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1.0. Aims and Objectives
1.1 Introduction
1.1.1. Definition
1.2. Sundry Debtors
1.3. Sundry Creditors
1.4. Final Accounts
1.5. Trading Account
1.5.1. Balancing of Trading Account
1.6. Profit and Loss Account
1.7. Balance Sheet
1.7.1. Definition
1.7.2. Objectives of Balance Sheet
1.7.3. Assets
1.7.4. Liabilities
1.8. Difference between a Trial Balance and a Balance Sheet
1.9. Let Us Sum Up
1.10 Lesson end Activities
1.11. Points for Discussion
1.12. Model answer to “Check your Progress”
1.13. Suggested Reading / References/ Sources
At the end of the lesson you be able to:
Ø Understand basics of Final Accounts
Ø Understand the difference between Profit and Loss Account with Trial Balance
Ø Understand how to prepare Balance Sheet
All business transactions are first recorded in Journal or Subsidiary Books. They are
transferred to Ledger and balanced it. The main object of keeping the books of accounts is to
ascertain the profit or loss of business and to assess the financial position of the business at the
end of the year. The object is better served if the businessman first satisfies himself that the
accounts written up during the year are correct or al least arithmetically accurate.
When the transactions are recorded under double entry system, there is a credit for every
debit, when on a/c is debited; another a/c is credited with equal amount.
If a Statement is prepared with debit balances on one side and credit balances on the other
side, the totals of the two sides will be equal. Such a Statement is called Trial Balance.
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Trial Balance can be defined as “a list of all balances standing in the Ledger Accounts and
Cash Book of a concern at any given time.
1. It is the shortest method of verifying the arithmetical accuracy of entries made in the
Ledger. If the Trial balances agree, it is an indication that the Accounts are correctly
written up; but it is not a conclusive proof.
2. It helps to prepare the Trading A/c, Profit & Loss a/c and Balance Sheet.
3. It presents to the businessman consolidated lists of all Ledger Balances.
There are two methods for preparing the Trial Balance
First Method:
In this method, Ledger Accounts are not balanced. They are totaled. The debit side totals
and the credit side totals are entered in a separate sheet. The grand total of Debit Column will be
equal to the grand total of the Credit Column.
Second Method:
This method is more widely used. In this method, Ledger accounts are balanced. The
brought down balances are then brought to a sheet as given bellow.
Suresh Babu’s Books
Trial Balance as on _________ 20___
Debit Balance Credit Balance S.No. Name of Account L.F. Rs. P. Rs. P.
Assets, Sundry Debtors, Losses, Expenses and Drawings and debit balances; Capital, Liabilities,
Sundry Creditors, Gains, Incomes and Capital, Revenues are credit balances.
When a trader sells on credit basis, The Buyer’s Account in the Ledger is debited. For each
buyer, there is one Ledger a/c. Some of the buyer accounts may be automatically balanced. But
it is quite natural that many of these Customer’s Accounts have a debit balances.
When we bring these balances to the Trial Balance, if we are going to write all individual
names of customers, then the Trial balance will be too lengthy. Therefore, first a list of Debtors
with their individual debit balances are prepared and totaled. Instead of writing the individual
names of Debtors, the total is written under the heading “Sundry Debtors” which appears in the
Trial Balance.
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There are a number of parties from whom the Trader buys goods on credit basis. For each
one of them, an Account is opened in the Ledger. As in the case of Debtors, a List of Creditors
with the balances due to them is prepared. In the Trial Balance, instead of writing the individual
names of Creditors,, the total of the balances of the creditors is written under the heading
“Sundry Creditors”
If the Trial Balance agrees, it is an indication that the accounts are correctly written up; but
it is not a conclusive proof. If the trial balance disagrees, then the difference amount is generally
placed in ‘Suspense Account’
Trial Balance of Mr. Akkash
As on 31
st December 2007
Debit Balance Credit Balance S.No. Name of Account L.F. Rs. P. Rs. P.
The total amount of debit balances should be equal to the total amount of credit balances. This
method is uniformly followed by all.
The balances extracted from the books of Sankar are given below. From the prepare Trial
Balance on 31st March 3007
Rs. Rs.
