12th BOOK KEEPING: FINAL ACCOUNTS

When a person begins a small business he wishes to learn the financial performance of his business. A convenient and universally accepted approach to knowing this is to see the profit or loss at annual intervals (1st April to 31st March) and the budget of the business enterprise on the confirmed date.

He can ascertain these by planning the Final Accounts, which is prepared based on the Trial Balance. The preparation of Final Accounts is the last part of the accounting routine and that’s the reason they are called Final Accounts. Final accounts will be the method of conveying the profitability and budget to management, owners, and interested outsiders of the continuing business. Final accounts have to be prepared every year, to make a continuous assessment of the business enterprise for a completed period. It must be kept in mind that expenses and incomes for the full accounting period should be taken into account.

Suppose, the month of March is not paid the firm closes its books on 31st March, and rent for, this expense (rent) has been incurred yet to be paid. Therefore, it would be proper to add the lease for the month (March) along with the rent of the year to know the real profit. In a company there will be a number of items, both incomes and expenses, which have to be altered.

If such items aren’t adjusted, the ultimate accounts will not uncover the real and fair picture of the business performance. All such items which need to be brought into books of account to prepare final accounts are called “adjustments”. Journal entries handed to effect the mandatory modifications are known as changing entries.

Some important and common items, which have to be altered at the right time of planning the ultimate accounts are talked about below. 14. Provision for discount on creditors. Note: All adjustments are given outside the trial balance. The unsold goods in stock at the ultimate end of the accounting period is called as shutting stock.

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This is usually to be appreciated at cost or selling price whichever is leaner. The worthiness of shutting stock shown outside the trial balance on 31.3.2004 is Rs.1,00,000. Expenses that were incurred however, not yet paid during the accounting period that the final accounts are being ready are called as exceptional expenses.

Example: Trial balance shows incomes paid Rs.22,000. Adjustment: Salary for March 2004, Rs.2,000 not yet paid. Expenses which have been paid beforehand are called as prepaid (unexpired) expenses. Example: Trial Balance for the time ending 31st March, 2004 shows Rs.15,000 as insurance superior. Adjustment: Prepaid Insurance superior Rs.7,500. Income, which includes been earned but not received through the accounting period is named as accrued income. Example: Credit part of Trial Balance (31.3.2004) shows the percentage received Rs.8,000. Adjustment: Commission accrued however, not yet received Rs.2,000. Income received during a particular accounting period for the task to be achieved in the future period is called as income received beforehand.

Example: Trial Balance for the period ending 31st March, 2004 shows Rent received Rs.25,000. Adjustment: Rent received in advance Rs.5,000. In order to see whether the business is absolutely earning profit or not, it is attractive to charge interest on capital at a certain rate. Example: According to Trial Balance, capital as on 31.3.2004 is Rs.4,00,000.

Adjustment: Provide 6% interest on capital. To bring interest on capital to the Profit and Loss accounts, the following transfer entry is required. Balance Sheet by way of addition to the administrative center. Amount withdrawn by the owner for his personal use is called as drawings. When interest on capital is allowed, interest on drawings is billed from the dog owner then. Interest on drawings can be an income for the business enterprise and will reduce the capital of the dog owner.