Final Account of Company

Preparation of Final Account of a Company

The preparation of final account of a joint stock company includes the preparation of a set of accounts and statement at the end of a financial year. The final account includes trading account, profit and loss account and the balance sheet. Therefore, in practice, the accounts include the following:

1. Trading account
2. Profit and loss account
3. Profit and loss appropriation account and
4. Balance sheet

1. Trading account

It shows the result of buying and selling of goods for a particular period. The trading account records the amount of purchase and expenses relating to manufacturing of goods are known as direct expenses. When sales exceed the cost of the saleable stage, all these expenses are known as direct expenses. When sales exceed the cost of goods sold, it results in gross profit and gross loss will result in the reverse case.

Importance and Advantages of Trading Account

Trading account facilitates a company to know the trading result. It provides relevant information about sales and cost of goods sold that shows the trading efficiency of the company. The main importance of trading account are as follows:

• It provides information about gross profit or gross loss made during a certain accounting period.

• It helps to control direct expenses as it takes into account only those expenses which are directly related to manufacturing of products.

• It helps to judge the profitability of the company by comparing the gross profit with sales.

• It helps to determine the cost of goods sold.

• It helps to know the trading expenses of the company.

Preparation of Trading Account

Trading account is the first step in the preparation of final account. All expenses relating to purchase and manufacturing of the product are shown on the debit side and a number of sales is shown in the credit side of trading account. Since, all the goods manufactured or purchased may not be sold during the period, the amount of closing stock is also shown on the credit side, to show the true result from buying/manufacturing and selling of products. A specimen of trading account of a joint stock company is given below.

2. Profit and Loss Account

Another important set of account in company’s final account is the profit and loss account. The Company Act 2053 of Nepal requires that the company must prepare profit and loss account at the end of each financial year to show its operating result of the period. The profit and loss account of the company can be defined as final account, which summarize income and gain earned and expenses incurred during the financial year and the result thereof. Therefore, the profit and loss account is prepared to ascertain the operating results of a company in term of net profit or loss. The profit and loss account determines net income or loss by matching income and expenses occurred during a particular financial year.

Importance and advantage of Profit and Loss Account

The importance and advantages of a profit and loss account are as follows:

• It helps to calculate the operating results of a company in terms of Profit / Loss for a specific period.

• It helps to control indirect expenses.

• It helps to judge the overall efficiency of the business.

• It helps to determine the amount of dividend of the year.

Preparation of Profit and Loss Account

Profit and loss account is prepared after the trading which shows gross profit or loss. It records all the revenue expenses including capital losses such as loss on sale of fixed assets, and revenue is a nominal account which is debited by the expenses and credited by incomes. The difference between total incomes and gains and total expenses and losses is either net profit or net loss. The excess of total credit over total debit result in net profit, while the excess of total debt over total gains result in a net loss.

A general format of profit and loss account is given below:

Note:

• In a profit and loss account, either gross loss on the debit side or gross profit on credit side is shown; both are not shown in the account at the same time.

• Similarly, either net profit on the debit side or net loss on credit side is shown in the profit and loss account; both are not shown in the account at the same time.

3. Profit and Loss Appropriation Account

Profit and loss appropriation account is the account which sets aside available profit for different purposes. It is prepared after the preparation of profit and loss account. It shows the distribution of available profit in the way of dividend and creation of reserves. It also adjusts the depreciation and tax. It is a common practice that the Nepalese companies prepare and present this account as a part of final accounts.

Importance of Profit and Loss Appropriation Account

• It helps to find out the total undistributed profit.

• It helps to create reserve and fund for future contingencies and developments.

• It helps to declare dividend and bonus.

• It helps to re-adjust tax and depreciation of the year.

Preparation of Profit and Loss Appropriation Account

This account is prepared after the profit and loss account. The operating result of the company is transferred to the profit and loss appropriation account. Profit and loss appropriation account are prepared to know the distribution of dividend, creation of reserve as well as bonus share. The profit and loss appropriation account are debited by the appropriations of the company’s profit such as the creation of reserves and funds and taxes paid and created by the company’s current year’s profits.

A specimen of profit and loss appropriation account is shown below:

Note:

• Net loss from profit and loss account is transferred to the debit side of P/L appropriation account.

• The debit balance of profit and loss appropriation account should be shown on the assets side of balance sheet.

4. Balance Sheet

A balance sheet is a statement of the financial position of a company prepared on a particular date. According to R.Stead, “Balance sheet is a screen picture of the financial position of the company in terms of its assets, at a certain moment.” Therefore, it shows the financial position of the company in terms of its assets, liabilities and shares capital as on the date for which it is prepared. A Nepalese company has to prepare its balance sheet in a form prescribed by the Company Act, 2053 of Nepal.

Importance and Objectives of Balance Sheet

The balance sheet is one of the most important final account of a company. It provides important information to different users such as shareholders, management, investors, lenders, bankers, creditors, and government for making financial decisions of their own.

• It helps to know the financial position reflecting the true and fair view of assets and liabilities.

• It helps to judge the debt paying capability of the company.

• It helps to show the nature and value of all assets.

• It helps to determine purchase consideration of the company.

• It helps to know about capital, owner’s equity and borrowed capital in detail, including authorized, issued, subscribed called up ad paid up capital.

Marshaling of Assets and Liabilities

The order in which assets and liabilities are arranged on a company’s balance sheet is known as Marshaling. It is a technique of showing assets and liabilities and the share capital in a certain order in the company’s balance sheet. Generally, the assets, liabilities and the share capital of the company can be arranged in its balance sheet in order of either liquidity or performance.

In order of liquidity

In order of liquidity, the most liquid form of assets is shown on the top of the balance sheet and the less liquid asset at its bottom. For example, cash in hand is placed at the top and goodwill at the bottom on the assets side of the balance sheet according to the order of liquidity. Similarly, in order of liquidity, the liabilities of the company which is payable early are shown on the top such as bills payable and then sundry creditors and share capital at the bottom on the liabilities side of the balance sheet.

In order of permanence

Unlike that, in order of permanence, the item of assets and liabilities are arranged in an upside down manner. For example, most permanent assets and liabilities are shown at the top and the down manner. For example, most permanent assets and liabilities are shown at the top and the least at the bottom on their respective sides of the balance sheet. The following table shows an example of marshalling of assets and liabilities in the balance sheet:

Preparation of Balance Sheet

The balance sheet of the company is prepared after the completion of its profit and loss appropriation account. All types of assets such as current and fixed assets, investments, intangibles and fictitious assets are categorically shown on the right-hand side of the balance sheet. Similarly, all types of liability such as current and long-term liabilities, reserves and surplus, share capital are shown on the left-hand side. The balance sheet form is prescribed by the Companies Act, 2053 of Nepal.

Note:

• All the assets and liabilities are presented in marshaling order.
• It is a general practice that all assets and liabilities are marshaled on the basis of marshaling order.
• In the case of issued, subscribed and called op capital, if all are the same, it can be shown at single heading.
• If loose tools are depreciated year, they are treated as fixed assets.

References:

Koirala, Madhav et.al., Principles of Accounting -XII, Buddha Prakashan, Kathmandu

Shrestha, Dasharatha et.al., Accountancy -XII, M.K. Prakashan, Kathmandu

Bajracharya, Puskar, Principle of Accounting-XII, Asia Publication Pvt. Ltd., Kathmandu