Final Accounts of Sole Proprietor

Final accounts will give the answers to

following questions:
• Result of 365 days of business activities.
• Whether working is good or bad?
• Whether he has made a profit or loss?
• How to improve the profit or reduce the
losses?
• What are his assets?
• How much he owes to outsiders?
To answer the above
questions: Every
businessman prepares
Financial Statements.
 1) Trading Account : to know the
gross profit / gross loss for the
year

Financial 2) Profit and Loss Account: to

know the net profit/ net loss for
Statements the year

3) Balance Sheet: to know the

financial position of the business.
 1) To ascertain gross profit or gross loss and net profit or net loss
as a result of business done in the accounting year.

2) To check arithmetical accuracy of the business and to detect

Utility of fraud.

Final
3) To know the standing financial position of the business, I.e.
total assets owned by the business and total liabilities payable by
the business.

Accounts 4) To know how much tax is payable to the government on the

profits.

5) Final accounts needs to be submitted to bankers from whom

loans are taken.
Elements of Financial
Statements
1) Relating to measurement of Financial Position
A) Asset
B) Liability
C) Equity
2) Relating to measurement of Profit
A) Income
B) Expenses
Process of Preparing
Final Accounts
Trading Account

In other words, it explains

Trading account gives the
whether purchasing of
overall result of trading I.e.
goods and selling them has
purchasing and selling of
proved to be profitable for
goods.
the business or not.
 Gross Profit = Sales – Cost of Goods Sold
(COGS)

Equation for
COGS = Opening Stock + Purchases +
Direct Expenses – Closing Stock

preparing Trading Gross Profit = Sales - (Opening Stock +

Purchases + Direct Expenses - Closing Stock)

Account OR

Gross Profit = (Sales+ Closing Stock) - (Opening

Stock + Purchases + Direct Expenses)
 Trading Account
for the period ending..........
Dr. Cr.

Particulars Amount Particulars Amount

To Opening Stock ----- By Sales _________ -----

Less: Returns _______
To Purchases ________ ----- By Closing Stock -----
Less: Returns ________
To Direct Expenses ----- By Gross Loss* -----

To Gross Profit* -----

* Only one figure will be there

 Stock: Opening Stock & Closing Stock

Opening Stock: Goods lying unsold with the businessman in the beginning of

Important the accounting period.

Points
Closing Stock: Goods lying unsold with the businessman at the end of the accounting
year.

regarding
Note: The Closing stock is taken after the books of accounts have been closed and
the entry is passed in the Journal Proper to record the amount of closing stock.

Trading
Closing Stock A/c Dr.

Account
To Trading Account

Closing Stock is shown in the credit side of the Trading account and as an asset in
the Balance Sheet. Valuation of Closing Stock is done on the basis of "Cost or Market
Price whichever is less.
 Purchases: It includes both Cash and Credit purchase of
goods.

Goods here means items purchased for resale.

Important Points regarding

Trading Account
Assets purchased for permanent use in the business
such as plant and machinery, Furniture etc. Not be
included in the purchase of goods

Purchase of articles such as Stationery meant for using

in the business will not be included in the purchase of
goods.
Special entries with regards to Goods purchased

Condition –1 Goods withdrawn for personal use

Condition – 2 Goods lost by fire
Condition – 3 Goods Lost by Theft
Condition – 4 Goods distributed as free sample

Entries for the above conditions will be-

Drawings/ Loss by Fire/ Loss by theft/ Advertisement A/c Dr.
To Purchase A/c
Important Points regarding Trading Account

DIRECT EXPENSES 1) WAGES 2) CUSTOMS AND 3) FRIEGHT 4) ROYALTY 5) GAS, 6) PACKING

IMPORT DUTY CHARGES, ELECTRICITY, MATERIAL
CARRIAGE AND WATER, FUEL ETC.
CARTAGE
 Closing Entries: are entries passed at the end of
the accounting year to close different accounts.

