INTRODUCTION TO FINAL ACCOUNT

INTRODUCTION

All business transactions are first recorded in Journal or Subsidiary Books. They are transferred to Ledger and balanced it. The main object of keeping the books of accounts is to ascertain the profit or loss of business and to assess the financial position of the business at the end of the year. The object is better served if the businessman first satisfies himself that the accounts written up during the year are correct or al least arithmetically accurate.

When the transactions are recorded under double entry system, there is a credit for every debit, when on a/c is debited; another a/c is credited with equal amount.

If a Statement is prepared with debit balances on one side and credit balances on the other side, the totals of the two sides will be equal. Such a Statement is called Trial Balance.

DEFINITION

Trial Balance can be defined as “a list of all balances standing in the Ledger Accounts and Cash Book of a concern at any given time.

Advantages:

1. It is the shortest method of verifying the arithmetical accuracy of entries made in the Ledger. If the Trial balances agree, it is an indication that the Accounts are correctly written up; but it is not a conclusive proof. 
2. It helps to prepare the Trading A/c, Profit & Loss a/c and Balance Sheet. 
3. It presents to the businessman consolidated lists of all Ledger Balances. 

Preparation:

There are two methods for preparing the Trial Balance

• First Method: In this method, Ledger Accounts are not balanced.They are totaled.The debit side totals and the credit side totals are entered in a separate sheet. equal to the grand total of the Credit Column. They are totaled. The debit side totals The grand total of Debit Column will be

• Second Method: This method is more widely used. In this method, Ledger accounts are balanced. 

Assets, Sundry Debtors, Losses, Expenses and Drawings and debit balances; Capital, abilities,Sundry Creditors, Gains, Incomes and Capital, Revenues are credit balances

SUNDRY DEBTORS

When a trader sells on credit basis, The Buyer’s Account in the Ledger is debited. For each buyer, here is one Ledger a/c. Some of the buyer accounts may be automatically balanced. But it is quite natural that many of these Customer’s Accounts have a debit balances.

When we bring these balances to the Trial Balance, if we are going to write all individual names of customers, then the Trial balance will be too lengthy. Therefore, first a list of Debtors with their individual debit balances are prepared and totaled. Instead of writing the individual names of Debtors, the total is written under the heading “Sundry Debtors” which appears in the Trial Balance.

SUNDRY CREDITORS

There are a number of parties from whom the Trader buys goods on credit basis. For each one of them, an Account is opened in the Ledger. As in the case of Debtors, a List of Creditors with the balances due to them is prepared. In the Trial Balance, instead of writing the individual names of Creditors, the total of the balances of the creditors is written under the heading “Sundry Creditors”

If the Trial Balance agrees, it is an indication that the accounts are correctly written up; but it is not a conclusive proof. If the trial balance disagrees, then the difference amount is generally placed in ‘Suspense Account’

The total amount of debit balances should be equal to the total amount of credit balances. This method is uniformly followed by all

FINAL ACCOUNTS

So far, we have discussed that how the business transactions are recorded in Journal and ledger and how to detect and rectify the errors and how to prepare Trial Balance.

Is quire natural that the businessman is interested in knowing whether his business is running on profit or Loss and also the true financial position of his business. The main aim of Bookkeeping is to inform the Proprietor, about the business progress and the financial position at the right time and in the right way. Preparation of Final accounts is highly possible only after the preparation of Trial Balance.

Trading & Profit and Loss A/c

Balance sheet

1. Trading and Profit and Loss A/c is prepared to find out Profit or Loss.
2. Balance Sheet is prepared to find out financial position a if concern.

Trading and P&L A/c and Balance sheet are prepared at the end of the year or at end of the part. So it is called Final Account.

Revenue account of trading concern is divided into two-part i.e.

