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N.E..S.

RA
ATNAM
M CO
OLLEG
GE
OF ARTS,
A
SCIIENCE & COMME
ERCE
BHA
ANDUP (W
W), Mum
mbai -400
0078

MASTER
R OF COM
MMERCE
E
Se
emester
r II
2015-2016
6

A proje
ect rep
port on
o
Fiinaliza
ation of
o par
rtnership fir
rm
Subm
mitted on partia
al fulfilm
ment
On requirem
r
ment for
r a boar
rd of
Deg
gree of master
m
of comme
erce
Su
ubmitted by:
MR. VISSHAL G. JA
ADHAV.
Pro
oject gu
uide:
Mr. rajiv misshra

N.E.S
S RA
ATNA
AM
CO
OLLE
EGE
OF AR
RTS, SC
CIENCE
E & COM
MMERC
CE
BHANDU
UP (W), Mu
umbai -4000078

CER
RTIFICATE

This is to certify Mr.


M VISH
HAL GA
ANESH JADHA
AV of
OM, Sem
mester-II (2015--2016) has
h succeessfully completeed the
M.CO
projecct on F
FINALIZ
ZATION
N OF PA
ARTNER
RSHIP FIRM under
the guuidance of
o Mr. RA
AJIV MISHRA.
M
.

Projeect Guidee/Intern
nal Exam
miner
(M
Mr. RAJJIV MISH
HRA)

P
Principa
al
(Mrs. R
RINA SA
AHA)

Exterrnal Exaaminer

Date:

DECLARATION

I VISHAL GANESH JADHAV the student of


M.COM (Master Of Commerce) Semester II (20152016) hereby declare that I have completed the project
on FINALIZATION OF PARTNERSHIP FIRM.
The information submitted is true & original to
the best of my knowledge.

Signature Of The Student:


VISHAL G. JADHAV
Roll No. 16

ACKNOWLEDGEMENT

My sincere appreciation is extended to many people who


helped and supported me through this project.
First and Foremost, I would like to thank Professor MR.
RAJIV MISHRA for her invaluable advice and comments. Without
his support this study would not have been possible.
My deep sense of gratitude to PRINCIPAL MRS. RINA
SAHA of NES Ratnam of Arts, Science & Commerce for support &
guidance. Thanks & appreciation to the helpful at NES Ratnam
College of Arts, Science & commerce, for their support.
Last but not the least; I would like to thank my parents for
always being there for me. They have constantly guided and
encouraged me through this study.

WHAT IS FINALIZATION OF ACCOUNTING?


Preparation of final account is the last stage of the
accounting cycle. The basic objective of every concern maintaining
the book of accounts is to find out the profit or loss in their business
at the end of the year. Every businessman wishes to ascertain the
financial position of his business firm as a whole during the
particular period. In order to achieve the objectives for the firm, it is
essential to prepare final accounts which include Manufacturing
and Trading, Profit and Loss Account and Balance Sheet. The
determination of profit or loss is done by preparing a Trading,
Profit and Loss Account. The purpose of preparing the Balance
Sheet is to know the financial soundness of a concern as a whole
during the particular period.
The following procedure and important points to be
considered for preparation of Trading, Profit and Loss Account and
Balance Sheet.
Finalization of accounts refers to closing the books of
accounts for the particular period of time. This includes verification
of account balances, passing adjustment journal entries, preparing
trail balance, preparing profit & loss account and balance sheet for
the same period, etc. This help to give a clear picture of the financial
performance of the organization during the year and to give the
financial position of the organization at the end of the year.

STEPS/PROCESS OF FINALIZATION OF ACCOUNTS


The process of finalization is something like this:
Prepare a Trial Balance See whether it agrees or not If it does not
agree then investigate the ledgers That process means that see
whether Purchase ledger tallies with cash book purchase entries etc.
After that you are ready to finalize the accounts but provide
for taxes prepare provision for doubtful debts, prepare gross block
of fixed assets and depreciation, prepare net block of fixed assets,
prepare gross and net block of inventory and value inventory at
cost or market value whichever is less for this purpose the market
value of the inventory need to be ascertained, prepare bank
reconciliation statement and tally all bank balances with bank
accounts prepare gross and net block of furniture and fixtures
provide for wages and salaries etc. if they are payable after
finalization period.
These are the following steps involved in Finalization.
1. PRIMARY BOOK (JOURNAL ENTRIES):
Journalizing is the process of recording transaction in an
accounting journal. The journalizing process starts when a business
transaction occurs. Accountants or bookkeepers must analyze each
business transaction in order to understand what accounts are
affected by the business transaction. Once the accounts are
identified, the accountant must figure out how the accounts are
affected. The business transaction can then be journalized starting
with the account to be debited and the ending with the credited
accounts. Each journal entry is typically accompanied with a date
and a description of the business transaction.

