Final Accounts of a Company

INTRODUCTION

Joint Stock Company simply refers to a company in Nepal. Every company should prepare income statements, statements of retained earnings, and balance sheet at the end of the accounting year. In the case of a joint stock company, under the section of 109 of the company act 2063, specifies the legal obligation of the preparation and submission of financial statements. There is also a provision of sending a summary financial statement to the shareholders in section 109 of the company act, 2063. The format of such a statement shall be as prescriber by the office in consultation with authority empowered to set accounting standards under the law in force, which has stated in subsection 2 of sec. 109.

 

MEANING

Final account is the last step of the accounting cycle. It is prepared to ascertain the operating results and financial position of a business at the end of the accounting year. The final account is also known as financial statements, which includes retained earnings and balance sheet. Income statement includes trading, profit and loss account. Income statement provides information about the operating result of the business. Operating results indicate net profit or net loss of the business. The statement of retained earnings is also knowns profit and loss appropriation account, which provides the information about the appropriation of profit. Balance sheet is the statement, which provides information regarding the financial position.

 

PREPARATION OF FINAL ACCOUNTS OF A COMPANY

The final account of a company is prepared at the end of the accounting year. The accounting year may be fiscal or another year also. Nepal accounting standard has prescribed the forms for income statements and balance sheets in a vertical shape. Therefore, in practice, the final accounts include the following:

a.     Manufacturing account

b.     Trading account

c.     Profit and loss account

d.     Profit and loss Appropriation account

e.     Balance sheet

MANUFACTURING ACCOUNT

A manufacturing joint-stock company prepares an account at the end of a financial year to show the expenses incurred for manufacturing its output in the factory. The account is called the manufacturing account which ascertains the cost of output. The cost of production of the output is determined by deducting the sale of the scarp and closing balances of raw materials and work-in-progress from all factory and manufacturing expenses.

 

Importance and Advantages of Manufacturing Account

The important advantages of manufacturing account are as follows:

o   It shows the manufacturing and factory expenses incurred during a financial year.

o   It helps to determine the total manufacturing cost of a product.

o   It helps to ascertain the total profit of manufacturing if the trading price is available.

o   It helps to control expenses relating to the manufacturing process.

 

Preparation of Manufacturing Account

Manufacturing account is prepared at the end of each financial year to know the manufacturing costs of production. The expenses relating to the purchase of raw materials and the conversion expenses of raw materials into finished goods are debited to the manufacturing account. The manufacturing account is credited by the unused stock of raw materials and work-in-progress and the sale of scrap.

 

TRADING ACCOUNT

It is a nominal account, which is prepared at the end of the accounting year. Trading account is the first step of the final account. The main objective of preparing a trading account is to ascertain the gross profit or loss during an accounting period. Since it is a nominal account, all direct expenses are debited and all direct incomes are credited in the trading account. It contains mainly stock (opening and closing), purchase and sale of goods, all expenses relating to the purchase of goods, and all expenses relating to the day-to-day operation of a factory.

 

Importance and Advantages of Trading Account

The important advantages of trading account are as follows:

o   It helps to find out net sales and net purchases during a particular period.

o   It helps to know the trading expenses of the company.

o   It helps to know the trading results of the company.

o   It helps to determine the cost of goods sold.

 

Preparation of Trading Account

Trading account is the first step in the preparation of the final account. All expenses relating to purchase and manufacturing or production of goods are shown on the debit side and the amount of sales on the credit side of the trading account. Opening and closing stocks are shown in the debit and credit side of the trading account respectively.

 

Difference between a trading account and manufacturing account are given below:

Manufacturing account Trading account It is used by manufacturing concern It is used by trading concern It is prepared to find out cost of production It is prepared to find out trading result termed as gross profit or loss It is debited by raw materials, consumed, productive wages, all manufacturing and factory expenses It is debited by purchase of merchandise goods, carriage inward and trading expenses A fixed rate of interest is to be paid to the debenture holders A fixed rate of interest is to be paid to the debenture holders The cost of production shown by manufacturing account is transferred of trading account The gross profit or loss shown by trading account is transferred to profit and loss account

 

 

PROFIT AND LOSS ACCOUNT

After preparing trading account, the next step is to prepare a profit and loss account. The profit and loss account is prepared to achieve the operating results of a company at the end of an accounting year. Operating result means either net profit or net loss. It is also a nominal account. Therefore, indirect expenses like office and administrative, selling and distribution and abnormal losses, etc. are recorded on the debit side and all incomes of the business except sales and closing stock are recorded on the credit side. If the credit side is excess than a debit side, the difference is known as net profit and if the debit side is excess than credit, the difference is known as net loss. The amount of net profit is transferred to the credit side of the profit and loss appropriation account and net loss is transferred to the debit side.

