Unit 4 Final account of sole proprietor.pdf

Unit 4: Final Accounts of a Sole Trader
Preparation of Income statement – Trading Account and Profit and Loss Account; Preparation of
Balance Sheet; Treatment of adjustments - Closing Stock, Outstanding Expenses, Prepaid or Unexpired
Expenses, Accrued Income, Unearned Income, Income Received in Advance, Depreciation, Interest on
Capital, Interest on Drawings, Interest on Loan, Bad Debt, Provision for Bad and Doubtful Debts.
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4.1 Introduction to final accounts
Business entities raise funds, acquire assets and incur various expenses for the purpose of carrying on
business operations and earning income from such operations. These transactions are first recorded in
the journal and then classified under common heads in the ledger. Preparation of trial balance from
ledger balances helps to verify the arithmetical accuracy of entries made in the books of accounts, but
it is not the end in itself. The business entities are interested in knowing periodically the results of
business operations carried on and the financial soundness of the business. In other words, they want to
know the profitability and the financial position of the business. These can be ascertained by preparing
the final accounts or financial statements. The final accounts are usually prepared at the end of the
accounting period on the basis of balances of ledger accounts shown by the trial balance.
The final accounts or financial statements include the following:
a. Income Statement or Trading and Profit and Loss Account and
b. Position Statement or Balance Sheet.
The purposes of preparing the financial statements are:
i. To ascertain the financial performance of an enterprise and
ii. To ascertain the financial position of an enterprise.
The income statement and balance sheet are prepared for these purposes respectively. Income statement
gives the manner in which the profit or loss for an accounting period is arrived at. The revenues earned
and expenses incurred to earn the revenues during the period are shown in the income statement under
appropriate heads as per matching principle. All the nominal accounts and accounts relating to goods
during an accounting period are to be considered only in the relevant accounting period and are not to
be carried forward. Moreover, only these items are to be compared for determining the financial
performance. Hence, at the close of the accounting period, all nominal accounts (i.e. expenses, losses,
revenues, gains, purchases, purchases returns, sales and sales returns) are to be closed by transferring
to the income statement or trading and profit and loss account.
While transferring the items, it is desirable that the results of buying and selling of goods and the results
of overall operations and financial performance are given separately. Hence, income statement is
divided into two parts. The first part, i.e., trading account shows the results of buying and selling and
the second part shows the results of overall financial performance. The second part may also be
presented in such a manner to give the operating results and overall financial performance separately.
All the direct expenses and items relating to goods are transferred to trading account which is the first
part of income statement. All indirect expenses and losses and indirect incomes and gains are transferred
to profit and loss account along with the net result of trading account.

4.2 Trading account
Trading refers to buying and selling of goods with the intention of making profit. The trading account
is a nominal account which shows the result of buying and selling of goods for an accounting period.
According to J. R. Batliboi, “The trading account shows the results of buying and selling of goods. In
preparing this account, the general establishment charges are ignored and only the transactions in goods
are included.”
Trading account is prepared to find out the difference between the revenue from sales and cost of goods
sold. Cost of goods sold refers to directly related cost. Direct cost includes the purchase price of goods
purchased and all other expenses which are incurred to bring the goods to the business premises or
godown and to make these ready for sale. All the goods purchased during the accounting period may
not be sold during the same accounting period. Hence, it is necessary to calculate the cost of goods sold
during the period. Matching principle is applied here. Hence, the cost of stock not sold must be
deducted, i.e., value of closing stock must be deducted. But if there is any opening stock of goods that
will be sold during the accounting period, it is to be added to the cost of purchases made during the
period. If there is cost of goods manufactured, it must also be added to find out the cost of goods sold.
Cost of goods sold = Opening stock + Net purchases + Direct expenses – Closing stock
If the amount of sales exceeds the cost of goods sold, the difference is gross profit. On the other hand,
the excess of cost of goods sold over the amount of sales results in gross loss.
Sales – Cost of goods sold = Gross profit
Sales – Gross profit = Cost of goods sold
4.2.1 Need for preparation of trading account
Preparation of trading account serves the following purposes:
(i) Provides information about gross profit or gross loss
It shows the gross profit or gross loss of the business for an accounting year. This helps the
businesspersons to find out gross profit ratio by expressing the gross profit as a percentage of sales. It
helps to compare and analyse with the ratios of the previous years. Thus, it provides data for
comparison, analysis and planning for a future period.
(ii) Provides an opportunity to safeguard against possible losses
If the ratio of gross profit has decreased in comparison to the preceding years, effective measures can
be taken to safeguard against future losses. For example, the sale price of goods may be increased, or
steps may be taken to analyse and control the direct expenses.
(iii) Provides information about direct expenses and direct incomes
All the expenses incurred on the purchase of goods are direct expenses. They are recorded in the trading
account. Trading account also shows sales revenue, which is a direct income. With the help of trading
account, percentage of such expenses on sales revenue can be calculated and compared with similar
ratios of the previous years. Thus, it enables the management to have control over the direct expenses.
4.2.2 Preparation of trading account
Trading account is a nominal account. The opening stock, net purchases and all expenses relating to
purchase of goods are shown on the debit side and the net sales and closing stock are shown on the
credit side of it.
A) Items shown on the debit side of the trading account
The following are the items shown on the debit side of the trading account:
(i) Opening stock
The stock of goods remaining unsold at the end of the previous year is the opening stock of the current
year. This item will not be there in a newly started business. It will not appear if it is adjusted with
purchases. As opening stock would have been sold during the year, the cost of opening stock is included
in trading account.
(ii) Purchases and purchases returns
Goods which have been bought for resale are termed as purchases. Goods purchased which are returned
to suppliers are termed as purchases returns or returns outward. Purchases include both cash purchases

and credit purchases. Net purchases, i.e., purchases minus purchases returns are shown in the debit side
of the trading account.
(iii) Direct expenses
All the expenses incurred on the purchase of goods and for bringing the goods to the go down or place
of business and to make them to saleable condition are known as direct expenses. They are debited to
trading account. Direct expenses include the following:
(a) Carriage inwards or Freight inwards
Amount paid for transporting the goods purchased to the godown or business premises is called carriage
inwards or carriage on purchases or freight inwards.
(b) Wages
Amount paid to workers who are directly engaged in loading, unloading and handling of goods
purchased is known as wages.
(c) Dock Charges
These are the charges levied for shipping the cargo while entering or leaving docks. When they are paid
on import of goods, they are treated as direct expenses.
(d) Octroi
This is a tax levied by the local authority when the purchased goods enter the municipal limits.
(e) Import duty
Taxes paid on import of goods are known as import duties.
(f) Royalty
This is the amount paid to the owner of a mine or a patent for using owner’s right. When the royalty is
based on cost of production or output, it is treated as a direct expense.
(g) Coal, gas, fuel and power
Cost incurred towards coal, gas and fuel to make the goods saleable is also considered as direct
expenses.
(iv) Cost of goods manufactured
If the sole proprietor is also engaged in manufacture of goods, a separate account, namely,
manufacturing account is to be prepared in which expenses incurred for manufacture of goods will be
entered. Examples of such expenses are raw materials, coal, gas, fuel, water, power, factory rent,
packaging, factory lighting, royalty on manufactured goods, etc. The total cost of goods manufactured
is transferred to the debit side of trading account.
B) Items shown on the credit side of the trading account
Following are the items shown on the credit side of the trading account:
(a) Sales and Sales returns
Both cash and credit sales of goods will be included in sales. The sales account will show credit balance
whereas the sales returns account will show debit balance. The amount of net sales is shown on the
credit side of the trading account by deducting sales returns from sales.
(b) Closing stock
The goods remaining unsold at the end of the accounting period are known as closing stock. They are
valued at cost price or net realisable value (market price) whichever is lower as per Accounting Standard
2 (Revised).

4.2.3 Format of Trading Account
* The difference in trading account will be either gross profit or gross loss.
The heading of the trading account contains the words ‘for the year ended……’ as it discloses the sales
and cost of goods sold of the business for the whole accounting year.
Illustration 1
The following information is provided by Wilson & Sons on31st March 2022
Particulars Amt. (₹) Particulars Amt. (₹)
Opening Stock 5,000 Production Expenses 500
Sales 56,000 Freight 1,500
Purchases 31,000 Coal, fuel, gas, etc., 1,800
Carriage 3,000 Wages 5,600
Factory rent 7,000
Closing Stock: Cost Price ₹7,800 and Market Price ₹8,000
You are required to (i) Prepare Trading Account and (ii) Calculate % of Gross Profit on sales.
Solution
1.
Trading Account
for the year ending 31st
March 2022
To Opening Stock 5,000 By Sales 56,000
To Purchases 31,000 By Closing Stock 7,800
To Carriage 3,000
To Factory rent 7,000
To Production Expenses 500
To Freight 1,500
To Coal, fuel, gas, etc., 1,800
To Wages 5,600
To Gross Profit (b/f) 8,400
63,800 63,800
2. % of Gross profit on sales
= (Gross Profit/Net Sales) x 100 = (8,400/56,000) x 100 = 15%

Illustration 2
From the following balances extracted from the books of M/s. Lavanya and sons, prepare trading
account for the year ended 31st March 2017:
Solution
Illustration 3
From the following information, prepare trading account for the year ending 31st
December 2017.

