CHAPTER

Final Accounts and Concept of Trading

ACcOunt, Protit & LossAccount and
Balance Sheet (Without Adjustments),
Marshalling of Balance Sheet
LEARNING OBJECTIVES
The study of this Chapter would enable students to understand:
Meaning of Final Accounts
O Preparation of Trading Account, Profit & Loss Account and Balance Sheet
O Difference between Trading Account and Profit& Loss Account
O Difference between Gross Profit and Net Profit
O Difference between Balance Sheet and Trial Balance
Grouping and Marshalling of Balance Sheet
Difference between Order of Permanence and Order of Liquidity
Classification of Assets and Liabilities
FINAL AcCOUNTSs
Meaning
After the Trial Balance is prepared, next step in the accounting process is preparation of Final
Accounts, which include:
1.
Trading Account and Profit & Loss Account; and
2. Balance Sheet.

Trading Account and Profit & Loss Account shows the financial performance, i.e., profit earmed
OsS incurred by an enterprise during the accounting period and Balance Sheet shows the
nnancial position of an enterprise on the date it is prepared. They are collectively called Final
ACcounts or Financial Statements.
wo broad
objectives of preparing final accounts are
4) to ascertain net
profit or net loss; and
() to ascertain the financial
position.
TRADING ACCOUNT
Meaning
An t prepared tnormally at year end) to determine gross profit or gross loss for the accounting period.
t stage in the process of preparing the Final Accounts is preparing Trading Account.
iodared to determine gross profit earned or gross loss incurred during the accounting
period, normally a
year.
 Double Entry Book Keeping-Isc
19.2
Account and Revenue istransk
are transferred to
the debit of Trading
Direct Expenses sides is either Gross Profit or
or ofit Groeeto
Gross
account. Difference in total of two Los
the credit of the
Net Sales and Direct Expensao
Revenue means
Revenue from Operating Activities, i.e., Sales.
xpenses .

means
to earn the revenue, i.e., Cost of Goods Sold or Cost of
cost incurred
and Cost of God
betrween Net Sales (i.e., Sales Sales Return)
-

Gross profit or gross loss is the difference

than the Cost of Goods Sold, gross profit earned. tf the
is
If the amount of Net Sales is more incurred.
amount of Cost of Goods Sold is more
than Net Sales, gross loss is
total of opening stock, purchases (net), diro.
Direct Expenses or Cost of Goods Sold is the sum irect
or manufacturing the goods
less closing stock. Thus,
expenses purchasing
on
Cost of Goods Sold = Opening Stock+ Purchases (Net)+ Direct Expenses - Closing Stoc

Purpose of the Trading Account

or gross loSs during the accountino
Trading Account is prepared to determine gross profit
when revenue from sale of goods and
period. It is based on Matching Concept, hence services rendered are also recognised
services is recognised related cost of goods sold and/or

Features of Trading Account

1. It is the first stage in preparing the final
accounts.

2. It shows net sales and cost of goods sold.

loss.
3. Balance of the account is either gross profit or gross
the Profit & Loss Account.
4. The balance of the account is transferred to
5. It is a Nominal Account.

Contents or Items of Trading Account

Entries (Items) shown on the Debit Side of the Trading Account:
stock or inventory of the previous year, which
i) Opening Stock or Inventory. It is the closing Balane
is shown as Opening Stock by passing an opening entry. Thus, it is shown in the debit
as a first entry (item) on
the
Sheet of the previous year as closing stock. It is placed
side of the Trading Account. Of course, in the first year of a business there will be no

stock or inventory is offinisheu

opening stock or inventory. Inthe case of trader, opening
a

the opening stock or inventory is of raw matertals

goods. For a manufacturing concern,
work-in-progress and finished goods.
Purchases and Purchases Return. Purchases means materials purchased for manufactug
(ii) andlor gods purchased for resale. Purchases Account has a debit balance, showing the gr
amount of purchases, both cash and credit purchases of goods.
Purchases Return Account has a credit balance which means return of materials purcna
for manufacturing and/or goods purchased for resale to the sellers from whom they with
below
purchased. On the debit side of the Trading Account, net amount is shown
as

imaginary figures):

