FINAL ACCOUNTS OF

NON - MANUFACTURING
ENTITY
Final Accounts
Final Accounts is the last step in the accounting process.
Trial Balance is prepared at the end of all the accounting year
to know the balances of all the accounts & to test the
arithmetic accuracy of accounts. But the basic objective of
accounting is to know about the profit or loss during the
previous year & present financial position. This can be
known only if Trading account and Profit & Loss account and
Balance Sheet are prepared at the end of year. These are also
known as Financial Statement which are prepared.
The Accounting Cycle
1) Recording the transactions in Journal
2) Preparing ledger accounts
3) Preparing Trial Balance
4) Preparing the Final Accounts i.e. Income
statement and Position statement
FLOW CHART OF ACCOUNTING
CYCLE
Business Transactions

Documentation Journal Entries

& Recording
Classifying Ledger Accounts

Summarizing Trial Balance

Bifurcating Final Accounts

Trading Profit & Balance

Account Loss A/c Sheet
ELEMENTS OF FINAL ACCOUNTS
Final accounts of non-manufacturing entities include
Trading account, Profit and Loss Account and Balance Sheet

NON-MANUFACTURING BUSINESS ENTITIES

Final Accounts

Trading Account Profit & Loss Account Balance Sheet

OUTCOMES OF FINAL ACCOUNTS
FINANCIAL
STATEMENTS

INCOME POSITIONS
STATEMENT STATEMENT

TRADING PROFIT & LOSS BALANCE SHEET

ACCOUNT ACCOUNT

POSITIONS OF
GROSS PROFIT OR NET PROFIT OR
ASSETS &
GROSS LOSS NET LOSS
LIABILITIES
Comparison between Income
Statement and Position Statement
Income Statement Position Statement
Profit or loss is disclosed in the It exhibits assets and liabilities of the business as at the
Income Statement prepared at the close of the financial year.
close of the financial year.
Income Statement is sub-divided into Apart from balance sheet, to judge financial position of the
following two parts for a non- business, sometimes additional statements are also prepared
manufacturing concern: like cash flow statement, value added statement etc.
which is not mandatory for non- corporate entities.
These additional statements are prepared for the better
understanding of the financial position of the business.
Income Statement discloses net profit or Position statement discloses the assets and liabilities
net loss of the business after position as on a particular date.
adjusting from the income earned
during the year, all the expenditures of
the business incurred in that year.
TRADING A/C
Trading account is used to determine the gross
profit or gross loss of a business which results from
trading activities. Trading activities are mostly related to
the buying and selling activities involved in a business.
Trading account is useful for businesses that are dealing
in the trading business.
Format of Trading Account
Trading Account
Dr (Fortheperiodended………) Cr
Particulars Amount Particulars Amount.
To Opening stock By Sales
To Purchases Less: Sales returns
Less: Purchases returns By Closing Stock
To Wages
To Customs and Import duty
To Carriage expenses
To Royalty
To Manufacturing expenses
To Packing expenses
Total Total
To gross profit transferred to profit By gross loss transferred to
and loss account profit and loss account
POINTS TO BE CONSIDERED WHILE
PREPARING TRADING A/C

 The openinginventoryand purchases are written on the debit side.

 Sales and the closing inventoryare entered on the credit side.

 If there are any direct expenses/factory expenses then they should also be
written on the debit side of the Trading Account.
 If the balances of credit side is more, the difference is written on the debit
side as gross profit. This amount will also be carried forward to the Profit
and Loss Accounton the credit side.

