Chapter 02 Final Accounts

Chapter- 2
Final Accounts
(Without Adjustment)
Learning Objectives
After going through this chapter, students will be able to:
➢ Describe the meaning of financial statement

➢ Know various types, objectives and nature of financial statements
➢ Learn about meaning, features and objectives of Trading, Profit and Loss Account
➢ Understand the meaning, objectives of Balance Sheet
➢ Prepare Trading, Profit & Loss Account and Balance Sheet in the prescribed format
Introduction
The process of accounting starts with recording of transactions of the business by making journal
entries, posted the entries in to ledger accounts. All those ledger accounts are balanced properly
followed by preparation of a Trial Balance. Trial balance is made to check the arithmetical
accuracy of the accounts.
The next step is to prepare financial statements which fulfill the requirement of the trader; as the
trader is normally interested to know the operating results of the concern along with financial
status. Such financial statements provide detail information about the financial and profitability
position during the accounting cycle. Trading and Profit & Loss Account with Balance Sheet are
prepared for the accounting period as the component of a Financial Statement. Because of the
timing of its preparation, financial statements are considered as Final Account or Final Accounts.
Profit earning is the main objective of running a business. The success of the business results in
profit what the owner of the business aims for. Accounts are prepared as per the accounting
policies to measure the degree of success of the enterprise at the end of each accounting period.
Transactions are recorded in journal, posted to the respective ledger accounts and prepare the
Trial balance in order to ensure the arithmetical accuracy. Finally, a statement prepared
containing the summarized fact and figures to ascertain the net result of the business at the end of
the year. Such statement is known as Financial Statements.
Financial statement comprises two important statements, the profit and loss account and the
balance sheet. The profit & Loss Account presents a bird’s eye view of the operations for the
entire period, while the balance sheet portrays the financial position at a point of time when the
accounting period comes to a close. Financial Statement may be defined as a statement which is
prepared to know the exact financial position of an organization on a particular date. It provides
a clear picture about the reliability, durability, and credit worthiness of the firm. It plays the role
of a reflector to safeguard the interest of the investor. It comprises of two parts i.e. Income
statement and Balance sheet.
As per L.K.Rockly, “The Profit & Loss Account is very similar to a cine camera’s picture
of something occurring over a period of time, while the balance sheet may be one of the stills
taken at any stage during the run of that particular cine film.
The American Institute of Certified Public Accountants state the nature of financial
statements as “ financial statements are prepared for the purpose of presenting a periodical
review of report on progress by the management and deal with the status of investment in the
business and the results achieved during the period under review.
According to John M Myer, the financial statements are composed of data which are the
result of a combination of recorded facts concerning the business transactions, conventions
adopted to facilitate the accounting technique, postulates or assumptions made to and personal
judgments used in the application of the convention and postulates.
In the words of R.N.Anthony, Financial statements are interim reports presented annually and
reflect a division of the life of an enterprise into more or less arbitrary accounting period- more
frequently a year.
From the above definition it is concluded that financial statements are organized summaries of
information about the financial performance & the position of an organization.
Types of Financial Statements:-
Basically financial statements presents in the following shapes.
1. The Income Statement/ Profit & Loss Account
2. The Position Statement/ Balance Sheet
3. The Statement of Cash Flow
4. The Funds Flow Statement
5. The Statement of Retained Earnings
It is not mandatory to prepare all these statements but the Income Statement & Position
Statement has to prepare in order to fulfill the objective of Financial Statement. Now a day a new
resolution is under observation of the cabinet committee of our country to make the Cash Flow
Statement mandatory to be included in the financial statement.
Objectives of Financial Statements:-
The primary objectives of preparing financial statements are:-
1. To ascertain the profit or loss of the enterprise during an accounting year.
2. To depict the financial position of the business at the end of the accounting year.
3. To provide the reliable information about the flow of cash during the accounting period.
4. It helps to obtain information relating to the requirements of these statements.
5. To reveal the changes in working capital for the smooth operation of the business.
Nature of Financial Statements
The following are the features of the financial statements.
1. Recorded Facts:-
All the recorded facts formed the body of a financial statement. It means already made records
are taken in to consideration for the purpose of preparing a suitable and legal statement of
finance. For instance, purchase and sales made, expenses and income accrued during the
financial year.
2. Accounting Convention:-
Principles are keys to success. Accounting follows the same path in the form of financial
statement. Accounting Convention consists of those customs or traditions which act as a guide to
the accountants for the preparation of financial statements. The main accounting conventions are
Materiality, Full Disclosure, Consistency and Conservatism.
3. Postulates:-
It is the accountant who prepares the statement by taking due responsibility. To facilitate
decision making accountant takes some assumptions regarding business. One of the assumption
is business should carried on for a long time known as going concern. It takes the decision
regarding the value of money which remains constant in different periods.
4. Personal judgments:-
As per the human tendency, recognition of proven convention is limited. People take their own
decision or judgment regarding certain accounting matters. It may be contrary in nature but
follows disparately. For instance different methods followed for valuation of stock, valuation of
depreciation depends upon the mercy of the creator.
Composition of Financial Statements:
Generally financial statements comprise two basic statements:
a. The Income Statement or Trading & Profit and Loss A/c.

b. The Position Statement or Balance Sheet.
The Income Statement or Trading and Profit and Loss Account
The meaning of the term Income is different in Economics and Accountancy. In Economics
Income is the real increase in the ownership funds between two points of time. Where,
Accounting refers that income is measured in terms of net profit. It is a process of matching the
revenues with the related expenses. The difference between expenses and income is known as
profit or loss. Profit & Loss Account is a financial statement prepared to ascertain the level of
profit or loss occurred during the accounting period. It is generally prepared at the end of the
accounting period by matching incomes with that of expenses. It includes all the indirect
incomes and expenses along with the gross profit carried forward from Trading Account. The
final outcome this account should be transferred to capital of the proprietor. It is the true reflector
of the financial performance of the business.
Objectives:-
The main objective of preparing profit and loss account can be briefly summarized as follows.
1. To ascertain Net Profit or Loss:- Profit and Loss Account is prepared to provide
information about the net profit earned or net loss suffered by the business during a particular
accounting period.
2. To disclose Financial Performance:- Result of the operations of the business carried

on through out the accounting year can be obtained in terms of net profit or loss. Profit & Loss
Account shows the real financial performance of the business as on a particular date.
3. To know the change in Profitability:- A comparative statement can be prepared to

ascertain the changes made in profit of this year with that of previous year. It can improve the
profitable factors of the concern.
4. To provide control over Expenses and Revenues:- The expenses and the incomes are
shown in the profit and loss account can be checked and compared with previous years to know
the changes and to make an exercise control over them.
5. To forecast the future performance:- The Income Statement provides a base on which
estimations or future forecasting regarding profit earning can be made. It ensures the strength of
the organization to grow and achieve the desired level of profits in upcoming near future period
of time.
Trading Account
The main activity of a trading firm is purchase and sell of goods. Goods are first purchased from
producers, brought to the go down by spending direct expenses like freight, Octroi, cartage etc.
Sometimes the total goods purchased may not be sold during the current accounting year. The
value of unsold goods becomes the closing stock at the end of the year. The closing stock of one
year becomes the opening stock for the next year.
Objectives of Trading Account
The main objectives of trading account are;
a. To calculate the gross profit or loss out of the whole business operations during the
accounting year.
b. To disclose detail information on direct expenses like carriage, freight, wages, other
manufacturing expenses etc.
c. To ascertain the cost of goods sold
d. To check and measure the efficiency level of the business which is reflected through the
final result of Gross Profit or Loss.
e. To make a comparison between the performance of the current year with that of the
previous year.
Importance of Preparing Trading Account
Trading Account has the following advantages or importance in the financial statement.
Reveals the profit or loss position
Trading account records all the direct expenses and incomes and find out the profit or loss by
comparing the income with the expenses. The final balancing figure shows the gross margin of
the business during a period.
Helps in getting information regarding to purchase and stock
Trading Account provides informations regarding net purchase, unsold stock, purchase return
and opening balance of stock.
Direct Expenses proportion