To Purchases 3,00,000
2,90,000
Less: Purchases Retun 10,000
Besides the purchases return, amount of goods taken by the proprietor for his perso
goods given as charity and goods given as samples are also deducted from purchases gainst

GST Paid (Input GST) on purchases is not debited to Purchases Account, as it is set-ohalan
GST Collected (Output GST) on sales. These accounts are separately maintained ana v

after setting ot,

it any, is shown in the Balance Sheet.
Final
Acca ounts and Concept of Trading Account.. 19.3

is purchased are returned to the seller, GST Paid on purchases of those goods is
the goods purchased

w/he
reversed.for
When.
example, if goods are returned on which IGST was paid at the time of purchase,
For example,
CST
GST Account is credited with the amount of IGST Paid on returned goods.
discusssome issues relating to Purchases for more clarity.
L e tu

Purchases
includes both cash and credit purchases.
1. Durchases means goodsjpurchased for the purpose of resale or for manufacturing ofgoods.
2. Pun
Purchase of assets being not goods are shown in the Balance Sheet.
goods. It, along
Cods taken by the proprietor for personal use is Drawing and not a sale of and credited to
t h the amount of GST on these goods, is debited to Drawings Account GST Account. It
of GST is credited to respective Input
The amount
Purchases Accoune'.
means purchases are shown at net value, i.e., Purchases less Drawings.
of goods. It, along
sale with the amount of GST on these
Goodsgiven as charity 1S also not
a
5
Account and credited to 'Purchases Account. The
goods, is debited credited to Charity
to Donation or
are shown at
amount of GST is respective Input GST Account. Thus, purchases
Purchases less Donation or Charity.
net value, i.e.,
since it is given for promotion of the goods. It,
6. Goods given as Samples is also not a sale of goods Account'
of GST on these goods, is debited to 'Sales Promotion Expenses
along with the amount GST
The amount of GST is credited to respective Input
and credited to Purchàses Account'.
Thus, purchases are shown at net value, i.e.,
Purchases less Sales Promotion Expenses.
Acount.
debited
in transit, they are recorded. The amount is
7. If goods purchased are
Account. The entry passed is:
to 'Goods-in-Transit Account' and credited to Seller's
Goods-in-Transit A/c ..Dr.
To Seller's or Supplier's A/c
Account' is shown on the assets side as part of closing
In the Balance Sheet, 'Goods-in-Transit
side. Trading Account remains unaffected by
stock and Seller's Account on the liabilities
such purchases.
On receipt of goods, the entry passed is:
.Dr.
Purchases A/c
To Goods-in-Transit A/c
8. Purchases are shown in the Trading Account as follows:
Purchases
Less: Purchases Retum
Drawings
Donation/Charity
Sales Promotion (Samples)
***

Add: Goods in Transit

Net Purchase
also Closing Stock
given in the Trial BalanceOpening Stock and
means
4justed Purchases the following Journal
entries:
lave been
adjusted in Purchases Account by passing
) For Adjustment of Opening Stock:
..Dr.
Adjusted Purchases A/c
To Opening Stock A/c
(i) For Adjustment of Closing Stock:
..Dr.
Closing Stock A/c
To Adjusted Purchases A/c
 19.4 Double Entry Book
As a result of above adjustment entries, Adjusted Purchases Account ana Keeping-iSC
will appear in the Trial Balance. The amount of Adjusted Purchases Accoe
debit side of the
unt
Trading Account and the amount of Closing Stock is shown on
on the
the assets
Closing St
hoo Stonot the
Balance Sheet.
side of
te
It should be noted that neither Opening Stock nor Closing Stock would
appear in Trade
as these are already adjusted in Purchase Account. rading Accom
Adjusted Purchases = Net Purchases (i.e., Purchases less Purchases Retun
+ Opening Stock - Closing Stock