 In case of gross loss, i.e., when the debit side of the Trading Account
exceeds the credit side, the amount will be written on the credit side of
the Trading Account and transferred to the debit side of the Profit and
Loss Account.
Iindividual items in detail
(1) OPENING INVENTORY : Since this was closing inventory of the last year, it
must have been entered in the opening inventory account, through the opening
entry. Therefore, it will be found in the trial balance. This items is usually put as the
first item on the debit side of the Trading Account. Of course, in the first year of
a business there will be no openinginventory.
JOURNAL ENTRY
TradingA/c Dr. XXX
ToOpeningStockA/c XXX
(2) PURCHASES AND PURCHASE RETURNS: The
purchases account will have debit balance, showing the gross amount of
purchases made of the materials. The purchase returns account will have credit
balance showing the return of materials to the supplier. On the debit side of
trading account the net amount is shown as indicated(withassumed figures):
JOURNAL ENTRY
TradingA/c Dr. XXX
To PurchaseA/c XXX

It happens sometimes that goods are received but the relevant invoice is not
received from the supplier. On the date of the closing of the account, an entry
must be passed to debit the purchases account and credit the supplier with the
cost of goods.
(3) CARRIAGE OF FREIGHT INWARDS/FREIGHT: This item
should also be debited to the Trading Account, as it is incurred to bring the
materials to the firm’s godown and make them available for use. However, if any
freight or cartage is paid on any asset, like machinery, it should be added to the cost
of the asset andnot debitedto the TradingAccount.

JOURNAL ENTRY
TradingA/c Dr. XXX
To Carriage inward/freight inward XXX
(4) Wages: Wages paid to workers in the godown/stores, should be debited to the
Trading Account. If any amount is outstanding, it must be brought into books so that
full wages for the period concerned are charged to the Trading Account. However, if
wages are paid for installation of a fixed asset, it should be added to the cost of the
asset.
JOURNAL ENTRY
TradingA/c Dr. XXX
To Wages XXX
(5) Sales and Sales Returns: The sales account will have a credit balance
indicating the total sales made during the year. The sales return account will have a debit
balance, showing the total amount of goods returned by customer the net of the two
amounts is entered on the credit side of the Trading Account.
JOURNAL ENTRY
Sales A/c Dr. XXX
To Sales Return XXX
To Trading A/c Dr. XXX

Sometimes, goods are sold on approval basis that is when the customer has the right to
return the goods with in stipulated period in that case the sale entry should be reversed.
It is discussed later in detail.
(6) Closing Inventory and its valuation: Usually there
is no account to show the value of goods lying in the godown at the
end of the year. However, to correctly ascertain the gross profit, the
closing Inventories must be properly taken and valued.

JOURNAL ENTRY
Closing Inventory A/c Dr. XXX
To Trading A/c XXX
PROFIT AND LOSS A/C
The Profit and Loss Account starts with gross profit on the
credit side. If there is gross loss, it will be written on the debit
side. After that all those expenses and losses, which have not
been entered in the Trading Account, will be written on the
debit side of Profit and Loss Account. Incomes and gains, other
than sales, will be written on the credit side.
FORMAT OF PROFIT & LOSS A/C
Particulars Rs. Particulars Rs.
To gross Loss b/d …….. By Gross Profit b/d …….
Salaries & wages …….. Interest earned ……..
Rent, rates & taxes ……... Commission earned ……..
Depreciation …….. Rent recd. ……..
Discount allowed …….. Profit on sale of fixed assets …….
Carriage outward …….. Income from investments ……..
Advertising …….. Net Loss transferred to Cap. A/c ……..
Bad debts ……..
Interest on Loan ……..
Net profit transferred to capital A/c ……..
……..

NOTE:
1. Gross loss appears in the debit side of the Profit and Loss Account at the top; while Gross Profit on the credit side.
2. Net loss appears in the credit side of the Profit and Loss Account; while Net profit on debit side as balancing figures.
Individual items in detail
(1) Drawings: Drawings are not expenses for the firm but
reduction of capital and therefore should not be debited to the Profit and
Loss Account but to Capital of the proprietor.
JOURNAL ENTRY
Capital A/c Dr. XXX
To Drawings A/c XXX

