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Trading A/c is prepared with a view to ascertaining the profitability of the goods purchased and the goods sold by the trading firm. Expenses and incomes of a variable nature are taken into consideration to find out the Gross Profit of the firm. Trading A/c should be debited with the following items: Opening Stock Purchases cash as well as credit purchase Purchases, Returns or Returns outwards Goods withdrawn for personal use Goods distributed as free samples Goods given as charity Direct Expenses such as freight inward, import duty, direct wages, factory expenses. Trading A/c should be credited with the following items: Sales, less Sales returns or Returns inwards, Closing stock

Format for Trading A/c Trading A/c of ..for the Period Ending Dr. Particulars To Opening Stock + Purchases Less Returns outwards Direct Expenses Wages Carriage inwards Gross Profit Transferred to Amount Rs. ------------------------------------------By Sales Less Returns inwards Closing Stock Gross Loss transferred to P&L A/c Particulars Cr. Amount Rs. -----------------------------

P&L A/c



Ex. From the following information relating to ABC Ltd., prepare Trading A/c for the year ending on 31st March, 2002. The firm started business on 1st April, 2001

Sales Returns outward Salaries & wages Carriage inward Returns inward Freight inward Interest

Rs. 50,000 150 4,000 2,000 250 2,300 3,000

Office Expenses Wages Fuel Insurance Cash Purchases Rent

Rs. 2,000 5,000 1,000 3,721 1,500 40,000 700

Closing stock on 31.3.2002

Rs. 3000

Trading A/c of ABC Ltd. For the year ended 31st March, 2002

Dr. Particulars Amount Rs. 40,000 By Sales Particulars

Cr. Amount Rs.

To Purchases


Less. Return Outward

Carriage Inward Freight Inward


2,000 2,300

Return inward
By closing Stock



Fuel Gross Profit transferred to P/L A/c

1,000 2,600



Profit & Loss A/c

The P&L A/c is prepared to ascertain the Net Profit earned or Net Loss incurred by the business operations during an accounting Period . All the indirect revenue expenses and Loss are charged. A general format of a P&L A/c is shown below:

A general format of a P&L A/c is shown below:Dr Profit & Loss A/c of ------ for the Period ending -------Cr Particulars To gross Loss b/d Salaries & wages Rent, rates & taxes Depreciation Discount allowed Carriage outward Advertising Bad debts Interest on Loan Net profit transferred to capital A/c Rs. ------------------------------------------------------------Particulars By Gross Profit b/d Interest earned Commission earned Rent recd. Profit on sale of fixed assets Income from investments Net Loss transferred to Cap. A/c Dr. -------------------------------------------


Ex. From the following trial balance of Mohan Singh & Sons, prepare the Trading & P&L A/c for the year ended 31st March, 2001
Trial Balance As on 31st March, 2001

Particulars Mohans Capital Mohans Drawings Purchases & sales Sales & Purchase Returns Stock (1-4-2000) Wages Building Freight and Carriage Trade expenses Advertisement Interest Taxes & Insurance

Debit 760 8,900 280 1200 800 22,000 2,000 200 240 130

Credit Rs. 29,000

15,000 450


Particulars Debtors & Creditors Bills Rec. & Bills Payable Cash at Bank Cash in Hand Salaries

Debit 6,500 1,500 1,200 190 800 46,700

Credit Rs. 1200 700


Closing Stock : Rs. 1500

Trading & P&L A/c of Mohan Singh & Sons For the year ended 31st March, 2001 Particulars Opening Stock Purchase 8,900 Returns 450 Wages Freight & Carriage Gross Profit c/d Trade Expense Advertisement Taxes & Insurance Salaries Net Profit Amount Particulars Rs. 1,200 By Sales 15,000 Less Return 280 8,450 Closing Stock 800 2,000 3,770 16,220 200 240 Gross Loss b/d 130 Interest 800 2,750 4,120 Amount Rs. 14,720 1500

16,220 3,770 350


Explanation Purchases have a debit balance Rs. 8900 whereas Sales have a credit balance of Rs. 15000. Purchase returns show credit balance and sales returns show debit balance. Thus Rs. 280 represents sales returns (Debit Balance) and Rs. 450 is purchases returns (credit balance)

Balance Sheet of .. As at.. Liabilities Current Liabilities Bank Overdraft Bills Payable Outstanding Expenses Sundry Creditors Income recd. in advance Long Term Liabilities Loan Capital Opening Balance Add: Net Profit (Less: Net Loss) Less Drawings Amount Rs. Assets Current Assets Cash in Hand Cash at Bank Bills Receivable Sundry Debtors Prepaid Expenses Closing Stock Investments Fixed Assets Furniture & Fixtures Plant & Machinery Building Land Good Will Amount Rs.