1. Trading Account and
2. Profit and Loss Account.

TRADING ACCOUNT

Trading refers buying and selling of goods. Trading A/c shows the result of buying and selling of goods. This account is prepared to find out the difference between the Selling prices and cost price. If the selling price exceeds the cost price, it will bring Gross Profit. For Example, If the cost price Rs.50,000 worth of goods are sold for Rs.60,000 that will bring in Gross Profit Rs.10,000

If the cost price exceeds the selling price , the result will be Gross loss. For example, if the cost price Rs. 60,000 worth of goods are sold for Rs. 50,000 that will result in Gross Loss of Rs.10,000

Thus the Gross Profit or Gross Loss is indicated in Trading Account.

Items appearing in the Debit side of Trading Account.

1. Opening Stock: Stock on hand at the commencement of the year or peiod is termed as the opening stock.
2. Purchases: It indicates total purchases both cash and credit made during the year.
3. Purchases Returns or Returns out words: Purchases Returns must be subtracted from the total purchases to get the net purchases. Net purchases will be shown in the trading account.
4. Direct Expenses on Purchases: Some of the Direct Expenses are.

• Wages: It is also known as Productive wages or Manufactur
• Carriage or Carriage Inwards
• Octroi Duty: Duty paid on goods for bringing them within municipal limits.
• Customs duty, dock dues, Clearing charges, Import duty etc.
• Fuel, Power, Lighting charges related to production
• Oil, Grease and Waste.
• Packing charges: Such expenses are incurred with a view to put the goods in the Saleable Condition.

Items appearing on the credit side of Trading Account.

1. Sales: Total Sales (Including both cash and credit) made during the year.
2. Sales Returns or Return Inwards: Sales Returns must be subtracted from the Total Sales to get Net sales. Net Sales will be shown
3. Closing stock: Generally, Closing stock does not apperar in the Trial Balance. It appears outside the Trial balance. It epresents the value of goods at the end of the trading period.

BALANCING OF TRADING ACCOUNT

The difference between the two sides of the Trading Account indicates either Gross Profit or Gross Loss. If the total on the credit side is more, the difference represents Gross Profit. On the other hand, if the total of the debit side is high, the difference represents Gross Loss. The Gross Profit or Gross Loss is transferred to Profit and Loss A/c.

Closing Entries of Trading A/c:

Trading A/c is a ledger account. Hence, no direct entries should be made in the trading account. Several items such as Purchases, Sales are first recorded in the journal and then posted to the ledger. The same accounts are closed by the transferring them to the trading account. Hence it is called as closing entries.

Advantages of Trading Account

1. The result of Purchases and Sales can be clearly ascertained
2. Gross Profit ratio to Sales could also be easily ascertained. It helps to determine Price.
3. Gross Profit ratio to direct Expenses could also be easily ascertained. And so, unnecessary expenses could be eliminated.
4. Comparison of trading account details with previous years details help to draw better administrative policies

PROFIT AND LOSS ACCOUNT

Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account. Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of accounting year

Items appearing on Debit side of the Profit & Loss A/c

The Expenses incurred in a business is divided in too parts. i.e. one is Direct expenses are recorded in trading A/c., and another one is Indirect expenses, which are recorded on the debit side of Profit & Loss A/c. Indirect Expenses are grouped under four heads:

1. Selling Expenses: All expenses relating to sales such as Carriage outwards, Travelling Expenses, Advertising etc.,
2. Office Expenses: Expenses incurred on running an office such as Office Salaries, Rent, Tax, Postage, Stationery etc.,
3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs and Renewals, Depreciation etc.
4. Financial Expenses: Interest Paid on loan , Discount allowed etc., are few examples for Financial Expenses.

Item appearing on Credit side of Profit and Loss A/c.

Gross Profit is appeared on the credit side of P & L. A/c. Also other gains and incomes of the business are shown on the credit side. Typical of such gains are items such as interest received,Rent received, Discounts earned, Commission earned. 

BALANCE SHEET

Trading A/c and Profit & Loss A/c reveals G.P. or G.L and N.P or N.L respectively, Besides the Proprietor wants

• To know the total Assets invested in business
• To know the Position of owner’s equity
• To know the liabilities of business.

DEFINITION

The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and Liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date.”

