By:

Satyanath Mohapatra
 One of the important purposes of accounting is to find out the profit or loss of a business for a particular
accounting period.

And also to know its financial position on a particular date.

For this purpose, Income Statement and Position Statement are prepared every year by all business organisations.
Income statement is divided into two parts, which are as follows
(i) Trading Account and
(ii) Profit and Loss Account
Position Statement
(iii) Balance Sheet
 Income Statement is prepared to know the earnings of a business during a particular accounting year or the loss suffered
during the year.

Position Statement, also known as Balance Sheet, is prepared to know the financial position of a business on a particular
date.

OBJECTIVES OF FINANCIAL STATEMENTS

i) Ascertain the result of business activities

ii) Ascertain the financial position of business

iii) Correct decision making

iv) Judging the performance of management

v) Ascertaining the cash position of business

 Income Statement
Income statement is prepared to find out the profit or loss of business for a particular accounting year. Income
statement is made up of the following accounts:

a) Trading Account

b) Profit and loss Account

Trading Account
Trading Account is prepared to find out
the Gross profit earned or Gross loss
suffered by the business from business
activities during an accounting year. This
account is prepared in T-form. Following is
the proforma of a Trading Account.
To Opening Stock 6,500 To Sales 72,000
To Purchase 45,000 (-) :Returns 1,500 70,500
(-) :Returns 500 44,500 To Closing Stock 8,000
To Carriage 1,200
To Wages 4,800
To Fuel & Power 3,200
To Gross Profit transferred
18,300
to P & L A/c

78,500 78,500
 Manufacturing Account
Manufacturing Account is prepared by an
enterprise engaged in manufacturing
activities. It is prepared to ascertain the
cost of goods manufactured during an
accounting period. This account is closed by
transferring its balance to the debit of the
Trading Account. A general format of a
Manufacturing Account is shown:
Profit and Loss Account
After finding out the
gross profit/ gross loss
by preparing the Trading
Account, Profit and Loss
Account is prepared to
find out the net profit /
net loss of the business
during an accounting
year. This account is also
prepared in T-form.
Following is the
proforma of a Profit and
loss Account.
 BALANCE SHEET

Balance Sheet or Position Statement is prepared to find out the financial position of a business on a
particular date. Generally it is prepared on the last date of an accounting year. It is prepared after
preparing Trading Account and Profit & Loss Account.

The balance sheet is one of the three fundamental financial statements and is key to both financial
modeling and accounting. The balance sheet displays the company’s total assets, and how these assets are
financed, through either debt or equity. It can also sometimes be referred to as a statement of net worth, or
a statement of financial position. The balance sheet is based on the fundamental equation:

Assets = Liabilities + Equity.

FINAL ACCOUNTS OF A SOLE TRADER

(with adjustments)
Closing Stock
The closing stock represents the cost of unsold goods lying in the stores at the end of the accounting period. The
adjustment with regard to the closing stock is done by

(i) by crediting it to the trading account.

(ii) by showing it on the asset side of the balance sheet.
Outstanding Expenses
A business enterprise to have some unpaid expenses in the normal course of business operations at the end of an
accounting year. Such items usually are wages, salaries, interest on loan, etc. it is logical that they should be duly charged
against revenue for computation of the correct amount of profit or loss.
I. The amount of outstanding expenses is added to the total of expenses under a particular head for the purpose of
preparing trading and profit and loss account.
II. Outstanding Expenses is shown on the liabilities side of the balance sheet
Prepaid Expenses
There are several items of expense which are paid in advance in the normal course of business operations. At the end of
the accounting year, it is found that the benefits of such expenses have not yet been fully received.
I. The amount of prepaid expenses is deducted from the total of the particular expense
II. The prepaid expense is shown on the Asset side of the balance sheet.
Accrued Income
It may also happen that certain items of income such as interest on loan, commission, rent, etc. are earned during the
current accounting year but have not been actually received by the end of the same year. Such incomes are known as
accrued income.
I. The amount of accrued income will be added to the related income in the profit and loss account.
II. The new account of accrued income will appear on the asset side of the balance sheet.

Income Received in Advance / Unearned Income

Sometimes, a certain income is received but the whole amount of it does not belong to the current period. The
portion of the income which belongs to the next accounting period is termed as income received in advance or an
Unearned Income. The income received in advance and will be recognised as a liability.
i. The account of income received in advance will be shown as a liability in the balance sheet.
ii. we need to deduct the amount of income received in advance from that particular income.
• Interest on loan expenses ₹150000. The interest of ₹50000 is outstanding.

Interest on Loan A/c Dr 50000

To Outstanding Interest on Loan A/c 50000
• Wages expense ₹72000. Out of this wages of ₹12000 pertains to the next accounting year.

Prepaid Wages A/c Dr 12000

To Wages A/c 12000
• The commission received ₹15000. Amount of commission earned but not received is ₹5000.

