Finalisation of Accounts: 16 Practical Steps with Examples

Finalisation of accounts is one of the most important processes in accounting.  But it is a critical accounting process carried out at the end of the financial year to ensure that the Profit & Loss Account and Balance Sheet show a true and fair view of business performance.

Before preparing the financial statements, several checks, reconciliations, and adjustments are required. Let us understand the 16 steps of finalisation of accounts with real-life examples used by accountants in practice.

1. Sales Reconciliation with GST Portal and Books

Sales reconciliation is the process of matching the sales recorded in the books of accounts with sales reported on the GST portal.  Any differences due to timing, credit notes, or amendments should be identified and corrected. So, this step is very important during finalisation of accounts to ensure accuracy, GST compliance, and correct turnover reporting. 

Why Sales Reconciliation Is Important?

• It ensures no sales are under-reported or over-reported
• It avoids GST notices, penalties, and interest
• It also confirms correct output GST liability
• It helps in preparing accurate Profit & Loss Account

Records Used for Reconciliation

Books of Accounts	GST Portal
Sales Register	GSTR-1
Output GST Ledger	GSTR-3B
Credit/Debit Notes	GSTR-1 Amendments

Practical Process of Sales Reconciliation

1. Step 1: Extract Sales Data from Books - Take total sales invoice-wise from accounting software (Tally, Busy, Excel, etc.).
2. Step 2: Download GST Sales Data - Download GSTR-1 summary from GST portal for the financial year.
3. Step 3: Match Invoice-wise - 
• Match:
• Invoice number
• Date
• Taxable value
• GST rate
• GST amount

For Example,

Books of Accounts:

• Total Sales = ₹50,00,000
• GST Portal (GSTR-1): Total Sales = ₹49,50,000
• Difference = ₹50,000

Possible Reasons for difference:

• Invoice missed in GSTR-1
• Credit note issued in next month
• Wrong invoice date
• Cancelled invoice not reversed in books

Difference must be identified and adjusted.

Common Reasons for Difference

Reason	Explanation
Timing difference	Invoice recorded in March but reported in April
Credit notes	Issued after filing GST return
Wrong GST rate	Invoice uploaded with incorrect rate
Nil-rated / exempt sales	Missed classification
Export / SEZ sales	Incorrect reporting

Accounting & GST Adjustments

If Sales as per Books > GST Portal:

• Check missing invoices
• Amend GSTR-1
• Pay additional GST if required

If Sales as per GST Portal > Books:

• Check duplicate upload
• Reverse excess GST liability
• Pass correction entry in books

Journal Entry (If Invoice Missed)

Debtor A/c        Dr

    To Sales A/c

    To Output GST A/c

Checklist for Sales Reconciliation

1. Invoice-wise matching completed
2. Credit notes verified
3. GST rate verified
4. Output GST matched with GSTR 1 and GSTR-3B
5. Differences adjusted
6. Final sales figure confirmed

Practical Insight: Sales reconciliation is the first and most critical step in finalisation of accounts. A properly reconciled sales figure ensures accurate profits, correct GST payment, and smooth audits.

2. Purchase Reconciliation with GST Portal and Books

Purchase reconciliation is the process of matching purchases recorded in books of accounts with purchases reflected on the GST portal, mainly through GSTR-2B. This step ensures that Input Tax Credit (ITC) claimed by the business is correct, eligible, and analog with GST law. Purchases recorded in books should be matched with GSTR-2B / GSTR-2A. This step ensures:

• Correct purchase value
• Eligible Input Tax Credit (ITC)
• No missing or excess claims

Why Purchase Reconciliation Is Important

1. It ensures correct ITC claim
2. It prevents wrong or excess ITC
3. It avoids GST notices, reversals, interest, and penalties
4. It helps in accurate costing and profit calculation
5. It is mandatory for audit and assessment

Records Used for Purchase Reconciliation

Books of Accounts	GST Portal
Purchase Register	GSTR-2B
Input GST Ledger	GSTR-3B
Expense Ledgers	Supplier Invoices

Practical Process of Purchase Reconciliation

1. Step 1: Extract Purchases from Books - Take supplier-wise and invoice-wise purchases recorded in accounting software.
2. Step 2: Download GSTR-2B - Download GSTR-2B for the full financial year from the GST portal.
3. Step 3: Match Invoice-wise
• Match:
• Supplier GSTIN
• Invoice number & date
• Taxable value
• GST amount
• ITC eligibility

For Example,

Books of Accounts:

• Total Purchases = ₹10,00,000
• ITC claimed = ₹1,80,000

GST Portal (GSTR-2B):

• Purchases reflected = ₹9,20,000
• ITC available = ₹1,65,600

Difference in ITC = ₹14,400

Common Reasons for Differences

Reason	Explanation
Supplier not filed GSTR-1	Invoice not reflected in GSTR-2B
Wrong GSTIN	Invoice uploaded under wrong GSTIN
Wrong invoice date	Invoice appears in next period
Blocked ITC	ITC not allowed under GST law
Debit / credit notes	Not recorded or mismatched
Duplicate invoices	Recorded twice in books

ITC Eligibility Check (Very Important)

ITC Allowed

• Raw materials
• Packing material
• Business services
• Capital goods (with conditions)

ITC Blocked (Section 17(5))

• Personal expenses
• Motor vehicles (certain cases)
• Food, travel, club expenses
• Works contract (except allowed cases)

Accounting Treatment for Differences

Case 1: ITC Claimed but Not in GSTR-2B

• Reverse ITC temporarily
• Reclaim when supplier files return

Journal Entry:

Purchase A/c          Dr

Input GST A/c       Dr

    To Creditor A/c

(Then reverse ITC if required)

Case 2: Purchase in GSTR-2B but Not in Books

• Record missing purchase invoice
• Claim eligible ITC

Purchase Reconciliation Checklist

1. Supplier-wise reconciliation done
2. GSTR-2B matched invoice-wise
3. Ineligible ITC identified
4. ITC reversal entries passed
5. Follow-up done with non-filing suppliers
6. Final ITC figure confirmed

Practical Insight: Purchase reconciliation is a critical compliance step in finalisation of accounts. Accurate reconciliation ensures correct ITC, proper expense recognition, and GST compliance, reducing future litigation risk.

