DEPARTMENT OF HUMANITIES

Accountancy
Module 3

Samitesh Brahma
Assistant Professor
Department of Humanities
Jorhat Engineering College
Module 3
Final Accounts
Trading and Profit and Loss account
Balance Sheet

Preparation of final accounts

Profit and loss accounts with adjustments

Financial Statements
It refers to such statements which report the profitability and the
financial position of the business at the end of accounting period.
The term financial statements includes at least two basic
statements which are:
Income statement (or Trading and Profit & Loss Account) which shows
the results of business operation during an accounting period.
Statement of Financial Position (or Balance Sheet) which shows the
financial position of an enterprise at a specific point of time.
These two financial statements are termed as “Final Accounts”.
Objectives or need or Importance of Financial Statements

1. Trading and Profit and Loss Account

a) Determine Gross Profit or Gross Loss
b) Determine Net Profit or Net Loss
c) Comparison with previous year
d) Details of Expenses and Income
e) Ratio Analysis
2. Balance Sheet
a) Ascertaining Financial position
b) Comparison with previous year
c) Determining Solvency Position.
Users of financial statements

1. Owners
2. Management
3. Employees and Trade Unions
4. Investors
5. Creditors
6. Government
7. Taxation authorities
Income statement

Income statement is a summary of accounts that affects the profit or loss

of an enterprise.

• It is divided into two parts

✔ First part is called ‘Trading Account’. It shows the gross profit or gross loss,
✔ The second part is called ‘Profit and Loss Account’. It shows the net profit or
net loss.
Concept of Gross Profit and Net Profit
Direct expenses means all expenses directly connected with the manufacture,
purchase of goods and bringing them to the point of sale. Direct expenses include
carriage inwards, freight inwards, wages, factory lighting, coal, water and fuel,
royalty on production, etc.
The excess of sales over purchases and direct expenses is called gross profit.
If the amount of purchases including direct expenses is more than the sales
revenue, the resulting figure is gross loss.
Gross Profit = Sales – (Purchases + Direct Expenses)
If the total of the credit side of the profit and loss account is more than the total of
the debit side, the difference is the net profit for the period of which it is being
prepared. On the other hand, if the total of the debit side is more than the total of
the credit side, the difference is the net loss incurred by the business firm.
Net Profit = Gross Profit + Other Incomes – Indirect Expenses
Cost of goods sold and Gross Profit
Cost of goods sold = Opening Stock + purchases + Direct expenses – Closing stock
Cost of goods sold = Sales – Gross Profit

Illustration
From the following information, calculate the cost of goods sold and gross profit on
the basis of cost of goods sold.
₹
Opening Stock 40,000
Purchases 4,20,000
Expenses on purchase 8,000
Expenses on Sales 15,000
Wages 30,000
Sales 6,00,000
Closing Stock 52,000
Solution

Cost of Goods = Opening Stock + Purchases + Direct Expenses – Closing

Sold Stock
= Opening Stock + Purchases + Expense on Purchases + Wages
– Closing Stock
= ₹ (40,000 + 4,20,000 + 8,000 + 30,000 – 52,000)
= ₹ 4,46,000
Gross Profit = Sales – Cost of Goods Sold
= ₹ (6,00,000- 4,46,000)
= ₹ 1,54,000
 Trading Account

✔ It is prepared for calculating the gross profit or gross loss arising or

incurred as a result of the trading activities of a business.

✔ All expenses which relate to either purchase of raw materials or

manufacturing of goods are recorded in the trading account.

✔ All such expenses are called ‘Direct Expenses’.

✔ Trading Account is a nominal account.

