CBSE Class 11 Accounting End of Period Accounts

Accounting-End of Period Accounts

Money is invested in a business with the primary aim of earning profits. For knowing this, it isnecessary that the accountant must measure and accumulate accounting data in such a manner that the amount of profit earned or loss suffered by the business may be determined and reported. The profit figure is needed for income tax requirements and for chalking out expansion plans. For the purpose of determining the profit or loss figure, a statement known as trading and profit and loss account (or income statement), is prepared at the end of the year which includes all items of expenses and losses, and all revenues and gains occurring during the accounting period. This account or income statement is divided into two parts - first part is called trading account. This part is prepared to find out gross profit or gross loss. Gross profit is the difference between the net sales and cost of goods sold. In other words, gross profit/gross loss is the result of buying and selling of goods during trading period. The second part is called profit and loss account and shows the final figure of net profit or net loss. Another statement, balance sheet (or position statement), is also prepared with an aim to know the exact financial position of the business on the last date of the accounting period. The balance sheet shows the financial position of the business in the form of its assets and liabilities. It is divided into two parts when prepared in a T form. On the left hand side liabilities are shown and on the right hand side assets are shown.

These two statements, Trading and profit and loss account and balance sheet, are known as Financial Statements. They are also called Final Account because they are end of the period statements, or the end product of the financial accounting process. Both these statements are prepared from the balances appearing in the trial balance.

Preparation of End of the Period Statements

End of the period statements, i.e. trading and profit and loss account and balance sheet, are prepared from the balances appearing in the trial balance at the end of an accounting period. It means that trial balance becomes the basis for the preparation of these statements.

In order to decide the place where the particular balance should be taken, from the trial balance to end of the period statements, the following rules may be allowed.

Items from the debit column of the trial balance : Balances appearing in the debit column of the trial balance may be items of expenses, or losses, or assets. If the debit balance of an item represents an asset like land, building, plant and machinery, debtors, bills receivables, investments, cash at bank, cash in hand etc, then it is shown on the asset side of the balance sheet. As discussedin Chapter I, assets are the properties or possessions of the business which are acquired for use in the business and not for the purpose of resale. The benefits from assets are obtained for more than one year. If the balance of an account is an expense then it will be shown on the debit side of the trading account, or on the debit side of the profit and loss account as the case may be. You also learnt in Chapter I that expenses are the items of expenditure whose benefits are availed by the business immediately or during the same accounting year. The expenses are purchases, wages, carriage, cartage, commission, discount, salary, stationery, postage, advertisement etc.

Items from the credit column of the trial balance : The balances that are shown in the credit column of the trial balance are the items of liabilities, or incomes and gains. If these are liabilities there they are shown on the liability side of the balance sheet. In Chapter I you have learnt that liabilities are the obligations of the business which it has to discharge, e.g., capital, loans, creditors, bills payable, outstanding expenses, bank overdraft etc. The credit balances in the trial balance may also be items of incomes or gains; such balances are shown in the trading and profit and loss account. Items of incomes and gains are sales, discount received, commission received, rent received etc.

Preparation of trading account : As discussed earlier, profit and loss account is divided into two parts. The first part is called the trading account and the second part is called the profit and loss account. Trading account is prepared to find out the gross profit earned or gross loss incurred by the business enterprise during the accounting period. Gross profit is the difference between sales and cost of goods sold. The figures of sales made by the business during the accounting period are available in the sales account in the ledger. Cost of goods sold represents the cost price of that merchandise which was sold during the accounting period out of the total merchandise which was available for sale. This means that adjustments for opening and closing stock have to be made in the amount of cost of goods / merchandise available for sale to arrive at the figure of cost of goods sold. It can be understood easily with the help of the following formula.

Cost of goods sold = Opening stock + Net purchase + Direct expenses - Closing stock.

Opening stock is the cost price of the goods which were accounted for from the previous year. Net purchases are total purchases (cash purchases + credit purchases) less purchase returned which can be made available from the purchases account and purchases return account in the ledger. Direct expenses are all such expenses which may have to be incurred by the business for bringing the goods or services in a saleable position. Examples of direct expenses are carriage inwards, cartage, freight, wages, customs duties, dock charges, Collieage, fuel, power etc. Therefore, when from net sales, cost of goods sold is subtracted the balance is gross profit. It can be shown in the form of an equation as follows:

Gross Profit = Net sales - Cost of goods sold When the amount of cost of goods sold is more than the figure of net sales the balance will be gross loss.

Please refer to the link below - CBSE Class 11 Accounting-End of Period Accounts