) Direct Expenses. Direct Expenses, are the expenses incurred on the

they brought
are tothe place of business for sale. pureh.
goods
Examples of such
inwards, insurance, customs (import) duty, dlearing charges, etc. expenses a
In a manufac
business, besides the above, expenses incurred for purposes of
production such as
power and fuel, factory rent, etc., are also Direct Expenses.
Let us discuss below few direct
expenses individually that are debited to Trading
Acrcoe
(a) Carriage or Freight
or
Cartage Inwards. It is the expense incurred in bringing goodCount
materials to the firm's godown. It being a direct is
expense transferred to
Freight or carriage paid on any asset, say machinery, is added to the costTrading Actoum
of the asset.
(b) Wages, Wages paid or payable to workers in the factory,
transferred to Trading Account. If wages are including stores a
it is added to the cost of the asset.
paid for making or installing an ase
Salary is an indirect expense and is transferred to Profit & Loss Account. In case
Wages and Salaries are shown as a single amount as 'Wages and Salaries Account
it is presumed to be direct
expense and transferred to Trading Account. In case, it
is showrn as 'Salaries and
Wages Account' it is presumed to be indirect expense ani
transferred to Profit & Loss Account.
(c) Power and Fuel. Power and Fuel
expenses are incurred for running the machin
hence are direct expenses. They are transferred to
Trading Account.
d) Consumable Stores. These are used in
production to keep the machines in wo
condition and include engine oil, cotton waste, soft
soap, oil and grease consul
in a factory.
Stores consumed during the year Opening Balance of Stores+Purchases Wet)of
=

Stores
Stores during the year-ClosingBalanceot
Entries (Items) shown on the Credit Side of the Trading Account:
G) Sales and Sales Return. Sales Acount has a credit ofthe
balance, showing total sai the
goods during the year. Sales Return Account has a debit balance, showing
amount of goods returned by customers. Net
toard
sales, i.e., Sales Sales Return i5 tta
-

on the credit side of the

Trading Account.
Let us discuss some issues
relating to sales for more clarity. t s a l e

1. Sales means sale of goods dealt in by the firm. It includes both cash and
h e ya t

2. Sale of fixed assets

(say building) is not credited to Sales Account because
fixed assets and are not held for resale.
3. Sales Return means return of goods sold.
mal Aceous, Hd Concept of
Trading Account .. 19.5

Sales is shown in the inner column from which Sales Return is deducted and he
4. Gross Sales

et SSales) is shown in the outer column as follows:

balance(Net

Sales
Less: Sales Return

It means stock of unsold goods at the end of the accounting

e Stock or Inventory.
I n trading enterprise,
p e r i o d .I n t r a d i n
it includes only finished goods. In manufacturing concern
and finished goods. Closing Stock or
it
include raw materials, semi-finished goods
m a yi n c h u d e

the Trial Balance.

rmally is given as an additional information, i.e., outside
ntorynorm
is assed to incorporate the closing stock in the books:
lowing entry
Follo
Closing Stock A/c .Dr.

To Trading A/c
is shown on the credit side of the Trading
stock or inventory
Ac a Tesult the closing Balance Sheet.
also on the assets side of the
Account and been adjusted by
Trial Balance, means that it has already
losing Stock, if shown the in Account by passing
Stock Account and crediting Adjusted Purchases
debiting Closing
the following entry:
Closing Stock A/c
..Dr.
To Adjusted Purchases A/c and
Account, is reduced
is that the debit balance in the Purchases
The effect of this entry the Trading Account. It will be shown
in the
Stock is not shown in
the amount of Closing shown on the assets of side the Balance Sheet.
the Closing Stock will be
Trial Balance and also adjusted to Adjusted
of Closing Stock, Opening Stock is
Along with the adjustment Stock are shown
Purchases Account and Closing
Account. As a result, Adjusted
Purchases
in the Trial Balance. Inventory is valued
Principle, Closing Stock
or
(Conservatism) an article
to the Prudence whicheveris lower. For example,
According
value (market value), will be
atits cost or netrealisable this article is not sold up to the end of the year, its value
is purchased for F 1,000.
If time Net Realisable
m o r e than 7 1,000.
But, if at that
1,000, even if its sales value is it will be valued
at 7 950.
this article is 950,
Value (Market Price) of

Preparation of Trading Account or gross

loss. Preparation of a Trading
to determine gross profit (discussed above)
to
ding Account is prepared balances of accounts of all direct expenses the entries
unt requires transferring Entries as after recording
as Closing
entries are known
rading Acount. These
tese accounts are closed.
efect of such
transfer of balances:
to give
g Closing entries are passed
) For the Entries (Items) of Debit Side ...Dr.
Trading A/c
A/c
To Opening Stock
To Purchases A/c
(Net)
A/c
To Direct Expenses

0 For the Entries (ltems) of Credit Side: .Dr.

Sales A/c (Net) .Dr.