Transactions recorded in Trading account
1. Opening Stock
2. Purchases
3. Purchases Returns/ Return Outward
4. Sales
5. Sales return / return inward
6. Closing Stock
7. Expenses incurred on manufacturing of goods
8. Expenses incurred on purchasing and bringing the goods to the
trading place
Preparation of Trading Account
A. Items written on the Dr. side of the trading account
1. Opening stock or inventory
2. Purchases and purchases return
3. Direct expenses
i. Wages
ii. Carriage or carriage inwards or freight
iii. Manufacturing expenses
iv. Stores consumed
v. Docks charges
vi. Royalty
B. Items written on the Cr. Side of the trading account
1. Sales and sales return
2. Closing Stock
Closing entries
If the credit side of the trading account exceeds the debit, the
difference will be Gross Profit. The Gross Profit will be transferred to
the credit of a newly opened account called Profit and Loss Account.
Trading A/c DR
To Profit and Loss A/c
(The Transfer of Gross Profit to the Credit Side of P&L A/c

If the debit side of the Trading account exceeds the credit, the
difference will be gross Loss. It will be transferred to the debit of P&L
A/c by means of the following entry.
Profit and Loss A/c DR
To Trading A/c
(The Transfer of Gross Loss to the Dedit Side of P&L A/c
Format of a Trading Account
TRADING A/C
Dr For the year ending…………… Cr
Particulars Amount (₹) Particulars Amount (₹)
To opening stock By sales
To purchases Less: sales return
Less: Purchase returns Or return inwards
Or return outward By closing stock
To wages By Gross Loss
To wages and salaries (if any) transferred to
P&L A/c
To Direct expenses
To Carriage
To carriage inwards
To carriages on purchases
To Gas, fuel and power
To freight and cartage
Continued….
To manufacturing expenses, or
Productive Expenses
To Factory expenses, such as,
Factory lighting
Factory rent, etc.
To dock charges and clearing charges
To import duty or custom duty
To royalty
To Gross Profit
Transferred to P&L A/c
Illustration 1
Prepare a Trading Account for the year ended on 31st March, 2020 from
the following balances:-
Particulars ₹ Particulars ₹
Opening Stock 2,00,000 Purchases return 60,000
Purchases 10,00,000 Sales Return 1,00,000
Sales 25,00,000 Carriage on purchase 40,000
Freight 32,500 Carriage on sales 50,000
Wages 1,50,000 Factory Rent 2,20,000
Factory Lighting 54,000 Office rent 37,500
Coal, Gas and water 11,000 Salaries 1,00,000

Closing Stock = ₹ 3,00,000

Solution
TRADING A/C
Dr For the year ending on 31st March, 2020 Cr
Particulars Amount (₹) Particulars Amount (₹)
To Opening stock 2,00,000 By sales 25,00,000
To purchases 10,00,000 Less: sales return 1,00,000 24,00,000
Less: Purchase returns 60,000 9,40,000 By closing stock 3,00,000
To Freight 32,500
To Wages 1,50,000
To Factory Lighting 54,000
To Coal, Gas and Water 11,000
To Carriage on Purchase 40,000
To Factory Rent 2,20,000
Total 16,47,500
To Gross Profit transferred to
P&L A/c 10,52,500
27,00,000 27,00,000
 Profit and Loss Account
✔A Profit & Loss Account is an account into which all gains
and loses are collected, in order to ascertain the excess of
gains over the losses or vice- versa.
✔A Profit & Loss Account is started with the amount of gross
profit or gross loss brought down from the Trading Account.
✔These expenses include administrative expenses, selling
expenses, distribution expenses, etc.
✔These are called ‘Indirect Expenses’.
✔P&L Account is a nominal account.
Preparation of Profit and Loss Account

Items written on the Dr. Side of Profit & Loss Account :-

1. Gross Loss.
2. Office and Administrative Expenses.
3. Selling and Distribution Expenses.
4. Miscellaneous Expenses
Items written on the Cr. Side of Profit & Loss Account:-
1. Gross Profit.
2. Other incomes and gains.
Closing Entries relating to P&L A/c
1. For the transfer of credit balance of Profit & Loss A/c known as net
profit:
Profit and Loss A/c Dr.
To Capital A/c
(The transfer of net profit to capital A/c

