Chapter 2

FINAL
FAROOK ACCOUNTS OF SOLE TRADER
INSTITUTE OF MANAGEMENT STUDIES

Learning Objectives:
After going through this chapter, you will be able to:
✓ Identify the objectives of preparing final accounts
✓ List the various statements /accounts which comprise the final accounts of a business entity
✓ Understand the treatment of different items in preparation of the final accounts
✓ Appreciate the meaning and importance of different adjustment entries
✓ Pass appropriate adjustment entries
✓ Prepare Trading and Profit & Loss Accounts and Balance Sheet

➢ After the preparation of trail balance, the next step in the accounting process is the preparation of
financial statements.
➢ Financial statements are generally divided into two parts, i.e. Income statement, and position
statement.
➢ The term income statement is known as Trading and Profit and Loss Account, which is prepared to
find out the net results of the business.
➢ Position statement is known as Balance Sheet, which is prepared to know the financial position of
the business.
➢ Both these statements are collectively known as financial statements or final accounts.
➢ Thus, financial statements are mirrors which reflect the business results and the state of affairs of a
business concern.
➢ However, manufacturing concern, will prepare a manufacturing account prior to the preparation of
trading account, to find out the cost of production.

Trading Account

Trading refers to buying and selling of goods. Trading account is an account prepared to find
out the result of buying and selling of goods. It gives the gross profit or gross loss of a business, which
is the difference between sales and cost of goods sold. If the selling price exceeds the cost of price, it
will bring Gross profit. If the cost of sales exceeds the selling price, the results will be Gross loss.

RANEESH P 9747408079 1
TGCA
 FAROOK INSTITUTE OF MANAGEMENT STUDIES

Objective of Preparing Trading Account

1. To ascertain gross profit or gross loss.

2. To provide information about the direct expenses.
3. To compare closing stock with the stock of previous year.
4. To provide safety against the possible losses.

Calculation of Gross Profit or Gross Loss

Gross Profit = Net Sales – Cost of goods sold.
Gross Loss = Cost of goods sold – Net Sales
Cost of goods sold = Opening stock + Net Purchases + Direct expenses – Closing stock
Net Sales = Total Sales – Sales returns
Net Purchases = Total Purchases – Purchase returns

FORMAT OF Trading Account

Name of the Firm
TRADING ACCOUNT For the year ending ……………
Particulars Amount Particulars Amount
To Opening stock XXX By Sales xxx
To Purchase xxx Less: Sales Returns (Returns inwards) xx XXX
Less: Returns outwards (Purchase returns) xx XXX By Closing stock XXX
To Direct Expenses
Carriage inwards XXX
Cartage / Freight XXX
Wages XXX
Power & fuel XXX
water XXX
Gas XXX
Royalty (on production) XXX
Consumable Stores XXX
Manufacturing Exp. XXX
Import Duty XXX
Excise duty XXX
Customs duty XXX
Octroi XXX
Clearing charge XXX
Primary packing materials XXX
Dock dues XXX
Factory expenses XXX

To Gross Profit c\d (Balance) XXX By Gross Loss c/d (Balance) XXX
XXXX XXXX

RANEESH P 9747408079 2
TGCA
 FAROOK INSTITUTE OF MANAGEMENT STUDIES

Illustration 1
Calculate the value of cost of goods sold. Opening stock Rs. 10,000; Net purchases Rs.
5,000; Direct expenses Rs. 2,000; Closing stock Rs. 10,500
Cost of goods sold = Opening stock + Net Purchases + Direct Expenses - Closing stock
= (10,000+5000+2000) – 10500
= 17000 – 10500
= Rs. 6,500
Illustration 2
On 1st January 2008, a firm had stock of goods valued at Rs. 10,000. During the year the
following transactions took place. Sales Rs. 2,00,000; Purchases Rs. 1,20,000; Carriage
inwards Rs. 500; Sales returns Rs. 2,000; Purchase returns Rs. 1,000
Find out the amount of Gross Profit.

Net Sales = Total Sales – Sales returns

Net sales = 2,00,000 - 2,000
= 1,98,000
Net Purchases = Total Purchases – Purchase returns
Net Purchase = 1,20,000 - 1000
= 1,19,000
Cost of goods sold = Opening stock + Net Purchases + Direct Expenses - Closing stock
Cost of goods sold = 10,000+1,19,000+500
= 1,29,500
Gross Profit = Net Sales - Cost of goods sold
Gross Profit = 1,98,000 - 1,29,500
= Rs. 68,500
Alternative method;

Exercises 2
From the following balances extracted from the books of M/s Shine Paints, calculate
the amount of gross profit earned during the year ended 31st December 2017.
Opening stock Rs.17,000; Cash purchases Rs.2,30,000; Credit purchases Rs.7,10,000;
Cash Sales Rs.3,80,000; Credit sales Rs.12,05,000; Direct expenses Rs.2,20,000; Closing
stock Rs.28,000; Sales returns Rs.14,000 and Purchases returns Rs.12,000.
[Gross Profit Rs. 4,34,000]

RANEESH P 9747408079 3
TGCA