[Commerce Class Notes] on Finalization of Accounts Pdf for Exam [2024]

The most crucial function of financial accounting is to ascertain the financial position of the business and the profitability of the business. The trading and profit and loss account show the net profit and net loss of the business, while the balance sheet shows the financial position of the business.

Finalization of the accounts means the preparation of the profitability statement and the positional statement of the business. Hence, accounts that are required to be prepared are as follows:

Trading Account
Profit and Loss Account
Balance Sheet

These accounts are needed to be prepared according to the rules of financial accounting.

Introduction to Accounts

Finalization of accounts signifies that the books of accounts are checked and reconciled and are correct, perfect, and exact.

The books of account are normally closed at the end of the year. However, it’s best to test and reconcile accounts on an everyday basis, like monthly or quarterly.

The trade account, profit and loss account, and record are all included within the term “final accounts.”

The Indian Businesses Act, 2013, Sections 209 to 220, handle legal provisions referring to the assembly and presentation of ultimate accounts by companies. Companies must prepare final accounts in Section 210, while the shape and contents of the record and profit and loss account are addressed in Section 211.

Trading Account

The outcomes of the purchasing and selling of products are shown in a very trading account. This sheet aims to point out the gap between the damage and therefore the cost price. The trading account is ready to demonstrate the business’s trading performance like gross profit margin earned or gross loss endured. It keeps track of a company’s direct expenses.

Opening stock, purchase returns, and direct expenses also are things that appear on the accounting. Sales returns and shutting stock are the things that appear on the accounting system. profit is the difference between the credit and debit sides, and contrariwise.

Profit and Loss Account

This account is formed to work out a company’s net profit/loss and expenses over the course of a financial year. It keeps track of a company’s indirect costs, like rent, salaries, and advertising. Expenses and losses, additionally as revenue and gains, that have occurred in businesses apart from the assembly of products and services, are included in profit and loss a/c.

Earnings arising within the ordinary course of business, like commissions, discounts, and other incomes, like interest, dividends, and so on, appear on the method of accounting. profits are the difference between the credit and debit sides, and the other way around.

Balance Account

The record shows a company’s financial situation at a given point in time. A company’s financial situation is set by adding up its assets and liabilities on a particular date. The difference between assets and liabilities shows the capital invested within the business and reflects a company’s financial stability.

It is now called the company’s statement of the monetary situation.

Manufacturing Account

This report must be prepared by manufacturing firms, that is, those that convert raw materials into finished commodities. It determines the value of ultimate goods that are produced or made.

It comprises the value of raw materials consumed also because of the costs of obtaining them, like GST, duty, carriage and freight inwards, landing fees, and insurance fees, among other things.

With the end of the year approaching, you’ll be trying to find assistance in finalizing your accounts and submitting them to your CA for an audit.

How to Finalize an Account

STEP 1: Make a recording

Check for transactions that haven’t yet been entered into Reach Accountant Software.
If you have got any unpunched bills or invoices, confirm they’re entered into the software.

STEP 2: Reconcile your finances

Print and reconcile the Bank Book with the bank statements.
Prepare an announcement of Bank Reconciliation.
Reconcile cash balances and check funds, Imprest, and open claims.
Make a physical stock check using the Physical Stock Report (Compilation Stock Report).
Reconcile the sales figures with any VAT, Service Tax, or Excise Returns you will have previously filed.

STEP 3: Make any necessary adjustments before closing the books.

Pass journal entries to correct missing stock after you’ve completed the reconciliation.
Add in any missing bank and cash transactions.
Bad debts should be corrected or written off.
Depreciation entries should be passed.
To shift current earnings to retained earnings a/c, make a journal entry. This enables you to start the New Year with a fresh profit counter.

STEP 4: Compile the ultimate Accounts

Print the Daybook, Ledgers, balance, Profit and Loss Account, and Balance Sheets after you’ve finished the previous procedures.
Extracting them into excel or pdf and saving them to your Google Drive or Dropbox may be a better idea.
Accounts are frozen by visiting Settings>>Freeze entries.

STEP 5: Submit your financial statements for audit

You can easily let your auditor access your account by creating a user account.
To make his job easier, an auditor can use audit tools and pass adjustment entries.

STEP 6: In-Reach Accountant, create a replacement fiscal year.

Create a replacement of twelve months in Reach if possible.
If your accounts are closed, ensure you select to automatically carry over your balances.
Creating a brand new year without importing the opening balances if the finalization isn’t yet complete for the year.