Closing Stock A/c

To Trading Alc
 19.6 Double Entry Book
(ii) For Gross Profit:
Trading A/Vc ...Dr.
Keeping-18C
Keepino
Fin

To Profit & Loss A/c 5olL

(iv) For Gross Loss: D

Profit&Loss A/c .Dr. part
To Trading A/c
To
Balancing of Trading Account
o
Gross Profit or Gross Loss. After recording the above entries on the respective sid.. To
Trading Account, the two sides are totalled and balanced. The balance is Gross Proks e To
of credit side is
bigger) or Gross Loss (if total of debit side is bigger). To
Gross Profit is transferred to the credit side and Gross Loss is transferred to the
debit
the Profit & Loss Account. side of
e

Format of a Trading Account (With Opening Stock, Purchases and Closing Stock Ill
Dr. Pre
TRADING ACcOUNT for the year ended .
Particulars
|Particulars Stoc

To Opening Stock | By Sales Sale

To Purchases Less: Returns Inward
Less: Returns Outward
Sale
By Closing Stock Wag
To Wages and Salaries By Gross Loss c/d*
To Freight Inwards Purc
(Transferred to Profit &Loss A/c)
To Carriage/Carriage Inwards Purc
To Gross Profit c/d* Carr
***

(Transferred to Profit& Loss A/c) Carr

Freie
Sala
Format of a Trading Account (With Adjusted Purchases) Cl
Dr. TRADING ACCOUNT for the year ended..
Dr.
Particulars Particulars
To Adjusted Purchases A/c By Sales
To Wages and Salaries Less: Sales Return/Returns Inward
To Freight Inwards By Gross Loss*
To Carriage Inwards (Transferred to Profit &Loss A/c)
To Gross Proft* (Transferred to Profit &Loss A/c)

Either Gross Profit or Gross Loss will appear.

Illustration 1. No
Prepare Trading Account for the year ended 31st March, 2022 from the following balane