1. For the transfer of debit balance of Profit & Loss A/c, known as net
loss:
Capital A/c Dr.
To Profit and Loss A/c
(The transfer of net profit to capital A/c
Format of a Profit and Loss Account
PROFIT AND LOSS A/C
Dr. For the year ending ……………… Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Gross Loss b/d By Gross Profit B/d
(Transferred from Trading A/c) (Transferred from Trading A/c)
Office Expenses : By Rent from tenant
To Salaries By Discount Received
To Salaries and Wages By Commission Received
To Rent, Rates and taxes By Interest on Investments
To Printing and Stationary By Dividend on shares
To Postage By Bad-Debts Recovered
To Lighting By Profit on sale of assets
To Insurance Premium By Income from other sources
To Telephone charges By Misc. Income
To Legal Charges By Net Loss ( if any)
To Audit fees Transferred to Capital A/c
Format of a Profit and Loss Account
PROFIT AND LOSS A/C
Dr. For the year ending ……………… Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Travelling Expenses
To Establishment Expenses
To Trade expenses
To General Expenses
Selling and distribution expenses:
To Carriage outwards, or
Carriage on Sales
To Advertisement
To Commission
To Brokerage
To Bad-Debts
To Export duty
To Packaging charges
Format of a Profit and Loss Account
PROFIT AND LOSS A/C
Dr. For the year ending ……………… Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Delivery Van Expenses
To Stable expenses
Miscellaneous Expenses:
To Discount allowed
To Repairs
To Depreciation
To Bank charges
To Conveyance Expenses
To Donation and charity
To Loss on sale of assets
To Net Profit
Transferred to Capital A/c
Illustration
From the following particulars, prepare a profit and loss account for the
years ending 31st March, 2021
Particulars Amount (₹) Particulars Amount (₹)
Gross Profit 10,52,500 Discount Allowed 15,000
Trade Expenses 10,000 Lighting 3,900
Carriage on Sales 50,000 Commission Received 4,200
Office Salaries 79,000 Bad-Debts 6,000
Postage 3,600 Discount Received 3,000
Office Rent 37,500 Interest on loan 11,000
Legal Charges 2,000 Stable Expenses 7,000
Audit fee 8,000 Export duty 11,500
Donation 5,500 Misc. Income 2,500
Sundry Expenses 1,800 Unproductive Expenses 20,500
Selling Expenses 26,600 Travelling Expenses 12,500
Solution
PROFIT AND LOSS A/C
Dr. For the year ending 31st March 2021 Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Trade expenses 10,000 By Gross Profit B/d 10,52,500
To Carriage on sales 50,000 By Commission Received 4,200
To Office Salaries 79,000 By Discount Received 3,000
To Postage 3,600 By Misc. Income 2,500
To Office Rent 37,500
To Legal Charges 2,000
To Audit fee 8,000
To Donation 5,500
To Sundry Expenses 1,800
To Selling Expenses 26,600
To Discount Allowed 15,000
To Lighting 3,900
To Bad-Debts 6,000
Solution

PROFIT AND LOSS A/C

Dr. For the year ending 31st March 2021 Cr.
Particulars Amount (₹) Particulars Amount (₹)
To Interest on Loan 11,000
To Stable Expenses 7,000
To Export duty 11,500
To Unproductive Expenses 20,500
To Travelling Expenses 12,500
To Net Profit transferred to
Capital Account 7,50,800
10,62,200 10,62,200
Operating Profit and Net Profit

Profit may be of two types:

i. Operating profit and

ii. Net profit.

 Operating Profit
✔ The profit earned through normal operating activities of the business.

✔ Expenses which are related to the main or normal activities of the

business are called operating expenses.

✔ They include office and administration expenses, selling and

distribution expenses, discount, bad- debts, etc.

✔ They are also called ‘Earnings before Interest and Tax’ or EBIT.
 Net Profit
✔ It is arrived by deducting operating as well as non- operating expenses
from the gross profit.

