Final Accounts with Adjustments | Full Course | Trading A/C, Profit and Loss A/c & Balance Sheet

TLDR;

Hello students, this is a comprehensive guide to final accounts, covering everything from trading and profit & loss accounts to balance sheets, with adjustments and numerous questions. The lecture simplifies complex topics such as closing stock valuation, cost of goods sold, bad debts, and GST adjustments. It also provides clear rules and step-by-step instructions to make final accounts easy to understand.

Understanding Final Accounts
Rules and Practical Questions
Adjustments and Advanced Concepts

What is Final Account [1:55]

Final accounts are prepared to summarise the financial activities of a business. The accounting process involves identifying transactions, recording them in journals, creating ledgers, and preparing a trial balance. Final accounts, including the trading account, profit and loss account, and balance sheet, are prepared after the trial balance. These accounts help determine the profit or loss and the financial position of the business.

Rules of Final Accounts [9:35]

There are three types of accounts: personal, real, and nominal. Nominal accounts, which include expenses and incomes, are closed by transferring them to the trading and profit & loss account. Expenses are transferred to the debit side, while incomes are transferred to the credit side. Personal and real accounts are transferred to the balance sheet. Nominal accounts are closed at the end of the year, while personal and real accounts have balances carried forward.

Trading Account [43:13]

The trading account includes all expenses related to the manufacturing of goods or services. Expenses directly involved in production, such as the cost of raw materials, wages, and factory expenses, are included in the trading account. The trading account helps in determining the gross profit.

Closing Stock valuation [1:34:02]

Closing stock is valued at cost or market value, whichever is lower, based on the conservative concept. This concept recognises expected losses but not expected profits. For example, if the cost of closing stock is ₹6 and the market price is ₹4, it will be valued at ₹4.

Cost of Goods Sold ( COGS) [1:53:18]

Cost of Goods Sold (COGS) is calculated using the formula: Opening Stock + Purchases + Direct Expenses - Closing Stock. Alternatively, COGS can be calculated as Net Sales - Gross Profit.

Journal Entry of Final Account [2:27:15]

To close nominal accounts, transfer them to the trading account or profit and loss account. For example, to close the opening stock account (debit balance), credit it and debit the trading account. For closing stock, the journal entry is Closing Stock Account Debit to Trading Account.

Direct expenses [2:53:25]

Direct expenses are those incurred directly in the manufacturing process. Examples include wages, carriage inward, factory rent, and factory electricity.

Adjusted Purchase [2:59:10]

Adjusted purchase is calculated as Opening Stock + Purchases - Closing Stock. If adjusted purchase is given, do not include opening stock or closing stock separately in the final accounts.

Profit and Loss Account [3:03:11]

All expenses not included in the trading account are recorded in the profit and loss account. These include office expenses, selling expenses, and administrative expenses.

Indirect expenses [3:08:19]

Indirect expenses are those not directly related to production, such as salaries, office rent, and advertising.

Journal Entry of Profit and Loss Account [3:30:42]

Wages and Salaries Treatment in the Final Account [3:53:22]

Wages: Trading Account
Salaries: Profit and Loss Account
Wages & Salaries: Trading Account (first word is wages)
Salaries & Wages: Profit and Loss Account (first word is salaries)
Productive Wages: Trading Account (related to production)
Factory Manager Salary: Trading Account (related to factory)

Carriage in final accounts [3:55:38]

Carriage: Trading Account (assumed to be carriage inward)
Carriage Inward: Trading Account
Carriage Outward: Profit and Loss Account

Lightening Treatment in the Final Account [3:57:46]

Lighting: Profit and Loss Account (if the question is silent)
Factory Lighting: Trading Account

Trade Expense Treatment in the Final Account [3:58:22]

Trade Expenses: Profit and Loss Account (if General Expenses, Sundry Expenses, or Miscellaneous Expenses are not mentioned)
Trade Expenses: Trading Account (if General Expenses, Sundry Expenses, or Miscellaneous Expenses are mentioned)

What is Balance sheet [4:08:40]

The balance sheet is a statement, not an account, that provides a snapshot of a company's assets, liabilities, and equity at a specific point in time. Assets are a company's possessions, while liabilities are its obligations. The total assets must always equal the total liabilities plus equity.

