000 Purchases
1,10,000 Return inwards 5,000 Sales 3,00,000 Return outwards 7,000 Factory
rent 30,000 Wages 40,000
From the following information, prepare a profit and loss account for the year
ending March 31, 2017. Gross profit 60,000 Rent 5,000 Salary 15,000
Commission paid 7,000 Interest paid on loan 5,000 Advertising 4,000 Discount
received 3,000 Printing and stationery 2,000 Legal charges 5,000 Bad debts
1,000 Depreciation 2,000 Interest received 4,000 Loss by fire 3,000
Calculate the amount of gross profit and Net profit on the basis of the
following balances extracted from the books of M/s Rajiv & Sons for the year
ended March 31, 2017. Rs. Opening stock 50,000 Net sales 11,00,000 Net
purchases 6,00,000 Direct expenses 60,000 Administration expenses 45,000
Selling and distribution expenses 65,000 Loss due to fire 20,000 Closing stock
70,000
 Some Important Pointers:-
• Purchase Return can be shown on the credit side of the Trading Account or can also be
subtracted from the Purchases.
• Sales Return can be shown on the debit side of the Trading Account or can also be
subtracted from the Sales made during the year.
• Operating Expenses are associated with the maintenance and administration of a
business on a day-to-day basis.
• A non-operating expense is an expense incurred by an organisation that does not relate
to its main activity. E.g- Depreciation, Interest paid etc.
• Non-operating income is any profit or loss generated by activities outside of the core
operating activities of a business. E.g. – interest income, Dividend Income etc.
From the following balances taken from the books of Simmi and Vimmi Ltd. for
the year ending March 31, 2017, calculate the gross profit. (Rs.) Closing stock
2,50,000 Net sales during the year 40,00,000. Net purchases during the year
15,00,000. Opening stock 15,00,000 Direct expenses 80,000
 Financial Statements
The financial statements generally include two
statements:
• Balance sheet
• Statement of profit and loss
They are required for external reporting and also
for internal needs of the management like
planning, decision-making and control.
Balance sheet of a company is prepared
and presented in the form prescribed in
(Revised) Schedule VI of the Companies
Act, 2013. The form prescribed is vertical
It does not apply to (i) Insurance or
Banking Company, (ii) Company for
which a form of balance sheet or
income statement is specified under
any other Act.
Vertical format of balance sheet
followed now.
You are required to make the balance sheet of Ankit
Which of the following is included in the final accounts of a
business entity?
(i) Balance Sheet
(ii) Manufacturing ad trading Accounts
(iii) Profit and Loss Accounts
(iv) Fund flow and cash flow
1. All of the above
2. (i) Only
3. (i) to (iii) only
4. None of these
Which of the following final accounts, helps in ascertaining the cost
of goods sold:
A. Balance sheet
B. Profit and loss account
C. Manufacturing and Trading Account
D. None of these
Net Sales minus Cost of Sales results in :-
A. Cost of goods sold
B. Gross profit or gross loss
C. Net profit or net loss
D. All of the above
The cost of sales can be calculated as:-
A. Cost of raw material consumed plus direct expenses
B. Cost of raw material consumed plus trading expense
C. Cost of raw material plus expenses
D. Opening stock plus purchase plus expenses
To calculate amount of purchases for including in the manufacturing accounts,
which of the following is taken into account:-
A. Cash purchases
B. Credit purchases
C. Purchase return
D. All of the above
Given:–
• Opening Stock -700
• Closing Stock -100
• Purchase of stock during the year – 1240 A. 900
• Purchase Return – 40 B. 860
• Wages – 200 C. 960
• Factory Expense – 70 D. 800
• Freight and carriage – 80
• Other direct expense – 50
• The amount of net sales – 3000
Based on this information, calculate the
amount of gross profit.
A business entity has net sales less than its cost of sales. It will
result in to :-
A. Gross profit
B. Gross loss
C. Net profit
D. Net loss
When a business firm makes gross profit, for the purpose of final
accounts ,it is transferred to:–
A. Trading and manufacturing account
B. Balance sheet
C. Profit and loss account
D. None of these
Net profit or Net loss is calculated as part of which of the
following:–
A. Trading and manufacturing account
B. Profit and loss account
C. Trial balance
D. None of these
Non -operating Income such as interest received, discount received
dividend received is recorded:-
A. On credit side of profit and loss account
B. On debit side of profit and loss account
C. On credit side of trading Account
D. On debit side of trading Account
Which of the following is included are as part of profit and loss
account?
(i) office and administrative expenses
(ii) selling expenses
(iii) advertisement expenses
(iv) marketing expenses
1. All of the above
2. (i) Only
3. (i) to (iii) only
4. None of these
Which of the following are operating expenses of a business
entity:-
A. Selling and marketing expenses
B. Office and administrative expenses
C. Financial expenses
D. All of the above
Loss on sale of fixed assets, preliminary expenses and writing off of
assets, are part of:–
A. Selling and marketing expenses
B. Office and administrative expenses
C. Financial expenses
D. Non-operating expenses
In the profit and loss account, the gross profit is shown as:-
A. On credit side as first entry
B. On debit side as first entry
C. On credit side as resultant balance
D. On debit side as resultant balance
In the profit and loss account, the gross loss is shown:-
A. On credit side as first entry
B. On debit side first entry
C. On credit side as resultant balance
D. On debit side as resultant balance
What journal entry is passed to bring the sales into trading
account?
A. Debit sales account and credit trading account
B. Debit trading account and credit sales account
C. Debit trading account and credit stock account
D. Debit stock account and credit trading account
The closing stock is valued by business firm at:–
A. Cost price
B. Market price
C. Cost price or market price whichever is higher
D. Cost price or market price, whichever is lower
Trading account is prepared to find out:-
A. Gross profit or gross loss
B. Cost of sales
C. Net profit or net loss
D. All the above
Manufacturing account is prepared to find out:-
A. Gross profit or gross loss
B. Cost of sales
C. Net profit or net loss
D. All the above
The amount of depreciation is taken as part of which of the
following accounts:-
A. Trading account
B. Manufacturing account
C. Profit and loss account
D. Balance sheet
A company has earned a net profit of Rs. 10 lakh before payment
of commission to managing director is entitled for a commission of
5% on the net profit. What is the amount of commission that he
will get?
A. Rs. 50,000
B. Rs. 48,653
C. Rs. 47,619
D. Inadequate data
Company A had total debtors of Rs. 150,000. During the year it found that debtors worth
Rs. 5,000 are not traceable and have to be treated as bad debts. The firm is already
having a provision of Rs. 5000. they want to make total provision of 5% on the debtors,
including the existing provision. Based on this information, calculate the amount of
provision of bad debts required?
A. Rs. 2,250
B. Rs. 5,050
C. Rs. 7,250
D. Rs. 7,500