Trading account provides a picture about the direct expenses proportion to sales over a period of
time.
Stock Analysis
As stock values are reflected in trading account significant changes in the amount of stock can be
enquired in to.
Specimen of Trading Account
Trading Account
For the year ended ……………
Particular Amount Particular Amount
To Opening Stock By Sales
To Purchases Less- Return Inward
Less: Return Outward By Closing Stock
To Wages
To Man. Expenses
To Carriage
To Gross Profit c/d
xxxxx xxxxx
By Gross Profit b/d
Illustration 1
On the basis of following balances, prepare the trading account for the year ending 31 st
December, 2012.
Rs
Purchase 40,000
Wages 10,000
Opening Stock 20,000
Freight & Duty 2,000
Sales 70,000
Carriage Inward 1,000
Manufacturing Expenses 6,000
Purchase Return 2,000
Sales Return 100
Power 600
Coal & Coke 200
Octroi 100
Clearing Charges 300
Closing Stock Valued at Rs 30,000.
Solution:
Trading Account
Particulars Amount Particulars Amount
To Opening Stock 20,000 By Sales 70,000

Purchases 40,000 Less Sales return 100 69,900
Less Purchase return 2,000 38,000 By Closing Stock 30,000
Wages 10,000
Freight & duty 2,000
Power 600
Coal and Coke 200
Octroi 100
To Gross Profit c/d 21,700
99,900 99,900
Illustration 2
From the following details, calculate profit made by a trader in 2012-13:

Purchase 40,000
Purchase return 4,000
Sales return 8,000
Carriage inward 1,000
Sales 80,000
Closing stock 2,000
Solution:
Trading Account
For the year ended 31st March, 2013

Purchases 40,000 Less Sales return 8,000 72,000
Less Purchase return 4,000 36,000 By Closing Stock 2,000
74,000 74,000
Problems for Practice
1. Prepare Trading Account of Jyoti from the following balances for the year ended 31st March,
2013.

Purchase 60,000
Sales return 7,000
Sales 90,000
Closing stock 10,000
[Gross Profit: Rs 9,000]
2. On the basis of following balances, prepare the trading account for the year ending 31 st
December, 2012.
Rs
Purchase 40,000
Wages 10,000
Sales 90,000
Sales Return 2000
Power 800
Coal & Coke 200
[Gross Profit Rs 38,000]
Profit & Loss Account
Profit & loss Account is otherwise known as Income Statement which reflects the income or
loss arises during a course of time of a business organization. It is the process of matching
revenues and the expenses incurred in a business for different operating activities. The
difference between revenues and expenses is either net profit or net loss for the period. It
contains the balancing figure extracted from the trading account whether gross profit or loss.
It gives overall view of the results of a business which can be used for intra firm and inter
firm comparisons. It provides details of indirect expenses or overheads which are of great
help for controlling overhead costs. The final figure comes out as a net figure of profit or
loss.
Features of Profit & Loss Account
1. Profit and Loss Account is a nominal account prepared at the end of the accounting year.
2. Profit and Loss Account records all the transactions related to revenue and not the capital.
3. It records all those expenditures and incomes relating to the current accounting period.
4. It includes outstanding expenses and incomes along with the expenses paid in advance
and income received in advance.
Need for Profit & Loss Account
The profit and loss account is required to ascertain the profit or loss of the concern by comparing
the revenue with that of expenses. The need for making the profit and loss account is given
below:
a. To get a detailed idea about the income position of the concern

b. To make a comparative study of profits
c. To have a better control over the expenditures
d. To help in making different future plans
e. To calculate the amount of income tax payable
f. To help in making the Balance Sheet
Importance or Advantages of Profit & Loss Account
Preparation of profit & loss account gives the following advantages:
➢ It gives a clear view of the results of the business.

➢ It provides details of indirect expenses or overheads.
➢ It helps in determining the profitability ratio which is of great interest to financial
analysis.
➢ The figure of net profit as revealed by income can be suitably adjusted to ascertain cash
from operating activities.
Specimen or Proforma of Profit & Loss Account
Profit & Loss Account of B. Co. Ltd

For the year ended ……………………
To Gross Loss c/d By Gross Profit b/d
To Salaries By Interest Received
To Repair By Commission Received
To Printing and stationery By Dividend Received
To Audit fees By Apprenticeship premium
To Legal charges By Bad debts recovered
To Telephone expenses By Sale of Old news paper
To Office heating By profit on sale of fixed assets
To Office lighting By Interest on drawings
To Traveling Expenses By Sundry receipts
To Free Samples
To Delivery Van Expenses
To Commission on Sales
To Export duty
To Carriage Outward
To Brokerage
To Go down rent
To Interest on loan
To Bank charges
To Repairs
To Charity
To Trade Expenses
To Loss of sale of fixed assets
To Gifts and presents
To Donations
To Loss of stock by fire
To fines and penalty
To Employees welfare expenses
To Rent
To Bad debts
To Depreciation on Fixed Assets
To Interest on Capital
To Net Profit c/d By Net Loss c/d
xxxxx xxxxx
Profit and Loss Account (Vertical Format)
Gross Profit xxxx

Add: Other Income xxxx
Discount (cr) xxxx
Commission Received xxxx
Non-trading Income xxxx
Dividends Received xxxx
Interest (cr) xxxx
Abnormal Gain xxxx
Receipt of Insurance Claim xxxx
Profit on sale of fixed asset xxxx
Less:
Office and Administrative Exp. xxxx
Selling & Distribution Expenses xxxx
Financial Expenses xxxx
Maintenance Expenses and Losses xxxx
Net Profit transferred to Capital xxxx
Difference between Trading and Profit & Loss Account
Following are the main points of difference between trading account and profit and loss
account:
Trading Account Profit and Loss Account