 

Importance and Advantages of Profit and Loss

The important advantages of a profit and loss account are as follows:

o   It helps to calculate the operating results of a company in terms of P/L for a specific period.
It helps to control indirect expenses.

o   It helps to judge the overall efficiency of the business.

o   It helps to determine the amount of dividend and bonus.

 

Preparation of profit and loss account

Profit and loss is prepared after the trading account which shows gross profit or loss in the credit side and debit side respectively. It records all the revenue expenses including capital losses such as loss on sale of fixed assets, and revenue incomes including capital gains such as interest in investment. Since the profit and loss account is a nominal account, it is debited by all the expenses and credited by incomes.

 

PROFIT AND LOSS APPROPRIATION ACCOUNT

Profit and loss appropriation account is the third process of the final account, which is prepared after the preparation of the profit and loss account.  Profit and loss appropriation account is the account, which sets aside available profit for a different purpose. It is prepared after the preparation of the profit and loss account. It shows the distribution of available profit in the way of dividend and the creation of reserves. It also adjusts the depreciation and tax of the previous year. Although the companies Act, 2053, of Nepal has not provided a company to prepare its profit and loss appropriation account, it is a common practice that the Nepalese companies prepare and present this account as part of final accounts.

 

Importance of Profit and loss appropriation account

o   It helps to find out the total undistributed profit

o   It provides information about reserve and fund for future contingencies and developments

o   It helps to declare dividend and bonus

o   It helps to re-adjust tax and depreciation of the previous year

 

Preparations of profit and loss appropriation account

This account is prepared after the profit and loss account. The operating result of the company (net profit or net loss) is transferred to the profit and loss appropriation account. Profit and loss appropriation account is prepared to know the distribution of dividend, creation of reserve as well as bonus share. The profit and loss appropriate account is debited by the appropriations of the company’s profit such as creations of reserves and funds, dividends, and taxes paid and credited by the company’s current year’s profit.

 

BALANCE SHEET

Balance sheet is also known as a “position statement”. Balance sheet is the last step of final account. It is prepared after the preparation of the profit and loss appropriation account. It is a statement, not an account, therefore, it has no debit and credit side but has assets and liabilities. Balance sheet is a summary of the personal account and real account having debit and credit balances, therefore, those accounts which do not have any balance or which have been closed by transferring to trading, profit and loss and profit and loss appropriation account do not find any place in it.

 

Importance and objectives of balance sheet

The importance and objectives of the balance sheet are as follows:

o   It helps to know the financial position reflecting the true and fair view of assets and liabilities.

o   It helps to judge the debt-paying capability of the company.

o   It helps to show the nature and value of all assets.

o   It helps to determine the purchase consideration of the company.

o   It helps to know about capital, owner’s equity, and borrowed capital in detail, including authorized, issued, subscribed, called up, and paid-up capital.

 

Marshalling of Assets and Liabilities

The order in which assets and liabilities are arranged in a company’s balance sheet is known as marshalling. It is a technique of showing assets, and liabilities and share capital in a certain order in the company’s balance sheet. Generally, the assets, liabilities, and the share capital of the company can be arranged in its balance sheet in order of either liquidity or permanence.

 

In order of liquidity

In order of liquidity, the most liquid form of assets is shown on the top of the balance sheet and the less liquid asset at its bottom.

For example, cash in hand is placed at the top and goodwill at the bottom on the asset side of the balance sheet according to the order of liquidity.

 

In order of permanence

Unlike that, in order of permanence, the items of assets and liabilities are arranged in an upside-down manner. For example, most permanent assets and liabilities are shown at the top and the least at the bottom on their respective sides of the balance sheet.

 

Preparation of balance sheet

The balance sheet of the company is prepared after the completion of its profit and loss appropriation account. All types of assets such as current and fixed assets, investments, intangibles and fictitious assets are categorically shown in the right-hand side of the balance sheet. Similarly, all types of liabilities such as current and long-term liabilities, reserves and surplus, share capital are shown on the left-hand side of the balance sheet.

 

ADJUSTMENT FOR FINAL ACCOUNTS

The transaction that does not appear in a ledger account is to be noted as adjustments. Those financial transactions not included in the concerned ledger account are mentioned separately as adjustments after the preparation of trial balance.

Every adjustment has a dual effect. The duel effects are recorded either in:

Trading account and balance sheet or

Trading account and profit and loss account or

Profit and loss and balance sheet or

Trading, P/L and balance sheet or

Only in balance sheet.

 

Closing stock

The unsold parts of the goods remaining in the store at the end of the accounting year are called closing stock. The closing stock is valued at cost price or market price whichever is less. The entry of closing stock as closing entry and it should be closed by transferring into a trading account.