On the left hand side of this statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be equal. Capital arrives Assets exceeds the liabilities

OBJECTIVES OF BALANCE SHEET

1. It shows accurate financial position of a firm.
2. It is a gist of various transactions at a given period.
3. It clearly indicates, whether the firm has sufficient assents to repay its liabilities.
4. The accuracy of final accounts is verified by this statement
5. It shows the profit or Loss arrived through Profit & Loss A/c.

The Balance sheet contains two parts i.e.

1. Left hand side i.e. the Liabilities
2. Right hand side i.e. the Assets

ASSETS:

Assets represent everything which a business owns and has money value. Assets are always shown as debit balance in the ledger. Assets are classified as follows.

1. Tangible Assets:

Assets which can be seen and felt by touch are called Tangible Assets. Tangible Assets are classified into two:

• Fixed Assets: Assets which are durable in nature and used in business over and again are known as Fixed Assets. e.g. land and Building, Machinery, Trucks, etc.
• Floating Assets or Current Assets: Current Assets are i. Meant to be converted into cash, ii. Meant for resale, iii. Likely to undergo change e.g. Cash, Balance, stock,Sundry Debtors.

2. Intangible Assets: Assets which cannot be seen and has no fixed shape. E.g., goodwill,Patent.

3. Fictitious assets: Assets which have no real value and will appear on the Assets side of B/S. are known as Fictitious assets:

E.g. Preliminary expenses, Discount or creditors.

LIABILITIES:

All that the business owes to others are called Liabilities. It also includes Proprietor’s Capital. They are known as credit balances in ledger.

Classification of Liabilities:

1. Long Term Liabilities: Liabilities will be redeemed after a long period of time 10 to 15 years E.g. Capital, Long Term Loans.
2. Current Liabilities: Liabilities, which are redeemed within a year, are called Current Liabilities or short-term liabilities E.g. Trade creditors, B/P, Bank Loan.
3. Contingent Liabilities: Liabilities, which have the following features, are called contingent liabilities. They are:

• Not actual liability at present
• Might become a liability in future on condition that the contemplated event occurs. E.g. Liability in respect of pending suit.

Equation of Balance Sheet:

• Capital = Assets – Liabilities
• Liabilities = Assets – Capital
• Assets = Liabilities + Capital

DIFFERENCE BETWEEN A TRIAL BALANCE AND A BALANCE SHEET

Trial Balance
1. It shows the balances of all ledger accounts.
2. It is prepared after the completion of the ledger accounts or arrival of the balances
3. Its object is to check the arithmetical accuracy
4. Items shown in the Trial balance are not in order
5. It shows the opening stock.
6. It has the headings, debit and credit.

Balance Sheet
1. It shows the balances of personal and real accounts only.
2. It is prepared after the completion of Trading and P&L A/c.
3. Its object is to reveal the financial position of the business.
4. But in the B/S, the items shown must be in order.
5. It shows the closing stock
6. It has the heading of Assets and Liabilities.

Check your Progress - I

1. _________ account enables the trader to find out Gross Profit or Loss

2. _________ account enables the trader to find out the Net Profit or Loss.

3. Direct Expenses appears on ______ side of _________ account.

4. Indirect Expenses appears on _________ side of _____ account.

5. Wages and Salaries appear on __________ account

6. Salaries and wages appear on ________ account.

7. Trade Expenses will appear on __________ side of P & L A/c.

8. If the Trail Balance contains both Trade Expenses and Office Expenses, The Trade Expenses

Posted to _____________ account and office Expenses posted to _______ account.

9. __________ shows the Financial Position of a Trader.