Solution
Classwork
Problem 1
Prepare Trading Account of M/s Robin Pandey & Sons for the year ending 31st
March 2022 from the
following information.
Purchases 79,800 Sales Return 1,400
Sales 1,05,900 Carriage outwards 2,300
Salaries 7,600 Carriage inwards ,1900
Wages 11,000 Purchase Returns 2,300
Rent 1,700 Insurance 800
Freight 1,900 Bad debts 1,500
Production Expenses 780 Dock Charges paid 1,800
Stock (opening) 11,500 Trading Expenses 7,000
Closing Stock at the end was ₹15,700.
[Answer: Gross Profit: ₹13,820]
Note: Salaries, Rent, Carriage Outwards, Insurance, Bad debts and Trading Expenses are shown in the
profit & loss account, as these are indirect expenses. In Trading Account only direct expenses are
shown.
Self-Assessment
Q. No. 1
From the following balances of M/s Simran, prepare Trading Account for the year ended 31st
March
2022.
Stock (01.04.2021) 5,700 Carriage Inwards 7,500
Purchases 1,11,000 Carriage Outwards 9,700
Sales 2,26,000 Rent and Taxes 1,380

Return Outwards 4,000 Production Expenses 4,380
Return Inward 5,000 Coal, Fuel, Gas, etc., 7,380
Salaries 11,700 Lighting and Heating (office) 2,380
Wages 6,900 Import Duty 1,340
Closing Stock at the end was ₹7,900
[Answer: Gross Profit: ₹88,700]
4.3 Profit and Loss Account
Profit and loss account is the second part of income statement. It is a nominal account in nature. A
business entity is interested in knowing not only the gross profit or loss but also the net profit earned,
or net loss incurred during the year. Hence, profit and loss account is prepared to ascertain the net profit
or net loss during the year. Profit and loss account contains all the items of indirect expenses and losses
and indirect incomes and gains in addition to gross profit or gross loss pertaining to the accounting
period. The difference is net profit or net loss. According to Prof. Carter, “A Profit and Loss Account
is an account into which all gains and losses are collected, in order to ascertain the excess of gains over
the losses or vice-versa”.
4.3.1 Need for preparing profit and loss account
Profit and loss account is prepared for the following purposes:
(i) Ascertainment of net profit or net loss
The profit and loss account discloses the net profit available to the proprietor or net loss to be borne by
him. Ascertainment of profitability helps in planning for the growth and efficiency of a business
enterprise. Inter-firm comparison and intra-firm comparison of profit and loss account items help in
assessing efficiency in comparison with other enterprises and other departments of the same enterprise
respectively.
(ii) Comparison of profit
The net profit of the current year can be compared with the profit of the previous years. It helps to know
whether the business is conducted efficiently or not.
(iii) Control on expenses
Profit and loss account helps in comparing various expenses with the expenses of the previous years.
The percentage of individual expenses to net sales can be calculated and compared with
the similar ratios of previous years. Such a comparison will be helpful in taking effective steps for
controlling unnecessary expenses.
(iv) Helpful in the preparation of balance sheet
A balance sheet can be prepared only after ascertaining the net profit or loss through profit and loss
account. Net profit or loss is shown in the balance sheet. Thus, it facilitates preparation of balance sheet.
4.3.2 Preparation of profit and loss account
The amount of gross profit or gross loss brought down from the trading account is the first item in the
profit and loss account. All the indirect expenses and losses are debited to profit and loss account.
Indirect expenses include office and administrative expenses, selling expenses, distribution expenses,
etc. As the profit and loss account is a nominal account, all the indirect expenses and losses are shown
on the debit side and all the indirect incomes and gains are shown on the credit side.
Items shown on the debit side of profit and loss account are as follows:
(i) Gross loss
If trading account discloses gross loss, it is shown on the debit side of the profit and loss account.
(ii) Indirect expenses
Expenses which are not connected with purchase of goods are indirect expenses, i.e., expenses incurred
in administration, office, selling and distribution of goods are indirect expenses.
(a) Office and administrative expenses
Expenses incurred for office and administration such as salary of office employees, office rent, lighting,
postage, printing, legal charges, audit fee, depreciation and maintenance of office equipment, etc. are
classified as office and administrative expenses.

(b) Selling and distribution expenses
Expenses incurred for selling, promotion of sales and distribution of goods such as advertisement
charges, commission to salesmen, carriage outwards, bad debts, godown rent, packing charges, etc., are
classified as selling and distribution expenses.
(c) Other indirect expenses and losses
The expenses such as interest on loan, repair charges, depreciation, charity, loss on sale of fixed assets
and abnormal losses such as loss due to fire, theft, etc. not covered by insurance are shown under this
category.
Items shown on the credit side of profit and loss account are as follows:
(i) Gross profit
The first item on the credit side of profit and loss account is the gross profit brought down from the
trading account if there is gross profit.
(ii) Other incomes and gains
All items of indirect incomes and gains are shown on the credit side of the profit and loss account.
Income from investments, rent earned, discount received, commission earned, interest earned and
dividend received are indirect incomes. Profit on sale of fixed assets and investments are examples of
gains.
4.3.3 Closing of profit and loss account
After debiting indirect expenses and losses and crediting all indirect incomes and gains, if the total of
the credit side of the profit and loss account exceeds the debit side, the difference is termed as net profit.
On the other hand, if the total in the debit side exceeds the credit side, the difference is termed as net
loss. Net profit or net loss is transferred to the capital account.
4.3.4 Format of Profit and Loss Account

Illustration 4
From the following information, prepare profit and loss account for the year ended 31st
March 2018.
Solution

Illustration 5
From the following information, prepare profit and loss account for the year ended 31st
December 2017.
Solution
Note: Carriage inwards will not appear in profit and loss account as it is a direct expense.
Classwork
Problem 2
Sh. Sunder Lal is a proprietor of a business. The following are the extracts from his trial balance. Prepare
profit and loss account of the year ending 31st
March 2022.
Interest (Dr.) 570 Bad debts 770
Salaries 14,690 Interest on investment 240
Stationery & Printing 2,310 Rent 2,340
Audit fees 1,590 Depreciation 490
General expenses 670 Gross profit 40,770
Commission received 1,230
[Answer: To Net Profit (b/f): 18,810]

Problem 3
From the following information, prepare Trading and Profit and Loss Account for the year ending 31st
March 2023.
Salaries 2,000 Purchases 23,000
Wages 7,000 Stock (1.4.2022) 11,000
Carriage 3,400 Factory rent 4,000
Bad debts 700 Audit fees 3,200
Plant & Machinery 46,000 Depreciation 6,200
Sales 55,000 Freight 700
Drawings 3,000 Sales return 900
Return outwards 500 Land and Building 70,000
Closing Stock is valued at ₹19,000
[Answer: To Gross Profit b/d ₹24,500; To Net Profit ₹12,400]
Self-Assessment
Q. No. 2
From the following information, prepare profit and loss account for the year ending 31st December
2021.
[Answer: Net Loss ₹1,02,000]
Q. No. 3
From the following balances obtained from the books of Mr. Ganesh, prepare trading and profit and
loss account.
Closing stock on December 31.12.2017 was ₹4,500
[Answer: Gross profit: ₹14,000; Net profit: ₹4,200]
4.4 Balance sheet
Balance sheet is a statement which gives the position of assets and liabilities on a particular date. Assets
are the resources owned by the business. Liabilities are the claims against the business. After
ascertaining the net profit or net loss of the business enterprise, a businessperson would like to know
the financial position of the business. For this purpose, balance sheet is prepared which contains
amounts of all the assets and liabilities of the business enterprise as on a particular date. The statement
so prepared is called ‘balance sheet’ because it gives the balances of ledger accounts which are still