3. Direct Expenses Verification and ITC Claim

Direct expenses are those expenses that are related to the production, purchase, or processing of goods and services. During making of finalisation of accounts, these expenses must be carefully verified to ensure correct classification, accurate costing, and proper GST Input Tax Credit (ITC) claim.

Direct expenses should be:

• Correctly classified
• Properly bifurcated between taxable and non-taxable
• Checked for correct GST ITC eligibility

For Example: A manufacturing unit records electricity expenses under direct expenses. Since electricity has no GST, no ITC can be claimed, and the expense must be correctly classified.

Why Direct Expenses Verification Is Important

• It ensures correct cost of goods sold (COGS)
• It avoids wrong ITC claims
• It prevents overstatement or understatement of profit
• It Helps in GST compliance and audit
• It improves gross profit accuracy

Examples of Direct Expenses

Type of Business	Direct Expenses
Manufacturing	Raw material, power, fuel, wages
Trading	Freight inward, packing charges
Construction	Site labour, cement, steel
Service	Sub-contracting charges

Practical Process of Verification

1. Step 1: Identify Direct Expense Ledgers
• Review ledgers like:
• Raw material
• Power & fuel
• Freight inward
• Factory wages
2. Step 2: Verify Supporting Documents
• Check:
• Tax invoices
• Payment proofs
• Nature of expense
• GST rate and HSN/SAC
3. Step 3: Check Correct Classification
• Ensure the expense is:
• Direct (related to production)
• Not wrongly booked as indirect

For Examples

Example 1: Electricity Expense

A manufacturing unit records factory electricity under direct expenses.

• Correct classification
• GST ITC not available (electricity is outside GST)

Example 2: Freight Inward

A trader pays ₹50,000 as freight inward with GST of ₹2,500.

• Expense is direct
• ITC is allowed if goods are for business use

Example 3: Labour Charges

Labour charges paid to a contractor with GST charged.

• Direct expense
• ITC allowed if:
• Invoice is valid
• Payment made
• Supplier filed GSTR-1

ITC Eligibility Check on Direct Expenses

ITC Allowed When:

• Expense is for business purpose
• Invoice is GST-compliant
• Supplier has filed return
• Expense is not blocked under Section 17(5)

ITC Not Allowed On:

Expense	Reason
Electricity	Outside GST
Petrol/Diesel	Outside GST
Personal expenses	Not business use
Goods lost or destroyed	ITC blocked

Common Errors Found During Verification

• Direct expenses wrongly booked as indirect
• ITC claimed on ineligible items
• Missing or invalid GST invoices
• Wrong GST rate applied
• Duplicate expense entries

Accounting Treatment (ITC Reversal Example)

If ITC wrongly claimed on ineligible expense:

Expense A/c        Dr

   To Input GST A/c

Direct Expenses Verification Checklist

• Nature of expense verified
• Correct classification done
• GST invoice checked
• ITC eligibility confirmed
• Ineligible ITC reversed
• Final direct expense figure confirmed

Practical Insight: Verification of direct expenses and ITC claim ensures accurate cost calculation, correct gross profit, and GST compliance. It is a crucial step in the finalisation of accounts and must be performed with proper documentation and legal understanding.

4. Closing Stock Physical Verification

Closing stock physical verification means checking the actual quantity of stock available on the last day of the accounting year (usually 31st March) and matching it with stock records. This step is crucial because closing stock directly affects gross profit, net profit, and balance sheet figures.

For Example: Stock register shows 1,000 units, but physical count shows 980 units. Shortage of 20 units may be due to:

• Wastage
• Theft
• Recording error

Adjustment is required before preparing final accounts.

Closing stock must be physically verified as on 31st March. Quantity and valuation should match stock records, as closing stock directly impacts profit.

Why Closing Stock Physical Verification Is Important

1. It ensures accuracy of stock quantity
2. It prevents overstatement or understatement of profit
3. It detects shortage, wastage, theft, or damage
4. It Helps in correct valuation of inventory
5. It required for audit and tax purposes

Types of Stock to Be Verified

Type of Business	Stock
Trading	Finished goods
Manufacturing	Raw material, WIP, finished goods
Construction	Cement, steel, site material
Service	Consumables

Practical Process of Physical Verification

1. Step 1: Fix Stock Count Date - Physical stock is normally verified on 31st March or nearest possible date.
2. Step 2: Physical Counting of Stock
• Count item-wise quantities
• Use stock sheets / bin cards
• Segregate damaged or obsolete items
3. Step 3: Compare with Stock Records
• Match physical stock with:
• Stock register
• ERP/Tally stock summary

Example

Example 1: Stock Shortage

Stock register shows 1,000 units, but physical count shows 980 units. Shortage of 20 units may be due to:

• Theft
• Wastage
• Recording error

Adjustment must be passed.

Example 2: Excess Stock

Physical stock shows 520 units, but books show 500 units.

Excess stock may be due to:

• Purchase not recorded
• Sales wrongly recorded

Correction entry required.

Example 3: Damaged / Obsolete Stock

A trader has goods costing ₹50,000 which are damaged and can be sold only for ₹15,000. Stock must be valued at Net Realisable Value (NRV), not cost.