10. Assets – Liabilities = _________

11. Assets – Capital = _____________

12. Capital + Liabilities = _____________

Answers
1. Trading
2. Profit & Loss
3. Debit, Trading
4. Debit, Profit & Loss
5. Trading
6. Profit & Loss
7. Debit
8. Trading, P & L A/c
9. Balance Sheet
10. Capital
11. Liabilities
12. Assets

Check your Progress - II

State whether the following are true or false:
1. Balance Sheet is a ledger A/c
2. Land is an intangible asset
3. Patent is a tangible asset
4. Stock is a floating asset.
5. Bills payable is a long term liabilities

Answers
1. False,
2. False,
3. False,
4. True,
5. False

Benefits on Procurement of Capital Goods under Foreign Trade Policy 2015-20

Export Promotion Capital Goods (EPCG) scheme 

The objective of the EPCG Scheme under Indian Foreign Trade Policy 2015-20 is to facilitate import of capital goods for producing quality goods and services to enhance India’s export competitiveness. 

EPCG Scheme for Export Promotion of Capital Goods 

1. EPCG Scheme under Import Export Policy 2015-20 allows import of capital goods for pre-production, production and post-production at Zero customs duty. Alternatively, the Authorization holder may also procure Capital Goods from indigenous sources in accordance with provisions of paragraph 5.07 of FTP. Capital goods for the purpose of the EPCG scheme shall include: 

I. Capital Goods as defined in Chapter 9 including in CKD/SKD condition thereof (Refer Note below). 

II. Computer software systems; 

III. Spares, moulds, dies, jigs, fixtures, tools & refractories for initial lining and spare refractories; and 

IV. Catalysts for initial charge plus one subsequent charge. 

Note: Definition of Capital goods as per Chapter 9 is as follows: 

Capital Goods" means any plant, machinery, equipment or accessories required for manufacture or production, either directly or indirectly, of goods or for rendering services, including those required for replacement, modernization, technological up-gradation or expansion. It includes packaging machinery and equipment, refrigeration equipment, power generating sets, machine tools, equipment and instruments for testing, research and development, quality and pollution control. 

Further, Capital goods may be for use in manufacturing, mining, agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture and viticulture as well as for use in services sector. 

2. Import of capital goods for Project Imports notified by Central Board of Excise and Customs is also permitted under EPCG Scheme. 

3. Import under EPCG Scheme Import Export Policy 2015-20 shall be subject to an export obligation equivalent to 6 times of duty saved on capital goods, to be fulfilled in 6 years reckoned from date of issue of Authorization. 

4. Authorization shall be valid for import for 18 months from the date of issue of Authorization. Revalidation of EPCG Authorization shall not be permitted. 

5. In case countervailing duty (CVD) is paid in cash on imports under EPCG, incidence of CVD would not be taken for computation of net duty saved, provided CENVAT is not availed. 

6. Second hand capital goods shall not be permitted to be imported under EPCG Scheme under Exim Policy 2015-20. 

7. Authorization under EPCG Scheme as per IMPEX Policy 2015-20 shall not be issued for  import of any Capital Goods (including Captive plants and Power Generator Sets of any kind) for; 

I. Export of electrical energy (power), 

II. Supply of electrical energy (power) under deemed exports, 

III. Use of power (energy) in their own unit, and 

IV. Supply/export of electricity transmission services, 

It may be noted that the above exclusion does not cover domestic sale of electricity energy and incidental services there on. 

8. Import of items which are restricted for import shall be permitted under EPCG Scheme Import Export Policy 2015-20 only after approval from Exim Facilitation Committee (EFC) at DGFT Headquarters. 

9. If the goods proposed to be exported under EPCG authorization are restricted for export, the EPCG authorization shall be issued only after approval for issuance of export authorization from Exim Facilitation Committee at DGFT Headquarters. 

Coverage 

1. EPCG Scheme covers manufacturer exporters with or without supporting manufacturer(s), merchant exporters tied to supporting manufacturer(s) and service providers. Name of supporting manufacturer(s) shall be endorsed on the EPCG authorization before installation of the capital goods in the factory / premises of the supporting manufacturer(s). In case of any change in supporting manufacturer(s) the Regional Authority shall intimate such change to jurisdictional Central Excise Authority of existing as well as changed supporting manufacturer(s) and the Customs at port of registration of Authorization. 

