Understanding Financial Statements and Adjustments

1. Chapter no. 6 Final accounts with adjustments

2. meaning • Financial statements which are prepared • at the end of the year to know about the • financial position of the business are called • final accounts.

3. Parts of final acounts • Trading account • Profit and loss account • Balance sheet

5. Need and importance of final accounts • To know the result of a business • To know the financial position of a business • To get loans from financial institutions • To assess income tax • To conduct comparative study • To assist management of business

6. Trading account • Tells about gross profit or gross losses • Debit side shows all the direct expences- • Opening stock,purchases,direct expences • Credit side shows-sales ,closing stock

7. Profit and loss account • Tells about net profit and net losses. • Debit side shows all indirect expences and losses. • Credit side shows all indirect incomes and gains.

8. Importance of p&l acount • Tells net profitibility • Comparative study of profit and loss • Control on unnecessary expences • Helpful in preparing balance sheet

9. Balance sheet • It is a statement to know about financial position of a business on a certain fixed date .

10. Need and Importance of balance sheet • Tells about financial position of a firm • Tells about liquidity position of a firm • Tells about the balance of debtors and creditors • Tells about the liabilities and assets of the firm • Tells economically capability of a firm • Opening entry on the basis of balance sheet

11. Marshalling of balance sheet • In order of liquidity • In order of permanence

12. Liabilities long term liabilities Current liabilities Contingent liabilities Assets Fixed assets Current assets Fictitious assets Wasting assets Classification of assets and liabilities

13. Similarities between trial balance and balance sheet • Both are statement • To and by not used • Prepared from the balances of ledger • Prepared on a specific date • Balance of cash book written in both

14. Trial balance Checks airthmatical accouracy Debit and credit sides All accounts written Prepared before T.&P.L.account Not compulsory Not as a proof No adjustments Balance sheet Shows financial position Liability and assets side Only real and personal account After tr.and p.&l. account Compulsory As a proof Adjustments considered Differencew between trial balance and balance sheet

15. adjustments • If any transaction omits • If wrongly entered in other account • If amount is wrongly entered • If any transation wrongly entered in wro ng side accout

16. Need and importance of adjustments • To find out correct profit and loss and financial position • To rectify the error • To complete the incomlete transaction • To record the transcactions • To record the current incomes and expences

17. Closing stock • Trading account (given in adj.): credit side • Balance sheet : current assets

18. Outstanding expences • o/s exp.: trading acount : add it into concerned exp. balance sheet : current liabilities Entry particular exp. Dr. to o/s exp.

19. prepaid expences • trading acount : deduct it into concerned exp. balance sheet : current assets Entry prepaid exp. Dr. to particular exp.

20. Outstanding expences • o/s exp.: trading acount : add it into concerned exp. balance sheet : current liabilities Entry particular exp. Dr. to o/s exp.

21. Outstanding income • o/s income: trading acount : add it into concerned income balance sheet : current assets Entry: accrued income. Dr. to particular income

22. Prereceived or unearned income • Trading and p/l accout : deduct from particular income balance sheet : current liability Entry : particular income dr; to unearned income

23. Depriciation • Trading account • dr. side Balance sheet : deducted from particular asset depriciation acount dr to particular asset

24. Interest on capital • Profit and loss account: debit side balance sheet: liability side add in capital entry interest on capital dr. to capital

25. Interest on drawing • Profit and loss account: cedit side Balance sheet: liability side deducted in capital Entry drawing account dr. to interest on drawing

26. Interest on loan • Profit and loss account: debit side Balance sheet: liability side added in loan Entry : interest on loan account dr. To loan account

27. Bad debts • Profit and loss account: debit side Balance sheet: assets side deducted from debtor Entry : bad debts account dr. To debtors account

28. Provision for doubtful debts • Profit and loss account: debit side Balance sheet: assets side deducted from debtor Entry : provision for debts account dr. To debtors account

29. Discount on debtors • Profit and loss account: debit side Balance sheet: assets side deducted from debtor Entry profit and loss account dr. To discount on debtors account

30. Provision for discount on creditors • Profit and loss account: credit side Balance sheet: liability side deducted from creditors Entry discount on creditors account dr. To profit and loss account

31. Implied interest • Profit and loss account- debit side Balance sheet- liability side added in loan Entry interest on loan account dr. to loan account

32. Loss of goods • Trading account- deducted from purchases • Profit and loss account-debit side • Entry-loss account dr. To purchases p/l account dr. to loss by accident