It is the second stage of the final
1 It is the first stage of final accounts. 1
accounts.
It shows the gross result (gross profit It shows the net results (net profit or net
2 2
or gross loss) of the business. loss) of the business.
All direct expenses (expenses
All expenses connected with sales and
connected with purchase or
3 3 administration (indirect expenses) of
production of goods) are considered in
business is considered.
it.
It always starts with the balance of a
It does not start with the balance of
4 4 trading account (gross profit or gross
any account.
loss).
Its balance (G.P or G.L) is transferred Its balance (N.P or N.L) is transferred to
5 5
to profit and loss account. capital account in balance sheet.
Gross Profit Vs Net Profit
Production is possible by the united efforts of four factors of production viz. land, labour, capital
and organization. The whole of income or total revenue earned by firm is divided among four
factors of production. After distributing the revenue among three factors of production, what
remains goes to the share of an entrepreneur. This residual revenue thus firms profit of an
entrepreneur. Thus profit is a residual income. The share of income received by an entrepreneur
in the process of distribution is called profit. Therefore, profit is the excess of income from the
sale of production over his cost of production. As an entrepreneur takes vital decision in
production, makes co-ordination among factors of production and bears all risks, uncertainty, he
deserves profit.
J.B. Clarks opines that profit arises because of the changes that frequently occur in the economy.
To Schumpeter profit is a reward for an entrepreneur's introducing innovation. F.H. Knight has
emphasized the role of uncertainty in giving rise to profits. As entrepreneur takes all the hardship
of production, he therefore deserves profit. In production, profit is, thus, the difference between
total revenue and total cost of production.
Therefore Profit = Total revenue — (Rent + Wages + Interest)
Gross Profit:
The difference between the total revenue and total cost is called Gross profit. Gross profit arises
after deducting all expenses of production from the total income. Thus it is the excess of total
income over total cost of production. To produce, output, the firm or entrepreneur has to hire and
pay for labour, raw materials, powers, rent for land, Interest on borrowed capital and meet
depreciation changes. After selling their output a firm get certain revenue from the sale of its
products. The excess of the revenue earned over these various payments and charges is called
gross profit. Gross profit consists of various elements. In other words there are various
components of gross profits which have been given below.
(i) Wages of Management:
The entrepreneur performs the task of management, and supervision. But his remuneration for
the above tasks is not deducted from the Gross Profit. If he had done the above task else where
he would have received certain rewards. Thus from gross profit his remuneration for
management must be deducted. Thus the element of wages of management is a part of the gross
profit.
(ii) Rent on entrepreneur's own land:
Gross profit also includes rent that arises from the entrepreneur's own land used in his production
of output. The entrepreneur in his production uses his own land, factory building, worker's sheds
etc. which he could have given to other producers in return of rent. Thus the rent arising out of
his own land and building is to be subtracted from the gross profit to arrive at net profit.
(iii) Interest on his own Capital:
The entrepreneur has also got his own capital which he invests in the production of output. He
never takes interest from the employment of his capital. His gross profit, therefore, includes the
interest on capital provided by the entrepreneur. His personal capital could have fetched him
some income if they had been provided to other's production activity. Thus interest on his capital
must be deducted from the gross profit.
(iv) If the entrepreneur earns excess profit on account of certain advantages of monopoly the
excess or super normal profit subtracted from the gross interest. Because, this profit se of market
advantage not because of his effort. Thus income calculate net profit his monopoly profit must be
sub' id from the gross profit.
(v) Sometimes profit arises due to certain chance factors, is profits arise unexpectedly. These
profits are caused by chance not by human effort. Thus the amount of profit arising out of such
source is to be deducted from the gross profit.
Net Profit:
Net Profits arise because of function of a person as an entrepreneur. These functions are risk
bearing ability, introduction ovation etc. Thus net profit is the excess of revenue over it and
implicit cost of production. After deducting all explicit costs from the gross profit, the residue
forms the net profit. Profit may be negative or positive. Net profits’ include five components
which are explained below.
(i) Payment for risk and uncertainty:
Every business involves some amount of risks and uncertainty. An entrepreneur takes risks in the
business. The business may flourish or may be liquidated due to widespread loss. Demand for
the product may decline overnight. This may lead to a severe fall in sale of output. Thus business
uncertainty and risks are borne by an entrepreneur. Thus he is rewarded for risk bearing. This
reward is included in net profits.
(ii) Reward for bargaining ability:
The reward arising out of bargaining ability of an entrepreneur is also included in the net profit.
The entrepreneurs having good bargaining power can employ cheaper factors of production and
thereby reduce their cost of production. So they earn more revenue and hence more profit.
(iii) Reward of Innovation:
Innovation means introducing new method of production in production. By introducing newly

invented techniques in production, an entrepreneur reap wide spread profit than others. The
reward for having introduced innovation in the production is included in the net profit.
(iv) Monopoly gains:
Monopoly gains arise due to the nature of market. In such a market condition the entrepreneur
can pay lower prices to the hired factors. He can charge higher price of his product as he enjoys
the exclusive power of producing that brand of output. In monopoly, the profit is definitely
higher. We also exclude such monopoly gains from gross profit.
(v) Chance gains

Profit may arise due to certain chance factors. In such a case no amount of an entrepreneur's
effort has been made to reap such profit. Due to sudden rise in demand for a commodity will
raise the price thereby giving rise to windfall profit. This type of profit is not included in net
profit. Thus in order to arrive at net profit this windfall gain is to be subtracted from gross profit.
Illustration 3
From the following information, prepare the Profit and Loss Account for the year ended 31st
March, 2013.
Gross Profit 3,00,000 Salaries 10,000

Wages 1,000 Carriage Inward 2,000
Carriage Outward 1,500 Discount allowed 1,000
Discount Received 500 Dividend received 2,000
Profit on sale of assets 3,500 Commission received 1,300
Interest on loan 2,700 Interest received 1,200
Rent paid 2,000 General Expenses 3,800
Misc. Expenses 400 Loss on sale of assets 600
Solution:
Profit and Loss Account

For the year ended 31st March 2013
To Salary By Gross Profit b/d 3,00,000
To Carriage outward 1,500 By Discount received 500
To Discount allowed 1,000 By Commission received 1,300
To Rent 2,000 By Interest received 1,200
To General Expenses 3,800 By Dividend Received 2,000
To Interest on loan 2,700 By Profit on sale of assets 3,500
To Misc. Expenses 400

To Loss on sale of assets 600
To Net Profit c/d 2,96,500
3,08,500 3,08,500
Illustration 4
From the following data from the records of SAI Traders on 31st December, 2012 are given
below;
Opening Stock 4,000

Closing stock 8,000
Cash sales 25,000
Sales returns 2,000
Credit sales 2,000
Credit purchases 11,000
Cash Purchases 2,000
Carriage inward 500
Capital 50,000
Drawings 2,000
Office Expenses 2,400
Calculate the following:

a. Net Sales
b. Net Purchase
c. Gross Profit
d. Capital Balance
Solution
(a) Net Sales

Cash Sales 25,000
Add: Credit Sales 2,000
27,000
Less: Sales Returns 2,000
Net Sales 25,000
(b) Net Purchase

Credit Purchases 11,000
13,000
Less: Purchases Return 1,000
Net Purchases 12,000
(c) Gross Profit

Net Sales 25,000
Less: Cost of goods sold
Opening stock 4,000
Add: Net Purchase 12,000
Carriage Inward 500
Less: Closing Stock 8,000
Gross Profit 8,500
(d) Capital Account
Capital at the beginning 50,000
Add: Net Profit (8,500 – 2,400) 6,100
Less: Drawings 2,000
Capital as on 31st March 2013 54,100
Illustration 5
From the following trial balance of Jyoti Traders, Prepare Trading and Profit and Loss Account
for the year ending on 31st March, 2013.
Particulars Amount Amount

Capital 15,000
Plant & Machinery 13,000
Sundry Debtors and Creditors 1,200 600
Drawings 500
Purchases 5,250
Wages 1,500
Bank 500
Repair 25
Stock 1,000
Return Outward 250
Rent 200
Sales 8,200
Manufacturing Expenses 400
Trade Expenses 350
Bad Debts 100
Carriage 75
Bills Payable 250
Return Inward 200
24,300 24,300
Solution
Trading and Profit & Loss Account of Jyoti Traders

To Purchases 5,250 Less- Return Inward 200 8,000
Less: Return Outward 250 5,000 By Closing Stock 1,400
To Wages 1,500
To Man. Expenses 400
To Carriage 75
9,400 9,400
To Repair 25 By Gross Profit b/d 1,425
To Trade Expenses 350
To Rent 200
To Bad debts 100
To Net Profit c/d 750
1,425 1,425
Problems for Practice
1. From the following information, prepare the Profit and Loss Account for the year ended 31st
March, 2013.

Carriage Outward 500 Discount allowed 1,000
Discount Received 500 Dividend received 2,000
Misc. Expenses 600 Loss on sale of assets 500
2. From the following data from the records of Tarun on 31st December, 2012 are given below;
Opening Stock 3,000

Closing stock 9,000
Cash sales 35,000
Sales returns 1,000
Credit sales 2,000
Carriage inward 500
Capital 80,000
Drawings 2,000

a. Net Sales
b. Net Purchase
c. Gross Profit
d. Capital Balance
3. From the following trial balance, Prepare Trading and Profit and Loss Account for the year
ending on 31st March, 2013.
Capital 25,000

Drawings 500
Purchases 5,250
Wages 1,500
Bank 500
Repair 25
Stock 2,000
Return Outward 250
Rent 200
Sales 9,200
Trade Expenses 350
Bad Debts 100
Carriage 275
Bills Payable 450
Return Inward 200
35,500 35,500
Balance Sheet
Balance sheet is a statement which portrays the financial position of a business at a point of time.
It is prepared to record capital, assets and liabilities of the business. It reflects the outcome of
investing and financing decisions. It reflects the claim of owners and others in the business. It is
prepared at the end of the accounting year. It is a statement containing ledger balances of real
and personal accounts. It records all the assets in the right hand side and liabilities in the left
hand side. Assets and liabilities can be shown by non-corporate entities in the order of liquidity
and permanence.
Features of Balance Sheet

The features of balance sheet are as follows:
➢ It is made prepared on a particular date; for a year.