Valuation of Closing Stock

Closing stock is valued at: Cost or Net Realisable Value (NRV), whichever is lower

Cost Includes:

• Purchase price
• Freight inward
• Direct expenses

Excludes: GST (if ITC claimed)

Common Issues Found During Verification

• Difference between physical and book stock
• Wrong valuation method
• Inclusion of GST in stock value
• Non-identification of slow-moving stock
• Cut-off errors (purchase/sales near year-end)

Accounting Treatment (Shortage Example)

Cost of Goods Sold A/c    Dr

     To Inventory A/c

Closing Stock Verification Checklist

• Physical stock counted
• Damaged/obsolete stock identified
• Stock matched with books
• Valuation method verified
• Adjustments passed
• Final closing stock value confirmed

Practical Insight: Closing stock physical verification is a critical control step in finalisation of accounts. Accurate stock quantity and valuation ensure true profit reporting, correct asset valuation, and compliance with accounting standards.

5. Gross Profit (GP) Ratio Analysis

Gross Profit (GP) Ratio analyze is the process of evaluating the relationship between gross profit and sales to understand the efficiency of production, pricing, and cost control of a business. During making the finalisation of accounts, GP ratio is analysed to identify errors, inefficiencies, or unusual variations.

GP Ratio is calculated as: GP Ratio = (Gross Profit / Sales) × 100

Where: Gross Profit = Net Sales – Cost of Goods Sold (COGS)

It should be:

• Compared with industry standards
• Compared with previous years 
• Large variations must be investigated.

Example: Last year GP ratio was 25%, but this year it is 18%.

Reasons could be:

• Increase in raw material cost
• Heavy discounting
• Stock valuation error

Such deviations must be investigated.

Why GP Ratio Analysis Is Important

• Shows profitability from core operations
• Helps detect stock valuation errors
• Identifies increase in costs or pricing issues
• Useful for management decisions
• Important for audit and tax scrutiny

Components Affecting GP Ratio

Component	Impact
Sales price	Increase → GP increases
Cost of raw material	Increase → GP decreases
Closing stock valuation	Overvaluation → GP increases
Wastage / theft	Increases cost → GP decreases

Example 

Example 1: Normal GP Ratio

• Sales = ₹40,00,000
• Gross Profit = ₹10,00,000
• GP Ratio = (10,00,000÷40,00,000) × 100=25%
• Indicates stable pricing and cost control.

Example 2: Sudden Fall in GP Ratio

• Last Year GP Ratio = 28%
• Current Year GP Ratio = 18%
• Possible reasons:
• Increase in raw material cost
• Higher discounts offered
• Theft or wastage
• Wrong closing stock valuation

Example 3: Abnormally High GP Ratio

• Industry GP Ratio = 20%
• Business GP Ratio = 35%
• Possible reasons:
• Overvaluation of closing stock
• Unrecorded purchases
• Under-recorded expenses

Common Reasons for GP Ratio Variation

Reason	Effect
Change in sales price	Direct impact
Increase in purchase cost	GP decreases
Wrong stock valuation	GP distorted
Sales/purchase omission	GP incorrect
Change in product mix	GP changes

Practical Checks During Finalisation

• Compare GP with previous years
• Compare GP with industry average
• Review stock valuation method
• Verify purchase and sales records
• Identify abnormal variations

Accounting & Audit Perspective

Auditors treat GP ratio as a key analytical tool. A major deviation without explanation may lead to:

• Detailed stock verification
• Invoice-level checking
• Tax authority scrutiny

GP Ratio Analysis Checklist

• GP ratio calculated
• Compared with last year
• Compared with industry
• Reasons for variation identified
• Errors corrected
• Final GP confirmed

Practical Insight: Gross Profit Ratio analysis is a powerful diagnostic tool in finalisation of accounts. It helps ensure that sales, purchases, and inventory figures are correct, leading to reliable financial statements.

6. Suspense Account Review

A Suspense Account is a temporary account in which transactions are recorded when their correct nature or ledger is not immediately identifiable. During finalisation of accounts, reviewing and clearing the suspense account is essential to ensure accurate classification and a true and fair view of financial statements. All balances lying in the Suspense Account should be analyzed and adjusted to the correct ledger before finalisation.

For Example: ₹15,000 is lying in the suspense account. On review, it is found to be bank charges debited without narration. This amount should be transferred to Bank Charges Account.

Why Suspense Account Review Is Important

• Ensures no unidentified transactions remain
• Helps in correct classification of income and expenses
• Prevents misstatement of profit
• Required for audit and statutory compliance
• Improves financial transparency

Common Reasons for Suspense Account Balance

Reason	Explanation
Incomplete narration	Transaction recorded without details
Bank differences	Unidentified bank entries
Trial balance mismatch	Temporary posting
Accounting errors	Wrong ledger selection
Pending clarification	Awaiting details from party

Practical Process of Suspense Account Review

1. Step 1: Extract Suspense Account Ledger - Check opening balance, debit entries, and credit entries.
2. Step 2: Identify Nature of Each Entry
• Analyse:
• Bank statements
• Supporting vouchers
• Narration details
• Counter-party confirmation
3. Step 3: Transfer to Correct Ledger - Once identified, transfer the amount from suspense account to the correct account.

Example

Example 1: Bank Charges in Suspense

₹1,200 debited by bank as charges, temporarily posted to suspense.

Correct entry:

Bank Charges A/c     Dr

   To Suspense A/c

Example 2: Unknown Credit in Bank

Unknown Credit in Bank ₹25,000 credited in bank, source not known initially, parked in suspense. Later identified as interest income.

Suspense A/c         Dr

   To Interest Income A/c

Example 3: Trial Balance Difference

Trial balance difference of ₹5,000 temporarily adjusted in suspense account. Later traced to double posting of an expense.

Common Errors if Not Reviewed

• Incorrect profit calculation
• Misclassification of income/expense
• Audit qualification
• Income-tax or GST notices
• Balance sheet mismatch

Accounting Rule for Suspense Account

• Suspense account is temporary in nature
• It should not appear in final financial statements

All balances must be cleared before finalisation.