Sankar’s Capital 30,000 Sundry Creditors 4,000
Sales 30,000 Cash in hand 1,800
Purchases 20,000 Cash in Bank 6,000
Interest (Dr) 400 Bills Receivables 11,000
Sales returns 1,000 Bills Payable 7,000
Purchases Returns 800 Discount earned 800
Sundry Debtors 15,000 Wages 7,000
Commission (Dr) 1,000 Rent 800
Plant and Machinery 8,000 Telephone charges 1,000
Misc. Income 400
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Trial Balance of Mr. Sankar
As on 31st March 2007
Debit Balance Credit Balance S.No. Name of Account L.F. Rs. P. Rs. P.
1. Sankars’ capital
2. Sales A/c 30,000
3. Purchases A/c 20,000
4. Interest A/c 400
5. Sales Returns A/c 1,000
6 Purchaes Returns
7. Sundry Debtors
8. Sundry Creditors 4000
9. Cash in hand 1,800
10. Cash at Bank 6,000
11. Bills Receivable
12. Bills Payable A/c 7,000
13. Commission A/c 1,000
14. Discount Earned
15. Wages A.c 7,000
16. Rent A/C 800
17. Plant and
Machinery A/c
18. Telephone charges
19. Miscellaneous
income A/c
Total 73,000 73,000
So far, we have discussed that how the business transactions are recorded in Journal and
ledger and how to detect and rectify the errors and how to prepare Trial Balance.
Is quite natural that the businessman is interested in knowing whether his business is
running on Profit or Loss and also the true financial position of his business. The main aim of
Bookkeeping is to inform the Proprietor, about the business progress and the financial position at
the right time and in the right way. Preparation of Final accounts is highly possible only after the
preparation of Trial Balance.
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Final Accounts
Trading & Profit and Loss A/c Balance sheet
1. Trading and Profit and Loss A/c is prepared to find out Profit or Loss.
2. Balance Sheet is prepared to find out financial position a if concern.
Trading and P&L A/c and Balance sheet are prepared at the end of the year or at end of the
part. So it is called Final Account.
Revenue account of trading concern is divided into two-part i.e.
1. Trading Account and
2. Profit and Loss Account.
Trading refers buying and selling of goods. Trading A/c shows the result of buying and
selling of goods. This account is prepared to find out the difference between the Selling prices
and Cost price. If the selling price exceeds the cost price, it will bring Gross Profit. For
example, if the cost price of Rs. 50,000 worth of goods are sold for Rs. 60,000 that will bring in
Gross Profit of Rs. 10,000.
If the cost price exceeds the selling price, the result will be Gross Loss. For example, if the
cost price Rs. 60,000 worth of goods are sold for Rs. 50,000 that will result in Gross Loss of Rs.
Thus the Gross Profit or Gross Loss is indicated in Trading Account.
Items appearing in the Debit side of Trading Account.
1. Opening Stock: Stock on hand at the commencement of the year or period is termed as the
Opening Stock.
2. Purchases: It indicates total purchases both cash and credit made during the year.
3. Purchases Returns or Returns out words: Purchases Returns must be subtracted from the
total purchases to get the net purchases. Net purchases will be shown in the trading account.
4. Direct Expenses on Purchases: Some of the Direct Expenses are.
i. Wages: It is also known as Productive wages or Manufacturing wages.
ii. Carriage or Carriage Inwards:
iii. Octroi Duty: Duty paid on goods for bringing them within municipal limits.
iv. Customs duty, dock dues, Clearing charges, Import duty etc.
v. Fuel, Power, Lighting charges related to production.
vi. Oil, Grease and Waste.
vii. Packing charges: Such expenses are incurred with a view to put the goods in the
Saleable Condition.
Items appearing on the credit side of Trading Account
1. Sales: Total Sales (Including both cash and credit) made during the year.
2. Sales Returns or Return Inwards: Sales Returns must be subtracted from the Total Sales to
get Net sales. Net Sales will be shown.
3. Closing stock: Generally, Closing stock does not appear in the Trial Balance. It appears
outside the Trial balance. It represents the value of goods at the end of the trading period.
Specimen Form of a trading A/c
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Trading Account fro the year ending ___________
Dr. Cr.
Particulars Amount
Rs P.
Rs. P.
Particulars Amount
Rs P.