➢ Assets and Liabilities side of a balance sheet must tally with each other.
➢ It shows the Financial Position of the business.
➢ It records the assets and the liabilities in the right and left hand side of the statement
chronologically.
Objectives of preparing Balance Sheet
The main objectives of preparing a Balance Sheet are to ascertain or estimate the value of the
business and find out the financial status of the concern. While ascertaining the financial
position, we also obtain the following additional information:
Nature and Value of the assets:
Balance Sheet represents various assets at their original value as per their date of acquisition. It
helps in depicting a clear picture about the financial position of the concern on a particular date.
Nature and extent of liabilities and actual capital:
It is the balance sheet which also records various liabilities which are long term, fixed and
current by nature in a classified form and depicts the amount of liabilities the business owes to
different types of creditors. It helps in presenting the actual value of capital of the business at the
end of trading period, representing the excess of assets over liabilities.
Solvency of the business:
The solvency position of any concern is easily identified by taking the help of the position
statement which shows the sources and application of funds during an accounting year in a
business enterprise. In other words one can say, If the assets exceed the liabilities the business is
considered as solvent. Greater is the difference, stronger is the financial position. On the other
hand, if liabilities exceed the assets, the business is considered as insolvent.
Over-trading and under-trading:
If the total creditors exceed assets - Cash, Bank, Investments, Debtors etc., the position of the
business is financially unsound, indicating over-trading. For sound financial position, a business
must have sufficient working capital. On the other hand, under-trading indicates excess liquid
assets over current liabilities, showing idleness of the funds.
Advantages of Balance Sheet

The preparation of balance sheet provides the following benefits to the end users.
➢ It reflects the financial position of the business as features by its assets and liabilities.
➢ It shows the end result of financing and investment decisions.
➢ It provides relevant information for calculating proportions to portray the liquidity
position of the concern.
➢ It represents the claim of owner and others in the business.
Limitations of Balance Sheet
➢ A balance sheet is prepared on going concern basis and therefore, does not necessarily
reflect the current value of the assets of a concern.
➢ A balance sheet is based on historical costs and does not make any allowance for the
impact of inflation on the assets and liabilities at a given date.
➢ Despite the emergence of accounting standards, personal judgments still enter in to some
fields of accounting.
➢ A periodical balance sheet is essentially an interim report and therefore, cannot be final.
➢ Balance sheets are prepared at the end of a financial year and may include figures
particularly for working capital items that are not representative of the year as a whole.
➢ Since everything is valued in terms of money, a balance sheet fails to depict events and
things which cannot be quantified in monetary items.
➢ This convention of conservatism can lead to some bias in the accounting.
➢ Certain problems arise in financial accounting with regard to additively and
comparability.
Contents of Balance Sheet
There are two sides of Balance Sheet namely Liabilities and Assets. The various component
parts of balance sheet is given below in detail for a better understanding:
Assets
Assets represent the resources needed by the business to carry on the operation. It may be
procured either by capital or loan. It may also be arranged through borrowing from outsiders and
suppliers known as creditors. Assets include properties, possessions and rights occupied by a
concern possessing monetary value. Assets may be classified in to various parts as given below:
Fixed assets:
Fixed assets are assets which are acquired for utilization and not for resale. These assets are
generally valued at cost less depreciation. These include items acquired for use in the operation
of business for a relatively long period of time such as land and buildings, plant and machinery,
furniture etc. Fixed assets are shown in the assets side of the balance sheet. These are considered
as capital expenditure made for a long term basis. The position of the fixed assets of an
enterprise shows the stability of the business. Investment in fixed assets in a concern results in
block of capital. Fixed assets, on the other side reflects the utilization of various long term
sources of funds.
Current Assets or Circulating Assets or Floating Assets:
Current assets refer to those assets which are converted in to cash during normal operating cycle
of the business. For example, conversion of cash in to stock, into debtors, debtors in to bills
receivable and bills receivable in to cash completes operating cycle of business. Current assets
are also termed as fluctuating assets because of easy conversion from one form to another during
operation of business. It includes cash, bank, stock, debtors, bills receivable, short term
investments, prepaid expense and accrued incomes. These assets are considered as temporary
assets. Current assets denote those assets which are held for sale or to be converted into cash
after some time e.g., sundry debtors. bills receivables, stock of goods etc.
Liquid Assets:
Liquid assets are those assets which are with us in cash or easily converted into cash e.g., cash in
hand, cash at bank, investments etc.
Tangible assets have physically identity and include items which can be seen and touched like
Land & Building, Plant & Machinery etc. These assets generally helps in carrying on the
business for a long term.
Wasting Assets:
Wasting Assets denotes that category which is depreciated through "wear and tear" and whose
values expire with lapse of time or that become exhausted through working. This is a sub-class
of fixed assets e.g., plant machinery, mines etc.
Intangible:
There are assets which have no physical existence. Which can neither be seen with eyes not
touched with hands. These are called intangible assets or fictitious assets. They do not represent
anything valuable. They include debit balance of profit and loss account, goodwill etc.
Contingent Assets:
Contingent asset refers to an asset which is dependent on several factors like the occurrence or
non-occurrence of a specific event or upon the performance or non-performance of a specified
act e.g. for example, uncalled capital of a limited company.
Outstanding Assets:
Expenses paid in advance i.e., prepaid expenses, and income earned but not received are known
as outstanding assets.
Fictitious Assets:
Fictitious assets are not the real assets because of no benefit due to these but called so. These
assets include debit balance of profit & loss account, deferred revenue expenditure like
advertisement suspense account, discount of issue of equity shares and debentures, expenses
related to formation of business etc and are settlement in short period of time.
Classification of Liability
Liabilities are classified in to the following parts:
• Long term liabilities

• Current Liabilities
• Contingent Liabilities
Short Term and Long Term Liabilities
Short term liabilities refer to those liabilities which are payable within a short period of time,
ordinarily in a year. These include creditors, bills payable, outstanding expenses, unearned
income etc. Long term liabilities due for settlement in short period of time are also termed as
current liability.
Contingent Liability
Contingent Liability refers to an obligation to pay on the happening or non-happening of an

uncertain event. It is not an actual liability and therefore, it is not recorded in the balance sheet.
These liabilities appear as footnote to the balance sheet.
Specimen of Balance Sheet
In the order of Permanence
Balance Sheet of M/s. as on

Liabilities Amount Assets Amount
Rs Rs
Capital Fixed Assets
Add: Net Profit Goodwill
Add: Int. on Capital Land & Buildings
Plant & Machinery
Less: Drawings Loose tools
Fixed Liabilities Furniture & Fixtures
Long Term Loans Vehicles
Patents
Reserves Copy rights
General Reserve Live Stock
Investments
Current Liabilities Current Assets
Sundry Creditors Closing Stocks
Bills Payable Sundry Debtors
Bank Overdraft Bills Receivable
Outstanding Expenses Prepaid Expenses
Incomes received in advance Incomes due not received
Cash at bank
Cash in hand
Misc. Expenses
xxxxx xxxxx
In Order of Liquidity
Balance Sheet of M/s. as on
Rs Rs
Current Liabilities Current Assets
Sundry Creditors Closing Stocks
Bills Payable Sundry Debtors
Bank Overdraft Bills Receivable
Outstanding Expenses Prepaid Expenses
Incomes received in advance Incomes due not received
Cash at bank
Fixed Liabilities Cash in hand
Long Term Loans Misc. Expenses
Reserves Fixed Assets
General Reserve
Goodwill
Land & Buildings