there, after the closure of all nominal accounts by transferring to the trading and profit and loss account.
Balances of all the personal and real accounts are grouped into assets and liabilities. In the balance
sheet, liabilities are shown on the left-hand side and assets on the right-hand side.
According to J.R. Batliboi, “A Balance Sheet is a statement prepared with a view to measure the exact
financial position of a business on a certain fixed date.”
4.4.1 Need for preparing a balance sheet
The purposes of preparing a balance sheet are as follows:
a) The main purpose of preparing a balance sheet is to ascertain the true financial position of the
business at a particular point of time.
b) It helps in comparing the cost of various assets of the business such as the amount of closing
stock, amount due from debtors, amount of fictitious assets, etc. Moreover, as assets and liabilities
of similar nature are grouped and presented in balance sheet, a comparative study of these assets
and liabilities is facilitated. It helps in comparing the various liabilities of the business.
c) It helps in finding out the solvency position of the firm. The firm’s solvency position is favourable
if the assets exceed the external liabilities. The firm’s solvency position is not favourable it the
external liabilities exceed the assets.
4.4.2 Characteristics of balance sheet
The following are the characteristics of a balance sheet:
a) A balance sheet is a part of the final accounts. However, the balance sheet is a statement and not
an account. It has no debit or credit sides and as such the words ‘To’ and ‘By’ are not used before
the names of the accounts shown therein.
b) A balance sheet is a summary of the personal and real accounts, which have balances. Personal
and real accounts having debit balances are shown on the right-hand side known as assets side,
whereas personal and real accounts having credit balances are shown on the left hand side known
as liabilities side.
c) The totals of the two sides of the balance sheet must be equal. If the totals are not equal, it indicates
existence of error. It must satisfy the accounting equation, ie., Assets = Capital + Liabilities,
following the dual aspect concept.
d) Balance sheet is prepared on a particular date and not for a fixed period. It discloses the financial
position of a business on a particular date. It gives the balances only for the date on which it is
prepared.
e) It shows the financial position of the business according to the going concern concept.
4.4.3 Grouping and Marshalling of assets and liabilities in a balance sheet
The assets and liabilities shown in the balance sheet are grouped and presented in a particular order.
The term ‘grouping’ means showing the items of similar nature under a common heading. For example,
the amount due from various customers will be shown under the head ‘Sundry debtors.’ Similarly, under
the head ‘Current assets’, the balance of cash, bank, debtors, stock and other current assets will be
shown.
‘Marshalling’ is the arrangement of various assets and liabilities in a proper order. Marshalling can be
made in one of the following two ways:
(a) In the order of liquidity
According to this method, an asset which is most easily convertible into cash, i.e., cash in hand is shown
first and then will follow those assets which are comparatively less easily convertible, so that the least
liquid asset i.e., goodwill is shown last. In the same way, the liabilities which are to be paid at the
earliest will be shown first. In other words, current liabilities are shown first, then fixed or long-term
liabilities and finally the proprietor’s capital.
(b) In the order of permanence
This method is exactly the reverse of the first method. Asset, which is more permanent, i.e., goodwill
is shown first followed by assets which are less permanent. Similarly, those liabilities which are to be
paid last will be shown first. In other words, the proprietor’s capital is shown first, then fixed or long-
term liabilities and lastly the current liabilities. Joint stock companies are required under the Companies
Act to prepare their balance sheet in the order of permanence.

4.4.4 Methods of drafting a balance sheet
The balance sheet of business concern can be presented in the following two forms.
a) Horizontal form
b) Vertical form
a) Horizontal form of balance sheet
In the horizontal form, assets are shown on right hand side of the balance sheet and the liabilities are
shown on the left-hand side of the balance sheet.

b) Vertical form of balance sheet
The balance sheet of a sole proprietor can be presented in a vertical statement form as given below:

Illustration 6
From the following balances of Niruban, prepare balance sheet as on 31st December 2017.
Solution
Illustration 7
From the following trial balance of Sharan, prepare trading and profit and loss account for the
year ending 31st December 2017 and balance sheet as on that date. The closing stock on 31st
December 2017 was valued at ₹2,50,000.
Debit Balances Amt. (₹) Credit Balances Amt. (₹)
Stock (01-01-2027) 2,00,000 Sundry creditors 12,000
Purchases 7,50,000 Purchases returns 30,000
Carriage inwards 75,000 Sales 10,20,000
Wages 3,65,000 Commission received 53,000
Salaries 1,20,000 Capital 33,00,000
Repairs 12,000
Rent and taxes 2,80,000
Cash in hand 97,000
Land 21,50,000
Drawings 1,66,000

Bank deposits 2,00,000
44,15,000 44,15,000
Solution
Tutorial notes
Trading account and profit and loss account are prepared together. The first part is trading account,
whereas the second part is profit and loss account.
Points to remember
• Trading and profit and loss account is a nominal account in nature. It means that while preparing
this account, the rule of nominal account is followed.
• On the debit side of trading account, direct expenses and opening stock are shown.
• Direct expenses include the purchase price of goods purchased and all other expenses which
are incurred to bring the goods to the business premises or godown and to make these ready for
sale.
• On the credit side of trading account direct income, i.e. sales and closing stock are shown.
• On the debit side of profit and loss account, indirect expenses and losses are shown.
• On the credit side of this account, indirect incomes and gains are shown.
• Indirect expenses are those expenses incurred for office, administration and selling and
distribution.

• Indirect incomes and gains are the incomes or gains which are not directly related to the
operation of business enterprise. For example, interest received on the deposits in the bank.
• Balance sheet is a statement and not an account. On the left side liabilities including capital and
on the right side the assets are shown in the balance sheet.
• Assets are the resources owned by a business entity. Liabilities are claims against the business
or the amounts owed by business to outsiders and owners.
Classwork
Problem 4
Complete the following account by filling the amount of missing figures:
Particulars Amount Particulars Amount
To Opening Stock (20% on sales By Sales 5,00,000
To Purchases (300% of opening stock) By Closing Stock
To Wages (2% of sales)
To Factory Expenses (4% of purchases)
To Coal, Gas, and Water
(50% of wages, and factory expenses)
To Freight (10% of closing stock)
To Gross Profit
6,00,000 6,00,000
[Answer: Gross profit: ₹1,57,000]
Problem 5:
From the following Trail Balance prepare Trading and Profit and Loss account for the year ending 31st
March 2024 and a balance sheet as on that date:
Particulars Amt. (₹) Dr. Amt. (₹) Cr.
Purchases 37,500
Stock (opening) 15,000
Drawings 5,500
Returns Inwards 1,350
Trade Expenses 445
Wages 3,500
Salaries 2,800
Travelling Expenses 330
Advertising Expenses 210
Rent, Rates and Insurance 1,400
Bad Debts 200
Discount 150
Premises 3,000
Plant and Machinery 5,000
Fixtures and Fittings 2,500
Sundry Debtors 21,250
Cash in hand 515
Capital 17,500
Sales 62,500
Returns Outwards 650
Creditors 15,000
Bank Overdraft 5,000
1,00,650 1,00,650
Closing Stock was ₹21,000
[Answer: Gross profit: ₹26,800; Net profit: ₹21,265; Balance Sheet Total: ₹53,265]

Problem 6:
From the following Trial Balance extracted from the books of Sh. Golul Nath as on 31st
March, 2023,
prepare Trading and Profit and Loss Account for the year ending and Balance Sheet as on that date.
Debit Balance Amt. (₹) Credit Balance Amt. (₹)
Cash at Bank 1,400 Creditors 68,000
Cash in hand 3,000 Sales 1,46,000
Rent and Rates 1,200 Purchases Returns 2,000
Stock 18,000 Commission Received 4,000
Discount Allowed 400 Capital Account 55,000
Purchases 1,09,000 Rent Received 2,000
Carriage Outwards 3,600
Returns 6,000
Carriage on Purchases 1,000
Fixture and Fittings 12,000
Audit Fees 3,000
Salaries 6,000
Bills Receivable 12,000
Drawings 12,000
Wages 18,000
Commission 8,400
2,77,000 2,77,000
Closing Stock: ₹29,000
[Answer: Gross profit: ₹25,000; Net profit: ₹8,400; Balance Sheet Total: ₹1,19,400]
Problem 7:
Sh. Ram Gopal is a sole trader and his trial balance as on 31st
March 2023 is as under:
Stock (31-03-2023) 12,000
Account Payable 6,000
Furniture 3,000
Purchases (After adjusting stock) 1,00,000
Returns Inwards 6,000
Salaries 11,000
Cash 1,000
Life Insurance Premium 1,500
Bank (Overdraft) 5,000
Sales 1,70,000
Carriage Inwards 2,500
Returns Outwards 8,000
Investments 15,000
Dividend Received 2,000
Rent 4,400
Commission 2,400
Unproductive Wages 400
Printing and Stationery 1,000
Postage 300
Accounts Receivable 7,000
Royalties 5,000
Bad Debts 800
Rent Received 2,500