If the proprietor has enjoyed some personally, like use of the firm’s
car, a suitable amount should be treated as drawing and to that extent
the charge to the Profit and Loss Account will be reduced,
Drawings are debited to the proprietor’s capital account.
(2) Income tax: In case of companies, the income tax payable is treated like
other expenses. But in the case of sole proprietorship, income tax is treated as a
personal expense. It is debited to the Capital Account and not to the Profit and
Loss Account.
JOURNAL ENTRY
Capital A/c Dr. XXX
To Income Tax A/c XXX

This is because the amount of the tax will depend on the total income of the
partners or proprietor besides the profit of the firm. In case of partnership
business, firm's tax liability is to be debited to profit and loss account of the
firm but partners’ tax liability are not to be borne by the firm. Therefore if the
firm pays income tax on behalf of partners, such payment of personal income
tax should be treated as drawings.
(3) Discount received and allowed: We have already seen that discount is of two
types. Trade discount and Cash discount. Trade discount is allowed when the order for
goods is not below a certain figure. It is deducted from the invoice. Only the net amount
of invoice is entered in books. There is no further treatment of the trade discount. Cash
discount is allowed to a customer if he makes the payment before a certain date. It is
allowance made to him for prompt payment and is recorded in the books. Therefore,
Trade discount is not debited to P/L account, but cash discount is.
Discount received is really in the nature of interest received and similarly, discount allowed
really means interest paid. Discount received is a gain and is credited to the Profit and Loss
Account while discount allowed is debited.
JOURNAL ENTRY
Profit & Loss A/c Dr. XXX
To Discount Allowed A/c XXX
Discount Received A/c Dr. XXX
To Profit/Loss A/c XXX
( 4 ) Rebate: It is the allowance given to a customer when his purchases during a
period, say one year, total upto a certain figure. Suppose a firm allows a rebate of
4% to those customers whose purchases during the year are at least ¥ 5,000. One
Customer's purchases are ¥ 4,500, he will not get any rebate. Another customer's
purchases total 25,100, he will get a rebate of ¥ 204. The entry for rebate is made
only at the end of the year. The Rebate Account is debited and is later written in
the profit and Loss Account on the debit side. Various customers who have eared
the rebate are credited
JOURNAL ENTRY
Rebate A/c Dr. XXX
To Customer A/c XXX
( Initially rebate is given)
Profit/Loss A/c Dr. XXX
To Bad Debts A/c XXX
( At the year end closing entry)
(5) Bad Debts: When a customer does not pay the amount due from him and all hopes
of recovering the amount are lost, it is said to be a bad debt. It is a loss to the firm.
Therefore, the bad debts account is debited, which is later on written in the Profit and
Loss Account on the debit side. Since it is no use showing the amount due still as an
asset, the account of the customer concerned is closed by being credited. The entry.

JOURNAL ENTRY
Bad Debts A/c Dr. XXX
To Debtor’s/Customer (by Name) A/c XXX
Profit & Loss A/c Dr. XXX
To Bad Debts A/c XXX
→ In case of Provision for Bad debts has already been prepared then bad debts
should be written off first from it. Entry for it will be:

JOURNAL ENTRY
Provision for Bad Debts A/c Dr. XXX
To Bad Debts A/c XXX

→ If later on, the amount is recovered, it should be treated as a gain. It should not
be credited to the party paying it, it should be credited to Bad Debts
Recovered Account. It will be entered in the Profit and Loss Account on the
credit side.
JOURNAL ENTRY
Bad Debts Recovered A/c Dr. XXX
To Profit & Loss A/c XXX
ADDITIONAL
ADJUSTMENT
S
CLOSING STOCK
The unsold goods lying in store at the end of accounting year.

TREATMENT:
JOURNAL ENTRY
Stock A/c Dr. XXX
To Trading A/c XXX

Two-Fold effect of adjustment will be:-

1) Shown on Credit side of the Trading account
2) On asset side of Balance Sheet
OUTSTANDING EXPENSES
Those Expenses which have been incurred & not yet paid.