Example
Let's take a look at an example business transaction that we can
show the journalizing process. Assume Pizza Pizza, Inc. just bought
a new delivery car for $1,000 cash on January 1st.
First, the transaction must be analyzed to identify what accounts
were affected. Pizza Pizza, Inc. bought a new car, so the vehicle
account would have been affected and it paid cash for the car, so
the cash account would also have been affected.
Second, we must analyze how these accounts changed. The vehicle
account increased because we just added another vehicle to it and
the cash account decreased because we just paid cash for the
vehicle.
Third, we must record the transaction. Since both of these accounts
are asset accounts, they both have debit balances. We will debit the
vehicle account to increase it and credit the cash account to
decrease it. Here is what our example journal entry will look like in
the purchases journal.
2. SECONDARY BOOK (LEDGER ACCOUNT):
A journal, as we have studied, is a sequential record of
business transactions. It records all financial transactions of
business in a book in chronological order; however, it does not
record transactions relating to a particular subject, thing or persons
into one account. For example, if we want to know the total
purchase of business for a period of three months, we have to go
through all journals of three months, which is quite time consuming

and tedious. To overcome the short coming of journal, a ledger


account is maintained.
Ledger is a statement prepared to collect and record
transactions relating to similar nature or subject into one place. In
other words, a book which records transactions having similar
features, nature and subject into the account is called ledger
account. It is a book which contains a classified and summer' zed
form of permanent record of all transactions. Ledger is called the
book of secondary entry because it is prepared from journal.
A ledger may be prepared either in T-shape or showing
balance
after
each
transaction
which
is
called
a
Ledger account showing running balance i.e. running shape.
T-shape ledger account:
This type of ledger account commonly used in book keeping.
The ledger is divided into two parts, the left part of debit and right
part for credit. A specimen ruling of ledger accounting is presented
below:
1. Date dr.
2. Particulars
3. JF
4. Amount rs
5. Date cr.
6. Particular
7. JF
8. Amount rs
BALANCING OF LEDGER ACCOUNTS
After posting transaction journalized into ledger account, all
the ledger account must be closed to find their and posting on the

business at the end of certain period. For example, if the ledger has
to determine the amount of cash balance at the end of certain
period. Then he has to prepare cash a/c and debit and credit of the
account are totaled. The difference between two sided (i.e. dr, and
cr.) is balance of the account. The process is called balance of ledger
accounts.
Balancing of account is done periodically i.e. monthly, quarterly,
semi-annually as per requirement. Normally, monthly balancing is
common in practice.
Debit side of an account greater than credit side
In this case, the debit of an account will be greater than
credit total. It is known as debit balance of an account. Here the
excess debit in the credit side of the account as by balance C/D and
closed the account in the beginning of next period. The balancing
figure is brought down as to balance b/d.
Credit side of an account greater than debit side
In this case, the credit total of an account is greater than
debit total. It is knows as credit balance of an account. Here excess
credit amount is entered in the debit side of account as " to balance
c/d' and closed the account. In the next period, the balancing figure
is brought down as "By balance b/d".
BALANCING OF DIFFERENT ACCOUNTS:
Balancing is done periodically, i.e., weekly, monthly,
quarterly, half yearly or yearly, depending on the requirements of
the business.
I. PERSONAL ACCOUNTS: These accounts are generally
balanced regularly to know the amounts due to the persons
(creditors) or due from the persons (debtors).

II. REAL ACCOUNTS: These accounts are generally balanced at


the end of the financial year, when final accounts are being
prepared. However, cash account is frequently balanced to know
the cash on hand. A debit balance in an asset account indicated the
value of the asset owned by the business. Assets accounts always
show debit balances.
III. NOMINAL ACCOUNTS: These accounts are in fact, not to be
balanced as they are to be closed by transfer to final accounts. A
debit balance in a nominal account indicates that it is an expense or
loss. A credit balance in a nominal account indicates that it is an
income or gain. All such balances in personal and real accounts are
shown in the Balance Sheet and the balances in nominal accounts
are taken to the Profit and Loss Account.
EXAMPLE
Illustration:
Journalise the following transactions in the books of Amar
and post them in the Ledger:2004
March1 Bought goods for cash Rs. 25,000
2 Sold goods for cash Rs. 50,000
3 Bought goods for credit from Gopi Rs.19,000
5 Sold goods on credit to Robert Rs.8,000
7 Received from Robert Rs. 6,000
9 Paid to Gopi Rs.5,000 20 Bought furniture for cash Rs. 7,000
Solution:
Date

Journal of Amar
Particulars

L.F.

Debit

Credit

(Rs.)
25,000

2004
Mar 1

(Rs.)

Purchases a/c
Dr.
25,000
To Cash a/c
2
Cash a/c
Dr.
50,000
To sales a/c
50,000
3
Purchases a/c
Dr.
19,000
To gopi a/c
19,000
5
Robert a/c
Dr.
8,000
To sales a/c
8,000
7
Cash a/c
Dr.
To Robert a/c
9
Gopi a/c
Dr.
5,000
To cash a/c
5,000
20
Furniture a/c
Dr.
7,000
To cash a/c
7,000
Explanation : There are six accounts involved: Cash, Purchases,
Sales, Furniture, Gopi & Robert, so six accounts are to be opened in
the ledger.
Ledger of Amar
Cash account
Date Particulars J.F. Amt. Date Particulars
2004
2004
Mar 5 To sales a/c
50,000 Mar By purchases
1
a/c
7 To Robert
6,000
9 By gopi a/c
a/c
20 By furniture
a/c
Purchases a/c

J.F.

Amt.
25,000
5,000
7,000

Date Particulars J.F. Amt. Date


2004
March To cash a/c
25,000
1
3 To gopi a/c
19,000

Date

Particulars

Date Particulars
2004
Mar To cash a/c
20

Date Particulars
2004 To cash a/c
Mar 9

J.F.

J.F.

Particulars

J.F.