Premises 50,000
Insurance 1,800
Drawings 14,900
Discount 1,000 3,000
Capital 44,500
2,41,000 2,41,000
You are asked to prepare Trading and Profit and Loss Account for the year ending and Balance Sheet
as on that date.
Hint: - 1. Life Insurance Premium is treated as Drawings
2. Closing Stock is given as balance in the trial balance, so it will be shown in Balance Sheet
only
Self-Assessment
Q. No. 4
From the following balance prepare Trading and Profit and Loss Account for the year ending 31st
March
2023, and Balance sheet as on that date:
Purchases 36,000
Stock (01.04.2022) 12,500
Sales 59,000
Sales Returns 1,000
Purchase Returns 1,500
Creditors 5,500
Book-debts 10,300
Furniture 2,500
Freight and Duty 1,000
Carriage Outwards 250
Rent and Insurance 1,750
Advertisement 700
Stationery Expenses 400
Office Expenses 200
Telephone Expenses 400
Bad Debts Recovered 200
General Reserve 300
Salaries 3,650
Productive Wages 7,000
Leasehold Property 12,500
Cash in hand 600
Bank balance 12,750
Capital 45,000
Income Tax 8,000
1,11,500 1,11,500
Closing Stock ₹11,900.
Q. No. 5
Prepare Trading, Profit and Loss Account from the following
Trail Balance
David’s Drawings & Capital 5,000 40,000
Leasehold land 25,000

Freehold premises 20,000
Goodwill 7,000
Trademark 13,000
Fixture and Fittings 2,000
Stock at Commencement 18,000
Bills Receivable and Payable 4,000 6,000
Sundry Debtors and Creditors 16,000 24,000
Purchases and Sales 80,000 1,50,000
Returns 1,000 2,000
Carriage in 1,500
Carriage out 500
Fright and duty 1,200
Manufacturing Wages 22,000
Coal, Fuel & Gas 800
Factory Expenses 4,500
Salaries 18,000
Rates and Taxes 6,000
Commission 2,500
Interest 3,000
Discount 6,000
Stationery 4,000
Trading Expenses 500
Cash in hand 1,800
Bank Overdraft 700
2,70,000 2,70,000
Closing Stock at the end of the year ₹20,000
4.5 Balance Sheet with Adjustments
4.5.1 Meaning and Need/Importance of Adjustments
In accounting we follow the Accrual Concept, and according to this concept there may be some incomes
and expenses which are still to be brought into the books of accounts. So, it is compulsory to adjust
these items in the Final Accounts, to get the true and fair picture of this business. If there is any item
which is not correctly stated in Trading, Profit & Loss Account or in the Balance Sheet, then these
records will not show the real Profit or Loss and financial position of the business.
Need or Importance of Adjustments
1. To know the actual profits of the business
2. To know the actual financial position of the business
3. To know the actual value of assets and liabilities
4. To record the unrecorded assets and liabilities
5. To record the outstanding expenses and incomes
6. To rectify the errors
7. To make the provision for bad debts, provision for
tax and depreciation
4.5.2 Accounting Treatment of Adjustment Entries
1. Treatment of Opening Stock
Generally opening stock is shown as first item in the
Trading Account (Debit side) when it is given in the trial
balance but sometimes opening stick is given in the
adjustments, in such a case it will not take place in Trading
Opening
Stock
If given in
trail balance
Trading A/c
(Debit Side)
If given in
adjextments
No Use
ignore

Account or Balance Sheet, because it is already adjusted and given in the question only for information
purpose.
2. Treatment of Closing Stock
This is the stock left at the end of the financial period. Closing stock is always valued at cost price or
market price whichever is less. Mostly closing stock is given below the trial balance because it is valued
after the accounts have been closed. All items given below the trial balance are adjustments and always
shown twice i.e., in Trading Account and Balance Sheet or in Profit & Loss account and Balance sheet
and so on. Closing Stock, if given in the
adjustment, will be shown twice i.e., it is
recorded on the credit side of the trading
account and shown as an asset in the
Balance sheet. For example, stock at the
end of the year is given ₹5,000 below the
Trail Balance (Adjustment) its effect on
the final accounts will be:
(a) In Trading Account Credit side
₹5,000
(b) In Balance Sheet Assets side ₹5,000
Valuation of Closing Stock = Cost or
Market price (realisable value)
whichever is less.
For Example: Closing Stock cost price ₹10,000 and realisable value (market price) is ₹ 9,500; in such
a situation realisable value (Market price) is less, so value of stock will be ₹9,500.
Treatment:
(a) If given in Trial Balance: Show only in Balance Sheet Asset side.
(b) If given in Adjustments: Show in Trading A/c and Balance Sheet both.
3. Treatment of Outstanding Expenses
Generally certain expenses relating to particular year are not recorded in the books because these
expenses have not been paid. It is necessary that the expenses incurred but not paid should be recorded
in the books by an adjustment journal entry, which is as follows:
Expenses A/c Dr.
To Outstanding Expenses A/c
(Being expenses incurred but not paid)
In final accounts the amount of outstanding expenses is debited to Trading Account or Profit and Loss
Account (to which it concerns) and shown as liability in the Balance Sheet. For example, a businessman
acquires a building (for office use) at a monthly rent of ₹2,000 and keeps that building for full one year
i.e., for 12 months, but he paid rent only for nine months i.e., ₹2,000 x 9 = ₹18,000 whereas he should
pay the rent for full year. Rent for three months ₹6,000 i.e., ₹2,000 x 3 is outstanding and should be
shown in the final accounts as:
Treatment of
Closing Stock
If given in
adjustments
Trading Account
Cr. side
Balance Sheet
Assets side
If given in trial
balance
Only in Balance
Sheet Assets side
Treatment of
Outstanding
Expneses
If given in
adjustments
Add in related
item in Trading
or P&L A/c
Balance Sheet
Liabilities side
If given in trial
balance
Only in Balance
Sheet Liabilities
side

Profit and Loss Account
Particulars Amt. (₹) Amt. (₹) Particulars Amt. (₹) Amt. (₹)
To Rent 18,000
Add: Outstanding 6,000 24,000
Balance Sheet
Liabilities Amt. (₹) Assets Amt. (₹)
Outstanding Rent 6,000
If outstanding expenses is given in the trial balance it will be shown as liability in the Balance Sheet
only. Outstanding expenses can be named as expenses due, unpaid, expenses incurred but unpaid etc.,
Treatment:
1. If given in Trial Balance: It will be shown only in liabilities side of Balance Sheet.
2. If given in adjustments:
(i) Add in related item and
(ii) Show in liabilities side of Balance Sheet
4. Treatment of Accrued or Outstanding Incomes
Whole of the incomes earned during the year must be credited to Profit and Loss Account for the period
whether received or not. If the balance of income earned during the period is not received and not
recorded, an adjustment entry will be passed bringing into the account the income earned but not yet
received.
Accrued Income A/c Dr.
To Income A/c
(Being income earned not yet received)
For example, interest earned during the year is ₹1,000, but out of this ₹800 is received only. The balance
₹200 is not yet received and recorded in the books. This adjustment will effect the final accounts as
follows:
By Interest 800
Add: Accrued 200 1,000
Balance Sheet
Accrued Interest 200
So, outstanding income or accrued income or income earned but not received, if given in the adjustment
is shown twice i.e., Profit and Loss Account credit side (added in related income) and assets side in
Treatment of
Accrued Income
If given in
adjustments
Profit and Loss
A/c (Cr. side)
Balance Sheet
Assets side
If given in trial
balance
Only in Balance
Sheet Assets side

Balance Sheet. If Accrued income is given in the trial balance, it will be shown as an asset in the Balance
Sheet only.
Treatment:
1. If given in Trial Balance: Show in Assets side of Balance Sheet only
2. If given in adjustment: 1. Cr. Side of P&L A/c and 2. B/S Assets side.
5. Treatment of Prepaid, Carry Forward or Unexpired Expenses
Expenses paid but not due or expenses paid in advance or pre-paid expenses are those expenses which
are paid during the year but belong to the subsequent year. Expenses related to next year not shown in
the books of this year, but if those are already included in the expenses of current year, then with the
help of following journal entries these will be adjusted:
Prepaid Expenses A/c Dr.
To Expenses A/c
(Being prepaid expenses adjusted)
For example, a trader’s financial year is from 1st
April 2019 to 31st
March 2020. He paid for insurance
₹400 for one year on 1st
July 2019. As the insurance is paid for one year, it expires on 30th
June 2020,
but the accounting year ends on 31st
March 2020 so for the 3 months i.e., 1st
July 2019 to 30th
June 2020
it is paid in advance i.e., ₹100 (for 3 months only). It will effect the final accounts as follows:
To Insurance Premium 400
Less: Paid in Advance 100 300
Balance Sheet
Insurance Premium paid in advance 100
Treatment:
1. If given in Trial Balance: Show asset side of Balance Sheet only.
2. If given in adjustment: 1. Less from related item in Trading or P&L A/c; 2. Asset side of B/S.
6. Treatment of Income Received in Advance
Advertisement money received in advance by an advertising company, insurance premium received by
an insurance company and apprenticeship premium etc., are some cases with the possibility for a
company to receive an advance payment. If this advance income is not adjusted, the following entry
will be passed to adjust it.
Income A/c Dr.
To Income received in advance A/c
(Being income received in advance adjusted)
Treatment of
Prepaid Expenses
If given in
adjustments
Less from related
item in Trading or
P&L A/c
Balance Sheet
Assets side
If given in trial
balance
Only in Balance
Sheet Assets side