Suspense Account Review Checklist

• Suspense ledger reviewed line-by-line
• Supporting documents verified
• Correct ledgers identified
• Transfer entries passed
• Suspense balance NIL before finalisation

Practical Insight: Suspense account review is a critical clean-up step in finalisation of accounts. Leaving balances in suspense can malformed financial statements and create audit issues. Hence, all suspense balances must be identified, adjusted, and closed before preparing final accounts.

7. Indirect Income Review (GST Implications)

Indirect income refers to income earned by a business that is not generated from its main operating activity. During finalisation of accounts, all indirect incomes must be identified, verified, correctly classified, and reviewed for GST applicability to avoid under-reporting of income or wrong GST treatment.

For Example: Bank interest of ₹40,000 is credited in bank statement but not recorded in books. This income must be recorded and reviewed for GST applicability (generally exempt).

Indirect incomes such as:

• Bank interest
• Discount received
• Other incomes

must be reviewed along with their GST applicability, if any.

Why Indirect Income Review Is Important

• Ensures complete income reporting
• Prevents GST short-payment or excess payment
• Avoids departmental notices
• Helps in accurate net profit calculation
• Required for audit and tax assessment

Common Types of Indirect Income

Type of Income	Example
Financial income	Bank interest
Trade-related	Discount received
Asset-related	Rent received
Miscellaneous	Commission, scrap sale

Practical Process of Indirect Income Review

1. Step 1: Identify Indirect Income Ledgers
• Check ledgers such as:
• Interest received
• Discount received
• Rent received
• Commission income
• Scrap sales
2. Step 2: Cross-Verify with Bank Statements
• Ensure all credits in bank statement are:
• Recorded in books
• Properly classified
3. Step 3: Review GST Applicability
• Check whether income is:
• Taxable
• Exempt
• Outside GST scope

Examples with GST Treatment

Example 1: Bank Interest

Interest of ₹30,000 credited by bank.

• Indirect income
• Exempt under GST
• Still taxable under Income Tax

Example 2: Discount Received from Supplier

Discount received of ₹20,000.

• Indirect income
• No GST if post-supply discount
• Must be reduced from purchase cost if linked to purchases

Example 3: Rent Received

Office space rented for ₹15,000 per month.

• Indirect income
• GST applicable @18% if registered and taxable

Example 4: Scrap Sale

Scrap sold for ₹50,000.

• Indirect income
• GST applicable
• Must be shown separately

Common GST Mistakes in Indirect Income

• Ignoring GST on taxable indirect income
• Treating exempt income as taxable
• Missing income credited directly in bank
• Incorrect classification under sales

Accounting Entries (Examples)

Bank Interest Received:

Bank A/c           Dr

   To Interest Income A/c

Rent Income with GST:

Bank A/c           Dr

   To Rent Income A/c

   To Output GST A/c

Indirect Income Review Checklist

1. All income ledgers reviewed
2. Bank credits verified
3. GST applicability chcked
4. Correct GST rate applied
5. Output GST recorded
6. Income properly disclosed

Practical Insight: Indirect income review ensures that no income is missed or wrongly treated for GST purposes. Proper classification and GST analysis help present true profits and avoid future tax disputes.

8. Indirect Expenses – Correct Bifurcation

Indirect expenses are those expenses that are not directly related to the production or purchase of goods or services, but are necessary for day-to-day business operations. During making the finalisation of accounts, these expenses must be correctly bifurcated to ensure accurate profit, proper capitalisation, and correct GST Input Tax Credit (ITC) treatment.

For Example: Office renovation expenses of ₹2,00,000 are fully debited to repairs. Since it gives long-term benefit, part of it should be capitalised instead of fully expensed.

Indirect expenses should be:

• Properly classified
• Checked for capital vs revenue nature
• Reviewed for GST input eligibility

Why Correct Bifurcation of Indirect Expenses Is Important

• Prevents overstatement or understatement of profit
• Ensures correct capitalization vs expensing
• Avoids wrong GST ITC claims
• Helps in true and fair presentation
• Important for audit and tax assessment

Common Examples of Indirect Expenses

Expense Type	Example
Administrative	Office rent, electricity, stationery
Selling	Advertisement, commission, delivery
Financial	Interest on loans
Employee-related	Office salaries, staff welfare

Practical Process of Bifurcation

1. Step 1: Identify Indirect Expense Ledgers
• Review ledgers such as:
• Office expenses
• Repairs & maintenance
• Advertisement
• Legal & professional fees
2. Step 2: Determine Nature of Expense
• Check whether expense is:
• Revenue in nature (charged to P&L)
• Capital in nature (capitalised as asset)
3. Step 3: Review GST ITC Eligibility
• Verify:
• Valid GST invoice
• Business purpose
• Not blocked under Section 17(5)

Examples

Example 1: Office Renovation

Office renovation cost = ₹2,50,000.

Long-term benefit → Capital expense

• Capitalise under Building / Furniture
• Depreciation applicable
• Do not expense fully

Example 2: Advertisement Expense

Advertisement cost = ₹60,000 + GST.

• Indirect expense
• ITC allowed
• Fully charged to P&L

Example 3: Staff Welfare Expense

• Staff party expense = ₹40,000.
• Indirect expense
• ITC blocked under GST
• Charged to P&L without ITC

Example 4: Repair vs Capital

Machine repair = ₹15,000 (routine).

Revenue expense

Machine upgrade = ₹2,00,000.

Capital expenditure

Common Mistakes in Indirect Expenses

• Capital expenses charged to P&L
• ITC claimed on blocked expenses
• Personal expenses mixed with business expenses
• Wrong classification between direct and indirect expenses

Accounting Entries (Capitalisation Example)

Asset A/c          Dr

   To Bank / Creditor A/c

(Depreciation charged later)

Indirect Expenses Bifurcation Checklist

• Nature of expense identified
• Revenue vs capital classified
• GST invoice verified
• ITC eligibility checked
• Ineligible ITC reversed
• Correct P&L disclosure done

Practical Insight: Correct bifurcation of indirect expenses ensures accurate net profit, proper asset valuation, and GST compliance. Misclassification can distort financial statements and invite audit objections.