Concept of Finalization of Accounts

In the balance sheet, these are the main issues:

Schedule III Rounding Off Format
Reconciliation of the number of shares in the company
Period of reporting
Placement in a private setting
Long-Term/Short-Term borrowings

Formats for Reporting

Clean Report: Based on audit processes procedures and depending on management representations, we report that disclosures are in compliance with the Company Company’s books of account and as submitted to us by Management.
The Company Fails to Make Required Disclosures: The Company has failed to make required disclosures in its financial statements about its holdings and dealings with a Specified Bank.
Profitability Statement – This is a statement that covers an entire accounting period. It summarizes the results of company activity over that period. Any company’s actions will involve purchasing, manufacturing, and selling.
Trading Account: A trading account is formed by a merchandising company that buys and sells goods over a period of time. The goal is to determine the gross profit or loss, which is a key measure of corporate efficiency.

The Debit Side of the Trading Account Will Show the Following Items:

Opening Stock: In the context of a business, the opening stock refers to the finished goods only. Trial Balance should be used to determine the amount of opening stock.
Purchases: The total amount of money spent over the course of the year. Cash is also used to make purchases. As a buy on credit Purchase deductions, like purchase returns, are possible.
Direct Expenses: these are all the costs incurred from the time the goods are purchased until they are in excellent working order. This comprises inbound freight, salaries, and other costs.
Gross Profit: If the credit side of the trading account is more than the debit side, gross profit is generated.

The Following Items will Display in the Trading Account’s Credit Side:

Sales Revenue: Sales revenue refers to the revenue generated by the primary company activity or operations.
Closing Stocks: In the event of a trading business, only finished products will constitute closing stocks. Stocks are valued at cost or net realizable value, whichever is lower, according to the conservative convention.
Gross Loss: A gross loss occurs when the debit side of a trading account is bigger than the credit side.
Other Incomes: The company will earn money from sources other than its principal operation. These are completely unintentional. It will include items like interest, dividends, and so on. The result of one P & L A/c component is transferred to the next component, and the net result is transferred to the balance sheet as an increase in owners’ equity. The gains are the property of the business owners.

Infirm organizations with widely distributed ownership, the profit figure is reported separately in the balance sheet.

Liabilities

Capital: This refers to the initial investment made by the business’s owner or owners.

This donation could be made at the commencement of the business or later on to meet the needs for finances for expansion, diversification, and other purposes. Owners and businesses are separate entities under the business entity idea, hence any capital investment by owners is a liability.

Reserves and Surplus: The company is a going concern, which means it will continue to make a profit or loss year after year. The accumulation of these profit or loss figures (known as surpluses) will continue to increase or decrease the equity of the owners. Profits and losses from non-corporate forms of enterprise are added to the capital A/c.

Bills Payable: It is fairly uncommon for suppliers to refuse to provide clean credit. They provide items in exchange for a promissory note, which must be signed as a promise to pay later or on a specific date. These are referred to as payable bills or payable notes.

Bank Overdrafts: Banks may provide funds such as overdrafts, which allow businesses to write checks up to a particular maximum. These checks will be honoured by the bank, and the money will be recovered from the firm. This is a temporary commitment.

B. Assets

All debit balances in personal and real accounts are referred to as assets in accounting.

Fixed assets and current assets are the two types of assets.

Fixed Assets: These are the assets or facilities that the company owns for a longer period of time. The primary goal of these resources is to use them for future revenues rather than to buy and sell them. The benefits of using these assets are spread out over a long period of time.

Some fixed assets are tangible, such as buildings, machinery, vehicles, computers, and so on, while others are intangible, such as patents, trademarks, and goodwill. Depreciation is the term used to describe the wear and tear on fixed assets. Fixed assets appear on the balance sheet.

Investments: These are money that is temporarily invested outside of the business. When a company has excess money that isn’t needed right away, it’s a good idea to invest it outside of the company, such as in mutual funds or fixed deposits. The goal is to make a respectable return on this money rather than letting it sit idle. These are assets that are listed on the balance sheet individually. There are two types of investments: current investments and non-current investments. Investments that are barred from being sold or disposed of beyond the present term are known as on-current investments.

Cash on Hand: This is the amount of cash held by the company on the balance sheet date. This money could be kept in a variety of offices, places, or areas where the business is conducted. Cash is physically counted and compared to the book balance at all locations. If there are any discrepancies, they are corrected.

Cash at the Bank: Bank transactions are extremely common. Funds maintained as bank balances are also classified as current assets because they will be used to pay suppliers. The bank balance in the books of accounts is always reconciled with the bank statement balance, the reasons for discrepancies are discovered, and the relevant entries are passed.

Finalization Accounts in Tally

In tally, different procedures are involved in the finalization of accounts. The steps are as follows:

Go to Tally > Audit and Compliance > Audit Journals > F7: Audit Journal.
Select the ledger and then specify the required amount in dr. field and then press enter.
Select the ledger required for Cr, field and then press enter.
Specify any narration if required, and press enter.
Press Y or enter to accept the transaction.
The voucher is required to be selected.
Press enter to provide audit details for the selected voucher.
Click the enter for display voucher or press Alt+Enter to view the voucher.
Click next on CTRL Enter: Alt Voucher or press CTRL Enter to Alter the Voucher.
Press CTRL to final audit.