Capital Plant & Machinery
Add: Net Profit Loose tools
Add: Int. on Capital Furniture & Fixtures
Vehicles
Less: Drawings Patents
Copy rights
Live Stock
Investments
xxxxx xxxxx
Vertical Format of Balance Sheet
Balance Sheet of A as on year ended …………..
Fixed Assets Rs
Goodwill
Land & Buildings
Plant & Machinery
Loose tools
Furniture & Fixtures
Vehicles
Patents
Copy rights
Live Stock
Investments
Current Assets
Closing Stocks
Sundry Debtors
Bills Receivable
Prepaid Expenses
Incomes due not received
Cash at bank
Cash in hand
Misc. Expenses
Less: Current Liabilities
Sundry Creditors
Bills Payable
Bank Overdraft
Outstanding Expenses
Incomes received in advance
Working Capital xxxxx

Net Assets Employed
B.
Capital
Add: net Profit
Fixed Liabilities xxxxx
Difference between Trial Balance and Balance Sheet

Points Trial Balance Balance Sheet
Trial balance is prepared with the Balance sheet is prepared to reveal the
intention to check and verify the financial position of the concern during
Purpose arithmetical accuracy of the recording the current accounting year.
and posting of different accounting
transactions.
Trial balance is recorded all types of

accounts namely nominal, real and Balance Sheet deals with the balances
personal. of real and personal accounts only.
Nature
Trial balance does not include the

figures of profit or loss.
Profit or loss are accounted for in the
liability side of the balance sheet with
Net Profit or capital.
Loss
Closing stock is not reflected in Trial
Balance unless adjusted in purchase. Closing stock is a part of the balance
sheet.
Stock
It contains all types of accounts e.g.
personal, real and nominal. Personal and Real Accounts are
considered only.
Nature of
Accounts
Trial Balance consisted two parts i.e.
used
debit and credit. Balance sheet has two parts i.e.
liabilities and assets.
Format
Trial balance cannot be used for the
purpose of analysis. Balance Sheet informations can be used
to analyze the financial statements.
Analysis It is not compulsory for preparing a
trial balance.
It is mandatory to prepare the balance
Trail Balance cannot be used as a legal sheet in a business.
evidence as per the court of law.
Balance Sheet is recognized as a legal
Optional evidence.
Legal
evidence
Distinction between Profit & Loss Account and Balance Sheet
Points Profit & Loss A/c Balance Sheet
Profit and loss account is prepared Balance sheet is prepared to reveal the
with the intention to find out financial position of the concern during
Purpose operational result of the concern the current accounting year.
during an accounting period.
Profit and Loss Account records

balances of nominal accounts only. Balance Sheet deals with the balances of
Nature real and personal accounts only.
Profit and loss account deals in the

process of ascertainment of profit or Profit or loss is accounted for in the
loss by comparing the operational liability side of the balance sheet with
Net Profit or
expenses and incomes incurred capital.
Loss
during an accounting period.
Illustration 6
From the following Trial Balance of R.K. Stores, Prepare the Trading, Profit & Loss
Account and Balance Sheet for the year ending 31st March 2013.
Purchase 3,00,000
Sundry Debtors 2,00,000
Sales return 3,000
General Expenses 2,000
Machinery 50,000
Rates and Taxes 2,600
Building 1,00,000
Cash in hand 20,000
Cash at bank 5,000
Salaries 3,200
Bad debts 1,000
Bills receivable 12,000
Sales 5,00,000
Sundry creditors 50,000
Capital 2,00,000
Discount received 3,000
Bills payable 13,000
Commission received 2,000

7,70,000 7,70,000
Closing Stock is Rs 13,000.
Solution:
Trading and Profit & Loss Account of R.K.Stores
To Opening Stock 70,000 By Sales 5,00,000
To Purchases 3,00,000 Less- Return Inward 3,000 4,97,000
Less: Return Outward 2,000 2,98,000 By Closing Stock 13,000
To Carriage Inward 1,200
To Gross Profit c/d 1,40,800
5,10,000 5,10,000
To General Expenses 2,000 By Gross Profit b/d 1,40,800
To Rates and taxes 2,600 By Commission 3,000
To Salaries 3,200 By Discount 2,000
To Baddebts 1,000

1,45,800 1,45,800
Balance Sheet of R.K. Stores
As on 31st March, 2013
Capital 2,00,000 Building 1,00,000
Add: Net Profit 1,37,000 3,37,000 Machinery 50,000
Sundry Creditors 50,000 Closing Stock 13,000
Bills Payable 13,000 Sundry Debtors 2,00,000
Bills Receivable 12,000
Cash at bank 20,000
Cash in hand 5,000
5,00,000 5,00,000
Illustration 7
From the following Trial Balance of KIRTI Mobile Store, Prepare the Trading, Profit &
Loss Account and Balance Sheet for the year ending 31st March 2013.
Capital 4,00,000
Drawings 20,000
Purchase 2,01,000
Sales 3,02,000
Sales Return 2,000
Sundry Creditors 60,000
Productive Wages 5,000
Power 2,500
Coal and coke 1,500
Printing and Stationery 3,800
Telephone Expenses 2,200
Plant & Machinery 1,00,000
Building 2,00,000
Furniture 55,000
Cash in hand 10,000
Cash at bank 30,000
Salaries 10,000
Bad debts 1,000

7,80,000 7,80,000
Closing Stock valued as Rs 40,000.
Solution:
Trading and Profit & Loss Account of KIRTI MOBILE Store
Less: Purchase Return 1,000 2,00,000 By Closing Stock 40,000
To Productive Wages 5,000
TO Power 2,500
To Coal & Coke 1,500
3,40,000 3,40,000
To General Expenses 3,000
To Rates and taxes 4,000 By Gross Profit b/d 1,13,500
To Salaries 10,000 By Commission 2,000
To Printing & Stationery 3,800 By Discount 3,000
To Telephone Expenses 2,200
To Baddebts 1,000
To Net Profit c/d 94,500
1,18,500 1,18,500
Balance Sheet of KIRTI MOBILE Stores
Add: Net Profit 94,500 Machinery 1,00,000
Furniture 55,000
Less: Drawings 20,000 4,74,500 Closing Stock 40,000
Sundry Creditors 60,000 Bills Receivable 11,500
Bills Payable 12,000 Cash at bank 30,000
Cash in hand 10,000

5,46,500 5,46,500
Illustration 8
Prepare Trading, Profit & Loss and Balance Sheet of Raj Electricals from the following
Trial Balance for the year ending 31st December 2012.
Capital 3,00,000
Drawings 20,000
Purchase 1,00,600
Sales 2,00,800
Purchase Return 600
Sales Return 800
Sundry Debtors 50,000
Opening Stock 5,000

Building 2,00,000
Cash in hand 10,000
Cash at bank 30,000
Salaries 10,000
Bills payable 4,000
5,37,900 5,37,900
Solution:
Trading and Profit & Loss Account of Raj Electricals
To Purchases 1,00,600 Less- Return Inward 800 2,00,000
Less: Purchase Return 600 1,00,000 By Closing Stock 40,000
To Productive Wages 2,000

2,40,000 2,40,000
To Salaries 10,000
To Printing & Stationery 1,500
1,34,500 1,34,500
Balance Sheet of Raj Electricals
Add: Net Profit 1,21,000 Plant & Machinery 1,00,000
Less: Drawings 20,000 4,01,000 Closing Stock 40,000