Rs. P.
To Opeining Stock
To Purchase
Less: Returns
To Wages
To Freight
To Carriage
To Clearing
To Packing charges
To Dock dues
To Power
To Gross Proft (to be
transferred to P&L
By Sales
Less: Returns
By Closing Stock
By Gross Loss (to
be transferred to
P&L A/c)
xxx xxx
Illustration 1:
Prepare a Trading Account from the following information of a trader
Total Purchases made during the year 2007 Rs. 20,000
Total Sales made during the year 2007 Rs. 25,000
Trading Account for the year ending 31st December 2007
Particulars Amount Particulars Amount
To Purchases 20,000 By Sales 25,000
To Gross Profit c/d 5,000
25,000 25,000
The difference between the two sides of the Trading Account indicates either Gross Profit
or Gross Loss. If the total on the credit side is more, the difference represents Gross Profit. On
the other hand, if the total of the debit side is high, the difference represents Gross Loss. The
Gross Profit or Gross Loss is transferred to Profit and Loss A/c.
Closing Entries of Trading A/c
Trading A/c is a ledger account. Hence, no direct entries should be made in the trading
account. Several items such as Purchases, Sales are first recorded in the journal and then posted
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to the ledger. The Same accounts are closed by the transferring them to the trading account.
Hence it is called as closing entries.
Advantages of Trading Account
1. The result of Purchases and Sales can be clearly ascertained
2. Gross Profit ratio to Sales could also be easily ascertained. It helps to determine Price.
3. Gross Profit ratio to direct Expenses could also be easily ascertained. And so, unnecessary
expenses could be eliminated.
4. Comparison of trading account details with previous years details help to draw better
administrative policies.
Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to credit
side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account.
Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at
a given time of accounting year.
Items appearing on Debit side of the Profit & Loss A/c
The Expenses incurred in a business is divided in too parts. i.e. one is Direct expenses are
recorded in trading A/c., and another one is Indirect expenses, which are recorded on the debit
side of Profit & Loss A/c. Indirect Expenses are grouped under four heads:
1. Selling Expenses: All expenses relating to sales such as Carriage outwards, Travelling
Expenses, Advertising etc.,
2. Office Expenses: Expenses incurred on running an office such as Office Salaries, Rent, Tax,
Postage, Stationery etc.,
3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs and Renewals,
Depreciation etc.
4. Financial Expenses: Interest Paid on loan, Discount allowed etc., are few examples for
Financial Expenses.
Item appearing on Credit side of Profit and Loss A/c.
Gross Profit is appeared on the credit side of P & L. A/c. Also other gains and incomes of
the business are shown on the credit side. Typical of such gains are items such as Interest
received, Rent received, Discounts earned, Commission earned.
Specimen Form
Profit & Loss Account
For the year ended 31st March 2007
Particulars Amount Particulars Amount
To Trading A/c
(Gross Loss)
To Salaries
To Rent & Taxes
To Stationeries
To Postage expenses
To Insurance
By Trading A/c
(Gross Profit)
By Commission earned
By Rent received
By Interest received
By Discounts received
By Net Loss
(Capital A/c)
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Particulars Amount Particulars Amount
Prepare Profit and Loss Account, from the following balances of Mr. Murugan for the year
ending 31.12.2007.
Office rent Rs. 3000
Printing expenses Rs. 2,200
Tax, Insurance Rs. 1,400
Discount received Rs. 400
Advertisement Rs. 3,600
Salaries Rs. 8,000
Stationeries Rs. 2,400
Discount allowed Rs. 600
Travelling expenses Rs. 2,600
Gross Profit transferred from the Trading A/c Rs. 25,000
Profit and Loss Account of Mr. Murugan
For the year ending 31st Dec. 2007
Dr. Cr.
Particulars Amount Particulars Amount
To Salaries 8,000 By Gross Profit
(transferred from the
trading a/c)
To Office rent 3,000 By Discount received 400
To Stationeries 2,400
To Printing expenses 2,200
To Tax, Insurance 1,400
To Discount allowed 600
To Travelling expenses 2,600
To Advertisement 3,600
To Net Profit (Capital
25,400 25,400
To Repairs
To Trading expenses
To office expenses
To Interest
To Bank charges
To Establishment expenses
To Sunder expenses
To Commission
To Discount
To Advertisement
To Carriage outwards
To Traveling expenses
To Distribution expenses
To Bad debt provision
To Net Profit
(transferred to Capital A/c)
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Trading A/c and Profit & Loss A/c reveals G.P. or G.L and N.P or N.L respectively,
Besides the Proprietor wants
i. To know the total Assets invested in business
ii. To know the Position of owner’s equity
iii. To know the liabilities of business.
