Sole Traders’ Final Accounts

Introduction:
Trial balance proves the arithmetical accuracy of the business transactions,
but it is not the end. The businessman is interested in knowing whether the
business has resulted in Profit or Loss and what the financial position of the
business is at a given period. In short, he wants to know the profitability
and the financial soundness of the business. The trader can ascertain these
by preparing the final accounts. The final accounts are prepared at the end
of the year from the Trial Balance. Hence the Trial Balance is said to be the
connecting link between the ledger accounts and the final accounts
Final Accounts

Trading and Profit & Loss A/c Balance Sheet

Parts of Final Accounts:
The final accounts of business concern generally include two parts. The first
part is Trading and Profit and Loss Account. This is prepared to find out the
net result of the business. The second part is Balance Sheet which is
prepared to know the financial position of the business. However,
manufacturing concerns, will prepare a Manufacturing Account prior to the
preparation of trading account, to find out cost of production.
Trading Account:
Trading means buying and selling. The Trading Account shows the result of
buying and selling of goods.
Need:
At the end of each year, it is necessary to ascertain the Net Profit or Net
Loss. For this purpose, it is first necessary to know the Gross Profit or Gross
Loss. The Trading Account is prepared to ascertain this. The difference
between the selling price and the cost price of the goods is the gross earning
of the business concern. Such gross earning is called as Gross Profit.
However, when the selling price is less than the cost of goods purchased, the
result is Gross Loss.
Items appearing in the debit side of Trading Accounts
 Opening Stock
 Purchases
 Direct Expenses which includes Wages, Carriage Inwards, Customs
Duty, Royalty and Other Expenses like Fuel, Power and Lighting
Charges etc.

[Author Name] 1
Items appearing in the credit side of Trading Accounts
 Sales
 Closing Stock

Profit and Loss Account:

After calculating the Gross Profit or Gross Loss the next step is to prepare
the Profit and Loss Account. To earn Net Profit a trader has to incur many
expenses apart from those spent for purchases and manufacturing of goods.
If such expenses are less than Gross Profit, the result will be Net Profit.
When total of all these expenses are more than Gross Profit the result will be
Net Loss
Need:
The aim of Profit and Loss Account is to ascertain the Net Profit earned or
Net Loss suffered during a period.

[Author Name] 2
Items appearing in the debit side of Profit and Loss Accounts:
Those expenses which are chargeable to the normal activities of the
business are recorded in the debit side of profit and loss account. They are
termed as indirect expenses.
 Office and Administrative Expenses
 Repairs and Maintenance Expenses
 Financial Expenses
 Selling and Distribution Expenses
Items appearing in the credit side of Profit and Loss Accounts:
Besides the gross profit, other gains and incomes of the business are shown
on the credit side. The following are some of the incomes and gains.
 Interest received on investment
 Interest received on fixed deposit
 Commission earned
 Rent received

[Author Name] 3
Balance Sheet:
This forms the second part of the final accounts. It is a statement showing
the financial position of a business. Balance Sheet is prepared by taking up
all personal accounts and real accounts (assets and properties) together
with the net result obtained from profit and loss account. On the left-hand
side of the statement, the liabilities and capital are shown. On the right-
hand side, all the assets are shown. Balance Sheet is not an Account, but it
is a Statement prepared from the ledger balances. So, we should not prefix
the accounts with the words ‘To’ and ‘By’.

[Author Name] 4
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’.