This income (received in advance) when given as adjustment, it will be deducted from particular income
in P&L A/c and shown as liability in the Balance Sheet. If advance income is given in the Trial Balance,
it will be shown as liability in the balance sheet.
Treatment:
1. If given in Trial Balance: Show in Liabilities side of Balance Sheet only.
2. If given in adjustment: 1. Deduct from related item and 2. Show on the liabilities side of B/S.
7. Treatment of Depreciation
Depreciation is allocation of cost of fixed asset in a systematic manner over its estimated useful life.
Book value of fixed assets reduces year after year because of depreciation being charged. Fixed assets
are used for earning revenue, therefore, decrease in their value is an expense incurred and like other
expenses, it is transferred to the Profit & Loss Account to determine correct profit or loss for the year.
Depreciation is not recognised on day-to-day basis but is charged at the end of an accounting period at
the given rate for the period asset is used in the accounting year. When the amount of depreciation is
credited to the Asset Account, value of the asset in the books reduces each year by the amount of
depreciation. i.e., when depreciation is given as an adjustment item, as a first step depreciation is
calculated by applying the given rate of depreciation and as per the method (WDV – Written Down
Value Method or SLM – Straight Line Method) as specified in the question and thereafter it will be
shown in the debit side of Proft and Loss Account and secondly it is deducted from the particular asset
in the Balance Sheet.
If depreciation is given in the trial balance it will be debited to Profit and Loss Account only.
Treatment:
1. If given in Trial Balance: Show only Debit side of Profit and Loss Account.
2. If given in adjustment: 1. Debit in P&L A/c and 2. Deduct from the related asset in the Balance Sheet.
Treatment of
Income Received
in advance
If given in
adjustments
Less from related
item in P&L A/c
Balance Sheet
Liability side
If given in trial
balance
Only in Balance
Sheet Liability side
Treatment of
Depreciation
If given in
adjustments
P&L A/c Debit
Side
Balance Sheet
Deduct from
related Asset
If given in trial
balance
Only in P&L A/c
Debit Side

Note:
1. If it is instructed to charge depreciation @10% then the depreciation is calculated ignoring time
factor. But if it is instructed to charge depreciation @10% p.a. then depreciation is calculated
with the time factor into consideration.
Example: Plant costing ₹2,00,000 and accounts are prepared for 6 months then the depreciation
will be:
a. ₹20,000 if the rate of depreciation is 10% and
b. ₹10,000 if the rate of depreciation is 10% p.a.
2. It is better to ignore depreciation on sale of assets if the date of transaction is not given.
Illustration 8
From the following Trial Balance of Sh. Ram Ji Lal prepare Trading and Profit and Loss Account for
the year ended and Balance Sheet as at 31st
March 2023.
Particulars Amt.(₹) Particulars Amt.(₹)
Opening Stock 15,000 Sundry Creditors 7,500
Sundry Debtors 12,500 B/P 2,750
B/R 3,750 Sales 86,000
Purchases 45,000 Purchase Return 275
Sales Return 375 Discount Received 150
Discount Allowed 125 Capital 25,000
Plant and Machinery 17,500 Rent Received 275
Furniture 1,750 Commission Received 7,250
Wages 7,500 Miss. Receipts 1,750
Salaries 9,000 Bank overdraft (HDFC Bank) 10,000
Freehold Premises 25,000
Carriage inwards 600
Carriage outwards 750
Electricity (Office) 500
Cash at Bank (State Bank of India) 600
Cash in hand 250
Repairs 750
1,40,950 1,40,950
Adjustments
1. Closing Stock was valued at ₹16,000.
2. Depreciation plant and machinery @ 5% and furniture @ 10% p.a.
3. Outstanding salaries ₹800.
4. Commission received in advance ₹2,000.
5. Electricity (EB) charges paid in advance ₹200.
6. Outstanding wages amounted to ₹800.
Solution
TRADING AND PROFIT AND LOSS ACCOUNT
March 2023
Dr. Cr.
Particulars Amt.(₹) Amt.(₹) Particulars Amt.(₹) Amt.(₹)
To Purchases 45,000 Less: Returns 375 85,625
Less: Returns 275 44,725 By Closing Stock 16,000
To Wages 7,500
Add: O/S Wages 800 8,300
To Carriage Inward 600
To Gross Profit (B/F) 33,000
1,01,625 1,01,625
To Discount 125 By Trading A/c (G.P) 33,000

To Salaries 9,000 By Discount 150
Add: O/S Salaries 800 9,800 By Rent 275
To Electricity 500 By Commission 7,250
Less: Prepaid 200 300 Less: Advance 2,000 5,250
To Carriage outward 750 By Miss. receipts 1,750
To Repairs 750
To Depreciation
Plant & Machinery 875
Furniture 175 1,050
To Net Profit (B/F) 27,650
40,425 40,425
BALANCE SHEET
as at 31st
March 2023
Liabilities Amt.(₹) Amt.(₹) Assets Amt.(₹) Amt.(₹)
Sundry Creditors 7,500 Plant and Machinery 17,500
Bills Payable 5,750 Less: Depreciation 875 16,625
Bank Overdraft 10,000 Furniture 1,750
Outstanding Salaries 800 Less: Depreciation 175 1,575
Outstanding Wages 800 Freehold premises 25,000
Commission received in advance 2,000 Closing Stock 16,000
Capital 25,000 Sundry debtors 12,500
Add: Net Profit 27,650 52,650 Bills Receivable 3,750
Cash at bank 600
Cash in hand 250
Prepaid EB Charges 200
76,500 76,500
Illustration 9
From the following Trial Balance of M/s Tee Bee & Sons, prepare Trading Account, Profit & Loss
Account for the year ending 31st
March 2023 and a Balance Sheet as on that date:
Debit Balance Amt.(₹) Credit Balance Amt.(₹)
Stock (Opening) 5,000 Sales 18,000
Purchases 20,000 Purchases Returns 1,000
Carriage on sales 1,000 Capital 22,000
Wages 300 Bills Payable 200
Bills Receivable 1,500 Creditors 800
Cash in hand 2,000 Interest 200
Debtors 2,000 Commission 600
Carriage & Freight 400
Printing & Stationery 100
Office Expenses 500
Plant & Machinery 10,000
42,800 42,800
Adjustments
1. Closing Stock ₹2,000.
2. Wages Outstanding ₹200.
3. Commission unearned ₹100.
4. Charge depreciation @ 5% p.a. on Plant & Machinery.

Solution
March 2023
Dr. Cr.
Less: Purchase Returns 1,000 19,000 By Gross Loss (B/F) 4,900
To Wages 300
Add: Outstanding 200 500
To Carriage & Freight 400
24,900 24,900
To Trading A/c (G.L) 4,900 By Interest 200
To Carriage on sales By Commission 600
To Depreciation on P & M Less: Unearned 100 500
To Printing & Stationery By Net Loss (B/F) 6,300
To Office Expenses 7,000 7,000
BALANCE SHEET
as at 31st
March 2023
Creditors 800 Plant & Machinery 10,000
Bills Payable 200 Less: Depreciation 500 9,500
Wages O/S 200 Closing Stock 2,000
Capital 22,000 Debtors 2,000
Less: Net Loss 6,300 15,700 Bills Receivable 1,500
Unearned Commission 100 Cash in Hand 2,000
17,000 17,000
8. Treatment of Bad Debts
In a credit transaction the payment by a customer is postponed to a later date. It is likely that at later
date customer may not pay his debt for one reason or the other and thus, the debt may become bad for
recovery. This known as bad debt. This loss will reduce the profit of the business. By nature, this is a
nominal account, and it finds its place on the debit side of Profit & Loss Account, e.g. total debtors of
a business during the year are of ₹20,000, and out of these ₹500 are bad debts. If these bad debts are
given in the adjustments, its effect be as follows:
To Bad Debts 500
Treatment of
Bad Debts
If given in
adjustments
P&L A/c Debit
Side
Balance Sheet
Deduct from
Debtors
If given in trial
balance
Only in P&L A/c
Debit Side