9. Depreciation Calculation

Depreciation is a arrangement of  allocation of the cost of a tangible asset over its useful life. During the making of finalisation of accounts, depreciation must be correctly calculated and recorded as per applicable laws to ensure true profit and correct asset valuation.

Depreciation must be calculated under:

• Companies Act (for books of accounts)
• Income Tax Act (for tax computation)

Difference in depreciation leads to deferred tax.

Why Depreciation Calculation Is Important

• Shows true profit by charging asset usage cost
• Prevents overstatement of assets
• Mandatory under accounting standards
• Required for tax computation
• Basis for deferred tax calculation

Assets on Which Depreciation Is Charged

Asset	Example
Plant & Machinery	Factory machines
Building	Office / factory building
Furniture & Fixtures	Tables, chairs
Computers	Laptops, desktops
Vehicles	Business vehicles

Methods of Depreciation

1. Straight Line Method (SLM)
• Equal depreciation every year
• Mostly used for books of accounts
2. Written Down Value Method (WDV)
• Depreciation on reducing balance
• Mostly used under Income Tax Act

Provisions

Companies Act (Books of Accounts)

• Useful life prescribed
• Schedule II applicable
• Shows book depreciation

Income Tax Act

• Prescribed depreciation rates
• Block of assets concept
• Shows tax depreciation

Examples

Example 1: Book Depreciation (SLM)

• Machine cost = ₹10,00,000
• Useful life = 10 years
• Annual depreciation: 10,00,000 ÷ 10 = ₹ 1,00,000

Example 2: Tax Depreciation (WDV)

• Machine cost = ₹10,00,000
• Income tax depreciation rate = 25%
• First year depreciation: 10,00,000 × 25%=₹ 2,50,000

Example 3: Partial Year Depreciation

Asset purchased on 1st October:

• Books: Half-year depreciation
• Income tax: 50% of normal depreciation

Common Mistakes in Depreciation

• Wrong rate applied
• Depreciation not charged
• Capital items expensed
• Depreciation on fully depreciated assets
• Ignoring additions and disposals

Accounting Entry for Depreciation

Depreciation A/c     Dr

   To Asset A/c

Impact of Depreciation

Area	Impact
Profit & Loss	Profit reduces
Balance Sheet	Asset value reduces
Tax Computation	Affects taxable income
Deferred Tax	Difference creates DTA/DTL

Depreciation Calculation Checklist

• Asset register verified
• Correct method applied
• Correct rate used
• Additions/disposals considered
• Depreciation posted in books
• Differences tracked for tax

Practical Insight: Depreciation calculation is a core step in finalisation of accounts. Correct computation ensures accurate profits, proper asset valuation, and compliance with accounting and tax laws.

10. Deferred Tax Adjustment

Deferred tax arises due to temporary differences between accounting income and taxable income. During finalisation of accounts, deferred tax must be identified, calculated, and properly adjusted to ensure that tax expense is matched with the related accounting income.

For Example: Higher depreciation under Income Tax reduces taxable profit now, creating a Deferred Tax Liability (DTL), which must be shown in the balance sheet.

Deferred tax mainly arises due to: Difference between book depreciation and tax depreciation. Deferred Tax Asset (DTA) or Deferred Tax Liability (DTL) should be properly recognized.

Why Deferred Tax Adjustment Is Important

• Ensures matching principle is followed
• Shows true tax expense in Profit & Loss Account
• Avoids distortion of profits
• Mandatory under Accounting Standards (AS-22 / Ind AS-12)
• Required for corporate financial statements

Meaning of Temporary Difference

Temporary difference is the difference between:

• Book profit (as per accounting records) and
• Taxable profit (as per Income Tax Act)

Types of Deferred Tax

1. Deferred Tax Liability (DTL): Arises when tax payable in future increases.
2. Deferred Tax Asset (DTA):  Arises when tax payable in future decreases.

Common Causes of Deferred Tax

Reason	Impact
Depreciation difference	DTL or DTA
Provision allowed later	DTA
Expenses disallowed temporarily	DTA
Income taxed later	DTL

Example 1: Deferred Tax Liability (DTL)

Depreciation:

• Books = ₹1,00,000
• Income Tax = ₹2,50,000

Tax depreciation > Book depreciation

Taxable income now is lower

• Creates DTL

Example 2: Deferred Tax Asset (DTA)

Provision for doubtful debts:

• Charged in books
• Allowed for tax only on actual write-off
• Creates DTA

Calculation Example

• Difference in depreciation = ₹2,50,000 – ₹1,00,000 = ₹1,50,000
• Assume tax rate = 25%
• Deferred Tax=1,50,000 × 25% = ₹ 37,500

Accounting Entries

For Deferred Tax Liability:

Income Tax Expense A/c     Dr

   To Deferred Tax Liability A/c

For Deferred Tax Asset:

Deferred Tax Asset A/c     Dr

   To Income Tax Expense A/c

Important Points to Remember

• Deferred tax applies mainly to companies
• Created only on temporary differences
• Not created on permanent differences
• Reviewed at every balance sheet date

Deferred Tax Adjustment Checklist

• Temporary differences identified
• Book vs tax depreciation compared
• Correct tax rate applied
• DTA/DTL calculated
• Accounting entry passed
• Disclosure made in balance sheet

Practical Insight: Deferred tax adjustment is a technical but essential step in finalisation of accounts. Proper recognition ensures accurate profit reporting and compliance with accounting standards.

11. Net Profit (NP) Ratio Analysis

Net Profit (NP) Ratio analyze is the process of evaluating the relationship between net profit and net sales. It shows the overall profitability of the business after considering all expenses, taxes, interest, and depreciation. During finalisation of accounts, NP ratio is analysed to assess financial efficiency and cost control.

