Preparation of Final Accounts | PAPER III – ACCOUNTING & FINANCIAL MANAGEMENT FOR BANKERS | MODULE B: FINANCIAL STATEMENTS AND CORE BANKING SYSTEMS

Preparation of Final Accounts and Financial Statements

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1. Trial Balance

A Trial Balance is a statement that lists all the ledger account balances at a particular date. It helps in detecting arithmetic errors and forms the basis for preparing final accounts.

Format:

Trial Balance as on 31st March 20XX
| Account Name        | Debit (₹) | Credit (₹) |
|---------------------|-----------|------------|
| Cash                | 10,000    |            |
| Capital             |           | 50,000     |
| Purchases           | 30,000    |            |
| Sales               |           | 40,000     |
| Rent                | 5,000     |            |
| Total               | 45,000    | 90,000     |

Example:

If total debits = ₹1,20,000 and total credits = ₹1,20,000, the trial balance is considered tallied and error-free (arithmetically).

2. Adjustment Entries

Adjustment entries are journal entries made at the end of an accounting period to update the ledger accounts before preparing financial statements. Common adjustments include:

• Outstanding Expenses
• Prepaid Expenses
• Accrued Income
• Depreciation

Example: Outstanding Rent

Rent due: ₹2,000. Entry:

Rent A/c Dr ₹2,000
To Outstanding Rent A/c ₹2,000

3. Preparation of Final Accounts

Final Accounts consist of:

• Trading Account
• Profit and Loss Account
• Balance Sheet

Steps:

1. Prepare Trading Account to find Gross Profit/Loss.
2. Transfer gross profit to Profit & Loss Account and record all indirect incomes/expenses.
3. Prepare Balance Sheet from the adjusted balances.

Mathematical Illustration:

Trading Account:
Sales = ₹1,00,000
Less: Cost of Goods Sold (Opening Stock + Purchases - Closing Stock)
COGS = ₹20,000 + ₹50,000 - ₹10,000 = ₹60,000
Gross Profit = ₹1,00,000 - ₹60,000 = ₹40,000

P&L Account:
Gross Profit = ₹40,000
Less: Rent = ₹5,000
Net Profit = ₹35,000

4. Financial Statements from Trial Balance

Once all adjustments are made, the final accounts (P&L and Balance Sheet) are prepared using adjusted Trial Balance figures.

Example:

Adjusted Trial Balance:
| Particulars           | Debit (₹) | Credit (₹) |
|------------------------|-----------|------------|
| Cash                  | 10,000    |            |
| Debtors               | 20,000    |            |
| Creditors             |           | 15,000     |
| Capital               |           | 50,000     |
| Net Profit            |           | 35,000     |
| Total                 | 30,000    | 100,000    |

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MCQs (Multiple Choice Questions)

1. What is the main purpose of a trial balance?
A. To detect all types of errors
B. To prepare tax returns
C. To check the arithmetical accuracy of ledger balances
D. To calculate depreciation
Answer: C

2. Which of the following is not an adjustment entry?
A. Depreciation
B. Prepaid Rent
C. Purchase of Machinery
D. Outstanding Salary
Answer: C

3. Where is prepaid insurance shown in the final accounts?
A. Trading Account
B. P&L Account
C. Liabilities Side of Balance Sheet
D. Assets Side of Balance Sheet
Answer: D

4. What does the Profit & Loss Account show?
A. Cash Flows
B. Capital Employed
C. Net Profit or Loss
D. Total Assets
Answer: C

5. Adjustment for accrued income is recorded as:
A. Accrued Income A/c Dr To Income A/c
B. Income A/c Dr To Accrued Income A/c
C. Cash A/c Dr To Income A/c
D. None of the above
Answer: A

6. Trading Account is prepared to calculate:
A. Net Profit
B. Operating Profit
C. Gross Profit
D. Net Loss
Answer: C

7. Closing Stock is shown in:
A. Only in Trading A/c
B. Only in Balance Sheet
C. Both Trading A/c and Balance Sheet
D. Only in P&L Account
Answer: C

8. Which side of the Trial Balance is Sales recorded?
A. Debit
B. Credit
C. Both
D. None
Answer: B

9. Which item is transferred from the Trading Account to P&L Account?
A. Gross Profit
B. Rent
C. Depreciation
D. Salaries
Answer: A

10. Depreciation is classified as:
A. Direct Expense
B. Capital Expense
C. Indirect Expense
D. Non-Cash Asset
Answer: C