Introduction to Final Accounting

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LESSON 1: INTRODUCTION TO FINAL ACCOUNT
CONTENTS
1.0. Aims and Objectives
1.1 Introduction
1.1.1. Definition
1.2. Sundry Debtors
1.3. Sundry Creditors
1.4. Final Accounts
1.5. Trading Account
1.5.1. Balancing of Trading Account
1.6. Profit and Loss Account
1.7. Balance Sheet
1.7.1. Definition
1.7.2. Objectives of Balance Sheet
1.7.3. Assets
1.7.4. Liabilities
1.8. Difference between a Trial Balance and a Balance Sheet
1.9. Let Us Sum Up
1.10 Lesson end Activities
1.11. Points for Discussion
1.12. Model answer to “Check your Progress”
1.13. Suggested Reading / References/ Sources
1.0 AIMS AND OBJECTIVES
At the end of the lesson you be able to:
Ø Understand basics of Final Accounts
Ø Understand the difference between Profit and Loss Account with Trial Balance Ø Understand how to prepare Balance Sheet
1.1 INTRODUCTION
All business transactions are first recorded in Journal or Subsidiary Books. They are transferred to Ledger and balanced it. The main object of keeping the books of accounts is to ascertain the profit or loss of business and to assess the financial position of the business at the end of the year. The object is better served if the businessman first satisfies himself that t he accounts written up during the year are correct or al least arithmetically accurate. When the transactions are recorded under double entry system, there is a credit for every debit, when on a/c is debited; another a/c is credited with equal amount. If a Statement is prepared with debit balances on one side and credit balances on the other side, the totals of the two sides will be equal. Such a Statement is called Trial Balance.

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1.1.1 DEFINITION
Trial Balance can be defined as “a list of all balances standing in the Ledger Accounts and Cash Book of a concern at any given time.
Advantages:
1. It is the shortest method of verifying the arithmetical accuracy of entries made in the Ledger. If the Trial balances agree, it is an indication that the Accounts are correctly written up; but it is not a conclusive proof.

2. It helps to prepare the Trading A/c, Profit & Loss a/c and Balance Sheet. 3. It presents to the businessman consolidated lists of all Ledger Balances. Preparation:
There are two methods for preparing the Trial Balance
First Method:
In this method, Ledger Accounts are not balanced. They are totaled. The debit side totals and the credit side totals are entered in a separate sheet. The grand total of Debit Column will be equal to the grand total of the Credit Column.

Second Method:
This method is more widely used. In this method, Ledger accounts are balanced. The brought down balances are then brought to a sheet as given bellow.

S.No.

Suresh Babu’s Books
Trial Balance as on _________ 20___
Debit Balance Credit Balance
Name of Account L.F.
Rs.
P. Rs.
P.

Assets, Sundry Debtors, Losses, Expenses and Drawings and debit balances; Capital, Liabilities, Sundry Creditors, Gains, Incomes and Capital, Revenues are credit balances. 1.2 SUNDRY DEBTORS
When a trader sells on credit basis, The Buyer’s Account in the Ledger is debited. For each buyer, there is one Ledger a/c. Some of the buyer accounts may be automatically balanced. But it is quite natural that many of these Customer’s Accounts have a debit balances. When we bring these balances to the Trial Balance, if we are going to write all individual names of customers, then the Trial balance will be too lengthy. Therefore, first a list of Debtors with their individual debit balances are prepared and totaled. Instead of writing the individual names of Debtors, the total is written under the heading “Sundry Debtors” which appears in the Trial Balance.

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