Sales a/c
Amt. Date Particulars
J.F.
2004
Mar By cash a/c
2
5 By Robert a/c

Furniture a/c
Amt. Date Particulars

Amt.

Amt.
50,000
8,000

J.F.

Amt.

J.F.

Amt.

7,000

J.F.

Date Particulars J.F.


2004
Mar 5 To sales a/c

Gopi a/c
Amt. Date Particulars
5,000 2004
Mar By purchases
3
a/c
Robert a/c
Amt. Date Particulars
2004
8,000 Mar By cash a/c
7

19,000

J.F.

Amt.
6,000

3. PREPARATION OF SUBSIDIARY BOOK:


What is subsidiary book?
Most of the big companies are recording the business
transactions in one journal and the posting of the same to the
concerned ledger accounts are very difficult tasks and which
require more clerical labour also. For avoiding such kind of
difficulties most of the business organizations are subdividing the
journal in to subsidiary journals or subsidiary books.
Subsidiary books are those books of original entry in which
similar nature of transactions are recording in a chronological
order.
In a business most of the transactions are related to receipt
and payment of cash, sale of goods and purchase of goods. Hence
separate books are maintained for recording these transactions. The
journal is subdivided into different books. These books are known
as Subsidiary Books. These are the books of prime or original entry.
All transactions are first recorded in the subsidiary books and then
posted to the ledger.
KINDS OF SUBSIDIARY BOOKS:
There are different kinds of subsidiary books which
includes purchase day book, Sales day book, purchase returns
book, Sales returns book, Bills receivable books, Bills payable
books, Cash book.
1. Purchase Day Book:
Purchase day book is used for recording credit purchase of
goods only. This will not record any cash purchase or credit

purchase of any assets. The term goods means all the commodities
and services in which the company deals in day to day activities.
The preparation of purchase day book involves the Date column,
Particulars column, Invoice number column, Ledger folio column,
inner amount column and Amount column.
Purchase book is prepared to record all the credit purchases
of an organization. Purchase book is not a purchase ledger.
Format:
Date
Particulars
Inward
L.F.
Amount
Invoice No.
2. Sales Day Book:
Sales day book is mainly used for recording credit sales of
goods and services in an organization. This will not record any cash
sales or assets sales. The ruling for the preparation of this book is
same as like Purchase day book. This involves the Date column,
Particulars column, Invoice number column, Ledger folio column,
inner amount column and Amount column.
The features of a sale book are same as a purchase book,
except for the fact that it records all the credit sales.
Format:
Date
Particulars
Outward
L.F.
Amount
Invoice No.
3. Purchase Returns Book:
This is maintained to record the transactions of goods
returned to the supplier when purchase on credit. The ruling of the
preparation of purchase return book or returns outward book
involves Date, Particulars, Debit note number, Ledger folio and
amount column.

Sometimes goods are to be retuned back to the supplier, for


various reasons. The most common reason being defective goods or
poor quality goods. In this case, a debit note is issued.
Format:
Date
Particulars Credit Note
L.F.
Amount
No.
4. Sales Returns Book:
This book is used to record the goods returned by the
customer the goods sold on credit. The ruling of the preparation of
Sales return book or returns inward book involves Date,
Particulars, credit note number, Ledger folio and amount column.
The reason of Sale return is same as for purchase return.
Sometimes customers return the goods if they dont meet the
quality standards promised. In such cases, a credit note is issued to
the customer.
Format:
Date
Particulars Debit Note
L.F.
Amount
No.
5. Bills Receivable Books:
It is used to record the transactions when the bills received
from the customer for credit sales. This provides a medium for
posting bills receivable transaction. The preparation of this book
involves Date when received, Drawer, Acceptor, Where payable,
date of bill, term, due date ledger folio, Amount, remarks columns.
Bills are raised by creditors to debtors. The debtors accept
them and subsequently return them to the creditors. Bills accepted
by debtors are called as Bills Receivables in the books of creditors,

and Bills Payable in the books of debtors. We keep them in our


record called Bills Receivable Books and Bills Payable Book.
Format:
Date
Received
Term
Due date
L.F.
Amt.
from
6. Bills Payable Books:
This is used to record the acceptances given to the suppliers
for credit purchase. The preparation of bills payable book involves
Date of acceptance, giver, payee, Where payable, date of bill, term,
due date, ledger folio, Amount, remarks columns.
Bills payable issues to the supplier of goods or services for
payment, and the record is maintained in this book.
Format:
Date
To Whom
Term
Due date
L.F.
Amt.
Given
4. PREPARATION OF CASH BOOK:
The cash book is used to record all the receipts and
payments of cash. For the preparation of cash book there are
different rules are available according to the nature of business.
Cash book is a record of all the transactions related to cash.
Examples include: expenses paid in cash, revenue collected in cash,
payments made to creditors, payments received from debtors, cash
deposited in bank, withdrawn of cash for office use, etc.
Note: In modern accounting, simple cash book is the most popular
way to record cash transactions. The double column cash book or
three column cash book is practically for academic purpose. A
separate bank book is used to record all the banking transactions as
they are more than cash transactions. These days, cash is used just

to meet petty and routine expenditures of an organization. In most


of the organizations, the salaries of employees are paid by bank
transfer.
Note: Cash book always shows debit balance, cash in hand, and a
part of current assets.
The different forms of cash book are as follows:1. Single Column Cash Book
Cash book is just like a ledger account. There is no need to
open a separate cash account in the ledger. The balance of cash
book is directly posted to the trial balance. Since cash account is a
real account, ruling is followed, i.e. what comes in debit, and what
goes out credit.
All the received cash is posted in the debit side and all
payments and expenses are posted in the credit side of the cash
book.
Format:
Dr.
Cr.
Date
Particulars L.F.
Amt. Date Particulars L.F.
Amt.
2. Double Column Cash Book:
Here, we have an additional Discount column on each side
of the cash book. The debit side column of discount represents the
discount to debtors of the company and the credit side of discount
column means the discount received from our suppliers or creditors
while making payments.
The total of discount column of debit side of cash book is
posted in the ledger account of Discount Allowed to Customers
account as To Total As Per Cash Book. Similarly, credit column of

cash book is posted in ledger account of Discount Received as By


total of cash book.
Format:
Date

Particulars

L.F.