These entries are passed to close the accounts

relating to Incomes, Expenses, Gains and Losses.
Important Points regarding
Trading Account
The accounts relating to assets and liabilities are
not closed but they are carried forward to the next
year.

The closing entries are passed in Journal Proper.

Closing entries for preparing a Trading Account
Trading Account Dr.
To Stock Account (Opening)
To Purchase Account
To Sales Return Account
To Carraige Account
To Custom Duty Account
Sales Account Dr.
Purchase Returns Account Dr.
Stock Account (Closing) Dr.
To Trading Account
From the following information, Prepare the Trading Account for
the year ending 31st March 2021
Particulars Amount Particulars Amount
Opening Stock 150000 Cash Sales 60000
Credit Sales 1200000 Return Outwards 10000
Wages & Salaries 4000 Carriage Inward 2000
Freight Inward 3000 Cartage Inwards 1000
Cash Purchases 50000 Credit Purchase 1000000
Returns Inward 20000 Closing Stock 84000
 All Operating Expenses and Operating Income, Non-Operating Expenses and Non-
Operating Income which are Indirect in nature are considered under Profit & Loss
A/c.

Profit
Operating Expenses can further be classified as Office & Administration Expenses
(Ex. Salary, Printing & Stationery, Office Rent, General Expenses Etc.), Selling &
Distribution Expenses (Ex. Salesman Salary, Delivery van expenses, Advertisement
etc.), Finance Expenses (Ex. Bad Debts, Interest paid etc,)

and Loss Operating Income: Dividend received; Interest received etc.

Account Non-Operating Expenses: Loss by sale of assets, Loss on sale of Investment etc.

Non-Operating Income: Profit on sale of assets, Profit on sale of Investment etc.

Preparation 1) Bring down the Gross Profit/ Gross Loss

of Profit
and Loss 2) Pass the necessary entries to transfer the
balances of accounts of all the concerned
Account items to Profit & Loss Account. Entries
required for such transfer are called Closing
entries
Accounting Entry to be passed

1) To close the accounts of Indirect revenue expenses and losses

Profit and Loss A/c Dr.
To respective items of expenses and losses A/c

2) To close the accounts of Indirect revenue Incomes and gains

Respective items of Income and gains A/c Dr.
To Profit and Loss A/c
 Profit and Loss Account
for the year ending ….....................
Particulars Amount Particulars Amount
To Gross Loss B/d -- By Gross Profit B/d
To Salaries -- By Discount received --
To Rent -- By Net Loss transferred to Capital A/c --
To Commission --
To Advertisements --
To Bad Debts --
To Discount --
To Net Profit Transferred to Capital Account
 From the following information, Prepare the Profit and Loss
Account of a Trader for the year ending 31st March 2022
Particulars Amount Particulars Amount
Gross Profit 500000 Commission allowed 2000
Salaries & Wages 10000 Commission received 3000
Wages & Salaries 1000 Interest allowed 3000
Carriage Inwards 2000 Interest received 4000
Carriage Outwards 5000 Rent Paid 4000
Freight Inward 3000 Rent received 5000
Freight Outward 5000 Apprenticeship Premium received 5000
Discount allowed 1000 Apprenticeship Premium paid 6000
Discount Received 2000 General Expenses 1000
Dividend received 3000 Miscellaneous Income 3000
Brokerage Allowed 3000
Closure of Profit and Loss Account

The profit and loss account is closed by transferring its balance to the Capital Account of the proprietor by
passing the following entry.

1) In case of Net Profit

Profit and Loss A/c Dr.
To Capital A/c
2) In case of Net Loss
Capital A/c Dr.
To Profit and Loss A/c
 Balance Sheet is a statement of assets and
liabilities of an enterprise at a given date.

Balance
Sheet (or It is called a Balance sheet because it is a sheet
of balances of those ledger accounts which
have not closed till the preparation of the

Position Trading and Profit and Loss Account.