Sundry Creditors 30,000 Bills Receivable 5,000
Bills Payable 4,000 Cash at bank 30,000
Cash in hand 10,000
4,35,000 4,35,000
Illustration 9
From the following Trial Balance of A.K. Agency, Prepare the Trading, Profit & Loss
Purchase 4,00,000
Sales return 3,000
Machinery 50,000
Building 1,00,000
Cash in hand 20,000

Cash at bank 5,000
Salaries 3,200
Bad debts 1,000
Sales 6,00,000
Capital 2,10,800
8,80,800 8,79,800
Solution:
Trading and Profit & Loss Account of A.K.Agency
Less: Return Outward 2,000 3,98,000 By Closing Stock 20,000

6,17,000 6,17,000
To Salaries 3,200 By Discount 3,000
To Baddebts 1,000
1,42,000 1,42,000
Balance Sheet of A.K. Agency
Add: Net Profit 1,33,200 3,44,000 Machinery 50,000
Sundry Creditors 50,000 Closing Stock 20,000
Bills Payable 13,000 Sundry Debtors 2,00,000

Bills Receivable 12,000
Cash at bank 20,000
Cash in hand 5,000
4,07,000 4,07,000
Manufacturing Account
The businesses which produce and sell the items prepare the following accounts at the end of its
accounting year:-
a. The Manufacturing account (to calculate the total cost of production)
b. The Trading and profit & loss account (to find out the net profit or loss)
c. The balance sheet.(to show the financial position of the business)
The total cost of production = Prime cost + Factory overhead
The Prime cost = Direct material + Direct labour + Direct expenses
Direct material cost = Opening stock of raw materials + purchase of raw materials + Carriage
inwards – returns outwards – closing stock of raw materials.
Factory overhead expenses = All expenses related to the factory (indirect expenses)
In a manufacturing concern, usually there are three kinds of stocks:
❖ Stock of Raw materials (the materials which are mainly used for production of the item)
❖ Stock of Work in progress (the materials on which some work process have been
❖ completed)
❖ Stock of Finished goods (The materials on which all the production processes are
completed and ready for sale to the customers)
Features of Manufacturing Account

Some concerns like to ascertain the cost of goods manufactured by them during the year
distinctly before they prepare the trading and ascertain the gross profit. This account is called the
manufacturing account and is prepared in addition to the trading account. It has the under
mentioned characteristics:
❖ The primary objective of preparation manufacturing account is to ascertain the cost of goods
produced during the year, the opening and closing stocks of finished goods are not entered in
it.
❖ Material Consumed is debited to the account on behalf of materials. This figure is obtained
by adjusting the purchase of materials for the opening and closing stock of materials.
❖ In case of manufacturing organizations, there will always be some unfinished goods or work-
in-progress. The cost of work-in-progress at the end of the year is credited to this account,
shown in the balance sheet and debited to the manufacturing account of next year as on
opening balance.
❖ There are different expenses like factory wages, power, fuel, repairs and maintenance,
factory salaries, rent and rates are debited to this account.
❖ Amounts collected from sale of waste or scrap of materials is subtracted from raw material
purchases.
❖ The difference generated from the two sides of this account is considered as cost of goods
manufactured during the accounting year. The said amount is credited to the manufacturing
account and debited to Trading Account.
The format of a manufacturing account

Specimen of a Trading Account (When manufacturing account is also prepared)
Illustration 10
From the following trial balance, prepare the manufacturing account, trading account and profit
and loss account for the year ending 31st March, 2013 and balance sheet as on that date.
Purchases of raw materials 2,00,000
Raw materials on 1.4.2012 30,000
Work in Progress on 1.4.2012 20,000
Finished Goods on 1.4.2012 60,000
Salary of Factory Manager 5,000
Machinery 1,00,000
Factory Rent and Taxes 2,000
Royalties 4,000
Office Rent 3,000
Advertising 1,000
Printing & stationery 2,000
Office expenses 1,000
Carriage outward 2,500
Discount allowed 1,500
Building 2,00,000
Cash in hand 10,000
Cash at bank 25,000

Drawings 10,000
Sales 4,51,000
Capital 2,10,000
7,31,000 7,31,000
The stock on 31st March, 2013 was as follows:
Raw Material Rs 40,000

Work in Progress Rs 30,000
Finished Goods Rs 40,000
Solution
Manufacturing Account
for the year ending 31st March, 2013
To Opening work in progress 20,000 By Transfer to trading account 1,89,000
To Raw Material Consumption (cost of finished goods procured)
Opening Stock of R.M. 30,000 By Closing Stock of Work in Progress 30,000
Add Purchase 2,00,000
Less Closing R.M. 40,000 1,90,000
To Carriage Inwards 2,000

To Salary of Factory Manager 5,000
To Factory Rent 2,000
2,19,000 2,19,000
Trading, Profit and Loss Account

For the year ending 31st March, 2013
To Opening Finished goods 60,000 By Sales 4,51,000
To Manufacturing Account 1,89,000 By Closing Stock of finished goods 40,000
4,91,000 4,91,000
To Royalties 4,000 By Gross Profit b/d 2,42,000
To Advertising 1,000
To Office rent 3,000
To Printing & Stationery 2,000
To Office Expenses 1,000
To Carriage Outwards 2,500
To Discount Allowed 1,500

To General Expenses 2,000
2,82,000 2,82,000
Balance Sheet
Less: Drawings 10,000 4,25,000 Machinery 1,00,000
Add: Net Profit 2,25,000 50,000 Closing Stock 1,10,000
Sundry Creditors 20,000 Sundry Debtors 40,000
Bills Payable Bills Receivable 10,000
Cash at bank 10,000
Cash in hand 25,000
4,95,000 4,95,000
Important Terms
 Financial Statement
 Income Statement
 Position Statement
 Trading Account
 Direct Expenses
 Indirect Expenses
 Adjusted Purchase
 Rebate
 Domestic Expenses
 Gross Profit
 Net Profit
 Fixed Assets
 Wasting Assets
 Current Assets
 Contingent Assets
 Floating Assets
 Fictitious Assets
 Fixed Liability
 Current Liability
 Marshalling
 Accounting Cycle
 Manufacturing Account
 Profit & Loss Account
 Balance Sheet
Model Exercise Questions
GROUP - A
Q. 1 From the following alternatives, write serially the correct answer along with its
serial number against each bit:
1. Which one of the following is not an inventory for a manufacturing firm?

a. Raw materials
b. Goods in process
c. Finished goods
d. Factory overhead
2. Which of the following is not one of the three elements of manufacturing cost?
a. Raw materials
b. Indirect labour
c. Direct labour
d. Factory Overhead
3. Which of the following is not one of the three elements involved in the manufacture
of a product?
a. Raw materials
b. Opening stock of finished goods
c. Factory overhead
d. Direct labour
4. Which of the following is not a direct material in the manufacture of a motor car?
a. Drill
b. Paint gum
c. Screw driver
d. All of these
5. Which of the following is not an overhead?
a. Light, heat and power
b. Indirect labour
c. Carriage on raw materials
d. Depreciation on factory machinery
6. The balance sheet as on 31st December, 2005 will show:
a. Raw materials purchased
b. Opening stock of raw materials
c. Closing stock
d. Raw materials
e. Cost of goods manufactured
7. Which of the following would be a factory overhead?
a. Direct Labour
b. Raw Materials
c. Bad Debt
d. Indirect Labour
8. A manufacturing Account is drawn up by:
a. Firms engaged solely in the buying and selling of goods
b. Firms providing personal services
c. Non- trading organizations
d. Firms which make and sell articles
9. Which of the following firm needs to know cost of goods manufactured?
a. A book store
b. A departmental store
c. A grocery
d. A bakery
10. The salary of which of the following employees is considered to be direct labour?
a. Assembly line worker
b. Maintenance man
c. Secretary
d. Finance Officer
11. Which one of the following is correct?
a. Gross Profit + Sales + Direct Expenses + Purchase + Closing Stock = Opening Stock
b. Gross Profit + Direct Expenses + Purchase + Closing Stock – opening Stock = Sales
c. Gross Profit + Sales + Direct Expenses + Purchase + Opening Stock – Closing Stock
= Sales
12. Which one of the following is correct?
a. Gross Profit + Purchase + Sales = Net Profit
b. Gross Profit + Purchase + Administrative Expenses = Net Profit
c. Gross Profit + Sales + Administrative Expenses = Net Profit
d. Gross Profit Administrative Expenses = Net Profit
[Answer: 1. D, 2. C, 3. C, 4. D, 5. B, 6. B, 7. D, 8. D, 9. D, 10. A, 11. C]
State whether the following statements are TRUE or FALSE
1. Net profit is reflected in higher cash balances.