Discount

Rs

Date

Particulars

L.F.

Discount Rs

3. Triple Column Cash Book:


When one more column of Bank is added in both sides of
the double column cash book to post all banking transactions, it is
called triple column cash book. All banking transactions are routed
through this cash book and there is no need to open a separate bank
account in ledger.
4. Petty Cash Book:
In any organization, there may be many petty transactions
incurring for which payments have to be done. Therefore, cash is
kept with an employee, who deals with it and makes regular
payments out of it. To make it simple and secure, mostly a constant
balance is kept with that employee.
Suppose cashier pays Rs 5,000 to Mr A, who will pay dayto-day organization expenses out of it. Suppose Mr A spend Rs
4,200 out of it in a day, the main cashier pays Rs 4,200, so his
balance of petty cash book will be again Rs 5,000. It is very useful
system of accounting, as it saves the time of the main cashier and
provides better control.
We will soon discuss about Analytical or Columnar Petty
Cash Book which is most commonly used in most of the
organizations.
Format:
Amt
Received

C.B.F.

Date Particulars Rs.

Stationery& Cartage
Printing

Loading Postag
e

L
.
F

5. PREPARATION OF TRIAL BALANCE:


Trial balance is a summary of all the debit and credit balances
of ledger accounts. The total of debit side and credit side of trial
balance should be matched. Trial balance is prepared on the last
day of the accounting cycle.
Trial balance provides us a comprehensive list of balances.
With the help of that, we can draw financial reports of an
organization. For example, the trading account can be analyzed to
ascertain the gross profit, the profit and loss account is analyzed to
ascertain the profit or Loss of that particular accounting year, and
finally, the balance sheet of the concern is prepared to conclude the
financial position of the firm.
Format:
TRIAL BALANCE
S. NO.
LEDGER ACCOUNTS
L.F. DEBIT
CREDIT
AMT
AMT
1.
X
Advance From Customers
2.
X
Advance To Staff
3.
X
Audit Fees
4.
X
Balance At Bank
5.
X
Bank Borrowings
6.
X
Bank Interest Paid
7.
X
Capital
8.
X
Cash In Hand
9.
X
Commission On Sale
10.
X
Electricity Expenses
11.
X
Fixed Assets
12.
X
Freight Outward

13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.

Interest Received
Inward Freight Charges
Office Expenses
Outstanding Rent
Prepaid Insurance
Purchases
Rent
Repair & Renewals
Salary
Salary Payable
Sale
Staff Welfare Expenses
Stock
Sundry Creditors
Sundry Debtors
Total

X
X
X
X
X
X
X
X
X
X
X
X
X
X
X
XX

XX

6. ADJUSTMENTS AND DEALING WITH ADJUSTMENTS:


Adjusting entries are usually made on the last day of
an accounting period (year, quarter, month) so that the financial
statements reflect the revenues that have been earned and
the expenses that were incurred during the accounting period.
Sometimes an adjusting entry is needed because:

Revenue has been earned, but it has not yet been recorded.

An expense may have been incurred, but it hasn't yet been


recorded.

A company may have paid for six-months of insurance


coverage, but the accounting period is only one month. (This

means that five months of insurance expense is prepaid and


should not be reported as an expense on the current income
statement.)
A customer paid a company in advance of receiving goods or
services. Until the goods or services are delivered, the amount is
reported as a liability. After the goods or services are delivered,
an entry is needed to reduce the liability and to report the
revenues.
A common characteristic of an adjusting entry is that it
will involve one income statement account and one balance
sheet account. (The purpose of each adjusting entry is to get
both the income statement and the balance sheet to be accurate.)

Purpose of Adjusting Entries:


The main purpose of adjusting entries is to update the
accounts to conform with the accrual concept. At the end of the
accounting period, some income and expenses may have not been
recorded, taken up or updated; hence, there is a need to update the
accounts. If adjusting entries are not prepared, some income,
expense, asset, and liability accounts may not reflect their true
values when reported in the financial statements. For this reason,
adjusting entries are necessary.
Types of Adjusting Entries:
Generally, there are 4 types of adjusting entries. Adjusting
entries are prepared for the following:
1. Accrued Income income earned but not yet received
2. Accrued Expense expenses incurred but not yet paid
3. Deferred Income income received but not yet earned
4. Prepaid Expense expenses paid but not yet incurred

Also, adjusting entries are made for:


5. Depreciation
6. Doubtful Accounts or Bad Debts, and other allowances
For example:
7. PREPARATION OF FINAL ACCOUNT:
Preparation of final account is the last stage of the
accounting cycle. The basic objective of every concern maintaining
the book of accounts is to find out the profit or loss in their business
at the end of the year. Every businessman wishes to ascertain the
financial position of his business firm as a whole during the
particular period. In order to achieve the objectives for the firm, it is
essential to prepare final accounts which include Manufacturing
and Trading, Profit and Loss Account and Balance Sheet. The
determination of profit or loss is done by preparing a Trading,
Profit and Loss Account. The purpose of preparing the Balance
Sheet is to know the financial soundness of a concern as a whole
during the particular period. The following procedure and
important points to be considered for preparation of Trading, Profit
and Loss Account and Balance Sheet.
The final account includes the following:
1. MANUFACTURING ACCOUNT:
Manufacturing Account is the important part which is
required to preparing Trading, Profit and Loss Account.
Accordingly, in order to calculate the Gross Profit or Gross Loss, it
is essential to determine the Cost of Goods Manufactured or Cost of
Goods Sold. The main purpose of preparing Manufacturing
Account is to ascertain the cost of goods manufactured or cost of
goods sold, which is transferred to the Trading Account. This
account is debited with opening stock and all items of costs

including purchases related to production and credited with


closing balance of work in progress and cost of goods produced
transferred to Trading Account. The term "Cost of Goods Sold"
refers to cost of raw materials consumed plus direct related
expenses.
Components of Manufacturing Account:
The following are the important components to be considered for
preparation of Manufacturing Accounts:
a. Opening Stock of Raw Materials.
b. Purchase of Raw Materials.
c. Purchase Returns.
d. Closing Stock of Raw Materials. Final Accounts
e. Work in Progress (semi-finished goods).
f. Factory Expenses.
g. Opening Stock of Finished Goods.
h. Closing Stock of Finished Goods.
(1) Opening Stock: The term Opening Stock refers to stock on hand
at the beginning of the year which include raw materials, work-inprogress and finished goods.
(2) Purchases: Purchases include both cash and credit purchase of
goods. If any purchase is returned, the same will be deducted from
gross purchases.
(3) Direct Expenses: Direct expenses are chargeable expenses or
productive expenses which include factory rent, wages, freight on
purchases, manufacturing expenses, factory lighting, heating, fuel,
customs duty, dock duty and packing expenses. In short, all those
expenses incurred in bringing the raw materials to the factory and
converting them into finished goods will constitute the direct
expenses that are to be shown on the debit side of the trading
account.

Format:
Particulars
Work in progress
(opening balance)
Raw material
consumed
Opening stock
Add: purchase
Less: closing stock
Factory wages
Factory overheads

Amt.
XX

XX
XX
XX
XX
XX
XX

Particulars
Sale of scrap

Amt.
XX

Work in progress

XX

Cost of production
(balancing figure)

XX

XX

2. TRADING ACCOUNT:
Trading Account and Profit and Loss Account are the two
important parts of income statements. Trading Account is the
first stage in the final account which is prepared to know the
trading results of gross profit or loss during a particular period.
In other words, it is a summary of the purchases, and sale of a
business or production cost of goods sold and the value of sales.
The difference between the elements establishes the gross profit
or loss which is then carried forward to the profit or loss account
for calculation of net profit or net loss. Accordingly, if the sales
revenue is higher than the cost of goods sold the difference is
known as 'Gross Profit,' Similarly, if the sales revenue is less than
the cost of goods sold the difference is known as 'Gross Loss.'
Specimen Proforma of Trading Account
The following Specimen Proforma of a Trading Account
which is widely used in practice:
Trading Account
For the year ended 31st..
Particulars
Amt. Particulars
Amt.

To Opening Stock
To Purchases
Less: Purchase Return
To Direct Expenses:
Carriage Inward
Wages

XX
XX
(X)

Freight
Custom Duty
Fuel And Power
Factory Expenses
Royalty On Production
Other Direct Expenses
To Gross Profit C/D
(Transferred To P&L
A/C)

XX
XX
XX
XX
XX
XX
XX

XX
XX

By Gross Sales
Less: Sales Return
Net Sales
By Closing Stock
By Gross Loss C/D
(Transferred To Freight
P&L A/C)

XX

XX
(X)
XX
XX
XX
XX

XX

Equation of Trading Account


The purpose of preparing the Trading Account is to calculate the
Gross Profit or Gross Loss of a concern during a particular period.
The following equations are highly useful for determination of
Gross Profit or Gross Loss :
Calculation of Gross Profit or Loss
Gross Profit = Sales - Cost of Sales
Sales
= Cost of Sales + Gross Profit
(or)
Sales
=Stock in the beginning + Purchases + Direct Expenses
- Stock at the end + Gross Profit
(or)
Stock in the beginning + Purchases + Direct Expenses
+ Gross Profit = Sales + Stock at the end
3. PROFIT AND LOSS ACCOUNT:
The determination of Gross Profit or Gross Loss is done by
preparation of Trading Account. But it does not reveal the Net