Statement) Balance Sheet has two sides, On the left side ,

the liabilities of the business are shown while
on the right-hand side the assets of
the business appear.
Items of Balance Sheet
 Grouping : Putting together items of
similar nature under common heading

Grouping
and Marshalling: refers to the order in
Marshalling which the various assets and liabilities
are shown in the Balance Sheet.

of Assets &
Liabilities The assets and liabilities can be
shown either in the order of liquidity
or in the order of permanency
 Performa of Balance Sheet
Balance Sheet
As on......................
Liabilities Rs Amount Assets Rs Amount
Shar Capital -- Fixed Assets
Add: Net Profit or Less: Net Loss -- Tangible Fixed Assets (Net Value)
Less: Drawings Gross value --
Long Term Liabilities -- -- Less: Depreciation --
Debentures Net Value -- --
Loans -- Intangible Fixed Assets --
Current Liabilities -- Long Term Investment --
Income Received in Advance Current Assets
Sundry Creditors -- Stock --
Outstanding Expenses -- Accrued Income --
Bills Payable -- Prepaid expenses --
Bank Overdraft -- Debtors --
-- Bills Receivable --
Cash at Bank --
Cash in Hand --
From the following balances extracted from the books of M/s Rajendra Kumar Gupta & Co.
Prepare Trading, Profit and Loss Account and Balance Sheet as on year ending 31st Dec 2021.
(The value of stock on 31st December 2021 was Rs 3700/-)
Particulars Amount Particulars Amount
Opening Stock 1250 Plant and Machinery 6230
Sales 11800 Returns Outwards 1380
Depreciation 667 Cash in Hand 895
Commission (Cr.) 211 Salaries 750
Insurance 380 Debtors 1905
Carraige Inwards 300 Discount (Dr.) 328
Furniture 670 Bills Receivable 2730
Printing Charges 481 Wages 1589
Carraige Outwards 200 Returns Inwards 1659
Capital 9228 Bank Overdraft 4000
Creditors 1780 Purchases 8679
Bills Payable 541 Petty Cash in Hand 47
Bad Debts 180
 Outstanding
Closing Stock Prepaid Expenses
Expenses

Income Received
Outstanding or
in Advance or Depreciation
Accrued Income
Adjustment Unearned Income

Entries Bad Debts

Provision for Bad
Debts
Provision for
discount on
debtors

Provision for
Interest Interest on
discount on
on Capital Drawings
creditors
 Closing Stock
Adjustment Entry Closing Stock
Adjusting Entry to be passed Closing Stock A/c Dr.
To Trading A/c
Treatment in Trading A/c Shown on the Credit Side
Treatment in Balance Sheet Shown in the Assets side as a Current Asset

If Closing Stock already appears in Trial Balance, then no adjusting entry is required. It will be shown
only on the Balance Sheet
Outstanding Expenses
(Expenses incurred but not paid during the current accounting period)

Adjustment Entry Outstanding Expenses

Adjusting Entry to be passed Concerned Expenses A/c Dr.
To Outstanding Expenses A/c
Treatment in Trading A/c (Direct Expense) Added to the concerned expenses on the debit side
Treatment in P & L A/c (Indirect Expense) Added to the concerned expenses on the debit side
Treatment in Balance Sheet Shown in the liabilities side as a Current Liability

If outstanding expenses already appears in Trial Balance, then no adjusting entry is required. It will be
shown only in the Balance Sheet
Prepaid Expenses
(Expenses which have been paid during the current accounting period but the
benefit of which will accrue in the subsequent accounting period or periods)

Adjustment Entry Prepaid Expenses

Adjusting Entry to be passed Prepaid Expenses A/c Dr.
To Respective Expenses A/c
Treatment in Trading A/c (Direct Expense) Deducted from the respective expenses on the debit side
Treatment in P & L A/c (Indirect Expense) Deducted from the respective expenses on the debit side
Treatment in Balance Sheet Shown on the assets side as a Current Asset

If Prepaid expenses already appears in Trial Balance, then no adjusting entry is required. It will be shown
only in the Balance Sheet
Accrued Income
(Income which has been earned but not received during the current
accounting period)