The Word ‘Balance Sheet’ is defined as “a Statement which sets out the Assets and
Liabilities of a business firm and which serves to ascertain the financial position of the same on
any particular date.”
On the left hand side of this statement, the liabilities and capital are shown. On the right
hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be
equal. Capital arrives Assets exceeds the liabilities.
1. It shows accurate financial position of a firm.
2. It is a gist of various transactions at a given period.
3. It clearly indicates, whether the firm has sufficient assents to repay its liabilities.
4. The accuracy of final accounts is verified by this statement
5. It shows the profit or Loss arrived through Profit & Loss A/c.
Balance Sheet of ___________
As on _____________
Liabilities Amount Amount Assets Amount Amount
Sundry Creditors
Bills Payable
Bank overdraft
Reserve Fund
Outstanding exp.
Add: Net Profit
Less : Net Loss
Less Drawings
Less: Income tax
Cash in hand
Cash at bank
Bills receivable
Sundry Debtors
Closing Stock
Furniture & Fittings
Plant & Machinery
Loose tools
Land & Buildings
Business premises
Horses & carts
Prepaid exp.
Patents & Trade marks
Good will
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The Balance sheet contains two parts i.e.
1. Left hand side i.e. the Liabilities
2. Right hand side i.e. the Assets
1.7.3. ASSETS:
Assets represent everything which a business owns and has money value. Assets are always
shown as debit balance in the ledger. Assets are classified as follows.
1. Tangible Assets:
Assets which can be seen and felt by touch are called Tangible Assets. Tangible Assets are
classified into two:
a. Fixed Assets: Assets which are durable in nature and used in business over and again
are known as Fixed Assets.
e.g. land and Building, Machinery, Trucks, etc.
b. Floating Assets or Current Assets: Current Assets are i. Meant to be converted into
cash, ii. Meant for resale, iii. Likely to undergo change e.g. Cash, Balance, stock,
Sundry Debtors.
2. Intangible Assets: Assets which cannot be seen and has no fixed shape. E.g., goodwill,
3. Fictitious assets: Assets which have no real value and will appear on the Assets side of B/S.
are known as Fictitious assets:
E.g. Preliminary expenses, Discount or creditors.
All that the business owes to others are called Liabilities. It also includes Proprietor’s
Capital. They are known as credit balances in ledger.
Classification of Liabilities:
1. Long Term Liabilities: Liabilities will be redeemed after a long period of time 10 to 15 years
E.g. Capital, Long Term Loans.
2. Current Liabilities: Liabilities, which are redeemed within a year, are called Current
Liabilities or short-term liabilities E.g. Trade creditors, B/P, Bank Loan.
3. Contingent Liabilities: Liabilities, which have the following features, are called contingent
liabilities. They are:
a. Not actual liability at present
b. Might become a liability in future on condition that the contemplated event occurs.
E.g. Liability in respect of pending suit.
Equation of Balance Sheet:
Capital = Assets – Liabilities
Liabilities = Assets – Capital
Assets = Liabilities + Capital.
Check your Progress I:
1. _________ account enables the trader to find out Gross Profit or Loss
2. _________ account enables the trader to find out the Net Profit or Loss.
3. Direct Expenses appears on ______ side of _________ account.
4. Indirect Expenses appears on _________ side of _____ account.
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5. Wages and Salaries appear on __________ account
6. Salaries and wages appear on ________ account.
7. Trade Expenses will appear on __________ side of P & L A/c.
8. If the Trail Balance contains both Trade Expenses and Office Expenses, The Trade Expenses
Posted to _____________ account and office Expenses posted to _______ account.
9. __________ shows the Financial Position of a Trader.
10. Assets – Liabilities = _________
11. Assets – Capital = _____________
12. Capital + Liabilities = _____________
S.No. Trial Balance Balance Sheet
1. It shows the balances of all
ledger accounts.