Balance Sheet
Liabilities Amt. (₹) Amt. (₹) Assets Amt. (₹) Amt. (₹)
Sundry Debts 20,000
Less: Bad Debts 500 19,500
Treatment:
1. If given in Trial Balance: Show only in the Debit side of P&L A/c
2. If given in adjustment: 1. P&L Debit Side and 2. Deduct from debtors in Balance Sheet.
9. Treatment of Provision for Bad and Doubtful Debts
The word 'doubtful' suggests that it is doubtful whether a debtor will pay or not. Under any
circumstances it cannot be treated as bad but cannot be treated as good either. But it is very difficult to
pinpoint the amount or account which is going to be bad for recovery. Therefore, the correct position
in respect of sundry debtors for any given year will be satisfactory, by making a provision for doubtful
debts, on an estimate basis. This estimate is shown in term of fixed percentage, may be based on the
past experiences of the business. This provision is made in the accounts by way of an adjustment entry.
An account named Provision for Doubtful Debts is credited and Profit & Loss Account is debited.
Effect of this transaction in the final accounts will be as follows:
1. Profit and Loss Account is debited to the extent of doubtful debts and
2. In the Balance Sheet this amount is deducted from the Sundry Debtors.
For example, Sundry Debtors for this year are amounted to ₹20,000 and provision for doubtful debts is
to be created to the extent of 10% on debtors. The treatment of this in the Final Accounts will be:
To Provision for doubtful debts
(10% of ₹20,000)
2,000
Balance Sheet
Less: Bad Debts 2,000 18,000

Illustration 10
Prepare Trading and Profit and Loss Account for the year ending 31st
March 2023 and Balance Sheet
as on that date, from the information given below:
Trade Creditors 17,890 Cash at Bank 9,490
Bills Payable 9,350 Capital 84,600
Stock (31-03-2023) 210 Buildings 20,000
General Expenses 3,790 Bank loan 20,000
Accrued Interest 8,100 Interest on Drawings 400
Reserve for doubtful debts 1,100 Bills Receivable 180
Prize distribution 200 Adjusted Purchases 58,600
Discount allowed 4,300 Investment 30,000
Wages 19,970 Debtors 32,110
Carriage inwards 1,790 Salaries 7,850
Sales 99,200 Charity 1,300
Advertisement Expenses 5,600 Plant & Machinery 29,900
General Reserve 1,900 Commission (Dr.) 1,550
Outstanding Salaries 500
Adjustments:
1. Bad debts ₹500
2. Provide for doubtful debts @5% on debtors
3. Depreciation Plant and Machinery @ 10% p.a.
4. Wages still outstanding were ₹1,000.
5. General expenses include expenses paid in advance to extent of ₹200.
Solution
March 2023
Dr. Cr.
To Adjusted Purchases 58,600 By Sales 99,200
To Wages 19,970
Add: Outstanding 1,000 20,970
To Carriage inwards 1,790
To Gross Profit (B/F) 17,840
99,200 99,200
To General Expenses 3,790 By Trading A/c (G.P) 17,840
Less: Prepaid 200 3,590 By Interest on Drawings 400
To Prize distribution 200 Be Net Loss 10,121
To Discount allowed 4,300
To Advertisement Expenses 5,600
To Salaries 7,850
To Charity 1,300
To Commission 1,550
To Bad debts provision 981
To Depreciation on P&M 2,990
28,361 28,361

BALANCE SHEET
as at 31st
March 2023
Outstanding Salaries 500 Buildings 20,000
Trade Creditors 17,890 Plant & Machinery 29,900
Bills Payable 9,350 Less: Depreciation 2,990 26,910
Bank Loan 20,000 Investments 30,000
General Reserves 1,900 Closing Stock 210
Outstanding wages 1,000 Bills Receivable 180
Capital 84,600 Debtors 32,110
Less: Net Loss 10,121 74,479 Less: Bad Debts 500
31,610
Less: New Provision 1,581 30,029
Cash at Bank 9,490
Accrued Interest 8,100
Prepaid General Expenses 200
1,25,119 1,25,119
Working Notes:
Calculation of Provision for Bad Debts
Old Bad debts (given in T.B) Nil
Add: New bad debts (given in adjustments) 500
Total 500
Debtors 21,110
Less: New bad debts (given in adjustments) 500
31,610 X 5/100 1,581 (This is New Provision)
Total 2,081
Less: Provision for bad debts (given in T.B) 1,100
Show this in P&L A/C Dr. side 981
Treatment in Balance Sheet
Debtors 32,110
Less: Bad Debts 500
31,610
Less: New Provision 1,581 30,029
Note:
Adjusted Purchases
Adjusted purchases means that Opening Stock, Returns Outwards and Closing Stock have been adjusted
in the purchases. As a result, Adjusted Purchases Account and Closing Stock are shown in Trial
Balance. Thus, Closing Stock, if given in the Trial Balance, means that Opening Stock, Closing Stock
and Purchases Return are adjusted in the purchases. As a result, Opening Stock and Purchases Return
are not shown in the Trial Balance and instead Adjusted Purchases and Closing Stock are shown therein.
Adjusted Purchases = Opening Stock + Purchases (Net) – Closing Stock.
[or]
Adjusted Purchases = Opening Stock + Purchases – Purchases Return – Closing Stock
Adjusted purchases are transferred in the debit of Trading Account while Closing Stock is shown as an
asset in the Balance Sheet under Current Assets.

Illustration 11
The following balances are extracted from the books of a Trader:
Particulars Dr. (₹) Cr. (₹)
Cash in hand 100 -
B/P - 3,850
Office Expenses 500 -
Rent Received - 320
Bad Debts Provision - 1,900
Advertisement Expenses 1,280 -
Furniture 2,000 -
Purchases 39,000 -
Sales - 65,360
Loan from A - 11,180
Bad Debts 550 -
Donations 2,500 -
Sundry Creditors - 2,500
Sundry Debtors 6,280 -
Direct Expenses 8,400 -
Salaries 1,320 -
Wages 2,240 -
Opening Stock 23,000 -
Machinery 9,340 -
Buildings 11,000 -
Commission 100 -
Drawings 2,000 -
Capital - 24,500
1,09,610 1,09,610
Adjustments
1. Prepaid salaries up to the extent of ₹50.
2. Closing Stock ₹23,500.
3. Provide ₹750 for outstanding interest on loan.
4. Write off further bad debts of ₹160 and maintain a provision for bad debts @ 5% on debtors.
5. Depreciate machinery @ 10% and furniture by ₹240.
Prepare Trading and P& L Account and Balance Sheet.
Solution
for the year ending __________
Dr. Cr.
Particulars Amt.(₹) Amt.(₹) Particulars Amt.(₹)
To Direct Expenses 8,400
To Wages 2,240
To Gross Profit 16,220
88,860 88,860
To Advertisement Expenses 1,280 By Trading (G.P) 16,220
To Interest on loan 750 By Rent received 320
To Office Expenses 500 By Bad debts provision* 884
To Commission 100
To Donation 2,500
To Salaries 1,320
Less: Prepaid 50 1,270

To Depreciation on Machinery 934
To Depreciation on Furniture 240
To Net Profit 9,850
17,424 17,424
BALANCE SHEET
as at _________
Capital 24,500 Buildings 11,000
Add: Net Profit 9,850 Machinery 9,340
34,350 Less: Depreciation 934 8,406
Less: Drawings 2,000 32,350 Furniture 2,000
B/P 3,850 Less: Depreciation 240 1,760
Loan from A 11,180 Closing Stock 23,500
Add: Interest 750 11,930 Debtor (6,280-160-306) 5,814
Sundry Creditors 2,500 Prepaid salaries 50
Cash in Hand 100
50,630 50,630
Working Notes:
Calculation of Provision for Bad Debts
Old Bad debts (given in T.B) 550
Add: New bad debts (given in adjustments) 160
Total 710
Debtors 6,280
Less: New bad debts (given in adjustments) 160
6,120 X 5/100 306 (This is New Provision)
Total 1,016
Less: Provision for bad debts (given in T.B) 1,900
Show this in P&L A/C Cr. side 884 (Negative Balance)
Treatment in Balance Sheet
Debtors 6,280
Less: New Bad Debts 160
6,120
Less: New Provision 306 5,814
10. Treatment of Interest on Capital
The amount brought by a trader in known as capital, he expects some type of return. Net Profit can be
the first type and second is interest on capital, which he will be taking from his business. Interest on
capital is therefore generally given to proprietor who has invested his money in the business and interest
is treated as trade expenses.
Journal entry for this interest on capital will be:
Interest on Capital A/c Dr.
To Capital A/c
(Being interest on capital credited to capital account)
Final accounts will be effected as follows, if interest on capital is given in adjustment
To interest on Capital 2,500

Balance Sheet
Capital A/c 50,000
Add: Interest on Capital @5% 2,500 52,500
Treatment:
1. If given in Trial Balance: Show only in the Debit side of P&L A/c
2. If given in adjustment: 1. P&L Debit Side and 2. Add in Capital in Balance Sheet.
11. Treatment of Interest on Drawings
The proprietor withdraws money during the year for household expenses. These withdrawals are know
as Drawings. The firm charges interest on these withdrawals from the proprietor. This interest on
drawings is a gain to the firm for which the following journal entry is passed
Capital A/c Dr.
To Interest on Drawings A/c
(Being interest charged on Drawings of the proprietor)
Interest on Drawings A/c Dr.
To Profit and Loss A/c
Suppose capital is ₹20,000 and proprietor has drawn ₹2,000 for personal use from the business, Interest
is charged @10% p.a. on this amount. It will effect the final accounts as follows:
By Interest on Drawings 200
Balance Sheet
Capital A/c 20,000
Less: Drawings 2,000
18,000
Less: Interest on drawings 200 17,800
Treatment:
1. If given in Trial Balance: Show only in the Credit side of P&L A/c
2. If given in adjustment: 1. P&L Credit Side and 2. Deduct from Capital in Balance Sheet.
Treatment of
Interest on
Capital
If given in
adjustments
P&L A/c Debit
Side
Balance Sheet
Add in Capital
If given in trial
balance
Only in P&L A/c
Debit Side