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Closing stock a/c …………………………………………………………Dr.     To Trading a/c (Being closing stock adjusted)		XXXXXX	XXXXXX

 

 

Outstanding Expenses

Expenses incurred but not yet paid are called outstanding expenses. These are the obligations of the company. Therefore, they are shown on the debit side of trading or profit and loss account and on the liabilities side of the balance sheet by passing the following adjustment entry:

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Name of expenses a/c …………………………………………………………Dr.     To Name of o/s expenses (Being outstanding expenses adjusted)		XXXXXX	XXXXXX

 

 

Accrued income

Income earned but not yet received is called accrued income such as commission earned but not received. It is deducted from the head of the income account on the credit side of the profit and loss account and shown on the asset side of the balance sheet by passing the following adjustment entry is:

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Name of accrued expenses…………………………………………………Dr.     To Name of income (Being accrued income adjusted)		XXXXXX	XXXXXX

 

 

Prepaid Expenses/Expenses paid-in-advance

Prepaid expenses represent the expenses paid in advance for the next accounting period. In other words, it is the unused part of expenses paid in the current year, the remaining of which will be consumed in the next accounting period. For example, the insurance premium paid for one year up to 1^stkartik 2065. If the accounting period ends on 31^stchaitra 2064, the insurance premium for the period of six months starting from 1^stBaishakh 2065 to 30^thAshwin will be treated as prepaid insurance during the accounting period ending 31^stChaitra 2064. These prepaid expenses are considered assets and debited in adjustment entry and recorded on the assets side of the balance sheet. On the other hand, it should be deducted from related expenses in trading or profit and loss account since they are not related to the current year-end.

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Prepaid expenses a/c …………………………………………………………Dr.     To related expenses (Being prepaid expenses adjusted)		XXXXXX	XXXXXX

 

 

Unearned income/Income received-in-advance

The income, which is not yet earned but received in advance, is called unearned income or income received-in-advance. Such an income received in advance is deducted from the concerned income account on the credit side of the profit and loss account and shown as a liability on the liability side of the balance sheet by passing the following adjustment entry:

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Name of income a/c …………………………………………………………Dr.     To Name of advance income (Being unearned income adjusted)		XXXXXX	XXXXXX

 

 

Depreciation

Depreciation is the decline in the value of fixed assets particularly due to their wear and tear. In case a fixed asset is to be depreciated based on additional information given outside the trial balance, the amount of depreciation of the concerned fixed asset should be shown separately on the debit side of the company’s profit and loss after deducting from the concerned fixed asset on the asset side of the balance sheet by passing the following adjustment entry:

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Depreciation a/c …………………………………………………………Dr.     To Name of fixed asset (Being depreciation adjusted)		XXXXXX	XXXXXX

 

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Depreciation a/c …………………………………………………………Dr.     To provision for or accumulated depreciation a/c (Being depreciation  adjusted)		XXXXXX	XXXXXX

 

 

Appreciation

Appreciation is the increase in the value of fixed assets due to increase in market value. In case of a fixed asset is to be appreciated based on additional information given outside the trial balance, the amount of  appreciation of the concerned fixed asset should be shown separately in the credit side of the company’s profit and loss account after adding from the concerned fixed asset on the asset side of the balance sheet by passing the following adjustment entry:

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Name of fixed asset a/c ……………………………………………………Dr.     To appreciation a/c (Being appreciation adjusted)		XXXXXX	XXXXXX

 

 

Amortization

Amortization is reducing the value of some intangible and fictitious assets such as goodwill, patents, trademark, preliminary expenses, underwriting commission, discount on the issue of shares, and premium on the redemption of debentures. These assets are reduced every year by some amount until they are fully written-off or amortization.

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Amortization of concerned asset a/c …………………………………Dr.     To name of concerned asset  a/c (Being amortization  adjusted)		XXXXXX	XXXXXX

 

 

Bad debts and provision for bad debts

Bad debts are the default of the amount receivable on account of credit sales. A debtor who has become insolvent will find nothing to pay an amount of credit sale to him from his estate. The amount receivable from such debtor is treated as bad debt and is, therefore, deducted from sundry debtors and shown on the debit side of the company’s profit and loss account as a bad debt.

In some instances, a further bad debt may occur and further provision for bad debt and doubtful debts may be set aside out of sundry debtors considering the additional information given outside the trial balance.