Classification of Assets and Liabilities:

Assets
Assets represents everything which a business owns and has money value.
In other words, asset includes possessions and properties of the business.
Asset are classified as follows:
Tangible Assets:
Assets which have some physical existence are known as tangible assets.
They can be seen, touched and felt, e.g. Plant and Machinery Tangible
assets
are classified into:
 Fixed assets: Assets which are permanent in nature having long
period of life and cannot be converted into cash in a short period are
termed as fixed assets.
 Current assets: Assets which can be converted into cash in the
ordinary course of business and are held for a short period is known

[Author Name] 5
 as Current Assets. This is also termed as Floating Assets. For
example, Cash in Hand, Cash at Bank, Sundry Debtors, Stock etc.
 Intangible Assets: The assets which have no physical existence and
cannot be seen or felt. They help to generate revenue in future, e.g.
Goodwill, Patents, Trademarks etc.
 Fictitious Assets: These assets are nothing but the unwritten off
losses or non-recoupable expenses. They are not assets but are
worthless items. For example, Preliminary Expenses.
Liabilities:
The amount which a business owes to others is liabilities.
Long Term Liabilities:
Liabilities which are repayable after a long period of time are known as Long
Term Liabilities. For example, Capital, Long Term Loans etc.
Current Liabilities:
Current liabilities are those which are repayable within a year. For example,
Creditors for Goods purchased, Short Term Loans etc.
Contingent liabilities:
It is an anticipated liability which may or may not arise in future. For
example, liability arising for bills discounted, Pending Court Case for claim.
Contingent liabilities will not appear in the Balance Sheet. But shown as
foot note.

Adjustments:
1. Closing Stock:
Closing Stock A/c……………..Dr.
To Trading A/c
2. Outstanding Expenses:
Expenses A/c……………………Dr.
To Outstanding Expenses A/c
3. Income Receivable:
Income Receivable A/c………….Dr.
To Income A/c
4. Expenses paid in Advance:
Prepaid Expense A/c……………..Dr.

[Author Name] 6
 To Expense A/c
5. Income Received in Advance:
Income A/c……………………Dr.
To Income Receivable A/c
6. Depreciation on Assets:
Depreciation A/c…………………Dr.
To Asset A/c
7. Interest on Loan:
Interest on Loan A/c…………….Dr.
To Loan A/c
8. Bad Debts:
Bad Debts A/c…………………… Dr.
To Debtors A/c
9. Reserve for Bad Debts:
Profit &Loss A/c…………………..Dr.
To RBD A/c

[Author Name] 7
Problem-01
The following Trial Balance was extracted from the Books of Mr. Vishwas
Kadam as on 31/03/2016:

Particulars Amount Particulars Amount

Buildings 4,50,000 Capital 12,00,000
st
12% Loan taken on 1
Machinery 9,90,000 8,50,000
April 2015
Land 1,51,000 Sundry Creditors 2,00,000
Stock on 01.04.2015 1,30,000 Interest 2,000
Office Expenses 8,000 Bills Payable 9,000
Dividend on
Sundry Debtors 2,50,000 8,000
Investments
Wages Miscellaneous
75,000 1,000
(For 10 Months) Receipts
Salaries 20,000 R.D.D. 13,000
Purchases 6,47,000 Sales 9,90,000
Bad debts 3,400 Returns Outwards 24,000
Factory Manager’s
15,800
Salary
Interest on Loan 12,000
Insurance 3,000
Cash 800
Bank 20,000
Drawings 1,00,000
Motive Power 19,000
Rent, Rates & Taxes 13,600
Carriage Inwards 2,000
Travelling Expenses 2,500
Discount 5,000
Investment 2,50,000
Goodwill 50,000
Loose Tools 4,500
Returns Inwards 4,400
Selling Expenses 30,000
Advertising 40,000
32,97,00
32,97,000
0

[Author Name] 8
Additional Information:
1. Stock on 31/3/2016 was ₹1,40,000.
2. Outstanding Salaries were ₹14,000.
3. Depreciate Building & Machinery by 10% each.
4. Provide RDD at 5% on Debtors.

Problem-02
From the following details prepare Final Accounts of Mr. Aniket for the year
ended 31/3/2015.