12. Treatment of Loan and Interest on Loan
The loan taken from bank or other parties will be treated as liability and interest on such loan will be
paid as it is financial expenses of the business. On the other hand, loan given to someone is treated as
an asset, and interest on such loan will be received. It is an income for the business. Interest will be
calculated as:
Interest will be calculated as: Loan Amount X Rate/100 X Time Period
Note: Interest on loan need to be paid whether there is profit or loss.
Illustration 12
The following are the balances extracted from the books of Gurmeet Singh as on 31st
March 2023. From
these balances and information given, prepare Trading and Profit & Loss Account and Balance Sheet.
Purchases 21,000
Discount Allowed 2,000
Factory Insurance 7,000
Sales 36,000
Salaries 2,000
Stationery Expenses 400
Export Duty 600
Travelling Expenses 400
Interest received 500
Office Expenses 300
Carriage on Purchases 800
Buildings 15,000
Furniture 3,600
Machinery 8,000
Debtors 4,000
Stock (Opening) 4,000
Cash in hand 1,000
Capital 25,000
Creditors 8,600
70,100 70,100
Adjustments
1. Closing Stock was valued at ₹8,000.
2. Depreciation: Building by 2%, Machinery by 10%, and Furniture by 20%.
3. Office expenses outstanding ₹200.
4. Allow 4% interest on capital.
Tratment of
Interest on
Drawings
If given in
adjustments
P&L A/c Credit
Side
Balance Sheet
Deduct from
Capital
If given in trial
balance
Only in P&L A/c
Credit Side

Solution
March 2023
Dr. Cr.
To Factory Insurance 7,000
To Carriage on Purchases 800
To Gross Profit 11,200
44,000 44,000
To Salaries 2,000 By Trading A/c (G.P) 11,200
To Discount allowed 2,000 By Interest received 500
To Stationery Expenses 400
To Export Duty 600
To Office Expenses 300
Add: O/S Expenses 200 500
To Travelling Expenses 400
To Depreciation on Building 300
To Depreciation on Machinery 800
To Depreciation on Furniture 720
To Interest on Capital 1,000
To Net Profit 2,980
11,700 11,700
BALANCE SHEET
as at 31st
March 2023
Capital 25,000 Building 15,000
Ad: Net Profit 2,980 Less: Depreciation 300 14,700
27,980 Machinery 8,000
Add: Interest on Capital 1,000 28,980 Less: Depreciation 800 7,200
Creditors 8,600 Furniture 3,600
O/S Office Exp. 200 Less: Depreciation 720 2,880
Closing Stock 8,000
Debtors 4,000
Cash in hand 1,000
37,780 37,780
Classwork
Problem 8
Cash in Hand 2,700 Sales 4,93,900
Cash at Bank 13,150 Returns Outwards 2,500
Purchases 2,03,375 Capital 3,10,000
Returns Inwards 3,400 Sundry Creditors 31,500
Wages 42,400 Rent 45,000
Fuel and Power 23,650
Carriage on Sales 16,000
Carriage on Purchases 10,200
Opening Stock 28,800
Building 1,60,000

Freehold Land 50,000
Machinery 1,00,000
Salaries 75,000
Furniture 37,500
General Expenses 15,000
Insurance Premium 3,000
Drawings 26,225
8,82,900 8,82,900
Taking into account the following adjustments, prepare Trading and Profit & Loss Account and Balance
Sheet as on March 31, 2023.
1. Stock in hand on March 31, 2023, was ₹34,000.
2. Machinery is to be depreciated at the rate of 10% and furniture @ 20%.
3. Salaries for the month of March 2023 amounted to ₹7,500 were outstanding.
4. Insurance includes a premium of ₹850 on a policy expiring on September 30, 2023.
5. Further bad debts are ₹3,625. Create a provision @ 5% on debtors.
6. Rent receivable ₹5,000.
[Answer: Gross profit: ₹2,18,575; Net profit: ₹1,27,931; Balance Sheet Total: ₹4,50,706]
Problem 9
From the following information, you are required to prepare Trading and Profit & Loss Account and
Balance Sheet.
Raman’s Capital 2,28,800 Stock 1.4.2023 38,500
Raman’s Drawings 13,200 Wages 35,200
Plant and Machinery 99,000 Sundry Creditors 44,000
Freehold Property 66,000 Postages and Telegram 1,540
Purchases 1,10,000 Insurance 1,760
Purchases Return 1,100 Gas and Fuel 2,970
Salaries 13,200 Bad Debts 660
Office Expenses 2,750 Office Rent 2,860
Office Furniture 5,500 Freight 9,900
Discount allowed 1,320 Loose Tools 2,200
Sundry Debtors 29,260 Factory Lighting 1,100
Loan to Mr. Kumar at 10% p.a. balance on
1.4.2023 44,000
Provision for bad and doubtful
debts 880
Cash at Bank 29,260 Interest on loan to Mr. Kumar 1,100
Bills Payable 5,500 Cash on hand 2,640
Sales 2,31,440
Adjustments
1. Stock on 1.3.2023 was valued at ₹72,600.
2. A new machine was installed during the year costing ₹15,400 but it was not recorded in the books as
no payment was made for it. Wages ₹1,100 paid for its erection have been debited to wage account.
3. Depreciation on plant and machinery by 33⅓%; furniture by 10%; Freehold property by 5%.
4. Loose tools were valued at ₹1,760 on 31.3.2023
5. Of the sundry debtors ₹600 are bad and should be written off.
6. Maintain a provision of 5% on sundry debtors for doubtful debts.
[Answer: Gross profit: ₹1,08,570; Net profit: ₹44,880; Balance Sheet Total: ₹3,25,380]
Problem 10
The following balances were extracted from the books of Shri R. Lal on March 31, 2017:
Capital 1,00,000 Rent (Cr.) 2,100

Drawings 17,600 Railway freight on sales 16,940
Purchases 80,000 Carriage inwards 2,310
Sales 1,40,370 Office expenses 1,340
Purchases Return 2,820 Printing and Stationery 600
Stock on April 01, 2016 11,460 Postage and Telegram 820
Bad debts 1,400 Sundry debtors 62,070
Doubtful debts reserve April 01, 2016 3,240 Sundry creditors 18,920
Rates and Insurance 1,300 Cash in bank 12,400
Discount (Cr.) 190 Cash in hand 2,210
Bills receivable 1,240 Office furniture 3,500
Sales returns 4,240 Salaries and Commission 9,870
Wages 6,280 Additions to buildings 7,000
Buildings 25,000
Prepare the trading and profit and loss account and a balance sheet as on 31st
March 2017 after keeping
in view the following adjustments:
1. Depreciate old buildings by ₹625 and addition to buildings at 2% and office furniture at 5%.
2. Write-off further bad debts ₹570.
3. Increase the bad debts reserve to 6% of debtors.
4. On March 31, 2017, ₹570 are outstanding for salary.
5. Rent receivable ₹200 on March 31, 2017.
6. Interest on capital at 5% to be charged.
7. Unexpired insurance ₹240.
8. Stock was valued at ₹14,920 on March 31, 2017.
Problem 11
From the following Trail Balance of Ramesh, you are required to prepare Trading, Profit and Loss
Account and a Balance Sheet as on that date:
Purchases 1,30,295 --
Sales -- 1,80,500
Cash in hand 500 --
Cash at bank 9,500 --
Stock on 1st
April 2023 40,000 --
Wages 22,525 --
Sales Return 2,400 --
Purchases Return -- 195
Repairs 1,675 --
Debtors 30,000 --
Creditors -- 30,305
Bad Debts 2,310 --
Discount Allowed 800 --
Discount Received -- 530
Capital -- 37,500
Interest on Loan 600 --
Salaries 8,000 --
Postage and Courier 800 --
Freight inwards 500 --
Insurance 1,000 --
Donation 125 --
Rent 2,000 --
Machinery 16,000 --
12% Loan -- 20,000