TREATMENT:
JOURNAL ENTRY
Expenses A/c Dr. XXX
To Outstanding Expenses A/c XXX

Two-fold effect:
1. Will be shown on debit side of trading & profit & loss a/c by way
of addition to particular expense.
2. Will be shown on liabilities side of Balance Sheet.
PREPAID EXPENSES
Those expenses which have been paid in advance i.e.,
whose benefit will be available in future is called prepaid
expenses.
TREATMENT:
JOURNAL ENTRY
Prepaid Expenses A/c Dr. XXX
To Expenses A/c XXX

Two fold effect:

1) Will be shown in profit & loss a/c by way deduction from particular expense.
2) Will be shown on asset side of Balance Sheet.
ACCRUED INCOME
That income which has been earned but not received during the
accounting year is called Accrued income.
TREATMENT:
JOURNAL ENTRY
Accrued Income A/c Dr. XXX
To Income A/c XXX

Two-fold effect:
1) Will be shown on credit side of P & L A/c.
2) Will be shown on asset side of Balance Sheet
UNEARNED INCOME
Income received but not earned during accounting year
is called income received in advance.
TREATMENT:
JOURNAL ENTRY
Income A/c Dr. XXX
To Income Received in Advance A/c XXX

Two fold effect:

1) Will be shown on credit side of P & L a/c by the way of deduction from particular
income.
2) Will be shown on liabilities side of Balance Sheet.
INTEREST ON CAPITAL
To see whether the business is really earning profit or
not , Interest on capital at a certain rate is provided.
TREATMENT:
JOURNAL ENTRY
Interest on Capital A/c Dr. XXX
To Capital A/c XXX

TWO FOLD EFFECT:

1) It will be shown on debit side of Profit and Loss A/c
2) Shown on liabilities side of BalanceSheet by way of addition to the
capital.
INTEREST ON DRAWINGS
Interest on drawings is charged from proprietor, as drawings
reduce capital.
TREATMENT:
JOURNAL ENTRY
Drawings A/c Dr. XXX
To Interest on drawings A/c XXX

Two fold effect will be:

1) It will be shown on credit side of Profit and Loss Account.
2) On liabilities side of Balance Sheet by way of addition to the drawings
which are ultimately deducted from the capital
GOODS USED IN MAKING OF
FURNITURE
There is an increase in furniture A/c and an alternate
decrease in purchase A/c
TREATMENT:
JOURNAL ENTRY
Furniture A/c Dr. XXX
To Purchase A/c XXX

Two fold effect will be:

1) Will be shown on debit side of trading & profit & loss a/c by way of
subtraction to purchases.
2) Shown on Assets side of Balance Sheet by way of addition to the
furniture.
GOODS USED FOR PERSONAL
PURPOSE
There is an increase in Drawings A/c and an alternate
decrease in purchase A/c
TREATMENT:
JOURNAL ENTRY
Drawings A/c Dr. XXX
To Purchase A/c XXX

Two fold effect will be:

1) Will be shown on debit side of trading & profit & loss a/c by way of
subtraction to purchases.
2) Shown on liabilities side of Balance Sheet by way of deduction from
capital.
GOODS GIVEN AS CHARITY/ FOR
DISTRIBUTION/
ADVERTISEMENT
This will be excluded from purchase A/c and debit to profit &
loss A/c
TREATMENT:
JOURNAL ENTRY
Profit & Loss A/c Dr. XXX
To Purchase A/c XXX

Two fold effect will be:

1) It will be shown on debit side of Profit and Loss A/c
2) Will be shown on debit side of trading & profit & loss A/c by way of
deduction from purchases.
GOODS DESTROYED BY FIRE
This will be excluded from purchase A/c and debit to profit &
loss A/c
TREATMENT:
JOURNAL ENTRY
Profit & Loss A/c Dr. XXX
To Purchase A/c XXX

Two fold effect will be:

1) It will be shown on debit side of Profit and Loss A/c
2) Will be shown on debit side of trading & profit & loss a/c by way of
deduction from purchases.