Download Industrial Economics and Management and more Schemes and Mind Maps Industrial economy in PDF only on Docsity! Unit III: Final Accounts Final Accounts of the business firm involves two different stages. 1. Preparation of Accounting • Trading Account • Profit & Loss Account 2. Positional Statement of the enterprise. • Balance Sheet Trading Account • The primary step of final account is a trading account. • It is a nominal account which is prepared at the end of the accounting year. • Trading account is a report or statement which is prepared by a business firm. It shows the gross profit of business actions during a particular period. • A trading account helps to find out gross earnings or gross loss during the accounting time. Steps to be followed while preparing Trading Account A. Debit side We write the amount of opening stock (In case of a new firm there will not be any opening stock). We write the amount of purchases Out of this purchases returns or returns outward is deducted. Purchases may be cash or credit or both. Then we write the direct expenses such as carriage inward, wages, power, etc. B. Credit side We write sales. Sales return or return inward is deducted from the sales to get the net sales figure. Sales may be cash or credit or both. Closing stock is the next item. C. Ascertaining Gross Profit/Gross Loss Finally Trading Account is closed by calculating the difference of the two sides. If credit side exceeds the debit side, the difference is written as Gross Profit on the debit side of the Trading A/c. In case debit side is more than the credit side, the difference amount is termed as ‘Gross Loss’ and is written on the credit side of the Trading A/c. Total of Credit column > Total of Debit column Gross profit Total of Debit column > Total of debit column Gross loss Items appearing in the debit side Opening stock: Stock on hand at the opening of the year is termed as opening stock. The closing stock of the earlier accounting year is brought forward as opening stock of the present accounting year. In the case of a new business, there will not be any opening stock. It consists of raw material, work in progress, and finished goods. Purchases: Purchases made during the year, includes both cash and credit purchases of goods. Purchase returns must be deducted from the total purchases to get net purchases. The goods may have been acquired in cash or credit and once purchased if the goods are returned to the supplier for any reason it becomes a part of purchase returns or returns outward. Direct Expenses: Expenses which are incurred from the stage of purchase to the stage of making the goods in saleable condition are termed as direct expenses. All direct expenses like Carriage inward & Freight Expenses, Rent for factory, Electricity and Power expenses, wages of workers and supervisors, Packing expenses, etc. Items appearing in the credit side Sales: • Goods sold in cash and credit by the business to earn profits are included under the head “Sales”. This includes both cash and credit sale made during the year. • Net sales are derived by deducting sales return from the total sales. Items once sold may be returned by the customers due to various reasons which are termed as sales returns or returns inward. Closing stock: • The unsold stock in hand at the end of the current accounting period is placed under the head “closing stock”. • The Closing stock is the worth of goods which remain in the hands of the trader at the end of the year. It is valued at the end of an accounting period at cost or net realizable value whichever is lower.