Purchases 1,12,000 Capital of Aniket 3,00,000

Factory Overheads 34,000 Bills Payable 76,000
Sundry Debtors 50,000 Sundry Creditors 1,59,000
Sales Returns 21,700 Bank Overdraft 32,700
Office Expenses 22,000 Sales 2,83,650
Salaries 46,800 Purchase Returns 15,500
Wages 22,400 Loan from BOB 70,000
Printing & Stationary 13,900 Discount Received 4,500
Opening Stock as on
27,700 Miscellaneous Income 11,600
01/04/2014
Rent paid 24,700

Discount Allowed 1,900

Bad Debts 12,700
Machinery 3,72,500
Furniture 1,00,000
Taxes 30,200
Insurance 21,700
Drawings of Aniket 36,000
Carriage Inwards 2,750
9,52,950 9,52,950
Additional Information:
1. Closing Stock on 31/3/2015 was ₹67,800.
2. Depreciate: Machinery by 10% & Furniture by 5%.
3. Annual salaries bill is ₹60,000.
4. Write off ₹2,000 for Bad Debts & Provide 3% for R.D.D on Debtors.
5. Prepaid Wages are ₹1,400.

[Author Name] 9
Problem-03
From the following Trial Balance prepare Final Accounts of Mr. Khan for the
year ended 31/3/2016
Particulars Amt. (₹) Particulars Amt. (₹)
Plant & Machinery 5,25,000 9% Loan from Ambani 1,50,000
taken on 1/10/2015
Telephone Charges 2,700 Capital 9,26,000
Drawings 25,000 Purchase Return 21,500
Bills Receivable 42,000 Commission Received 21,500
6% FD with Bank 4,40,000 R.D.D. 14,200
Sales Return 27,000 Dividend Received 13,700
Furniture 2,76,000 Sundry Receipts 13,300
Bad Debts 4,500 Bank Overdraft 50,000
Salaries 1,80,000 Bills Payable 21,350
Wages 1,00,000 Sales 7,14,900
Production Overheads 37,600 Creditors 2,28,500
Sundry Expenses 5,900 Loan from Wife 1,00,000
Office Expenses 18,500 Discount Received 12,000
Purchases 4,15,750
Debtors 32,000
Interest on Loan 5,000
Opening Stock 1,50,000
Total 22,86,95 Total 22,86,950
0
Additional Information:
1. Closing Stock as on 31/3/2016 was ₹1,27,000.
2. Outstanding Salaries were ₹30,000 & Outstanding Wages were ₹20,000.
3. R.D.D. was 4% of Debtors.
4. Depreciation is charged at 10% on Plant & Machinery.
5. Unrecorded purchases amounted to ₹5,000.
6. Goods worth ₹10,000 destroyed by fire, insurance company admitted claim
for ₹6,000.
7. On 31/3/2016, advance received from customer ₹10,000.

1
[Author Name]
0
Classwork Exercise:
Problem-04
From the following Trial Balance prepare Final Accounts of Mr. Ajit for the
year ended 31/3/2016
Particulars Amt. (₹) Particulars Amt. (₹)
Productive Wages 2,21,750 R.D.D. 8,450
Furniture 65,000 10% Loan from BOI on 65,000
1/4/2015
Debtors 57,500 Purchase Return 22,500
Interest on Loan 6,500 Sundry Receipts 58,100
Sundry Expense 7,500 Sales 14,95,700
Rent 32,700 Capital 5,57,150
Machinery 3,50,000 Bank Overdraft 30,000
Salaries 1,86,000 Interest Earned 21,100
Packing on Production 42,600 Creditors 45,000
Drawings 75,500
Purchases 9,82,500
Sales Returns 22,000
Office Expenses 2,500
Factory Overheads 76,000
Interest free Loan to
Vijay 52,500
Advertisement 7,500
Carriage Inward 5,500
Carriage Outward 7,200
Printing & Stationery 6,900
Bad Debts 9,850
Opening Stock 85,500
Total 23,03,00 Total 23,03,000
0
Additional Information:
1. Outstanding Salaries ₹10,000.
2. Provide Bad Debts of ₹7,500 & provide R.D.D. at 5%.
3. Depreciation be provided@ 7.5% on Machinery.
4. Closing Stock is 2,21,750(Cost) and 231,500 (Market Price).

1
[Author Name]
1