Profit or Net Loss of a concern during the particular period. This is


the second part of the income statement and is called as Profit and
Loss Account. The purpose of preparing the profit and loss account
to calculate the Net Profit or Net Loss of a concern. Net profit refers
to the surplus which remains after deducting related trading
expenses from the Gross Profit. The trading expenses refer to
inclusive of office and administrative expenses, selling and
distribution expenses. In other words, all operating expenses such
as office and administrative expenses, selling and distribution
expenses and non-operating expenses are shown on the debit side
and all operating and non operating gains and incomes are shown
on the credit side of the Profit and Loss Account. The difference of
two sides is either Net Profit or Net Loss. Accordingly, when total
of all operating and non-operating expenses is more than the Gross
Profit and other non-operating incomes, the difference is the Net
Profit and in the reverse case it is known as Net Loss. This Net
Profit or Net Loss is transferred to the Capital Account of Balance
Sheet.
Specimen Proforma of a Profit And Loss Account
The following Specimen Proforma which is used for preparation of
Trading, Profit and Loss Account.
Trading, Profit & Loss Account
For the year ended 31st Dec....
Particulars
Amt.
Particulars
Amt.
To opening stock
XX
By sales
XX
To purchases
XX
Less: returns
(X)
Less: returns
(X)
By closing stock
XX
To carriage inwards
XX
By gross loss c/d
XX
To wages
XX
To gross profit c/d
XX
XX
XX
To gross loss b/d
XX
By gross profit b/d
XX
To office &
By non-operating
administrative
incomes:
expenses:
Office salaries
XX
Interest received
XX

Office rent and rates


Printing and
stationary
Telephone charges

XX
XX

Discount received
Dividend received

XX
XX

XX

XX

Legal charges
Audit fees
General expenses
To Selling Expenses:
Advertisement

XX
XX
XX

Income from
investment
Interest on debenture
Any other incomes

Discount Allowed
Commission Paid
Salesmen Salaries
Godown Rent
Carriage Outward
Agent Commission
Travelling Expenses
To Distribution
Expenses:
Depreciation on
Vehicle
Upkeep of Motor Van
Travellers' Salaries
Repairs and
Maintenance
To Non-Operating
Expenses:
Discount on Issue of
Shares
Preliminary Expenses
To net profit c/d
(Transferred to capital
a/c)

XX
XX
XX
XX
XX
XX
XX

XX

By net loss c/d


(transferred to capital
account)

XX
XX

XX

XX
XX
XX
XX

XX
XX
XX
XX

Components appearing on Debit side of the P& L A/c:

XX

Those expenses incurred during the manufacturing process of


conversion of raw materials into finished goods will be treated as
direct expenses which are recorded in the debit side of Trading
Account. Any expenditure incurred subsequent to that will be
known as indirect expenses to be shown in the debit side of the
Profit and Loss Account. The indirect expenses may be classified
into: (1) Operating Expenses and (2) Non-Operating Expenses.
(1) Operating Expenses: It refers to those expenses as the day-today expenses of operating a business include office &
administrative expenses, selling and distribution expenses.
(2) Non-Operating Expenses: Those expenses incurred other than
operating expenses. Non-Operating expenses which are related to a
financial nature. For example, interest payment on loans and
overdrafts, loss on sale of fixed assets, writing off fictitious assets
such as preliminary expenses, under writing commission etc.
Components appearing on Credit Side of P&L A/c:
The following are the components as shown on the Credit Side:
(1) Gross Profit brought down from Trading Account
(2) Operating Income: It refers to income earned from the
operation of the business excluding Gross Profit and NonOperating incomes.
(3) Non-Operating Income: Non-Operating incomes refer to other
than operating income. For example, interest on investment of
outside business, profit on sale of fixed assets and dividend
received etc.
4. PROFIT AND LOSS APPROPRIATION ACCOUNT:
Profit and loss appropriation account shows the
distribution of net profit among the shareholders in the form of
dividend and transfer of profit to various reserves and issue of

bonus share. Profit and loss appropriation account is prepared after


the preparation of profit and loss account. Profit and loss
account provides the information about adjustment relating to last
year. Profit and loss appropriation account also provides the
information about the appropriation of dividend out
of available profit. Profit and loss appropriation account is
prepared after profit and loss account and before the preparation of
balance sheet. Profit and loss appropriation account is a vital item
of final account.
The profit and loss appropriation account is an extension of
the profit and loss account. The main intension of preparing a profit
and loss appropriation account is to show the distribution of profits
among the partners. It is debited with interest on capital and
remuneration to partners and credited with the net profits b/d
from the profit and loss account and interest on drawings. The
balance of the profit and loss appropriation account is transferred
to the capital accounts of the partners.
Profit and Loss Account
Dr.

For the year ended on..

Particulars
To interest on capital:
A
XX
B

XX

To salary to partner
To
commission
to
partner
To reserve
To profit transferred to:
As capital A/c
XX
(or As current a/c)

Amt.

XX
XX
XX
XX

Particulars
By profit and loss A/c
(net profit subject to
appropriations)
By
interest
on
Drawings:
A
XX
B
XX

Cr.
Amt.
XX

XX

Bs capital A/c
XX
(or Bs current a/c)

