Final Accounts for Narmada Co Ltd.
Comprehensive Preparation of Trading, Profit & Loss and Balance Sheet
Highlights
- Accurate Measurement: Calculation of Cost of Goods Sold using opening inventory, purchases, and closing inventory.
- Adjustments Incorporated: Consideration of outstanding rent, prepaid general expenses, depreciation, and prior period adjustments.
- Balanced Financial Statements: Ensuring the Balance Sheet reflects assets equaling liabilities plus equity.
Background and Adjustments
The trial balance for Narmada Co Ltd. as at 31st March 2024 provides the base data for the final accounts. In addition, the following adjustments were necessary:
Additional Information
- Closing Inventory: Inventories are valued at ₹8,200 as at 31st March 2024 (the provided date “2014” is assumed to be a typographical error).
- Depreciation: Machinery is depreciated at 10% on its cost of ₹2,900, resulting in a depreciation charge of ₹290.
- Outstanding Rent: An additional rent of ₹45 is outstanding and must be treated as an expense.
- Prepaid General Expenses: Prepaid general expenses of ₹500 have been provided on the credit side and must reduce the general expenses of the period.
- Provision for Doubtful Debts: An opening provision of ₹500 is deducted from Trade Receivables for a more accurate realization value.
- Prior Period Profit: The Statement of Profit and Loss as of 1st April 2023 shows a profit of ₹1,503, which is considered as a prior period adjustment transferred to the current capital.
Step 1: Preparation of the Trading Account
Calculation Details
The Trading Account focuses on determining the gross profit derived from the core trading operations. The key element is the Cost of Goods Sold (COGS) which is computed as:
COGS = Opening Inventory + Purchases – Closing Inventory
Substituting the values:
Opening Inventory = ₹7,500
Purchases = ₹24,500
Closing Inventory = ₹8,200
Hence, COGS = ₹7,500 + ₹24,500 – ₹8,200 = ₹23,800.
Sales are recorded at ₹35,000. The trial balance shows a discount of ₹700 (recorded on the credit side) which reduces gross sales. Thus, the Net Sales considered are:
Net Sales = ₹35,000 – ₹700 = ₹34,300.
The Gross Profit is computed as:
Gross Profit = Net Sales – COGS = ₹34,300 – ₹23,800 = ₹10,500.
Trading Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| Opening Inventory | 7,500 | Sales | 35,000 |
| Add: Purchases | 24,500 | Less: Discount (adjustment) | (700) |
| Subtotal | 32,000 | Net Sales | 34,300 |
| Less: Closing Inventory | (8,200) | ||
| Cost of Goods Sold | 23,800 | Gross Profit | 10,500 |
Step 2: Preparation of the Profit and Loss Account
The Profit and Loss Account apportions the gross profit after deducting operating expenses to arrive at the net profit. In addition to the trading expenses, several adjustments are taken:
Adjustments and Expenses
- Wages: ₹5,000
- Salaries: ₹750
- Rent: The recorded rent is ₹495; with ₹45 outstanding, the total is ₹495 + ₹45 = ₹540.
- General Expenses: Listed at ₹1,705, reduced by prepaid expenses of ₹500 so the adjusted general expenses are ₹1,705 – ₹500 = ₹1,205.
- Bad Debts: ₹483
- Depreciation on Machinery: 10% of ₹2,900 results in a depreciation charge of ₹290.
The total operating expenses are calculated as:
Total Expenses = Wages (₹5,000) + Salaries (₹750) + Rent (₹540) + General Expenses (₹1,205) + Bad Debts (₹483) + Depreciation (₹290).
That is, Total Expenses = ₹5,000 + ₹750 + ₹540 + ₹1,205 + ₹483 + ₹290 = ₹8,268.
Therefore, the net profit for the current year from operations becomes:
Net Profit (current year) = Gross Profit – Total Expenses = ₹10,500 – ₹8,268 = ₹2,232.
Moreover, the Statement of Profit and Loss as of 1st April 2023 showed a profit of ₹1,503. This prior period profit is transferred to the capital account. Adding the current year’s net profit:
Total Profit before appropriation = ₹2,232 + ₹1,503 = ₹3,735.
As a dividend of ₹900 has been paid during the year, the final profit transferred to the capital is:
Final Profit = ₹3,735 – ₹900 = ₹2,835.
Profit and Loss Account
| Particulars | Amount (₹) | Particulars | Amount (₹) |
|---|---|---|---|
| Gross Profit (from Trading Account) | 10,500 | Wages | 5,000 |
| Salaries | 750 | ||
| Rent (495 + 45) | 540 | ||
| General Expenses (net of Prepaid) | 1,205 | ||
| Bad Debts | 483 | ||
| Depreciation on Machinery (10% of 2,900) | 290 | ||
| Total Expenses | 8,268 | Net Profit (Current Year) | 2,232 |
| Add: Prior Period Profit (1.04.2023) | 1,503 | ||
| Less: Dividend Paid | 900 | ||
| Profit Transferred to Capital | 2,835 | ||
Step 3: Preparation of the Balance Sheet
The Balance Sheet is structured on the fundamental accounting equation:
Assets = Liabilities + Capital & Reserves
Liabilities and Equity
The equity side begins with the capital as per the trial balance. The current year’s profit (after appropriation) is added to the capital and reserves. The following are the components:
- Capital: ₹9,500 as given.
- Profit Transferred: ₹2,835 (from Profit and Loss Account).
- Reserves: ₹1,550 as recorded.
- Trade Payables: ₹1,750.
- Outstanding Rent: ₹45.
Hence, the aggregate on the liabilities side equals:
Capital (9,500 + 2,835 = 12,335) + Reserves (1,550) = 12,335 + 1,550 = 13,885. Adding Trade Payables (1,750) and Outstanding Rent (45) gives:
Total Liabilities = 13,885 + 1,750 + 45 = 15,680.
Assets
The assets include:
- Trade Receivables: ₹3,750 reduced by the opening provision for doubtful debts of ₹500; Net = ₹3,750 – ₹500 = ₹3,250.
- Cash: ₹1,620.
- Machinery: ₹2,900 less depreciation of ₹290 = ₹2,610.
- Closing Inventory: ₹8,200.
Summing these gives:
Total Assets = 3,250 + 1,620 + 2,610 + 8,200 = 15,680.
Balance Sheet as at 31st March 2024
| Liabilities and Capital | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Capital (₹9,500 + Profit of ₹2,835) | 12,335 | Trade Receivables (Net of Provision) | 3,250 |
| Reserves | 1,550 | Cash | 1,620 |
| Trade Payables | 1,750 | Machinery (Net of Depreciation) | 2,610 |
| Outstanding Rent | 45 | Closing Inventory | 8,200 |
| Total Liabilities | 15,680 | ||
Summary of Final Accounts
Key Components
- Trading Account: Demonstrates a gross profit of ₹10,500 derived from net sales (₹34,300) less the cost of goods sold (₹23,800).
- Profit and Loss Account: After adjusting for operating expenses (wages, salaries, rent, adjusted general expenses, bad debts, and depreciation), the current year profit stands at ₹2,232. When combined with the prior period profit and less dividend paid, a net amount of ₹2,835 is transferred to the capital.
- Balance Sheet: Assets equal liabilities plus equity with both sides totalling ₹15,680, ensuring balanced and accurate financial reporting.
References
- Final Accounts – Toppr
- Company Final Accounts – Accountancy Knowledge
- Final Accounts – Byju's
- How to Prepare Final Accounts – Captain Biz
- Adjusted Trial Balance for Final Accounting – Future Accountant
Recommended Further Queries
Last updated March 21, 2025