It shows the balances of
personal and real accounts
2. It is prepared after the
completion of the ledger
accounts or arrival of the
It is prepared after the
completion of Trading and
P&L A/c.
3. Its object is to check the
arithmetical accuracy.
Its object is to reveal the
financial position of the
4. Items shown in the Trial
balance are not in order.
But in the B/S, the items
shown must be in order.
5. It shows the opening stock It shows the closing stock.
6. It has the headings, debit
and credit.
It has the heading of Assets
and Liabilities.
From the following trial balance extracted from the books of Thiru. Venkatachalam as on
31.12.07. Prepare (i) Trading and Profit & Loss A/c and (ii) Balance Sheet
Trial Balance as on 31.12.07
Debit Balances Rs. Credit Balances Rs.
Cash in hand 2,000 Capital 2,00,000
Machinery 60,000 Sales 2,54,800
Stock 50,000 Sundry Creditors 40,000
Bills receivable 1,600 Bank overdraft 22,000
Sundry debtors 50,000 Return outwards 3,000
Wages 70,000 Discount received 1,800
Land 40,000 Bills payable 1,800
Carriage inwards 2,400
Purchases 1,80,000
Salaries 24,000
Rent 4,000
Postage 1,000
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Return inwards 3,200
Drawings 10,000
Furniture 18,000
Interest 600
Cash at bank 6,600
5,23,400 5,23,400
Stock as on 31.12.07 to Rs. 1, 00,000
Trading, Profit & Loss A/c of Thiru Venkatachalam
For the year ending 31.12.07
Dr. Cr.
Particulars Amount Particulars Amount
To Stock (1.1.07)
To Purchases 1,80,000
Less Returns 3,000
By Sales 2,54,800
Less Returns 3,200 2,51,600
To Wages 70,000 By Closing Stock 1,00,000
To Carriage inwards 2,400
To Gross Profit C/d
(transferred to P&L A/c)
3,51,600 3,51,600
To Salaries 24,000 By Gross Profit b/d
(transferred from
trading A/c)
To Rent 4,000
To Postage 1,000 By Discount received 1,800
To Interest 600
To Net Profit
(Capital A/c)
54,000 54,000
Balance Sheet of Thiru. Venkatachalam as at 31.12.07
Liabilities Amount Assets Amount
Sundry Creditors 40,000 Cash in hand 2,000
Bank overdraft 22,000 Cash at bank 6,600
Bills payable 1,800 Machinery 60,000
Capital 2,00,000
Add: Net profit 24,400
Less: Drawings 10,000

Bills receivable
Sundry debtors
Closing Stock
2,78,200 2,78,200
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Check your Progress II:
State whether the following are true or false:
1. Balance Sheet is a ledger A/c
2. Land is an intangible asset
3. Patent is a tangible asset
4. Stock is a floating asset.
5. Bills payable is a long term liabilities
The rapid expansion of business all over the world is a clear consequence of the population
increase, growth of technology and multiplication of wants. Expansion of business involves
industrialization as well as development of distribution activities.
Discuss the importance of profit and loss A/c and explain the terms Gross Profit and Net
Explain how the following items appear in the final accounts with reasons.
Dock dues, Factory rent, Carriage inwards, Carriage outwards, Customs duty, Sales Tax,
Manufacturing wages, Fuel, Freight, Factory Manager’s salary, Office manager’s salary,
traveling expenses, Stationery, Power.
I Fill in the blanks
1. Trading
2. Profit & Loss
3. Debit, Trading
4. Debit, Profit & Loss
5. Trading
6. Profit & Loss
7. Debit
8. Trading, P & L A/c
9. Balance Sheet
10. Capital
11. Liabilities
12. Assets
II State whether the following are true or false:
[Ans. 1. False, 2. False, 3. False, 4. True, 5. False]
Ø Hingorani N.L and Ramanathan A.R., “Management Accounting”, Sultan Chand, New
Delhi, 1982
Ø Kuchhal.S.C, “Finaical Management”, Chaitanya, Allahabad,1980
Ø Shukla M.C and Grewal T.S., “Advanced Accounts”, S.Chand & Company, New Delhi,
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