How to prepare the balance Sheet [4:36:37]

Assets are categorised into current and non-current assets. Non-current assets have a life of more than one year and include tangible assets like land, buildings, and machinery, as well as intangible assets like patents and goodwill. Current assets are those that can be converted into cash within one year, such as cash, bank balances, debtors, and stock. Liabilities are categorised into internal (owed to the owner) and external (owed to third parties). External liabilities are further divided into current (payable within one year) and non-current (payable after one year).

Final accounts Practical Question [4:49:09]

To prepare final accounts, classify each item in the trial balance as either a nominal, personal, or real account. Transfer nominal accounts to the trading and profit & loss account, and personal and real accounts to the balance sheet. Adjustments, such as closing stock, are made to both the trading account and the balance sheet.

Final Accounts with Adjustment [5:20:55]

When dealing with final accounts with adjustments, remember three important rules:

Personal and real accounts go to the balance sheet, while nominal accounts go to the trading or profit & loss account.
Each item in the trial balance appears only once.
Each adjustment has at least two effects.

Important Rules of Final Account with Adjustment [5:22:11]

Items prefixed with "Outstanding," "Prepaid," "Advance," or "Unpaid" are personal accounts and go to the balance sheet.
Look for hidden adjustments, such as interest on investments.
Value closing stock at cost or market price, whichever is lower.

Final Accounts with Adjustments Questions [5:30:07]

When dealing with bad debts, provision for doubtful debts, and provision for discount on debtors, follow these steps:

Adjust for bad debts given in the adjustments.
Create a provision for doubtful debts.
Create a provision for discount on debtors.

Bad debts and provision for doubtful debts [6:23:16]

Bad debts are amounts that are irrecoverable, while provision for doubtful debts is an estimate of potential future bad debts. The conservative concept dictates that expected losses should be recognised.

Provision for discount on debtors [7:08:04]

Provision for discount on debtors is created to account for potential discounts that may be given to debtors for timely payments. This provision is calculated after adjusting for bad debts and provision for doubtful debts.

GST adjustment in final accounts [7:23:25]

GST (Goods and Services Tax) is categorised into CGST (Central GST), SGST (State GST), and IGST (Integrated GST). When goods are sold within the same state, CGST and SGST are applied. When goods are sold outside the state, IGST is applied. Input GST is the tax paid on purchases, while output GST is the tax collected on sales. Input GST is an asset, and output GST is a liability.

Abnormal loss of goods in the Final Accounts [7:49:08]

When goods are destroyed by fire, the entry is Loss by Fire Account Debit to Purchase Account. The loss is measured at cost, not market value.

Loss of Fixed Assets [8:01:47]

When a fixed asset is destroyed, the entry is Loss by Fire Account Debit to Asset Account. The loss is the book value of the asset.

Goods distributed as free sample journal entry [8:06:45]

When goods are distributed as free samples, the entry is Advertisement Account Debit to Purchase Account.

Goods given as charity journal entry [8:14:22]

When goods are given as charity, the entry is Charity Account Debit to Purchase Account.

Drawing of goods Journal Entry [8:18:09]

When the owner withdraws goods for personal use, the entry is Drawings Account Debit to Purchase Account.

When Capital Expenditure is treated as revenue expenditure [8:22:31]

When capital expenditure is wrongly treated as revenue expenditure, correct the error by adjusting the respective accounts. For example, if the cost of installing a new machine is wrongly debited to wages, deduct it from wages and add it to the machinery account.

Manager commission before charging Commission [8:36:21]

If the manager is entitled to a commission on net profit before charging commission, calculate the commission as Net Profit Before Commission * (Commission Rate / 100).

Manager commission after charging Commission [8:44:05]

If the manager is entitled to a commission on net profit after charging commission, calculate the commission using the formula: Net Profit Before Commission * (Commission Rate / (100 + Commission Rate)).

Comprehensive Question on Final Account with adjustment [8:54:32]

A comprehensive question integrates all the concepts discussed, including trading account, profit and loss account, balance sheet, adjustments for outstanding expenses, prepaid expenses, depreciation, bad debts, provision for doubtful debts, GST, abnormal losses, and manager's commission. The key is to follow the rules consistently and systematically.