XX
XX

XX

5. BALANCE SHEET:
According to AICPC (The American Institute of Certified
Public Accountants) defines Balance Sheet as a tabular Statement of
Summary of Balances (Debit and Credits) carried forward after an
actual and constructive closing of books of accounts and kept
according to principles of accounting. The purpose of preparing
balance sheet is to know the true and fair view of the status of the
business as a going concern during a particular period. The balance
sheet is on~ of the important statement which is used to owners or
investors to measure the financial soundness of the concern as a
whole. A statement is prepared to show the list of liabilities and
capital of credit balances of the business on the left hand side and
list of assets and other debit balances are recorded on the right
hand side is known as "Balance Sheet."
The Balance Sheet is also described as a statement showing
the sources of funds and application of capital or funds. In other
words, liability side shows the sources from where the funds for the
business were obtained and the assets side shows how the funds or
capital were utilized in the business. Accordingly, it describes that
all the assets owned by the concern and all the liabilities and claims
it owes to owners and outsiders.
Specimen Form of Balance Sheet:
Companies Act 1956 has prescribed a particular form for
showing assets and liabilities in the Balance Sheet for companies
registered under this Act. There is no prescribed form of Balance
Sheet for a sole trader and partnership firm. However, the assets
and liabilities can be arranged in the Balance Sheet into
a. In the Order of Liquidity
b. In the Order of Performance

a) In the Order of Liquidity: When assets and liabilities are


arranged according to their order of liquidity and ability to meet its
short-term obligations, such an arrangement of order is called
"Liquidity Order." The Specimen form of Balance Sheet arranged in
the Order of Liquidity is given below:
Balance Sheet (I)
As on .....
Liabilities
Amt. Assets
Amt.
Current liabilities
Current assets:
Sundry creditors
XX
Cash in hand
XX
Bill payable
XX
Cash at bank
XX
Bank overdraft
XX
Sundry debtors
XX
Outstanding expenses
XX
Short term investment
XX
Long term liabilities
Stock in trade
XX
Loan from bank
XX
Bill receivable
XX
Loan from mortgage
XX
Prepaid expenses
XX
Debentures
XX
Accrued income
XX
Any other long term
XX
Fixed assets
loans
Total liabilities
XX
Plant and machinery
XX
Capital account:
Furniture and fixture
XX
Add: net profit
XX
Buildings
XX
Add: interest on
XX
Loose tools
XX
capital
Less: drawing
XX
Motor cars
XX
Reserves and surplus:
Intangible assets:
General reserve
XX
Goodwill
XX
Reserve for
XX
Patents
XX
contingency
Reserve for sinking
XX
Copy rights
XX
fund
Trade marks
XX
Fictitious assets
Preliminary expenses
XX
Advertisement
XX
Misc. expenses
XX
XX

(b) In the order of Performance: This method is commonly used by


the companies. The specimen form of Balance Sheet arranged in the
order of Performance is given below:
Balance sheet (II)
As on....
Liabilities
Amt.
Assets
Amt.
Current Liabilities
XX
Current Assets
XX
Fixed Liabilities
XX
Fixed Assets
XX
Long Term Liabilities
XX
Fictitious Assets
XX
Capital, Reserves And
XX
Any Other Investment
XX
Surplus
XX
XX
Classification of Assets & Liabilities:
I. Assets
Business assets are resources or items of values owned by the
business and which are utilized in the normal course of business
operations to produce goods for sale in order to yield a profit. The
assets are grouped into:
(1) Fixed Assets
(2) Current Assets or Floating Assets
(3) Fictitious Assets
(4) Liquid Assets
(5) Contingent Assets
(1) Fixed Assets:
This class of assets include those of a tangible nature
having a specific value and which are not consumed during the
normal course of business and trade but provide the means for
producing saleable goods or providing services.
Components of Fixed Assets
(1) Goodwill
(2) Land and Buildings
(3) Plant and Machinery
(4) Furniture and Fixtures
(5) Patents and Copy Rights

(6) Livestock
(7) Leaseholds
(8) Long-term Investments
(9) Vehicles
(2) Current Assets or Floating Assets:
The assets of a business of a transitory nature which are used
for resale or conversion into a cash during the course of business
operation. In other words, those assets which are easily converted
into cash in normal course of business during the shorter period
say, less than one year are treated as current or floating assets.
Components of Current Assets
(1) Cash in hand
(2) Cash at Bank
(3) Inventories:
Stock of raw materials
Stock of work-in-progress
Stock of finished goods
(4) Sundry Debtors
(5) Bills Receivable
(6) Short-Term Marketable Securities
(7) Short-Term Investments
(8) Prepaid Expenses
(3) Fictitious Assets:
Fictitious Assets refer to any deferred charges. They are
really not assets. Preliminary expenses, Share issue expenses,
discount on issue of shares and debentures, and debit balance of
profit and loss account etc. are the important components of
fictitious assets.
(4) Contingent Assets:
It refers to a right to property which may come into
existence on the happening of some future event. For example, a
right to obtain for shares in another company on favourable terms,
a right to sue for infringement of patents and copy rights etc.

(5) Liquid Assets:


Liquid Assets which are immediately converted into cash.
In other words, these assets are easily encashable in the normal
course of business. Cash in hand, Cash at bank, Bills Receivable
Sundry debtors, Marketable Securities, Short-term investments etc.
are the important components of liquid assets. While measuring
Liquid Assets, Stock of raw materials, work-in-progress, finished
goods and prepaid expenses are excluded from the components of
Current assets.
II. Liabilities
According to Accounting Principles Board, define liabilities
as an economic obligations of an enterprise that are recognized and
measured in conforming with generally accepted accounting
principles. The liabilities are classified into:
(1) Non-Current Liabilities
(2) Capital
(3) Current Liabilities
(1) Non-Current Liabilities: Non-Current Liabilities otherwise
known as Long-Term Liabilities. Liabilities which are become due
for payment beyond a period of one year say, five to ten years, are
treated as Long-Term Liabilities. The following are the examples of
Non-Current Liabilities:
(a) Long-Term Debit.
(b) Debenture.
(c) Long-Term Loan from Bank.
(d) Long-Term Loan from Financial Institutions.
(e) Long-Term Loan raised by Issue of Public Deposits.
(f) Long-Term Debt raised by Issue of Securities.
(2) Capital:
Capital refers to the value of assets owned by a business
and which are used during the course of business operations to
generate additional Capital or Wealth. It is also known as Owner's
Equity or Net Worth. When a business first comes into existence the
initial capital may be provided by the proprietor. The initial influx