2,69,030 2,69,030
Adjustments:
1. Purchases includes a machine purchased on 1st
October 2023 for ₹4,000 and wages include ₹2,000
paid for its installation.
2. Provide for depreciation on Machinery @ 10%.
3. Stock on 31st
March 2024 was worth ₹40,925.
4. Salaries unpaid ₹800 and rent is paid up to 30th
June 2024.
5. Write off further bad debts ₹400 and create a provision of 5% on debtors for doubtful debts.
6. Prepaid insurance ₹300.
Problem 12
From the following Trial Balance of Sunil as on 31st
March 2024 prepare Trading and Profit and Loss
Account for the year ended 31st
March 2024 and Balance Sheet as at that date.
Capital -- 8,00,000
Drawings 1,80,000 --
Sales -- 15,50,000
Purchases 8,26,000 --
Stock (1st
April 2023) 4,20,000 --
Returns Outwards -- 16,000
Carriage Inwards 12,000 --
Wages 40,000 --
Power 60,000 --
Machinery 5,00,000 --
Furniture 1,40,000 --
Rent 2,20,000 --
Salary 1,50,000 --
Insurance 36,000 --
Bank Loan -- 2,50,000
Debtors 2,06,000 --
Creditors -- 1,89,000
Cash in Hand 15,000 --
28,05,000 28,05,000
Adjustments:
1. Closing Stock ₹6,40,000.
2. Wages outstanding ₹24,000.
3. Interest rate on Bank Loan is 8%.
4. Bad Debts ₹6,000.
5. Provision for Doubtful Debts to be 5%.
6. Rent is paid for 11months.
7. Insurance premium is paid per annum, ended 31st
May 2024.
8. Loan from the bank was taken on 1st
October 2023.
9. Provide Depreciation on machinery @ 10% and on furniture @ 5%.
Self-Assessment
Q. No. 6
Prepare the trading profit and loss account of M/s Mohit Traders as on 31st
March 2023. Prepare Trading
and Profit and Loss Account and Balance Sheet as on that date:
Opening Stock 24,000 Sales 4,00,000
Purchases 1,60,000 Return outwards 2,000

Cash in hand 16,000 Capital 1,50,000
Cash at bank 32,000 Creditors 64,000
Returns inwards 4,000 Bills payable 20,000
Wages 22,000 Commission received 4,000
Fuel and Power 18,000
Carriage inwards 6,000
Insurance 8,000
Buildings 1,00,000
Plant 80,000
Patents 30,000
Salaries 28,000
Furniture 12,000
Drawings 18,000
Rent 2,000
Debtors 80,000
6,40,000 6,40,000
Adjustments:
1. Salaries outstanding ₹12,000.
2. Wages outstanding ₹6,000.
3. Commission is accrued ₹2,400.
4. Depreciation on building 5% and plant 3%.
5. Insurance paid in advance ₹700.
6. Closing stock ₹12,000.
Q. No. 7
Following are the balances extracted from the books of Narain on 31st
March 2024.
Narain’s Capital 3,00,000 Sales 15,00,000
Narain’s Drawings 50,000 Sales Return 20,000
Furniture and Fittings 26,000 Discount (Dr.) 16,000
Bank Overdraft 42,000 Discount (Cr.) 20,000
Creditors 1,38,000 Insurance 20,000
Building 2,00,000 General Expenses 40,000
Stock on 1st
April 2023 2,20,000 Salaries 90,000
Debtors 1,80,000 Commission (Dr.) 22,000
Rent from tenants 10,000 Carriage on Purchases 18,000
Purchases 11,00,000 Bad Debts written off 8,000
Adjustments:
1. Closing Stock at cost as on 31st
March 2024 was ₹2,00,600, whereas its Net Realisable Value (Market
Value) was ₹2,05,000.
2. Depreciation: Building by ₹3,000 and Furniture and Fittings by ₹2,500.
3. Make a provision of 5% on debtors for doubtful debts.
4. Carry forward ₹2,000 for unexpired insurance.
5. Outstanding Salary was ₹15,000.
Prepare Trading and Profit & Loss Account and Balance Sheet as at that date.
Hints: 1. Closing Stock will be taken at ₹2,00,600, being lower of Cost and Net Realisable Value
(Market Value) following the Prudence Concept.
2. ₹2,000 out of Insurance Expenses are Prepaid Insurance.

Q. No. 8
Prepare Trading and Profit & Loss Account for the year ended 31st
March 2024 and Balance Sheet as
at that date from the following balances taken from the books of Vijay on 31st
March 2024 after giving
effect to the following adjustments:
i. Stock as on 31st
March 2024 was valued at ₹2,30,000.
ii. Write off further ₹1,800 as Bad Debts and maintain the Provision for Doubtful Debts at 5%.
iii. Depreciate Machinery at 10%.
iv. Provide ₹7,000 as outstanding interest on loan.
Capital 2,45,000 Loan 78,800
Drawings 20,000 Sales 6,53,600
General Expenses 47,400 Purchases 4,70,000
Building 1,10,000 Motor Car 20,000
Machinery 93,400 Provision for Doubtful Debts 9,000
Stock on 1st
April 2023 1,62,000 Commission (Cr.) 13,200
Insurance 13,150 Car Expenses 18,000
Wages 72,000 Cash 800
Debtors 62,800 Bank Overdraft 33,000
Creditors 63,500 Charity 1,050
Bad Debts 5,500
[Answer: Gross profit: ₹1,79,600; Net profit: ₹95,510; Balance Sheet Total: ₹5,02,810]
I. Multiple Choice Questions
Choose the Correct Answer
1. Adjustments given are recorded once in Trading and Profit & Loss Account and again in Balance
Sheet. It is so because of
a. Matching Principle b. Dual Aspect Principle
c. Accrual Concept d. Materiality Principle
2. Expenses incurred but not yet paid are accounted because of
a. Matching Principle b. Dual Aspect Principle
c. Accrual Concept d. Materiality Principle
3. Wages paid for installation of machine is added to the cost of machine because of
a. Accrual Concept b. Matching Principle
c. Materiality Principle d. Cost Principle
4. Prepaid Insurance in the Trial Balance is shown in the Balance Sheet in the assets side because of
a. Accrual Concept b. Matching Principle
c. Materiality Principle d. Cost Principle
5. Indirect Expenses are transferred to
a. Trading Account b. Profit & Loss Account
c. Balance Sheet d. Trading Account and Balance Sheet
6. Wages and Salaries Account is shown in the
a. Trading Account b. Profit & Loss Account
c. Balance Sheet d. Trading Account and Balance Sheet
7. Closing Stock is valued at
a. Cost b. Net Realisable Value (Market Value)
c. a. or b. w.e.is more d. a. or b. w.e.is less

8. Closing Stock is valued at Cost or Net Realisable Value (Market Value) which ever is less because
of
a. Going Concern Concept b. Accrual Concept
c. Prudence or Conservatism Concept d. Consistency Concept
9. Closing Stock given outside Trial Balance is shown in
a. Trading Account and Balance Sheet
b. Profit & Loss Account
c. Balance Sheet
d. P&L A/c and Balance Sheet
10. Prepaid Expenses, if given in the Trial Balance is shown in
a. Trading account, as deduction from the respective expenses
b. Profit and Loss Account as deduction from the respective expenses
c. Trading and Profit and Loss Account, as deduction from the respective expenses and in the Balance
Sheet, as an asset.
d. Balance Sheet
11. Income Received in advance, if given in the Trial Balance, is shown in
a. Trading account, as deduction from the respective income
b. Profit and Loss Account as deduction from the respective income
c. Profit and Loss Account, as deduction from the respective income and in the liabilities side of Balance
Sheet.
d. Balance Sheet in the liabilities side.
12. Balance Sheet is prepared to know
a. Financial Performance b. Financial Position
c. Liabilities position c. Assets Position
13. Adjustment entries are those which are passed
a. in the middle of the year
b. at the beginning of the year
c. for adjustment of prepaid and outstanding expenses/incomes
d. for increasing profit
14. Depreciation of current year in the Trial Balance is
a. transferred to the debit of P&L A/c and it is deducted from that particular asset in the Balance Sheet.
b. shown in the asset side of Balance Sheet as a deduction from the particular asset.
c. transferred to the debit side of P&L Account.
d. transferred to the debit side of Trading Account.
15. Provision for doubtful debts in excess of the required provision is credited to
a. Debtors Account b. Trading Account
c. Profit and Loss Account d. Capital Account
16. Debts that were earlier written off, if recovered, are transferred to the credit side of
a. Debtors Account b. Trading Account
c. Profit and Loss Account d. Provision for Doubtful Debts Account
II. Very Short Answer Questions
1. What is meant by Adjustment Entry?
2. Why is it necessary to pass the Adjustment Entry?
3. What is meant by Adjustment Purchase?
4. How are outstanding expenses shown in the final accounts?
5. How are prepaid expenses shown in the final accounts?

6. What is meant by unearned income?
7. How is unearned income treated in the final accounts?
8. What is meant by depreciation?
9. What is meant by bad debts?
10. What is meant by provision for doubtful debts?
**********

Unit 4 Final account of sole proprietor.pdf

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Unit 4 Final account of sole proprietor.pdf