BCOM 1st Year Final Accounts Manufacturing Account Long Study Material Notes

2. Current Assets: Current assets include cash or such other assets which can be converted into cash or cash can be realised from them within the period of one year, but if the operating cycle of the business is less than one year, they can be realised in cash during this shorter period. Example of current assets are stock, debtors and B/RA/C, etc.

3. Wasting Assets: The assets which are exhausted completely by use and cannot be replaced in the normal way or regarded as wasting assets, e.g. mines. If there is a coal mine, whole of the coal of this mine has been taken out, then fresh coal cannot be created, therefore the mine is treated as wasting assets.

4. Fictitious Assets: The assets which are really speaking not assets but shown in the assets side are called fictitious assets, e.g. underwriting commission, brokerage discount on issue of shares, interest paid out of capital during construction, development expenditure not adjusted, preliminary expenses, etc. All these expenses have debit balances and they are written off through profit & loss account gradually during some years, hence unamortised amount of these expenses appear in balance sheet.

5. Contingent Assets: An asset whose existence and ownership depends on the happening or nonhappening of a specific event, e.g. a right to use for infringement of trade-mark or a suit for claiming a certain amount. If this suit is won, the amount will be received. Thus, the right to have or claim some property on the happening of an event is contingent asset. These assets are not shown in balance sheet because one of the conventions of accountancy is that provision for future losses is made but no consideration is made for uncertain future property or income. 

Liabilities

Liabilities are the amounts which a business entity has to pay. Liabilities may be internal or external. All amounts which business entity has to pay to proprietor or owner’s are internal liabilities, these liabilities include capital and undistributed profits.

Classification of Liabilities: These are as follows:

1. Fixed Liabilities: All long-term liabilities are treated as fixed liabilities whether they are payable by enterprise to the proprietor or to outsiders, namely capital, long-term loans and debentures, etc.

2. Current Liabilities: All short-term liabilities, i.e. the amount which are payable within one year are termed as current liabilities, namely creditors, bills payable, etc.

3. Contingent Liabilities: The liabilities, which are not the real liabilities of the business on the date of balance sheet but may become liabilities in future on happening of an uncertain event, are called contingent liabilities. For example, guarantee given for paying a loan on default of the principal debtor.

Adjustments

All such transactions which are related with the accounting period of final accounts but are not included in the trial balance of that period as their records have not taken place, are adjustments. The transactions whose incomplete records have taken place or the transaction whose records have taken place but do not belong to period of final accounts are also adjustments. Entries for adjustments are made at the time of preparing final accounts. Important adjustments are depreciation, outstanding expenses, etc. provision for bad doubtful debts, prepaid expenses, income received in advance, etc.

From the Balance Sheet According to Liquidity Basis

Balance Sheet [As on ……..]

Liabilities	Amount (Rs.)	Assets	Amount (Rs. )
Bank overdraft	–	Cash in hand	–
Bill payable		Cash at bank	–
Trade creditors		Money at call and short notice	–
Loan creditors		Investment (short-term)	–
Outstanding expenses		Income accrued, outstanding	–
Long-term loans		Expenses (unexpired)	–
Advance receipt of income		Debtors	–
Reserver & funds		Bills receivable	–
Capital		Stock (closing)	–
Add: Net profit		Stores (closing)	–
Less: Drawings		Furniture	–
		Patterns, patents	–
		Copyrights	–
		Livestocks	–
		Leasehold properties	–
		Investment of very long-term
		Vehicles	–
		Plant and machinery	–
		Land and building	–
		Goodwill	–

Q.3. How will you treat the following items in the final accounts? Pass adjusting entries of these items: 

1. Closing stock,

2. Outstanding expenses, 

3. Prepaid expenses,

4. Depreciation, 

5. Accrued income,

6. Interest on capital, 

7. Interest on drawing,

8. Bad debts, 

9. Provision for bad and doubtful debts. 

Or Discuss the treatment of closing stock written in the debit side of the trial balance while preparing final accounts. 

Ans. Final Account with Adjustment

In order to ensure that final accounts of a firm depicts its correct position, it is necessary that all expenses and incomes related to the year, for which accounts are being prepared, are taken into consideration. It is therefore, necessary that:

1. All expenses related to the current year, whether paid or not are included. 

2. All incomes related to the current year, whether received or not, are included. 

3. All expenses related to the succeeding year are excluded. 

4. All incomes related to the succeeding year are excluded.

All the above items which need to be brought into books of accounts at the time of preparation of that accounts are called adjustment. Journal entries passed to give effects to the required adjustments, are known as adjustment entries.

Some important entries of given items are: 

1. Closing Stock

It is the value of goods on the closing date of the accounting period. Stock is valued at cost price or market price, whichever is lower. Closing stock in case of manufacturing concerns is also classified as raw material, work in progress and finished goods.

In adjustment, it is shown at two places, i.e. the credit side of trading account and the assets of the balance sheet.

Accounting Treatment: Normally closing stock is given outside the trial balance because its value is ascertained after preparation of accounts and:

(a) It is to be shown on the credit side of trading A/c and

(b) It will be shown as an asset in the balance sheet. 

2. Outstanding Expenses or Unpaid Expenses (Expenses Due but not Paid)

Expenses which have become due and have not been paid at the end of accounting year are called outstanding expenses. Expenses A/c Dr.

To outstanding expenses A/C (for expenses due) 

Accounting Treatment:

(a) The amount of outstanding expenses should be added to related expenses on the debit side of trading and profit & loss account because it is an expense. 

(b) Outstanding expenses will be shown on liabilities side of the balance sheet because it represents those persons to whom the payment is to be made. 

3. Prepaid Expenses

Prepaid expenses are those expenses which have been paid in advance during the accounting year.

Prepaid exp. A/c Dr.

To Expenses A/C

(being expenses paid in advance) 

Accounting Treatment: 

(a) The amount of prepaid expenses shall be deducted from related expenses appearing on the debit side of trading and profit & loss A/c. 

(b) Prepaid expenses will be shown on assets side of the balance sheet. 

4. Depreciation 

Depreciation is the loss of value of assets due to its constant use. Depreciation A/c Dr.

To Assets A/C

(being depreciation charged) 

Accounting Treatment: 

(a) Depreciation being a loss shall be shown on the Dr. side of profit & loss account. 

(b) The amount of depreciation will be deducted from related assets on the assets side of balance

sheet because it reduces the value of assets. 

5. Accrued Income or Outstanding Income

It means income earned but not received during accounting year, e.g. accrued interest, accrued rent. Accrued income A/c Dr.

To Income A/C 

(Being income receivable) 

Accounting Treatment: 

(a) The amount of accrued income shall be added to related income on the Cr. side of profit & loss A/c because it is an income. 

(b) Accrued income will be shown on the assets side of the balance sheet because the cash is yet to be received 

6. Interest on Capital

It is a loss of business so it goes on Dr. side of P&L A/c.

Accounting Treatment: 

(a) Interest on capital is expenses of the business, so it shall be shown on the Dr. side of Profit &

Loss A/C. 

(b) The amount of interest on capital is added to the capital on the liabilities side of balance sheet because it becomes payable by businesss to its owner.