2. Net loss is reflected in lower net worth.
3. Profit and loss account shows the financial position of the concern.
4. A withdrawal of cash from the business by the proprietor should be charged to profit &
loss account as an expense.
5. Fixed assets are stated in the balance sheet at their market value.
6. Contingent liability is an ascertained liability but its amount and due date are
indeterminate.
7. The provision for discount on debtors is calculated after deducting the provision for
doubtful debts from debtors.
8. Freight paid on purchases of goods is added to the amount of purchases for valuation of
stock.
9. Goodwill is a fictitious asset.
10. Capital is all assets less fictitious assets.
11. The debit balance in the profit and loss account is surplus.
12. Debit balance of profit and loss account is a real asset.
13. Under the liquidity approach assets which are most liquid are presented at the bottom of
the Balance Sheet.
14. The total of the balance sheet must be equal.
15. Heavy expenditure incurred for advertisement is capital nature expenditure.
16. Assets are held for the purpose of Resale.
17. Bank overdraft is shown as a current liability.
18. Cost of goods sold = opening stock + net purchase + direct expenses – closing stock
19. Current assets are the assets which can be converted in to cash within 12 months.
20. Premium paid on the life policy of the proprietor debited to profit and loss account.
[Answer: True : 2, 7, 8,14, 15, 17,18,19, False : 1,3,4,5,6,9,10,11,12,13,16,20]
Fill in the Blanks
1. ……… account enables the trader to find out gross profit or loss.
2. Outstanding expense is a _________.
3. Salaries and wages appear on debit side of ……. .
4. …………. Shows the financial position of a trader.
5. Assets – Liabilities = …………..
6. Depreciation is provided on ………….
7. A credit in the suspense account will appear on …….. of balance sheet.
8. Commission received in advance is …………. for firm.
9. Goodwill is a ……….. asset.
10. A liability that may or may not be incurred by an entity depending on the outcome of
future event will be ……….
11. Proposed dividend is debited to …….
12. Oil well is an example of ……… asset.
13. The difference of goods lost by fire and amount received from insurance is debited to
…………
14. In a calendar year, books are closed on ……….
15. If closing stock is given in Trial Balance, not in adjustments, it is shown as ……….
16. Assets and Liabilities can be arranged in the Balance Sheet in to …………. Ways.
[Answer: 1. Trading Account, 2. Liabilities, 3. Profit & Loss A/c, 4. Balance Sheet, 5.
Capital, 6. Fixed Assets, 7. Liability Side, 8. Liability, 9. Intangible Assets, 10. Contingency
liability, 11. P & L Appropriation A/c, 12. Waste, 13. Profit & Loss A/c, Asset side of
balance sheet, 15. 31st December , 16. Assets, Balance sheet, 17. Two]
Answer the questions in one word
1. A statement which is prepared to know the exact financial position of an organization on a

particular date is
2. A financial statement prepared to ascertain the level of profit or loss occurred during the
accounting period is
3. The process to check and measure the efficiency level of the business which is reflected
through the final result of Gross Profit or Loss is
4. The difference between the total revenue and total cost is called
5. A statement which portrays the financial position of a business at a point of time prepared to
record capital, assets and liabilities of the business.
6. The resources needed by the business to carry on the operation is known as
7. Assets which are acquired for utilization and not for resale are
8. Those assets which are converted in to cash during normal operating cycle of the business are
9. Those assets which are with us in cash or easily converted into cash e.g., cash in hand, cash
at bank, investments etc. are known as
10. Assets have physically identity and include items which can be seen and touched like Land &
Building, Plant & Machinery etc. are known as
11. An asset which is dependent on several factors like the occurrence or non-occurrence of a
specific event or upon the performance or non-performance of a specified act e.g. for
example, uncalled capital of a limited company is
12. Liabilities which are payable within a short period of time, ordinarily in a year are
13. An obligation to pay on the happening or non-happening of an uncertain event is
14. A statement prepared with the intention to check and verify the arithmetical accuracy of the
recording and posting of different accounting transactions is
Answers: 1. Financial Statement, 2. Profit & Loss Account, 3. Trading Account, 4. Gross
Profit, 5. Balance Sheet, 6. Assets, 7. Fixed Assets, 8. Current Assets, 9. Liquid Assets, 10.
Tangible Assets, 11. Contingent Assets, 12. Short Term Liabilities, 13. Contingent Liability,
14. Trial Balance
Correct the underlined portion of the following sentences
1. Financial statement comprises two important statements, the profit and loss account and Trial
Balance.
2. Profit & Loss Account is a financial statement prepared to ascertain the financial position
during the accounting period.
3. Profit & loss Account is otherwise known as Position Statement which reflects the income or
loss arises during a course of time of a business organization.
4. The difference between the total revenue and total cost is called Net profit.
5. Capital profit is the excess of revenue over it and implicit cost of production.
6. Trial Balance is a statement which portrays the financial position of a business at a point of
time.
7. The main objectives of preparing a Profit & Loss Account are to ascertain or estimate the
value of the business and find out the financial status of the concern.
8. Current assets are assets which are acquired for utilization and not for resale.
9. Tangible Assets are those assets which are with us in cash or easily converted into cash e.g.,
cash in hand, cash at bank, investments etc.
10. Expenses paid in advance i.e., prepaid expenses, and income earned but not received are
known as Fixed assets.
11. Contingent liabilities refer to those liabilities which are payable within a short period of time,
ordinarily in a year.
Answers: 1. Balance Sheet, 2. Profit & loss level, 3. Income Statement, 4. Gross Profit, 5.
Net Profit, 6. Balance Sheet, 7. Balance Sheet, 8. Fixed Assets, 9. Liquid Assets, 10.
Outstanding Assets, 11. Short Term Liabilities
Answer the questions in One Sentence each
a. Define the concept of financial Statement.

b. What do you mean by Asset?
c. What is liability?
d. Explain the concept of wasting assets.
e. What is meant by Balance Sheet?
f. Define the concept of marshalling of assets and liabilities.
g. What is profit & loss account?
h. Define trading account.
i. What is manufacturing account?
j. What does trading account reveal?
k. Define contingent liability.
l. Define current assets.
m. What is current liability?
Answer the following terms within 30 words [2 Marks]
a. Adjusted purchases
b. Direct expenses
c. Indirect expenses
d. Fixed expenses
e. Closing entry
f. Contingent assets
g. Contingent Liabilities
h. Current Liabilities
i. Current Assets
j. Liquid Assets
k. Merchandising Cost or Cost of Goods Sold
l. Operating Expenses
m. Operating Income
Answer the following questions within 50 words [3 Marks]
1. Which assets are usually found in the debit side of Trading Accounts?
2. Write a note on cost of goods sold.
3. How can you ascertain cost of goods sold?
4. Explain the current assets with suitable examples.
5. Distinguish between manufacturing and Trading Account.
6. Differentiate between Balance Sheet and Net Profit.
7. Differentiate between Trial Balance and Balance Sheet.
8. Distinguish between Fixed Assets and Current Assets.
9. Define Capital Expenditure with some examples.
10. Write a note on capital expenditure.
Long Answer Type Questions
1. What is the purpose behind preparing a Trading Account as a part of Final Accounts of a
concern?
2. Differentiate between Trading and Profit & Loss Account.
3. Explain various ways of presenting the balance sheet in detail.
4. Give a specimen of a Balance Sheet.
Practical Problems
Trading Account
1. From the following information prepare a Trading Account for the year ending 31st
December 2016.
Opening Stock 2,000

