The Financial Statements
Final account is prepared at the end of each year to know the trading result and financial position of the business. For this the final account is divided into three parts:
1. Trading account
2. Profit and loss account and
3. Balance sheet.
(1) Trading Account
Trading account is an account which is prepared to know the profit or loss made on purchase and sale of goods in business. It contains all expenses and items directly related with goods. The credit balance of trading account
veals the ‘Gross Profit’ while debit balance reveals the ‘Gross Loss’ of the business during a particular accounting period.
Definition of Trading Account
According to Carter, “Trading account is that ac-
count, which is prepared to know the gross profit made on sale of goods.” The amount of cost of goods sold is deducted from the actual net sale to get the gross profit.
According to Batliboi, “Trading account is that ac-
count which shows the result of buying and selling of goods.”
Objects and Importance of Trading Account
1. Determine gross profit or gross loss- The main
object of preparing Trading account is to determine gross profit or gross loss. Gross profit is the difference between sales and cost of goods sold.
2. Knowledge of cost of goods sold-Gross profit or gross loss depends upon cost of goods sold. Trading account not only, indicates gross profit but also the cost of goods sold. If it is in excess, it can, be controlled.
3. Calculation of gross profit ratio
Meaning of Accounting Adjustments
While preparing final accounts at the end of every
accounting year, we come across certain problems. We find that the expenses of current year are still payable or the expenses of the next year have been paid in advance. Similarly, incomes of the current year are to be received yet or the incomes of the next year have been received in advance.
Depreciation on assets, interest on capital and drawings, provision for bad debts of the current year have not been recorded in the books. These are known as ‘Adjustments’ in accounting language. All these items must be adjusted in the books so that correct profit or loss of the business may be ascertained. If these adjustments are ignored while preparing final accounts, the trading and Profit and Loss Account, would not show the true profit or loss and thus Balance Sheet would fail to show the real financial position of the business.
Some important Adjustments with
(1) Outstanding Expenses (Due but not paid)- The
expenses which are related with current year and are due but not yet paid are known as outstanding expenses: For example, salary of a clerk is Rs. 5,000 per month. If the businessman has paid salary for 10 months only and salary of 2 months is due, it means Rs.10,000 are outstanding.
(ii)Prepaid Expenses- Prepaid expenses are op-
posite to the outstanding expenses. The expenses which have been paid in advance for next year are called prepaid expenses. For example if we have paid rent for 15 months in the current year @ 600 p.m. Then rent for 3 months Rs. 1,800 will be called prepaid rent.