Adjustment Entry Accrued Income

Adjusting Entry to be passed Accrued Income A/c Dr.
To Respective Income A/c
Treatment in P & L A/c Added to the respective Income on the Credit side
Treatment in Balance Sheet Shown on the assets side as a Current Asset

If Accrued Income already appears in Trial Balance, then no adjusting entry is required. It will be shown
only in the Balance Sheet
Unaccrued Income (Unearned Income)
(Income which has been received but not earned during the current accounting
period)

Adjustment Entry Unaccrued Income

Adjusting Entry to be passed Concerned Income A/c Dr.
To Unaccrued Income A/c
Treatment in P & L A/c Deducted from the concerned Income on the Credit side
Treatment in Balance Sheet Shown on the liabilities side as a Current Liability

If Unaccrued Income already appears in Trial Balance, then no adjusting entry is required. It will be shown
only in the Balance Sheet
Depreciation

Adjustment Entry Depreciation

Adjusting Entry to be passed Depreciation A/c Dr.
To Respective Asset A/c
Treatment in P & L A/c Shown on the debit side as a separate item
Treatment in Balance Sheet Shown on the assets side by way of deduction from the
value of respective fixed assets

If Depreciation already appears in Trial Balance, then no adjusting entry is required. It will be shown only in
the Income Statement.
Bad Debt
(Bad Debts refers to a debt which became irrecoverable)

Adjustment Entry Bad Debt

Adjusting Entry to be passed Bad Debts A/c Dr.
To Debtors A/c
Treatment in P & L A/c Shown on the debit side as a separate item
Treatment in Balance Sheet Shown on the assets side by way of deduction from the
Debtors
Provision for Doubtful Debts
(It refers to a provision created to cover the loss of possible
bad debts by means of a predetermined % of Net debtors)

Adjustment Entry Provision for Doubtful debts

Adjusting Entry to be passed Profit & Loss A/c Dr.
To Prov. For Doubtful Debts A/c
Treatment in P & L A/c Shown on the debit side as a separate item
Treatment in Balance Sheet Shown on the assets side by way of deduction from the
amount of Sundry Debtors
Provision for Discount on Debtors
(It refers to the provision created to provide for discount likely to be allowed on
good debtors. I.e. Sundry Debtors less additional bad debts given outside the Trial
Balance and the provision for doubtful debts)

Adjustment Entry Provision for Discount on Debtors

Adjusting Entry to be passed Profit & Loss A/c Dr.
To Prov. For Discount on Debtors A/c
Treatment in P & L A/c Shown on the debit side as a separate item
Treatment in Balance Sheet Shown on the assets side by way of deduction from the
amount of Sundry Debtors
Reserve for Discount on Creditors
(It refers to the reserve created for discount likely to be earned from creditors on
their payments)

Adjustment Entry Reserve for Discount on Creditors

Adjusting Entry to be passed Reserve for Discount on Creditors A/c Dr.
To Profit & Loss A/c
Treatment in P & L A/c Shown on the Credit side as a separate item
Treatment in Balance Sheet Shown on the liabilities side by way of deduction from the
amount of Sundry Creditors
Interest on Capital
(It refers to the cost of using the capital invested in an enterprise by the
proprietor)

Adjustment Entry Interest on Capital

Adjusting Entry to be passed Interest on Capital A/c Dr.
To Capital A/c
Treatment in P & L A/c Shown on the Debit side as a separate item
Treatment in Balance Sheet Shown on the liabilities side by way of addition to the
capital
Interest on Drawings
(It refers to the cost of using the sum of money or other asset withdrawn by the
proprietor)

Adjustment Entry Interest on Drawings

Adjusting Entry to be passed Capital A/c Dr.
To Interest on Drawings A/c
Treatment in P & L A/c Shown on the Credit side as a separate item
Treatment in Balance Sheet Shown on the liabilities side by way of deduction from the
capital