 

1.Adjustment entry for written-off further bad debts based on additional information:

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Bad debt a/c …………………………………Dr.     To sundry debtors a/c (Being bad debt-adjusted)		XXXXXX	XXXXXX

 

2.Adjustment entry for provisional of bad debt and doubtful debts based on additional information:

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Profit and loss a/c …………………………………Dr.     To provision for bad and doubtful debts a/c (Being provision for bad and doubtful debt-adjusted)		XXXXXX	XXXXXX

 

 

Loss of goods and insurance claim thereof

A joint-stock company insures its stock of goods from some insurance company to get it protected from an unforeseen future loss such as goods damaged by fire, accident, or loss by theft.

 

1. Full acceptance of claim:

In case the loss of goods occurs and the insurance company fully accepts the claim, the amount of loss should be deducted from purchases on the debit side of the company’s trading account and the amount of claim fully accepted by the insurance company.

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Insurance company a/c …………………………………Dr.     To purchase a/c (Being full acceptance of claim adjusted by the insurance company)		XXXXXX	XXXXXX

 

2. Partial acceptance of claim:

In case of loss of goods occurs but the insurance company partially accepts the claim, the whole amount of loss should be deducted from purchases on the debit side of the company’s trading account, and the partial amount of claim accepted by the insurance company should be shown separately in the name of the insurance company on the assets side of the balance sheet and the amount of claim not accepted by the insurance company.

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Insurance company a/c …………………………………Dr. Profit and loss a/c(not accepted by the insurance company)…….Dr.     To purchase a/c (Being partially acceptance of claim adjusted by the insurance company)		XXXXXX	XXXXXX

 

3. No acceptance of claim

In case the loss of goods occurs but the insurance company does not accept the claim at all, the amount of loss should be deducted from purchases on the debit side of the company’s trading profit.

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Profit and loss a/c …………………………………Dr.     To purchase a/c (Being no acceptance of claim adjusted)		XXXXXX	XXXXXX

 

 

Provision for dividend/proposed dividend/ interim dividend/final dividend

The amount of profits that are distributed to shareholders as a return on their investment is called the dividend. The dividend is an appropriation of profits earned by a joint-stock company. The dividend is to be paid out of the company’s profit for the year. Therefore, the BOD of the company may provide or propose some dividends and which will be paid out of the shareholders after some time.

 

1. In case of a provision for dividend or proposed dividend,

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Profit and loss appropriation a/c …………………………………Dr.     To provision for dividend or proposed dividend  a/c (Being provision for or proposed dividend-adjusted)		XXXXXX	XXXXXX

 

2. In case of interim or final dividend paid,

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Profit and loss appropriation a/c …………………………………Dr.     To cash a/c (interim or final dividend paid) (Being interim or final dividend-adjusted)		XXXXXX	XXXXXX

 

 

Reserve and surplus

Reserve and surplus are also appropriate for the profits of a joint-stock company. They are created out of the company’s profits for the meeting if future contingencies and development needs. In case of creating reserve and surplus, the amount of such reserve and surplus is shown on the debit side of the company’s profit and loss appropriation account and on the assets side of the balance sheet by passing the following adjustment entry:

Date	Particulars	LF	Debit Rs.	Credit Rs.
	P/L Appropriation a/c…………………………………………….Dr.          To Reserve and surplus a/c (Being adjustment entry made for the creation of reserve and surplus)		XXXXX	XXXXX

 

 

Outstanding commission

The amount of managerial remuneration may be specified in the Article of Association. If it is not specified in the article, the directors may be given a bonus commission of not more than 5% of net profit, as per Company Act 2063. Profit commission is the remuneration, which is charged based on a certain percentage of net profit either before or after charging such commission.

 

Date	Particulars	LF	Debit Rs.	Credit Rs.
	P/L a/c…………………………………………….Dr.          To outstanding commission a/c (Being adjustment made for outstanding commission)		XXXXX	XXXXX

 

 

Provision for taxation

For every amount of income earned by a joint-stock company, it has to pay tax to the government. Therefore, tax is charged against the company’s profits of the current year. For the payment of tax, the company should create a provision, which is called provision for tax.

Date	Particulars	LF	Debit Rs.	Credit Rs.
	P/L a/c…………………………………………….Dr.          To provision for tax a/c (Being provision for tax-adjusted )		XXXXX	XXXXX

 

 

Goods distributed as a sample

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Advertisement a/c…………………………………………….Dr.          To purchase  a/c (Being goods distributed for advertisement )		XXXXX	XXXXX

 

 

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Profit and loss a/c…………………………………………….Dr.          To advertisement  a/c (Being advertisement  transferred to P/L account )		XXXXX	XXXXX

 

Goods sold on a returnable basis(sales or return)

Sometimes goods are sold to a customer on a “sales or return” basis.

Date	Particulars	LF	Debit Rs.	Credit Rs.
	Sales a/c…………………………………………….Dr.          To Debtors  a/c (Being goods sold on returnable adjusted )		XXXXX	XXXXX

 

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