✔ Expenses which are indirect to the main operations of the business are
called non- operating expenses.

✔ They include interest on loan, donations, loss on sale of fixed assets,

loss due to theft.
 Balance Sheet
✔ A balance sheet is a statement prepared with a view to measure the
exact financial position of a business on a certain fixed date.

✔ A balance sheet contains all the Assets and Liabilities of the business
enterprise.

✔ Balances of all the personal and real accounts are group as assets and
liabilities.

✔ Liabilities are shown on the left hand side of the Balance Sheet and
Assets on the right hand side.
Characteristics of Balance Sheet

1. A balance sheet is a part of Final Accounts.

2. A Balance sheet is a summary of the Personal and Real Accounts,
which are still open and have not been closed by transfer of the
Trading and Profit and Loss Account.
3. The totals of the two sides of the balance sheet must be equal.
4. Balance sheet is prepared on a particular date and not for a fixed
period.
5. It shows the financial position
Format of a Balance Sheet
BALANCE SHEET
As at ……………
Liabilities Amount (₹) Assets Amount (₹)
Current Liabilities Current Assets
Bank Overdraft Cash in Hand
Bills payable Cash at Bank
Sundry Creditors Bills Receivable
Outstanding expenses Short Term Investments
Unearned Income Sundry Debtors
Non-Current Liabilities Closing Stock
Long term loans Prepaid Insurance
Reserves Accrued Income
Capital Long Term Investments
Add: Net Profit or Non- current Assets
(Less: Net loss)
Less: Drawings Furniture
Less: Income Tax Loose tools
Format of a Balance Sheet

BALANCE SHEET
As at ……………
Liabilities Amount (₹) Assets Amount (₹)
Less: Life Insurance Premium Motor Vehicle
Plant and Machinery
Land and Buildings
Patents and Trade Marks
Goodwill
Total Total
Important points for preparing Final Accounts

1. If a trail balance is not given in the question, it is better to prepare a trail

balance at first.
2. The items which appear on the debit side of the Trail Balance should be
shown either on the debit side of the Trading or P&L account or on the
assets side of balance sheet.
3. The items which appear on the credit side of the Trail Balance should be
shown either on the credit side of the Trading or P&L account or on the
liabilities side of balance sheet.
4. The balances of Personal and Real Accounts are always shown in the
balance sheet.
5. If the expenses in respect of ‘Rent’ and ‘Lighting’ are clearly stated as
having been incurred in respect of factory, these will be shown in the
Trading Account, otherwise these will be shown in Profit and Loss
Account.
6. The total of both sides of the balance sheet will always be equal.
Adjustment entries
Illustration
Given below is the trail balance of Gopi Chand Bros. as at 31st March, 2020. Prepare a Trading and
Profit & Loss account for the year ended on 31st March, 2020 and balance sheet as at that date. Stock
in hand on 31st March, 2020 was ₹75,000.

Debit balances Amount(₹) Debit balances Amount(₹) Credit Balances Amount(₹)

Stock on 1-4- 2019 45,000 Advertisement 25,000 Sundry Creditors 22,100
Purchases 1,20,000 Salary 36,000 Return Outwards 2,500
Return inwards 3,200 Cash in Hand 8,100 Sales 3,50,000
Carriage inwards 2,400 Cash at Bank 30,000 Capital 2,00,000
Carriage outwards 1,500 Motor Vehicles 58,000 Loan from Bank 24,000
Office Furniture 8,000 Motor Repairs 3,000 Discount received 2,000
Sundry Debtors 68,000 Interest on loan 2,400 Commission 1,600
Dock Charges 5,000 Rent and Insurance 24,500
Electric Power 10,000 Plant and Property 1,06,000
Fuel, Gas & Water 12,000 Drawings 33,000
Bad-Debts 1,100
Total 6,02,200 6,02,200