FINANCIAL ACCOUNTING

1. Buckingham College of London FINANCIAL ACCOUNTING ABE (Diploma in Business Management) • Lecturer : M. M. Ahsan Email : ahsan6960@gmail.com • Session : 01 Week : 04 • Lecture No : 04Date : 07/02/2012

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3. Final accounts and Balance sheet Unit 03

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5. Elements of Final Accounts • Manufacturing Account • Trading Account • Profit and Loss Account • Appropriation Account • Balance sheet Note : You will often see manufacturing, trading and profit & loss accounts present together and headed simply ‘Income Statement’.

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7. Format for Trading Account

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9. Example (a) From the following balances extracted from the ledger of H&M Com On 31st December,2010. Prepare the trading account of the business for the year ended December 31, 2010 : (b) In what way would the trading account of H & M be different if the proprietor had withdrawn goods for his own use valued at £500 selling price?

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11. Elements of Profit & Loss Account Credit : • Discount received • Rents received in respect of property let. • Interest & dividend received • Bad debts recovered • Other items of profit or gain, other than of a capital nature, including profits on the sale of assets.

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13. Elements of Profit & Loss Account • Administrative expense : Rent, rates, lighting, heating, repair of office building; director’s remuneration & fees, salaries of the employee. • Selling and distribution expense : Travellers commission, sales staff salaries, wages for driver & packers, warehouse rent, advertising, bad debt.

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15. Elements of Profit & Loss A/C • Financial expenses : Bank charges; interest on loans, hire purchase agreement, debentures, mortgages, bank overdraft; Note : Capital expenses will not be debited to profit & loss account.

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17. Items requiring special attention • Bad debts • Bank charges • Debenture interest • Depreciation • Discount • Dividends paid(Limited company only) • Drawings (Partnership or sole trader ship) • Goodwill • Preliminary expenses(Limited company only) • Provision for bad debt • Provision for discount allowable • Expenses paid in advance or arrears(Prepaid and Accrual)

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19. Difference between Trial balance & Balance sheet • A trial balance is a list of all the ledger balances, not only assets & liabilities but also gains or losses. A balance sheet is a list of a part only of the ledger balances i.e. Those remaining after the profit and loss items have been dealt with, the assets and liabilities. • A trial balance is prepared before the revenue accounts are compiled. A balance sheet is prepared after the revenue accounts have been dealt with.

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21. Functions of the Balance sheet • Financial position of the business • Arithmetical accuracy of accounts • Bridge between financial years

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23. Elements of Balance Sheet Non-current asset Current asset Work in progress Inventory in trade Trade receivables Payment in advance Temporary investments Bank deposit account Cash at bank Cash in hand • Goodwill • Patents, trademarks etc • Freehold land & Building • Leasehold land & buildings • Plant & machinery • Motor vehicles • Furniture & fittings • Long term investments

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25. Elements of Balance Sheet • Internal Liabilities : - Liabilities to proprietors • External liabilities : - Long term liabilities - Current liabilities - Secured liabilities - Unsecured liabilities - Preferential liabilities - Contingent liabilities

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27. Distinction between capital and revenue • Capital expenditure • Revenue expenditure • Capital receipts • Revenue receipts

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29. Format of Balance Sheet

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31. Format of Balance Sheet

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33. Example From the following balances appearing in the ledger of the new manufacturing com on Dec 31,2010. Draw up the profit and loss account for the year ended 31 December :

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35. Example Notes/Adjustments : • Write off 10% depreciation on plant and machinery. • Rent owing on 31stdecember amounted to £2,000. • An insurance premium amounting to £500 was paid in july in the current year for the year to 30 june of the following year. The £500 is included in sundry office expenses.

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37. Example The following balances remain in william dean’s books after he has completed his profit and loss account for the year ended 31May,year 2 : Set out williams deans balance sheet as at 31 May, year 2.

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