Ex. Prepare Trading and Profit and Loss A/c and a balance sheet as on 31st March, 1999 from the under mentioned Trial Balance of PQR Ltd.
Trial Balance As on 31st March, 1999

Particulars Opening Stock Purchases and Sales Returns Discount Capital and Drawings Cash and Bank Overdraft Debtors and Creditors Carriage & Cartage Freight outward Salaries & Wages Stationery

Amount Debit Rs. Credit Rs. 10,000 20,000 40,000 2,000 1,000 1,000 2,000 5,000 65,000 7,000 12,000 19,000 12,000 3,000 4,000 6,000 4,000

Particulars Land & Buildings Plant and Machinery Fixtures and Fittings Bills Receivable and Payable General Reserve

Amount Debit Rs. Credit Rs. 35,000 15,000 5,000 6,000 4,000 6,000 1,42,000

1,42,000 Closing Stock: Rs. 9,000

Trading Account For the year ended 31st March, 1999 Dr. Particulars Amount Rs. 10,000 Sales 20,000 Less Returns Particulars Cr. Amount Rs.

Opening Stock Purchase

40,000 2000

Less Returns
Carriage & Cartage


3,000 Closing Stock


Gross Profit Transferred to P/L A/c 15,000 47,000 47,000

Profit and Loss A/c of PQR Ltd For the year ended 31st March, 1999 Dr. Particulars Amount Rs. 1000 4,000 6,000 Particulars Cr. Amount Rs. 15,000 2,000

Discount Freight Outward Salaries & Wages

Gross Profit b/d Discount recd.

Net Profit Transferred to Capital A/c

2,000 17,000 17,000

Balance Sheet of PQR Ltd. As on 31st March, 1999 Liabilities Bank overdraft Creditors Bills Payable Capital Add: Net Profit Less: Drawings 65,000 2000 -5,000 62,000 Amount Rs. 12000 12000 4000 Assets Cash in Hand Debtors Closing Stock Bills Receivable Land & Buildings Plant & Machinery Amount Rs. 7,000 19,000 9,000 6,000 35,000 15,000

General Reserve


Fixtures & Fittings


Notes i) Purchases & Sales: Purchases have a debit balance; sales have a credit balance. ii) Purchase Returns have a credit balance (the reverse of Purchases). Sales return have a debit balance (reverse of sales) iii) Discount allowed has debit balance, discount recd. has credit balance. iv) Capital has credit balance. Drawings have debit. v) Cash always has debit balance (asset). Overdraft (liability) has credit balance. vi) Debtors (asset) debit balance. Creditors (liability) credit balance.

Explanation Salaries & Wages: The wages paid to workers, Works manager, Foreman Etc. are direct expenses. Salaries paid to office staff, even partners, are an indirect expense. Rent of office, shop, showroom is an indirect expense. Rent of factory is a direct expense. Interest on Loans, overdrafts is an indirect expense. Commission paid,all expenses incurred for sales promotion are indirect.

Carriage & freight outward are incurred after sale & hence are indirect.
Printing and Stationery are indirect expenses Advertising is an indirect expense.

Samples to prospective customers indirect

Discount allowed indirect expense Discount recd income credit to P&L A/c Insurance on office premises etc is indirect. Insurance paid on the life of a partner is a drawing & not an expense of the firm.

Methods of Presenting the Final Accounts 1. Horizontal Form 2. Vertical Form Vertical Format of Profit & Loss Account Particulars A Sales Less returns B Cost of Goods Sold Opening Stock Add-Purchases Less Returns Add. Direct Expenses - Carriage, Wages & Salaries COGS available for sale Less Closing Stock Rs.

Particulars C Gross Profit (A - B) D Operating Expenses Carriage outward Discount Allowed Commission Allowed Traveling Expenses Bad Debts Rent, Rates & Taxes Salaries & Wages Depreciation E Operating Profit/Loss


Particulars F Non-operating Results a) Interest earned Discount earned Misc. Income b) Non-operating expenses Interest paid Loss on Sale of a fixed asset Net Profit


Vertical Form of Balance Sheet

Source of Funds Shareholders Funds Long Term Debts Application of Funds Current Assets Cash in hand Cash in Bank Bills Receivables Debtors Stock Prepaid Expense Current Liabilities Bills Payable Creditors


Income recd. In advance Investments Fixed Assets Furniture & Fixtures Plant and Machinery Building Land Goodwill


Closing Stock For Outstanding Expenses

For Prepaid Expenses of the Business

For the Depreciation on Assets

Interest on Capital
Interest on Drawings For Bad Debts For Provision for Bad and Doubtful Debts