00000 Fr
Stock on 1st April, 2021 10,000 Purchases J500

Wages 5,000 Carriage Inwards

Sales
Returns Outward
1,55,000| Returns Inward
8,000
Freight Inwards 500 its
Closing Stock as on 31st March, 2022 was valued at cost, i.e., 7 20,000.
gmal
Acconis
and
ts and Concept of Trading Account. 19.7
Solution
TRADING ACCOUNT for the year ended 31st
March, 2022 Cr
Parthculars Particulars
o Opening
Stock 10,000 By Sales 1,55,000
1,00,000 Less: Returns Inward 1,50,000
o Purchases
5,000
e s s Returns Outward
8,000 92,000 By Closing Stock 20,000
5,000
o Wages
T o C a r m i a g eI n w a r d s
3,500
o FreightInwards S00
Gross
Proftcdd 59,000
To to Profit &Loss A/c)
(Tansfered
1,70,000 1,70,000
llustration 2.
nare Trading Account for the year ended 31st March, 2022 from the following balances:
Prepar
2021.. 10,000
Stockon 1st April, ****o*see*e*esosnse***************s****esseeseseee*****0seeeesesea**s*oeonsssstsseseeseo*sesesesseseoenres****s000oes*s*******
5,000
Sales Return.. ***essaaseao*asesenasess*******nsas*sbesssssrssa**********eassaseseapasesssassonssse esseessenasssesesssaaeeseosesss****os*
s**aaeenesae**snesssssese*eeeeeeeadeo*********oo******anansss*sesssaseees**eesessssseeaeseneoesseaeesssssssosessesvsosssesese*ssssosssseeessseasesenesesseasessassa**aas*a********
2,00,000
Sales
0eS....urnuesseonsessrseeeeepoossos****e*eo*** **************************a**s*o*0*s**************d*******s*sseoeesesssne***s**osssesssasseeesoescesoess*ea****s*****************
11,000
age
Purchases.. ooeesseneeesee*e*eeeseeesee**eooseeee*seeneces**************seanseeenseerssssseasodesengeeeesoeseeoe nsonasesseescooenevosescsssos**s*seoeeusse**ssoos************ 2,00,000
Purchases Return.
loseo*s*t00deeonoededdetseeaesese***********************************************************t****sss0*nsssg*ssssssese******s4ceoo*oseessses0*s*seaeseesosse*********s***************** 2,500
Carriage Inwards..
ssnseneeepesosesose**sseoseseseseseosssoessssessssesssessosssnssesesessossesssmmeessensosersesesenesseeesoreseesesssaressesee*onosessss*sssseseess*seseneoes*********o********* 1,500
Cariage Outwards. ssseoseueeiss0eosoee*ssesneseeeesseepste*etseeneepe*s**essse***esnese**neeessesssssessseen*s4ssaseeeseesseosseeeeseoseroe*seetseeoee****************************a*s*s****e*** 3,000
Freight Inwards.
uS .**esssooreseseressssssssossesososenseesseesssesssssessussessoasssossesseeasossssasaessssesessaeosesensseeassosnsonesosspeedaan*aeesaesssneossssaaea************************e** 2,500
Salarnes. m
a*sssesssess*sosssrpaseoasspesansss*s*stesnse*******************e**eseeeeen******************************************************s*****s*esa**ssessossa*s*****ssse*sosssessn******************************* 10,000
Closing Stock of goods as on 31st March, 2022 is R20,000.
Solution: TRADING ACcOUNT
. for the year ended 31st March, 2022 Cr
Particulars Particulars
To Opening Stock 10,000 By Sales 2,00,000
To Purchases
2,00,000 Less: Sales Return 5,000 1,95,000
Les: Purchases Return 2,500 1,97,500 By ClosingStock 20,000
To Wages 11,000 By Gross Loss cld 7,500
To Carriage Inwards (Transferred to Profit &Loss A/c)
1,500
To Freight Inwards
2,500
2,22,500 2,22,500
Larrlage Outwards and Salaries, being indirect expenses, will be debited to Proñt & Loss Account.
Wustration 3.
tronh e following information, prepare Trading Account for the year ended 31st March, 2022:
Cash
urchases 1,50,000; Credit Purchases9,00,000; Returns Inward 20,000; Cash Sales
Ih 1,60,000; Credit S
Credit Sales 11,00,000; Returns Outward 10,000; Freight Inwards73,00 Carriage
00; Carriage
its3,000;Wages and Salaries 4,00; Opening Stock 1,50,000; Closing Stock 8,00o,
its net
realisable value market value) is 84,000.
FinalAccountsa n oncept of Trading Account .
can be calculated as 19.11
Alternativel Sales follows:
alesbe
100; Gross Profit =7 20; Cost=7
100- 20-7 80
L e t
t h eS a l e s
Gross Profit on Sales 20_1
=
1 0 0 5 , or .
Gross Profit on Cost = 20 1
80 4
Gross Profit on Cost -
7
3,06,600x =7 76,650
Sales Cost of
Goods Sold
Gross Profit
+
3,06,600 + 76,650 =7 3,83,250.
objectives or Advantages of Trading Account
me objectives of preparing Trading Account are:
,Trading Account gives intormation about gross profit.
Ratio of gross profit to sales can help the trader to
compare his performance year after
Ratio of direct expenses to sales will help the trader to year.
ensure that
