Accountancy · Chapter 9

Financial Accounts

Study notes aligned to the official NEB syllabus.

Financial Accounts (Final Accounts)

Meaning

At the end of each fiscal year, every organization must prepare certain financial statements. Under the traditional approach, the Trading Account, the Profit and Loss Account, and the Balance Sheet are prepared to show the organization's trading result, overall profit or loss, and financial position.

(a) Trading Account

The Trading Account is the first component of the final accounts. It is prepared to find out the gross profit or gross loss for the year.

On the debit side of the Trading Account: opening stock, purchases (net of purchase return), wages, carriage inward, customs duty, import duty, coal/gas/water, heat, light and power, and all other manufacturing expenses, that is, all expenses incurred to produce or bring the goods to a saleable condition.
On the credit side of the Trading Account: sales (net of sales return), closing stock, and goods lost by fire or accident.

Format:

Dr. Trading Account	Amount	Cr.	Amount
To opening stock	xx	By sales	xx
To purchases	xx	less: sales return	xx
less: purchase return	(xx)
To wages, add: outstanding wages	xx	By closing stock	xx
To carriage inward	xx	By Gross loss c/d (if any)	xx
To coal, gas and water	xx
To local tax	xx
To freight	xx
To trade expenses	xx
To all manufacturing expenses	xx
To Gross profit c/d	xx

(b) Profit and Loss Account

After the Trading Account is prepared, the Profit and Loss Account should be prepared. It is prepared to find out the net profit or net loss for the year.

On the debit side of the Profit and Loss Account: all expenses and losses not related to the factory or production process, for example salary, rent, insurance, printing and stationery, general expenses, legal charges, telephone and communication, audit fee, depreciation, advertisement, carriage outward, bad debt, salesman's salary, commission, and so on.
On the credit side of the Profit and Loss Account: all indirect incomes and gains, for example rent received, interest received, commission received, discount received, bad debt recovered, and so on.

Format:

Dr. Profit and Loss Account	Amount	Cr.	Amount
To Gross loss b/d	xx	By Gross profit b/d	xx
To salaries, add: outstanding salary, less: prepaid salary	xx	By discount received	xx
To rent	xx	By commission received	xx
To printing and stationery	xx	By interest received	xx
To telephone and communication	xx	By bad debt recovered	xx
To general expenses	xx	By provision for doubtful debt (reduction, if any)	xx
To legal charges	xx	By appreciation on fixed assets	xx
To insurance	xx	By all other indirect incomes and gains	xx
To interest	xx	By Net loss c/d	xx
To depreciation	xx
To advertisement	xx
To carriage outward	xx
To discount allowed	xx
To commission paid	xx
To all office, administration, selling and distribution expenses	xx
To Net profit	xx

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Financial Accounts

Study notes aligned to the official NEB syllabus.

Financial Accounts (Final Accounts)

Meaning

(a) Trading Account

The Trading Account is the first component of the final accounts. It is prepared to find out the gross profit or gross loss for the year.

On the debit side of the Trading Account: opening stock, purchases (net of purchase return), wages, carriage inward, customs duty, import duty, coal/gas/water, heat, light and power, and all other manufacturing expenses, that is, all expenses incurred to produce or bring the goods to a saleable condition.
On the credit side of the Trading Account: sales (net of sales return), closing stock, and goods lost by fire or accident.

Format:

Dr. Trading Account	Amount	Cr.	Amount
To opening stock	xx	By sales	xx
To purchases	xx	less: sales return	xx
less: purchase return	(xx)
To wages, add: outstanding wages	xx	By closing stock	xx
To carriage inward	xx	By Gross loss c/d (if any)	xx
To coal, gas and water	xx
To local tax	xx
To freight	xx
To trade expenses	xx
To all manufacturing expenses	xx
To Gross profit c/d	xx

(b) Profit and Loss Account

After the Trading Account is prepared, the Profit and Loss Account should be prepared. It is prepared to find out the net profit or net loss for the year.

On the debit side of the Profit and Loss Account: all expenses and losses not related to the factory or production process, for example salary, rent, insurance, printing and stationery, general expenses, legal charges, telephone and communication, audit fee, depreciation, advertisement, carriage outward, bad debt, salesman's salary, commission, and so on.
On the credit side of the Profit and Loss Account: all indirect incomes and gains, for example rent received, interest received, commission received, discount received, bad debt recovered, and so on.

Format:

Dr. Profit and Loss Account	Amount	Cr.	Amount
To Gross loss b/d	xx	By Gross profit b/d	xx
To salaries, add: outstanding salary, less: prepaid salary	xx	By discount received	xx
To rent	xx	By commission received	xx
To printing and stationery	xx	By interest received	xx
To telephone and communication	xx	By bad debt recovered	xx
To general expenses	xx	By provision for doubtful debt (reduction, if any)	xx
To legal charges	xx	By appreciation on fixed assets	xx
To insurance	xx	By all other indirect incomes and gains	xx
To interest	xx	By Net loss c/d	xx
To depreciation	xx
To advertisement	xx
To carriage outward	xx
To discount allowed	xx
To commission paid	xx
To all office, administration, selling and distribution expenses	xx
To Net profit	xx