Purchases 14,000
Purchase Returns 1,000
Sales 30,000
Sales Returns 2,000
Factory Rent 1,500
Wages 2,500
Factory Lighting 1,700
Closing Stock on 31st March 2012 was Rs 2,000.
Answer
2. From the following information, prepare the Trading Account.
Opening Stock 3,000

Purchases 24,000
Purchase Returns 1,000
Sales 80,000
Sales Returns 2,000
Factory Rent 2,500
Wages 2,500
Factory Lighting 1,700
Royalty 1,000
Carriage on Sales 2,000
Custom Duty 3,000
Dock Dues 1,000
Fuel and Gas 1,200
Octroi 1,800
Clearing Charges 1,000
Closing Stock as on 31st March 2012 was Rs 4,000.
Answer
3. On the basis of following balances, prepare the trading account for the year ending 31 st
December, 2016.
Rs
Purchase 40,000
Wages 10,000
Sales 70,000
Sales Return 1000
Power 500
Coal & Coke 200
Octroi 100
Answer:
4. From the following details, calculate profit made by a trader in 2016-17:

Purchase 50,000
Sales return 10,000
Sales 80,000
Closing stock 12,000
Answer:
Profit and Loss Account
5. From the following particulars prepare a Trading and Profit and Loss Account for the year
ending 31st Mach, 2017.

Carriage Outward 2,500 Discount allowed 2,000
Discount Received 1,500 Dividend received 1,000
Misc. Expenses 1,400 Loss on sale of assets 1,600
Answer:
6. From the following data from the records of SAI Traders on 31st December, 2016 are given
below;
Opening Stock 4,000

Closing stock 8,000
Cash sales 30,000
Sales returns 2,000
Credit sales 2,000
Carriage inward 500
Capital 50,000
Drawings 2,000

a. Net Sales
b. Net Purchase
c. Gross Profit
d. Capital Balance
Answer:
7. From the following trial balance of Puja Traders, Prepare Trading and Profit and Loss
Account for the year ending on 31st March, 2017.
Capital 25,000
Drawings 500
Purchases 15,250
Wages 1,500
Bank 500
Repair 25
Stock 1,000
Return Outward 250
Rent 200
Sales 18,200
Trade Expenses 350
Bad Debts 100
Carriage 75
Bills Payable 250
Return Inward 200
44,300 44,300
[Answer: Gross Profit Rs 1,425 and Net Profit Rs 750]
8. From the following Trial Balance of Rubina Variety Stores, Prepare the Trading, Profit &
Loss Account and Balance Sheet for the year ending 31st March 2017.
Purchase 4,00,000
Sales return 3,000
Machinery 50,000
Building 1,00,000
Cash in hand 20,000
Cash at bank 5,000
Salaries 3,200
Bad debts 1,000
Sales 5,00,000
Capital 4,00,000
9,70,000 9,70,000

[Gross Profit Rs 40,800, Net Profit Rs 37,000 and Balance Sheet Total Rs 5,00,000]
9. From the following Trial Balance of T. Rojili Rani Stores, Prepare the Trading, Profit
& Loss Account and Balance Sheet for the year ending 31st March 2017.
Capital 5,00,000
Drawings 20,000
Purchase 2,05,000
Sales 3,02,000
Sales Return 2,000
Power 2,500
Coal and coke 1,500
Telephone Expenses 2,200
Building 2,00,000
Furniture 55,000
Cash in hand 10,000
Cash at bank 30,000
Salaries 10,000
Bad debts 1,000

8,84,000 8,84,000
[Answer: Gross Profit Rs 1,13,500, Net Profit Rs 94,500 and Balance Sheet Total Rs
6,46,500]
10. Prepare Trading, Profit & Loss and Balance Sheet of Amarnath Electricals from the
following Trial Balance for the year ending 31st December 2016.
Capital 4,00,000
Drawings 20,000
Purchase 1,00,600
Sales 3,00,800
Purchase Return 600
Sales Return 800
Opening Stock 5,000

Building 2,00,000
Cash in hand 10,000
Cash at bank 30,000
Salaries 10,000
Bills payable 4,000
5,37,900 5,37,900
[Answer: Gross Profit Rs 2,32,000, Net Profit Rs 2,21,500 and Balance Sheet Total Rs
6,35,000]
11. From the following Trial Balance of A.K. Agency, Prepare the Trading, Profit & Loss

Purchase 5,00,000
Sales return 3,000
Machinery 50,000
Building 1,00,000
Cash in hand 20,000
Cash at bank 5,000
Salaries 3,200
Bad debts 1,000
Sales 7,00,000
Capital 2,10,800
9,80,800 9,80,800
[Answer: Gross Profit Rs 2,37,000, Net Profit Rs 2,33,200 and Balance Sheet Rs 4,07,000]

Chapter 02 Final Accounts

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Chapter 02 Final Accounts

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Chapter- 2

➢ Describe the meaning of financial statement

Types of Financial Statements:-

Basically financial statements presents in the following shapes.

1. The Income Statement/ Profit & Loss Account

2. The Position Statement/ Balance Sheet

3. The Statement of Cash Flow

4. The Funds Flow Statement

5. The Statement of Retained Earnings

Objectives of Financial Statements:-

The primary objectives of preparing financial statements are:-

1. To ascertain the profit or loss of the enterprise during an accounting year.

4. It helps to obtain information relating to the requirements of these statements.

Nature of Financial Statements

The following are the features of the financial statements.

Composition of Financial Statements:

Generally financial statements comprise two basic statements:

a. The Income Statement or Trading & Profit and Loss A/c.

The Income Statement or Trading and Profit and Loss Account

2. To disclose Financial Performance:- Result of the operations of the business carried

3. To know the change in Profitability:- A comparative statement can be prepared to

Objectives of Trading Account

The main objectives of trading account are;

Importance of Preparing Trading Account

Reveals the profit or loss position

Helps in getting information regarding to purchase and stock

Direct Expenses proportion

Specimen of Trading Account

For the year ended ……………

Particular Amount Particular Amount

To Opening Stock By Sales

To Purchases Less- Return Inward

Less: Return Outward By Closing Stock

To Gross Profit c/d

By Gross Profit b/d

Closing Stock Valued at Rs 30,000.

Particulars Amount Particulars Amount

To Opening Stock 20,000 By Sales 70,000

From the following details, calculate profit made by a trader in 2012-13:

Opening Stock 15,000

To Opening Stock 15,000 By Sales 80,000

To Gross Profit c/d 22,000

Problems for Practice

Opening Stock 25,000

[Gross Profit: Rs 9,000]

Closing Stock Valued at Rs 30,000.

[Gross Profit Rs 38,000]

Profit & Loss Account

Features of Profit & Loss Account

Need for Profit & Loss Account

a. To get a detailed idea about the income position of the concern

Preparation of profit & loss account gives the following advantages:

➢ It gives a clear view of the results of the business.

Specimen or Proforma of Profit & Loss Account

Profit & Loss Account of B. Co. Ltd

Particular Amount Particular Amount

To Gross Loss c/d By Gross Profit b/d

To Salaries By Interest Received

To Repair By Commission Received

To Printing and stationery By Dividend Received

To Audit fees By Apprenticeship premium

To Legal charges By Bad debts recovered

To Telephone expenses By Sale of Old news paper

To Office heating By profit on sale of fixed assets