the expenses are controlled.
Ratio of cost of goods sold to sales can help the trader in
fixing the price of his products.
PROFIT & LOSS ACcOUNT
Meaning
An account
prepared (normally at the year end) to determine net profit or net loss.
Profit & Loss Account is
or net loss for the
prepared after preparing the Trading Account to determine net profit
accounting period.
Indirect expenses and indirect incomes are transferred to
Profit & Loss Account.
TOnt & Loss
Account starts with either Gross Profit
credit side or (transferred from Trading Account) in the
Gross Loss (transferred from the
Trading Account) in the debit side. Thereafter,
texpenses or losses for the current year are transferred to Profit & Loss Acount.
t
aufferently, expenses and losses which are not transferred to the Trading Account
ransferred to the debit side of Profit & Loss Account. Indirect
expenses are administrative
S,Selling and distribution expenses such as salaries, postage, stationery, depreciation,
Pala, carriage outwards, etc. Losses include entries like loss by fire, loss by theft, etc.
Incomes and
the credit of gains being not from operating activities for the current year are transterred to
gain (profit) Profit& Loss Account. Incomes and gains may be cash discount, interest earned,
Accoun
on sale of fixed
assets, etc.
The differen
iss highere of two sides of the account is either net profit or net loss. If total of the credit side
higher than the total of debit side, difference is net profit. In situation, the difference
will
will bebean
net
a reverse
Sloss.
proprietor.
This difference (i.e., net profit net loss) is transferred to Capital Account of
.Net pro increases
or
profit the capital while net loss decreases it.
 Double Entry Book
19.12
Keeping ISC
Features of Profit & Loss Account
1. It is the second stage in the preparation of the final accounts.
2. It relates to a particular accounting period and is prepared at the end of that perias
3. Accrual Basis of Accounting is followed in preparing the
4. It is credited with the gross profit and income from other sources and debited
expenses and losses.
ited with
with in.indireg
5. The balance of this account is Net Profit (if total of credit side is bigger) or Net Loss fi ,
of debit side is bigger).
6. Capital of the owner is increased or decreased by the Net Profit or Net Loss.
Format of Profit & Loss Account
PROFIT& LOSS ACCOUNT
Dr. for the year ended 3 1st March, 2022
Particulars Particulars
To Gross Loss* transferred from Trading A/c By Gross Profit transferredfrom Trading A/c
To Advertisement By Bad Debts Recovered
To Audit Fees By Discount Received
To Bad Debts By Dividends on Shares
To Bank Charges By Income from Investment
To Business Promotion Expenses By Interest Received
To Car Running and Maintenance Expenses By Rent Received
To Charity/Donation By Miscellaneous Incomes
To Commission By Net Losst transferred to Capital A/c
To Conveyance
To Depreciation
To Discount Allowed
To Electricity Expenses
To Freight and Carriage Outwards
To General Expenses
To Insurance Premium
To Interest
To Loss by Fire/Theft
To Office Expenses
To Postage
To Rent Paid
To Repairs
To Salaries
To Stationery and Printing
To Telephone Expenses
To Travelling Expenses
A/c
To Net Profit* transferred to Capital
*Either of the two shall appear.
 Accounts
andiConcept of Trading Account.. 19.13
Final
Importance of Profit & Loss Account
N e e da n d
d and
Profit &
. LOSs Account is prepared with the following objectives:
Loss.
a i t Net Profit or Net Loss. Profit & Loss Account shows the net profit earned or net
1. A:
loss incurred by the business during the accounting period.
Comparison with the Previous Year's Profit. Profit determined by the Profit & Loss
2.
Account for the accounting period can be compared with that of the previous
vear's profit. It helps in ascertaining whether the business is being conducted
efficiently o r n o t .
Help in Preparing the Balance Sheet. Balance Sheet shows capital at the end of the year.
Net profit is added to the opening capital. If there is a loss, it is deducted from the opening
capital. It is a link between two consecutive Balance Sheets.
4. Maintaining Reserves. To meet future uncertainties and to strengthen financial position
of the firm, Reserves àre set aside out of profits. The amount of reserves depends upon
net profit earned.
