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Final Accounts - Introduction

"The grand finale of accounting - presenting the financial story of the year."

After recording all transactions in journals, posting to ledgers, and preparing a Trial Balance, the final step is to prepare Final Accounts.

What are Final Accounts?

Definition: Financial statements prepared at the end of an accounting year to determine:

  1. Gross Profit/Loss (Trading Account)
  2. Net Profit/Loss (Profit & Loss Account)
  3. Financial Position (Balance Sheet)

Components of Final Accounts

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1. Trading Account

Purpose: To find Gross Profit or Gross Loss from trading activities.

Formula:

Gross Profit = Net Sales - Cost of Goods Sold

Format

Dr.                  Trading Account for Year Ending...               Cr.
--------------------------------------------------------------------------------
Particulars           | Amount || Particulars              | Amount
----------------------|--------||--------------------------|-------
To Opening Stock      | XX,XXX || By Sales                 | XX,XXX
To Purchases          | XX,XXX || By Closing Stock         | XX,XXX
To Direct Expenses    |        ||                          |
  - Wages             | X,XXX  ||                          |
  - Carriage Inward   | X,XXX  ||                          |
  - Factory Rent      | X,XXX  ||                          |
To Gross Profit c/d   | XX,XXX ||                          |
----------------------|--------||--------------------------|-------
Total                 |XX,XXX  || Total                    |XX,XXX

Key Items:

Debit Side (Expenses/Costs):

  • Opening Stock
  • Purchases (Net of returns)
  • Direct expenses (wages, carriage inward, power, factory rent)

Credit Side (Income):

  • Sales (Net of returns)
  • Closing Stock

2. Profit & Loss Account

Purpose: To calculate Net Profit or Net Loss after considering all indirect expenses and incomes.

Formula:

Net Profit = Gross Profit + Indirect Incomes - Indirect Expenses

Format

Dr.               Profit & Loss Account for Year Ending...              Cr.
--------------------------------------------------------------------------------
Particulars           | Amount || Particulars              | Amount
----------------------|--------||--------------------------|-------
To Gross Loss b/d     | XX,XXX || By Gross Profit b/d      | XX,XXX
To Operating Expenses |        || By Other Incomes         |
  - Salaries          | X,XXX  ||   - Commission Received  | X,XXX
  - Rent              | X,XXX  ||   - Discount Received    | X,XXX
  - Insurance         | X,XXX  ||   - Interest on Inv.     | X,XXX
  - Depreciation      | X,XXX  ||                          |
  - Bad Debts         | X,XXX  ||                          |
To Non-Operating Exp. |        ||                          |
  - Interest on Loan  | X,XXX  ||                          |
To Net Profit         | XX,XXX ||                          |
  (transferred to     |        ||                          |
   Capital A/c)       |        ||                          |
----------------------|--------||--------------------------|-------
Total                 |XX,XXX  || Total                    |XX,XXX

Key Items:

Debit Side (Expenses):

  • Gross Loss (if any)
  • All indirect/operating expenses (salaries, rent, advertising, depreciation)

Credit Side (Income):

  • Gross Profit
  • All indirect incomes (commission, discount, interest received)

3. Balance Sheet

Purpose: To show the financial position (what you own and what you owe) on a specific date.

Format:

Balance Sheet as on 31st March 202X
--------------------------------------------------------------------------------
Liabilities           | Amount || Assets                   | Amount
----------------------|--------||--------------------------|-------
Capital               |        || Fixed Assets             |
  Opening Capital     | XX,XXX ||   - Land & Building      | XX,XXX
  Add: Net Profit     | XX,XXX ||   - Machinery            | XX,XXX
  Less: Drawings      |(X,XXX) ||   - Furniture            | XX,XXX
                      |XX,XXX  ||                          |
Long Term Liabilities |        || Investments              | XX,XXX
  - Bank Loan         | XX,XXX ||                          |
Current Liabilities   |        || Current Assets           |
  - Creditors         | XX,XXX ||   - Stock                | XX,XXX
  - Outstanding Exp.  | X,XXX  ||   - Debtors              | XX,XXX
                      |        ||   - Cash & Bank          | XX,XXX
                      |        ||   - Prepaid Expenses     | X,XXX
----------------------|--------||--------------------------|-------
Total                 |XX,XXX  || Total                    |XX,XXX

Marshalling: Arranging items in order (usually liquidity order - least liquid to most liquid, or vice versa).

Relationship Between the Three

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Direct vs Indirect Expenses

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Real-World Example

D-Mart (Avenue Supermarts Ltd.) - Simplified

Trading Account:

  • Opening Stock: ₹2,000 Crores
  • Purchases: ₹18,000 Crores
  • Sales: ₹22,000 Crores
  • Closing Stock: ₹2,500 Crores
  • Gross Profit: ₹22,000 + ₹2,500 - ₹2,000 - ₹18,000 = ₹4,500 Crores

P&L Account:

  • Gross Profit: ₹4,500 Crores
  • Operating Expenses (salaries, rent, utilities): ₹3,000 Crores
  • Net Profit: ₹4,500 - ₹3,000 = ₹1,500 Crores

Balance Sheet:

  • Assets: Stores, Inventory, Cash, Investments
  • Liabilities: Share Capital, Reserves, Loans, Creditors

Key Formulas

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses - Closing Stock
Gross Profit = Sales - Cost of Goods Sold
Net Profit = Gross Profit + Other Incomes - Indirect Expenses

Quiz: Final Accounts Introduction

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