2. Export Promotion Capital Goods (EPCG) Scheme under Foreign Trade Policy 2015-20 also covers a service provider who is designated / certified as a Common Service Provider (CSP) by the DGFT, Department of Commerce or State Industrial Infrastructural Corporation in a Town of Export Excellence subject to provisions of Foreign trade Policy/ Handbook of Procedures with the following conditions :- 

I. Export by users of the common service, to be counted towards fulfillment of EO of the CSP shall contain the EPCG authorization details of the CSP in the respective Shipping bills and concerned Regional Authority (RA) must be informed about the details of the Users prior to such export; 

II. Such export will not count towards fulfillment of specific export obligations in respect of other EPCG authorizations (of the CSP/User); and 

III. Authorization holder shall be required to submit Bank Guarantee (BG) which shall be equivalent to the duty saved. BG can be given by CSP or by any one of the users or a combination thereof, at the option of the CSP. 

Actual User Condition 

Import of capital goods shall be subject to Actual User condition till export obligation is completed. 

Export Obligation (EO) as per Indian Foreign Trade Policy 2015-20 

Following conditions shall apply to the fulfillment of Export Obligation:- 

1. EO shall be fulfilled by the authorization holder through export of goods which are manufactured by him or his supporting manufacturer / services rendered by him, for which the EPCG authorization has been granted. 

2. EO under the scheme shall be, over and above, the average level of exports achieved by the applicant in the preceding three licensing years for the same and similar products within the overall Export Obligation period including extended period, if any; except for categories mentioned in paragraph 5.13(a) of HBP. Such average would be the arithmetic mean of export performance in the preceding three licensing years for same and similar products. 

Exemption from maintenance of average export obligation as per Para 5.13 (a) of HBP: 

a) In case of export of goods relating to the following the EPCG authorization holder shall not be required to maintain average export obligation: 

(i) Handicrafts, (ii) Handlooms, (iii) Cottage & Tiny sector, (iv) Agriculture, (v) Aqua-culture (including Fisheries), Pisciculture, (vi) Animal husbandry, (vii) Floriculture & Horticulture, (viii) Poultry, (ix) Viticulture, (x) Sericulture, (xi) Carpets, (xii) Coir, and (xiii) Jute. 

b) However, this exemption from maintenance of average export obligation shall not be allowed for import of fishing trawlers, boats, ships and other similar items. 

c) Goods, excepting tools imported under EPCG scheme by sectors specified in sub-paragraph (a) above, shall not be allowed to be transferred for a period of five years from date of imports even in cases where export obligation has been fulfilled. 

3. In case of indigenous sourcing of Capital Goods, specific Export Obligation (EO) shall be 25% less than the stipulated Export Obligation. i.e EO will be 4.5 times (75% of 6 times) of the duty saved on such goods. This reduction (from 10% to 25%) on indigenous sourcing is a step to promote ‘Make in India’ vision by encouraging use of indigenous manufactured goods. 

4. Shipments under Advance Authorization, DFIA, Drawback scheme or reward schemes under Chapter 3 of FTP; would also count for fulfillment of EO under EPCG Scheme Import Export Policy 2015-20. 

5. Export shall be physical export. However, deemed exports shall also be counted towards fulfillment of export obligation, along with usual benefits available under FTP subject to certain restrictions and exclusions. 

6. EO can also be fulfilled by the supply of ITA (Information Technology Agreement) - I items to DTA, provided realization is in free foreign exchange. 

7. Royalty payments received by the Authorization holder in freely convertible currency and foreign exchange received for R&D services shall also be counted for discharge under EPCG. 

8. Payment received in rupee terms for such Services as notified shall also be counted towards discharge of export obligation under the EPCG scheme. 

Provision for units under BIFR /Rehabilitation as per FTP - 2015-20 

A company holding EPCG authorization and registered with BIFR / Rehabilitation Department of State Government or any firm/ company acquiring a unit holding EPCG authorization which is under BIFR / Rehabilitation, may be permitted EO extension for the EPCG authorization(s) held by the acquired unit, as per rehabilitation package prepared by operating agency and approved by BIFR / Rehabilitation Department of State Government. If time-period up to which EO extension is to be granted is not specifically mentioned in the BIFR order, EO extension of 3 years from the date of expiry of EOP (including extended period) or the date of BIFR order, whichever is later, shall be granted without payment of composition fee. 