5. Calculation of Accounting Ratios. For financial analysis, several ratios are calculated
with the help of information/data provided in the Profit & Loss Account. For example,
Net Profit Ratio, Operating Ratio, Return on Capital Employed, etc.
Entries (Items) of Profft & Loss Account
Indirect expenses and losses are transferred to debit of Profit & Loss Account and Indirect
incomes are transferred to the credit of Profit & Loss Account.
Examples of Indirect expenses are:
Salaries, Salaries and Wages, Office rent, Electricity, Printing and Stationery, Postage, Telephone
charges, General expenses, Commission, Advertising, Freight and Carriage on sales, Insurance,
Bad Debts, Interest on Loan and Cash Discount allowed.
Examples of Indirect Incomes are:
Lommission, Gain (Profit) on Sale of fixed assets, Interest earned, rent earned and Cash
discount received.
rence between Trading Account and Profit & Loss Account
Basis Trading Account Proft&Loss Account
1. Purpose
Trading Account is prepared to ascertain Gross Profit& Loss Account is prepared to determine
2. Profit or Gross Loss. net proft or netloss of the business.
Transfer of Balance Balance of Trading Account is transferred to Balance of Profit &Loss Accountistransferred
the Profit& Loss Account. to Capital Account of the proprietor.
3. Items
Items shown in the Trading Account are Items like indirect expenses related to sales,
purchases, sales, stock, direct expenses, etc. distribution, administration, finance, etc, are
shown in the Profit &Loss Account.
 19.14
Double Entry Book
Keepino-
Explanation Regarding Certain Entries (ltems) of Profit & Loss
Account SCXI
(i)
Salary. Salary is an indirect If the Trial Balance has
expense. a head of ao
'Salaries and Wages Account' it is taken as an indirect account
expense and is transfer
Profit& Loss Account. An account titled 'Wages and
expense and transferred to the Trading Account.
Salaries Account' is taken
taken as aditeg
(i) Depreciation. Depreciation is a decrease in the book value of an asset
due to wear.
use or efflux of time. It is a business
expense and is debited to Profit & Loss A
iii) Discount. Discount Allowed Account and Discount Received
Account (other than Account.
Discount) are transferred separately on the debit side and credit side of the
ACcount Profede
respectively. It should be noted that Trade Discount is not shown separatel
ispart of purchases or sales, i.e., purchases and sales are recorded at net ely b
iv) Loss of Goods by Fire or amount
Theft or Damage. Loss of goods by fire or theft or damaca
loss to the business. It is transferred to the debit of Profit & Loss Account. Be isa
Ifthe goods are insured, Insurance Company is debited and if the goods are not
Loss of Goods insi. sured
by Fire or Theft or Damage Account is debited.
(v) Insurance. Generally, assets are insured to cover the
risk,of loss. Insurance premium
an
expense and debited to Profit & Loss Account.
(vi) Bad Debts and Bad Debts Recovered. When a debtor does not the
pay due amount, ia.
the amount becomes irrecoverable, it is a bad debt. It is a loss to the
firm. Therefore
Bad Debts Account is debited, which
later is transferred (posted) to the debit side
in
Profit & Loss Account.
If later the amount is recovered, it is a
gain (profit), it is not credited to the party paying
it, it is credited to Bad Debts Recovered Account. It is transferred to the credit side in
Profit & Loss Account.
Closing Entries in respect of the Profit & Loss Account. Entries passed in the Journal for
transferring direct expenses and revenues to Trading Account and indirect expenses and
incomes to Profit & Loss Account, are known as Closing Entries. To complete the Profit &los
Account, following closing entries are passed:
(a) For transferring indirect expenses, the entry is:
Profit &Loss A/c .Dr.
To Salaries A/c
To Rent A/c
To Interest A/c
(b) For transferring indirect incomes, the entry is:
Discount Received A/c ..Dr.
Interest Received A/c ...Dr.
Miscellaneous Income A/c ...Dr.
To Profit & Loss A/e
The above two entries close all the nominal accounts or Incomes and Expenses accounts
sterred
(c)At this stage, Profit & Loss Account shows either net profit or net loss. Both are transe
to the Capital Account.
In case of net profit, i.e., when the credit side is bigger than the debit side, the entsy iS
Profit &Loss A/c .Dr.
To Capital A/c
 NIS.