NP Ratio is calculated as: NP Ratio = (Net Profit / Sales) × 100

Where: 

Net Profit = Gross Profit – Indirect Expenses + Indirect Income – Taxes & Interest

It should be compared with:

• Industry norms
• Previous financial years

This helps evaluate overall profitability.

For Example: NP ratio falls from 12% to 7% even though sales increased.

This may indicate:

• Higher indirect expenses
• Interest burden
• Poor cost control
• Management analysis becomes necessary.

Why NP Ratio Analysis Is Important

• Shows overall profitability
• Helps management in decision-making
• Indicates expense control efficiency
• Useful for investors and lenders
• Important for audit and tax analysis

Difference Between GP Ratio and NP Ratio

Basis	GP Ratio	NP Ratio
Level	Operating level	Overall level
Expenses considered	Direct only	Direct + Indirect
Focus	Cost of goods	Total efficiency

Examples

Example 1: Normal NP Ratio

Sales = ₹50,00,000

Net Profit = ₹5,00,000

NP Ratio = (5,00,000÷50,00,000) × 100=10%

• Indicates healthy cost control.

Example 2: Falling NP Ratio

Last year NP ratio = 12%

Current year NP ratio = 7%

Possible reasons:

• Increase in indirect expenses
• Higher interest on loans
• Increase in administrative costs
• Tax burden increase

Example 3: Low NP Despite Good GP

• GP Ratio = 30%
• NP Ratio = 6%

Indicates:

• Heavy indirect expenses
• High marketing or finance costs
• Poor administrative control

Common Reasons for NP Ratio Variation

Reason	Impact
Increase in indirect expenses	NP decreases
Higher interest	NP decreases
Higher tax provision	NP decreases
Increase in indirect income	NP increases

Practical Checks During Finalisation

• Compare NP with previous years
• Compare NP with industry benchmarks
• Analyse indirect expenses trend
• Review finance costs and taxes
• Ensure all incomes are recorded

Management & Audit Perspective

Auditors and management use NP ratio to:

• Evaluate overall performance
• Identify cost leakages
• Support strategic decisions
• Assess financial stability

NP Ratio Analysis Checklist

• NP ratio calculated
• Compared with previous year
• Compared with industry
• Indirect expenses analysed
• Abnormal variations explained
• Final NP confirmed

Practical Insight: Net Profit Ratio analysis provides a complete picture of business profitability. It helps ensure that all incomes and expenses are correctly recorded and analysed during finalisation of accounts.

12. Bank Balance Verification & BRS

Bank balance verification is the process of matching the bank balance as per books of accounts with the bank balance as per bank statement. Differences are reconciled through a Bank Reconciliation Statement (BRS). During finalisation of accounts, this step ensures cash accuracy and reliability of financial statements.

For Example: 

Books show bank balance of ₹5,00,000, but bank statement shows ₹4,80,000 due to:

• Cheques issued but not presented
• Bank charges not recorded

A Bank Reconciliation Statement (BRS) is prepared.

Bank balances should be verified for:

• Current accounts
• Savings accounts
• Other bank accounts

Bank reconciliation statements (BRS) must be prepared.

Why Bank Balance Verification Is Important

• Ensures correct cash/bank balance
• Detects errors or fraud
• Identifies unrecorded bank transactions
• Mandatory for audit and finalisation
• Ensures true and fair presentation

Records Used

Books of Accounts	Bank Records
Bank Ledger	Bank Statement
Cash Book	Pass Book
Payment Register	Bank Advice

Practical Process of Bank Verification

1. Step 1: Extract Bank Balance from Books 
• Check closing balance in bank ledger.
2. Step 2: Obtain Bank Statement 
• Download bank statement till 31st March.
3. Step 3: Identify Differences
• Common differences include:
• Cheques issued but not presented
• Cheques deposited but not cleared
• Bank charges
• Interest credited by bank
4. Step 4: Prepare BRS
• Prepare Bank Reconciliation Statement to reconcile balances.

Example

As per Books (Debit Balance): ₹5,00,000

As per Bank Statement: ₹4,80,000

Differences:

• Cheque issued but not presented: ₹30,000
• Bank charges not recorded: ₹10,000
• Interest credited by bank: ₹20,000

BRS Preparation (Starting with Books)
Balance as per Books	₹5,00,000
Less: Cheque issued not presented	(30,000)
Less: Bank charges not recorded	(10,000)
Add: Interest credited by bank	20,000
Balance as per Bank Statement	₹4,80,000

Common Errors Found During BRS

• Bank charges not recorded
• Interest income missing
• Cheques recorded twice
• Wrong amount posted
• Old unreconciled items

Accounting Entries for Missing Items

Bank Charges:

Bank Charges A/c     Dr

   To Bank A/c

Interest Credited:

Bank A/c            Dr

   To Interest Income A/c

Special Points During Finalisation

• Prepare BRS for each bank account
• Clear old outstanding cheques
• Verify overdraft balances
• Confirm fixed deposit balances

Bank Balance Verification Checklist

• Bank statements obtained
• Bank ledger reviewed
• Differences identified
• BRS prepared
• Missing entries posted
• Final bank balance confirmed

Practical Insight: Bank balance verification and BRS are critical control tools in finalisation of accounts. They ensure cash accuracy, transparency, and reliability of financial statements.

13. Opening Balance Verification & Carry Forward

Opening balance verification is the process of confirming that the opening balances of assets, liabilities, and capital in the current year correctly match the closing balances of the previous year. During finalisation of accounts, this step ensures continuity, accuracy, and reliability of financial statements.

Opening balances should match:

• Previous year audited closing balances
• Proper carry forward of losses, reserves, and balances

For Example: Last year’s audited balance sheet shows creditors of ₹3,00,000, but books show ₹2,70,000. Difference must be reconciled before proceeding further.

