Today we are going to discuss on finalisation of books of accounts. In this topic we will discuss the closing entry to be passed at the end of the year for finalisation of books of accounts. An assessee should passed the following entry depreciation on fixed assets, provision for the expenses, provision for taxation, entry for deferred tax , entry for Accrued income on investment.
An assessee should also make the Bank reconciliation, Cash reconciliation, Stock Reconciliation etc.
In this blog we are going to explain the provisional entries which are passed on last day of the financial year i.e. 31st March & how these provisional entries are reversed back in next financial year.
Closing entry to be passed for the finalisation of books of accounts
Provision For Depreciation –
Depreciation means the charge made on Profit & loss account for the wear & tear of fixed assets. Decrease in value of fixed assets due to regular use of fixed assets. Two types of method are adopted by organization.
First method: In this method the value of fixed assets remain constant & every year the provision for depreciation increases. The entry passed at the end of year is :
Depreciation A/c. Dr. xxxxxxxx
To Provision for depreciation A/c. xxxxxxx
After passing this entry, transfer the depreciation a/c to Profit & loss a/c. The entry is :
Profit & Loss A/c. xxxxxxxxxx
To Depreciation A/c. xxxxxxx
This both entry is passed at the end of every year until the value of fixed assets comes to nominal value or zero.
Second Method : In this method the value of fixed assets decreases every year. The depreciation is charged directly to fixed assets. The entry is :
Depreciation A/c. Dr. xxxxxxxx
To Fixed assets A/c. xxxxxxx
By passing this entry the value of fixed assets decrease directly & then transfer the depreciation a/c. to Profit & loss a/c. as shown in above.
Provision of Taxation:
This is just a transfer entry. At end of year, organisation has to made the estimation of tax on their income & creates an provision of taxation. When tax is paid at the time of return filling then such provision is set off against such provision. The advance tax is also set off against this provision. The entries passed are:
Profit & loss A/c. Dr. xxxxxxxxx
To Provision of taxation A/c. xxxxxxxx
The set off entries are as follows:-
Provision for taxation A/c. Dr. xxxxxxxx
To Advance Tax A/c. xxxxxxxx
To Self Assessment Tax A/c. xxxxxxxx
To Excess provision A/c. xxxxxxxx
Provision for Expenses/ Statutory liabilities:
There are many expenses which relate to a particular month but paid in next month. The expense which are outstanding at the end of year are to be transferred to Provision for expenses account & this account is adjusted when such expenses are paid. We can understand the entries with the following example:
The electricity expense of March month is paid in April Month. At the end of year entry passed is:
Electricity Expenses A/c. Dr. xxxxxxxx
To Provision for Electricity expenses A/c. xxxxxx
When such expenses are paid the entry passed is :
Provision for electricity expenses A/c. Dr. xxxxx
To Bank/Cash A/c. xxxxxxx
Accrued Income Entries:
Make the interest income entry at the end of the year, In most of organisation the interest to unsecured loan party or interest from loan & advances party entry is passed at the end of month.
Interest expenses A/c. Dr. xxxxxx
To Unsecured loan party’s A/c. xxxxxxx
Loans & advance party’s A/c Dr. xxxxxx
To Interest income A/c. xxxxx
Bank Reconciliation:
Cross check the balance of bank as per bank statement with balance of bank with the books of accounts and make bank reconciliation if there is any difference.
hence above explained entries are the general entries which every organisation has to follow. Hope you will get understand. If there is any query relating to this blog please type your query in comment box we are ready to solve your queries.
Stock Reconciliation:
Take physical stock at the end of the year and check the stocks in the books of account and make the reconciliation of stock at the end of the year.
After reading this finalisation of accounts you can also read the tax planning in the month of march.