LUT/Bond/BG in case of Agro units 

LUT/Bond or 15% BG, as applicable, may be furnished for EPCG authorization granted to units in Agri-Export Zones provided EPCG authorization is taken for export of primary agricultural product(s) notified or their value added variants. 

Indigenous Sourcing of Capital Goods and benefits to Domestic Supplier 

A person holding an EPCG authorization may source capital goods from a domestic manufacturer. Such domestic manufacturer shall be eligible for deemed export benefit under FTP. Such domestic sourcing shall also be permitted from EOUs and these supplies shall be counted for purpose of fulfillment of positive NFE by said EOU. 

Calculation of Export Obligation 

In case of direct imports, Export Obligation (EO) shall be reckoned with reference to actual duty saved amount. In case of domestic sourcing, EO shall be reckoned with reference to notional Customs duties saved on FOR value. 

Incentive for early EO fulfillment 

With a view to accelerating exports, in cases where Authorization holder has fulfilled 75% or more of specific export obligation and 100% of Average Export Obligation till date, if any, in half or less than half the original export obligation period specified, remaining export obligation shall be condoned and the Authorization redeemed by RA concerned. However no benefit under Para 5.21 of HBP shall be permitted where incentive for early EO fulfillment has been availed. 

Explanation: As Per Para 5.21 Regional Authority Concerned may be condone shortfall up to 5% in specific export obligation. 

Reduced EO for Green Technology Products 

For exporters of Green Technology Products, Specific EO shall be 75% of stipulated Export obligation. However, average EO shall remain unchanged. The list of Green Technology Products is given in Para 5.29 of HBP which is as follows: 

I. Equipment for Solar Energy decentralized and grid connected products, 

II. Bio-Mass Gassifier, 

III. Bio-Mass/Waste Boiler, 

IV. Vapour Absorption Chillers, 

V. Waste Heat Boiler, 

VI. Waste Heat Recovery Units, 

VII. Unfired Heat Recovery Steam Generators, 

VIII. Wind Turbine, 

IX. Solar Collector and Parts thereof, 

X. Water Treatment Plants, 

XI. Wind Mill, Wind Mill Turbine / Engine, 

XII. Other Generating Sets - Wind powered, 

XIII. Electrically Operated Vehicles – Motor Cars, 

XIV. Electrically Operated Vehicles - Lorries and Trucks, 

XV. Electrically Operated Vehicles – Motor Cycles/Mopeds, and 

XVI. Solar Cells. 

Reduced EO for North East Region and Jammu & Kashmir 

For units located in Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Jammu & Kashmir, specific EO shall be 25% of the stipulated Export Obligation. However, average EO shall remain unchanged. 

Post Export EPCG Duty Credit Scrip(s) 

a) Post Export EPCG Duty Credit Scrip(s) shall be available to exporters who intend to import capital goods on full payment of applicable duties in cash and choose to opt for this scheme. 

b) Basic Customs duty paid on Capital Goods shall be remitted in the form of freely transferable duty credit scrip(s), similar to those issued under FTP. 

c) Specific EO shall be 85% of the applicable specific EO under the EPCG Scheme. However, average EO shall remain unchanged. 

d) Duty remission shall be in proportion to the Export Obligation fulfilled. 

e) All provisions for utilization of scrips issued under FTP shall also be applicable to Post Export EPCG Duty Credit Scrip(s). 

f) All provisions of the existing EPCG Scheme shall apply insofar as they are not inconsistent with this scheme. 

This is one of the incentive schemes by Government which covers small and medium concerns having export intentions in the near future. In the modern era business can’t be run merely by increasing turnover but can be made advantaged by availing the benefits of various incentive schemes intended to promote the business like EPCG.