Why Opening Balance Verification Is Important

• Ensures no mismatch between years
• Prevents carry-forward errors
• Mandatory for audit and assessments
• Helps identify prior period errors
• Ensures correct capital and liability position

Items Covered Under Opening Balance Verification

Category	Examples
Assets	Cash, bank, debtors, stock
Liabilities	Creditors, loans, provisions
Capital	Capital account, reserves
Others	Advances, deposits, suspense

Practical Process of Verification

1. Step 1: Obtain Previous Year Closing Balance Sheet
• Use audited financial statements of the previous year.
2. Step 2: Match with Current Year Opening Trial Balance
• Compare each ledger opening balance with last year’s closing figure.
3. Step 3: Identify Differences
• Investigate mismatches due to:
• Data entry errors
• Adjustments passed last year
• Rectification entries missing

Examples

Example 1: Creditor Balance Mismatch

Previous year closing creditors = ₹3,00,000

Current year opening creditors = ₹2,70,000

Difference = ₹30,000

Possible reasons:

• Payment wrongly adjusted
• Wrong opening entry

Correction required.

Example 2: Opening Stock Verification

Closing stock last year = ₹5,50,000

Opening stock this year = ₹5,40,000

Difference = ₹10,000

Must be reconciled immediately.

Example 3: Capital Balance Carry Forward

Closing capital last year = ₹12,00,000

Opening capital this year = ₹12,00,000

Correct carry forward.

Common Errors in Opening Balances

• Wrong opening entries
• Partial carry forward of balances
• Ignoring prior period adjustments
• Suspense account not cleared
• Incorrect stock opening value

Accounting Treatment for Differences

Prior Period Adjustment Entry:

Prior Period Adjustment A/c     Dr / Cr

   To Respective Ledger A/c

(As applicable)

Special Points During Finalisation

• Verify loan balances with statements
• Confirm debtors and creditors
• Ensure reserves and surplus match
• Opening balances should be audited figures

Opening Balance Verification Checklist

• Previous year audited balance sheet obtained
• All opening balances matched
• Differences identified
• Rectification entries passed
• Opening balances finalised

Practical Insight: Opening balance verification ensures a smooth transition between accounting years. Correct carry forward of balances is essential for true and fair financial reporting and avoiding audit issues.

14. Provision for Tax

Provision for tax is the amount set aside out of current year profits to meet the estimated income tax liability. During finalisation of accounts, tax must be properly estimated, provided for, and disclosed even if it is payable in the next financial year. Adequate provision for income tax should be made after estimating taxable income and applicable tax rates.

For Example: Estimated taxable income is ₹20,00,000 and tax liability comes to ₹6,24,000. Provision for tax must be created even if tax is not yet paid.

Why Provision for Tax Is Important

• Ensures true net profit calculation
• Follows matching concept
• Mandatory under accounting principles
• Prevents overstatement of profit
• Required for audit and statutory reporting

Types of Taxes Covered

Tax Type	Applicability
Income Tax	Mandatory
MAT / AMT	Companies / specified entities
Surcharge & Cess	As applicable

Practical Process of Creating Provision

1. Step 1: Estimate Taxable Income
• Start with book profit and adjust:
• Add disallowable expenses
• Deduct allowable deductions
2. Step 2: Calculate Tax Liability
• Apply:
• Applicable tax rates
• Surcharge (if any)
• Health & Education cess
3. Step 3: Adjust Advance Tax & TDS
• Reduce:
• Advance tax paid
• TDS already deducted

Example

Estimated taxable income = ₹20,00,000

Income tax @ 30% = ₹6,00,000

Health & Education cess @ 4% = ₹24,000

Total Tax Liability = ₹6,24,000

If:

Advance tax paid = ₹4,00,000

Provision required = ₹2,24,000

Accounting Entry for Provision

Income Tax Expense A/c     Dr

   To Provision for Tax A/c

Common Mistakes in Provision for Tax

• No provision created
• Wrong tax rate applied
• Ignoring cess and surcharge
• Not adjusting advance tax/TDS
• Mixing provision with actual tax paid

Presentation in Financial Statements

• Profit & Loss Account: Income Tax Expense shown
• Balance Sheet: Provision for Tax shown under Current Liabilities

Provision for Tax Checklist

• Taxable income estimated
• Correct tax rates applied
• Advance tax & TDS adjusted
• Provision entry passed
• Proper disclosure made

Practical Insight: Provision for tax ensures that profits are not overstated and that tax obligations are properly accounted for. It is a mandatory and critical step in finalisation of accounts.

15. Ledger Scrutiny

Ledger scrutiny is the detailed examination of all ledger accounts to ensure that transactions are correctly recorded, properly classified, supported by documents, and free from errors or irregularities. During finalisation of accounts, ledger scrutiny helps identify adjustments, provisions, reclassifications, and corrections before preparing final financial statements.

Detailed ledger scrutiny is required, especially for:

• Debtors: Long outstanding balances and possible write-off
• Creditors: Outstanding beyond 45 days or 180 days
• Other necessary adjustments and provisions

For Example:

• Debtor outstanding for more than 2 years may require provision or write-off
• Creditor outstanding beyond 180 days may attract GST ITC reversal

Ledger scrutiny avoids future disputes.

Why Ledger Scrutiny Is Important

• Detects errors and omissions
• Identifies long outstanding balances
• Ensures correct classification of income and expenses
• Helps in GST and income-tax compliance
• Essential for audit clearance

Ledgers Covered in Scrutiny

Ledger Type	Focus Area
Debtors	Long outstanding, doubtful debts
Creditors	Old balances, GST ITC impact
Expense ledgers	Nature, ITC eligibility
Income ledgers	Completeness, GST
Asset ledgers	Capital vs revenue
Loan accounts	Interest, confirmations

Practical Process of Ledger Scrutiny

1. Step 1: Review Ledger Balances
• Check debit/credit balances and unusual movements.
2. Step 2: Verify Supporting Documents
• Ensure each entry has:
• Proper voucher
• Correct narration
• Valid GST invoice (if applicable)
3. Step 3: Identify Required Adjustments
• Look for:
• Provisions
• Write-offs
• Reclassifications

Examples

Example 1: Debtors Outstanding for Long Period

A debtor of ₹1,20,000 outstanding for more than 2 years.