of capital will normally be in the form of cash which need to be


converted into plant and machinery, building and stock of
materials prior to commencing operations. Thus, capital is equal to
the total assets.
(3) Current Liabilities:
Any amount owing by the business which are currently due
for payment are referred to as current liabilities. In other words,
these liabilities which are paid within one year are treated as
current liabilities. The following are the components of current
liabilities:
(1) Bills Payable.
(2) Sundry Creditors.
(3) Short-Term Bank Loans.
(4) Dividend Payable.
(5) Provision for Taxes Payable.
(6) Short-Term Bank Overdraft.
(7) Trade Liabilities and Accrued Expenses.
(8) Outstanding Expenses.

WHAT IS PARTNERSHIP FIRM?


The Indian Partnership Act, 1932 is an act enacted by
the Parliament of India to regulate partnership firms in India. It
received the assent of the Governor-General on 8 April 1932 and
came into force on 1 October 1932. Before the enactment of this act,
partnerships were governed by the provisions of the Indian
Contract Act. The act is administered through the Ministry of
Corporate Affairs. The act is not applicable to Limited Liability
Partnerships, since they are governed by the Limited liability
Partnership Act, 2008.
The term 'partnership' is defined under section 4 of Indian
partnership act 1932 as under "Partnership is an agreement between

two or more persons who have agreed to share profits of the


business carried on by all or any one of them acting upon all."
Section 2 of the act defines,
(a) an "act of a firm" means any act or omission by all the partners,
or by any partner or agent of the firm which gives rise to a right
enforceable by or against the firm;
(b) "business" includes every trade, occupation and profession;
(c) "prescribed" means prescribed by rules made under this Act; (c1) "Registrar" means the Registrar of Firms appointed under subsection (1) of section 57 and includes the Deputy Registrar of Firms
and Assistant Registrar of Firms appointed under sub-section (2) of
that section;
(d) "third party" used in relation to a firm or to a partner therein
means any person who is not a partner in the firm; and
(e) expressions used but not defined in this Act and defined in the
Indian Contract Act, 1872, shall have the meanings assigned to
them in that Act.
Partnership refers to an agreement between persons to share
their profits or losses arising on account of actions carried by all or
one of them acting on behalf of all. The persons who have entered
such an agreement are called partners and give their collective
business a name, which is necessarily their firm-name. This relation
between partners arises out of a contract or an agreement, which
means a husband and wife carrying on a business or members of a
Hindu undivided family are not into partnership. The share of
profits received by any individual from the firm, money received
by a lender of money, salary received by a worker or a servant,
annuity received by a widow or a child of a deceased partner, does
not make them a partner of the firm.

The Indian Partnerships


characteristics:

have

the

following

common

1) A partnership firm is not a legal entity


Apart from the partners constituting it. It has limited identity for
the purpose of tax law as per section 4 of the Partnership Act of
1932.
2) Partnership is a concurrent subject.
Contracts of partnerships are included in the Entry no.7 of List III of
The Constitution of India (the list constitutes the subjects on which
both the State government and Central (National) Government can
legislate i.e. pass laws on).
3) Unlimited Liability.
The major disadvantage of partnership is the unlimited liability of
partners for the debts and liabilities of the firm. Any partner can
bind the firm and the firm is liable for all liabilities incurred by any
firm on behalf of the firm. If property of partnership firm is
insufficient to meet liabilities, personal property of any partner can
be attached to pay the debts of the firm.
4) Partners are Mutual Agents.
The business of firm can be carried on by all or any of them for all.
Any partner has authority to bind the firm. Act of any one partner
is binding on all the partners. Thus, each partner is agent of all the
remaining partners. Hence, partners are mutual agents. Section 18
of the Partnership Act, 1932 says "Subject to the provisions of this
Act, a partner is the agent of the firm for the purpose of the
business of the firm"
5) Oral or Written Agreements.

The Partnership Act, 1932 nowhere mentions that the Partnership


Agreement is to be in written or oral format. Thus the general rule
of the Contract Act applies that the contract can be in be 'oral' or
'written' as long as it satisfies the basic conditions of being a
contract i.e. the agreement between partners is legally enforceable.
A written agreement is advisable to establish existence of
partnership and to prove rights and liabilities of each partner, as it
is difficult to prove an oral agreement.
6) Number of Partners is minimum 2 and maximum 50 in any
kind of business activities.
Since partnership is agreement there must be minimum two
partners. The Partnership Act does not put any restrictions on
maximum number of partners. However, section 464 of Companies
Act 2013, and Rule 10 of Companies (Miscellaneous) Rules, 2014
prohibits partnership consisting of more than 50 for any businesses,
unless it is registered as a company under Companies Act, 2013 or
formed in pursuance of some other law. Some other law means
companies and corporations formed via some other law passed
by Parliament of India.
7) Mutual agency is the real test.
The real test of partnership firm is mutual agency set by the
Courts of India, i.e. whether a partner can bind the firm by his act,
i.e. whether he can act as agent of all other partners.

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