i n a t
A c c o u m
U) 1rading Account..

tis meant by Current Assets?

2
19.33
meant.
by Current Liabilities?
hatis
fouri of
List items Current Assetsaand
12 hort note on
two items of Current
3Wri Liabilities.
Contingent Liability
14 Explainthe
the term fixed assets
olain
a
thef assets in order of
List
5 re, Investments, Cash in Handliquidity: Sundry Debtors,
andCash at Bank. Stock, Land and
assets in Q15 in
order of
st the
permanence.
ncina Stock and the Cost
Building, Plant and Machinery,
Calcula of Goods
kT Sold from the
Opening 5,000; Sales T16,000;
Purchasesi
following information:
Carriage Inwards 1,000;
900.
10,000: and Purchases Return Sales Return7
18 CalculateGross Profit and Cost of 1,000; Gross Profit
Net Sales
Goods Sold from the 6,000
R1,00,000 following
Gross Proft 25% on cost. information
19.
termine Cost of Good Sold from the
Opening Stock following:
Purchases 8,500
Direct Expenses 30,700
Indirect Expenses 4,800
Closing Stock 5,200
Enlowing information of an accounting 9,000
added during the year is given: Opening
year 10,000 and Closing Capital 60,000; Drawings 5,000; Capital
Capital 90,000. Calculate Profit or Loss
21. Annual sales of a business were as under: for the year.
Cash Sales
Credit Sales 35,000
Cost of 40,000
Goods Sold (including all direct
expenses) works out at F
on
amounted to 6,700. Find out his Net Profit. 52,000. Expenses incurred
sales
2. Cash sales of a business in a year were 29,000 and
credit R 31,000.
direct expenses) works out at 52,000. Find out the Grosssales The cost of goods sold (including
Profit.
3. Calculate
Closing Stock from the following: Opening
Wages 7,000; Sales 60,000; Gross Stock 36,000; Net Purchases 45,000; Salaries and
24. Calculate value of Loss 4,000; Freight Inwards 6,000
Opening Stock from the following:
Cash Sales
40,000 Credit Sales
Sales Return (Out of
Credit Sales) 1,65,000
Purchases Return 5,000 Purchases 1,24,000
4,000 Carriage Inwards 8,000
Closing Stock 36,000 Rate of Gross Proft 40% on Sales

PRACTICAL PROBLEMS
Preparation of Trading Account
1.
Prepare Trading count from the transactions given below:

Opening Stock 23,000 Purchases Return 2,400

Purchases 29,000 Closing Stock 47,700
Sales Return 500 CarriageInwards 100
Sales
25,400 Depreciation 2,000
19.34 Double Entry Book Keeping-IsC XI

2. Determine Gross Profit from the following:

Opening Stock 20,000 Carriage on Sales 3,000

Closing Stock 18,000 Office Rent 5,800
85,000 Sales 1,40,700
Purchases
Carriage on Purchases 2,300
Account for the year ended 31st March, 2022:
3. From the following information, prepare Trading

Stock on 1st April, 2021 40,000 Returns Outward 80,000

4,00,000 Wages and Salaries 50,000
Purchases
3,80,000 ReturnsInward 20,000
Sales
Carriage Inwards 20,000 Stock on 31st March, 2022 1,30,000
Net Realisable Value or Market Value ofstock as on 31st March, 2022 was T 1,20,000.
for the year ended 31st
March, 2022:
4. From the following information, prepare Trading Account
50,400; Freight and Carriage Inwards
Adjusted Purchases 6,60,000; Sales 7,44,000; Closing Stock
3,600; Wages T6,000; Freight and Cartage utwards 2,000.
Preparation of Profit& Loss Account
5. From the following information, prepare Profit &Loss
Account ofSohan for the year ended on 31st March, 2022
3,000 Advertising 1,000
Salaries and Wages
Commission Paid 200 Discount Allowed 1,800
150 Rent Received 1,700
Postage 300 Interest on Investment 1,500
Insurance
400 Bad Debts 900
Interest Paid
500 BrokeragePaid 95
Carriage Outwards
The Gross Profit was 45% which amounted to 65,000.
ofsales,
2022 from the following information:
6. Prepare Profit &Loss Account for the year ended 31st March,

12,00,000| Discount Received 60,000

Gross Proft
40,000
Rent 50,000 Printing and Stationery
3,50,000 Legal Charges 1,00,000
Salary 20,000
Commission Paid 1,90,000 Bad Debts
50,000 Loss by Fire 60,000
Interest on Loan
40,000
Advertisement 80,000 Depreciation
Interest Received 80,000 Bad Debts Recovered 10,000

Preparation of Balance Sheet

7. From the following information, prepare Balance Sheet as at 31st March, 2022:
Dr. ) Cr.
Capital 40,000
Drawings 4,400
Debtors 6,400
Creditors 4,200
Cash in Hand 360
Cash at Bank 7,200
Plant 10,000
Furniture 3,700
Net Profit 1,660
General Reserve 1 000
Closing Stock **
14,800
46,860 46,860