Final Accounts: Trading, Profit & Loss Account, Balance Sheet & Adjustments
Idea in plain words
Trading Account: Determines Gross Profit = Net Sales - Cost of Goods Sold (COGS). COGS = Opening Stock + Net Purchases + Direct Expenses - Closing Stock.
Exam tip
High-yield exam topic (Very High).
Explanation
Final accounts synthesize the cumulative transactions of an accounting fiscal year. The accrual and matching concepts dictate that revenues and associated costs must be recognized in the period they occur, regardless of whether physical cash was transferred, necessitating year-end adjusting entries.
Key points
- Profit and Loss Account: Determines Net Profit = Gross Profit + Indirect Incomes - Indirect/Operating Expenses.
- Balance Sheet: Snapshot of financial position at a specific date; marshaled in order of liquidity or permanence.
- Year-End Adjustments: (1) Closing Stock (Trading Cr. & Balance Sheet Asset); (2) Outstanding Expenses (Add to Expense & BS Liability); (3) Prepaid Expenses (Deduct from Expense & BS Asset); (4) Depreciation (P&L Dr. & Deduct from Asset); (5) Provision for Doubtful Debts.
Example
Example
Depreciation Adjustment: Computer cost NPR 100,000 depreciated at 20% SLM. Debit Depreciation Expense NPR 20,000 in P&L Account. Show Computer on Balance Sheet as NPR 100,000 - NPR 20,000 = NPR 80,000.
Code examples
// Financial Statement Structure:
// Trading Account:
// Sales - (Opening Stock + Purchases + Wages/Freight - Closing Stock) = Gross Profit
//
// Profit & Loss Account:
// Gross Profit - (Salaries + Rent + Depreciation + Interest) = Net Profit
//
// Balance Sheet:
// ASSETS:
// Non-Current Assets: Plant & Machinery, Furniture, Computers (Less Depreciation)
// Current Assets: Closing Stock, Debtors, Prepaid Expenses, Cash & Bank
// LIABILITIES & EQUITY:
// Owner's Equity: Capital + Net Profit - Drawings
// Non-Current Liabilities: Bank Loan, Debentures
// Current Liabilities: Creditors, Outstanding Expenses, Bank Overdraft
Exam questions
- [12 Marks] From a comprehensive 12-item Trial Balance and adjustments (closing stock, outstanding wages, depreciation), prepare Trading Account, Profit & Loss Account, and Balance Sheet.
- [7 Marks] Explain the accounting treatment of outstanding expenses, prepaid expenses, and provision for doubtful debts with journal entries.