Action:

• Assess recoverability
• Create Provision for Doubtful Debts

P&L A/c              Dr

   To Provision for Doubtful Debts A/c

Example 2: Creditors Outstanding Beyond 180 Days

Supplier balance ₹80,000 outstanding beyond 180 days.

Action:

• Reverse ITC (if applicable under GST)
• Follow up with supplier

Example 3: Personal Expense Booked in Business

Mobile bill includes ₹10,000 personal use.

Action:

• Disallow expense
• Reduce business expense

Example 4: Wrong Ledger Posting

Purchase of computer booked under office expenses.

Action:

• Capitalise asset
• Charge depreciation

Common Issues Found During Scrutiny

• Duplicate entries
• Personal expenses mixed with business
• Wrong GST treatment
• Capital expenses charged to P&L
• Missing provisions or accruals

Important Adjustments Identified Through Scrutiny

• Provision for doubtful debts
• Outstanding expenses
• Prepaid expenses
• Accrued income
• ITC reversals

Ledger Scrutiny Checklist

• All major ledgers reviewed
• Long outstanding balances identified
• Wrong classifications corrected
• Required provisions created
• GST impact checked
• Final balances approved

Practical Insight: Ledger scrutiny acts as a final quality check before preparing financial statements. Proper scrutiny ensures accuracy, compliance, and audit-ready accounts, reducing future disputes.

16. Trial Balance & Final Financial Statements

After completed all reconciliations, verifications, and adjustments, the accountant prepares the Trial Balance. Once the trial balance tallies, final financial statements the Profit & Loss Account and Balance Sheet are prepared to present the true and fair view of the business.

Meaning of Trial Balance 

A Trial Balance is a statement showing all ledger balances (debit and credit) at a particular date to check the arithmetical accuracy of books of accounts.

Example:

After passing all adjustments:

• Trial balance tallies
• Financial statements are prepared

Corporate Entity: Schedule III format

Non-Corporate Entity: ICAI prescribed format

Format of Trial Balance

Particulars	Debit (₹)	Credit (₹)
Assets	✔
Expenses	✔
Liabilities		✔
Income		✔

Debit Total = Credit Total

Practical Process

1. Step 1: Prepare Adjusted Trial Balance
• Include effects of:
• Depreciation
• Provisions
• Accruals & prepayments
• GST & tax adjustments
2. Step 2: Check Tallying
• If trial balance does not tally:
• Recheck postings
• Verify ledger balances
• Clear suspense account
• Example
• Adjusted Trial Balance shows:
• Total Debits = ₹85,00,000
• Total Credits = ₹85,00,000
3. Trial balance tallies → proceed to final accounts.

Final Financial Statements Prepared

Profit & Loss Account

Shows:

• Gross Profit
• Indirect income & expenses
• Net Profit / Loss

Balance Sheet

Shows:

• Assets
• Liabilities
• Capital

Formats Used

Entity Type	Format
Companies	Schedule III
Non-Corporate Entities	ICAI prescribed format

Common Errors Detected at This Stage

• Missing adjustment entries
• Wrong ledger balances
• Incomplete accruals
• Incorrect depreciation
• Unmatched GST figures

Disclosure Requirements

• Accounting policies
• Notes to accounts
• Contingent liabilities
• Related party transactions

Finalisation Checklist (Last Step)

• Adjusted trial balance prepared
• Trial balance tallied
• P&L Account prepared
• Balance Sheet prepared
• Proper format followed
• Notes & disclosures completed

Practical Insight: Finalisation of accounts is a practical and analytical process, not just bookkeeping. These real-life examples show how accountants ensure: 

• Accuracy 
• Compliance 
• Meaningful financial reporting 

So, these 16 steps help businesses avoid errors, penalties, and financial misstatements.

Finalisation of Accounts – Practical Checklist

GST & Revenue

1. Sales matched with GSTR-1
2. Purchases matched with GSTR-2B
3. ITC eligibility verified

Expenses & Stock

1. Direct expenses verified
2. Indirect expenses correctly classified
3. Closing stock physically verified

Analysis

1. GP ratio analysed
2. NP ratio analysed
3. Variations explained

Adjustments

1. Suspense account cleared
2. Depreciation calculated
3. Deferred tax adjusted

Bank & Ledger

1. Bank balances verified
2. BRS prepared
3. Debtors reviewed
4. Creditors reviewed

Final Steps

1. Provision for tax created
2. Trial balance tallied
3. Financial statements prepared

Final Conclusion Finalisation of accounts is a systematic, analytical, and compliance driven process. It goes beyond bookkeeping to ensures the accuracy, transparency, and legal compliance. By following a structured flow, checklist, and analysis, businesses can prepare reliable financial statements and avoid future disputes.

Frequently Asked Questions 

Why is GST reconciliation important in finalisation?

It ensures that sales, purchases, and ITC reported in books match with GST returns, avoiding notices and penalties.

Why is physical stock verification necessary?

Because stock valuation directly affects gross profit and closing balance sheet figures.

Why depreciation differs under Companies Act and Income Tax Act?

Because both Acts follow different methods and rates, leading to deferred tax.

What is ledger scrutiny?

It is a detailed review of debtor, creditor, and expense ledgers to identify errors, long outstanding balances, and required adjustments.

Is trial balance the last step?

Trial balance is prepared before final accounts. After it tallies, Profit & Loss Account and Balance Sheet are prepared.

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Sandeep Ghatuary

Finance & Accounting blogger simplifying complex topics.

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