Accrued Commission A/c Dr 5000

To Commission A/c 5000
• Rent received ₹50000. Rent of ₹10000 is received in advance.

Rent A/c Dr 10000

To Rent received in advance A/c 10000
Particulars Amount (Dr.) Particulars Amount (Cr.)
To Opening Stock A/c By Sales A/c

To Purchases A/c By Closing Stock A/c

To Wages A/c 72000

Less: Prepaid wages (12000) 60000
To Gross Profit c/d
xxx xxx
To Interest on Loan A/c 150000 By Gross Profit b/d

Add: Outstanding interest on a loan 50000 200000 By Commission A/c 15000

Add: Accrued commission 5000 20000

By Rent A/c 50000

Less: Rent received in advance (10000)

To Net Profit
xxx xxx
 Balance Sheet
As at …

Liabilities Amount Assets Amount

Capital Fixed Assets:
Add: Net Profit Land and Building
Less: Drawings Plant and Machinery
Long-term liabilities: Furniture and Fixtures
Bank Loan Current Assets:
Current Liabilities: Stock
Outstanding Interest on Loan 50000 Debtors
Rent received in advance 10000 Prepaid Wages 12000
Accrued Commission 5000

xxx xxx
Depreciation
The depreciation is the decline in the value of assets on account of wear and tear and passage of time. This, in
effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the
purpose of earning profits.
i. It is treated as a business expense and is debited to profit and loss account.
ii. In the balance sheet, the asset will be shown at cost minus the amount of depreciation.

Bad Debts
Bad debts refer to the amount that the firm has not been able to realise from its debtors. It is regarded as a loss
and is termed as bad debt.
i. Bad debts and further bad debts both written in the debit side of the P & L account.
ii. If in trial balance both Debtor and Bad debts are given, signifies that we have incurred a loss arising out of
bad debts during the year and which has been already recorded in the books of account. So no need to
adjust it again in balance sheet. Only if it is given in the name of further Bad debt then we will adjust it with
debtors in asset side of balance sheet.
Provision for Bad and Doubtful Debts
The provision for doubtful debts, which is also referred to as the provision for bad debts or the provision for losses on
accounts receivable, is an estimation of the amount of doubtful debt that will need to be written off during a given
period. Hence, we make a reasonable estimate of such loss and provide the same.
i. Such provision is called provision for bad debts and is created by debiting profit and loss account.
ii. Provision for doubtful debts is also shown as a deduction from the debtors on the asset side of the balance sheet.

• It may be noted that the provision created for doubtful debts at the end of a particular year will be carried forward to
the next year and it will be used for meeting the loss due to bad debts incurred during the next year.
• The provision for doubtful debts brought forward from the previous year is called the opening provision or old
provision.
• When such a provision already exists, the loss due to bad debts during the current year are adjusted against the same
and while making provision for doubtful debts required at the end of the current year is called new provision.
• The balance of old provision as given in trial balance should also be taken into account.
Let us take an example to understand how bad debts and provision for doubtful debts are recorded. An extract from a trial
balance on March 31, 2014 is given below : Rs.
Sundry debtors 32,000
Bad debts 2,000
Provision for doubtful debts 3,500
Additional Information : Write-off further bad debts Rs. 1,000 and create a provision for doubtful debts @ 5% on debtors.
1. Closing stock Rs. 70,000
2. Create a reserve for bad and doubtful debts @ 10% on book
debts
3. Insurance prepaid Rs. 50
4. Rent outstanding Rs. 150
5. Interest on loan is due @ 6% p.a.
Provision for Discount on Debtors
Discount likely to be allowed to customers in an accounting year can be estimated and provided for by creating a
provision for discount on debtors. Provision for discount is made on good debtors which are arrived at by deducting
further bad debts and the provision for doubtful debts.
i. The provision for discount on debtors will be created in P&L account.
ii. it will be shown as a deduction from the debtors account to portray correctly the expected realiable value of
debtors on good debtors.
Manager’s Commission
The manager of the business is sometimes given the commission on the net profit of the company. The percentage of
the commission is applied on the profit either before charging such commission or after charging such commission.
I. Manager’s Commission need to be taken in debit side of P& L account
II. Manager’s Commission outstanding to be taken as current liability in liability side of the balance sheet.
Adjustments:
i. Outstanding salaries amounted to Rs.  4,000
ii. Rent paid for 11 months
iii. Interest due but not received amounted to Rs.  2,000
iv. Prepaid insurance amounted to Rs.  2,000
v. Depreciate buildings by 10%
vi. Further bad debts amounted to Rs.  3,000 and make a provision for bad debts @ 5% on sundry debtors
vii. Commission received in advance amounted to Rs.  2,000
By Interest Received
Add: Accrued
By Discount Received 2000