BINAYAK ACADEMY,

Gandhi Nagar 1st Line, Near NCC Office,

Berhampur
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
Balance Sheet
Profit and Loss Account
Parts of Final Accounts
The final account of business concern generally includes 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.

Format
Trading Account for the year ending 31st March 2003
Dr.

Cr.
Particulars
To Opening Stock
To Purchases
Less Returns
To Wages
To Freight
To Carriage inwards
To Clearing charges
To Packing charges
To Dock dues
To Factory power
To Octroi duty
To Gross profit c/d
(transferred to P&L A/c)

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By Sales
Less Returns
By Closing stock
By Gross Loss c/d
(transferred to P&L
A/c)

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Items appearing in the debit side

1

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
1. Opening stock: Stock on hand at the beginning of the year is termed as opening
stock. The closing stock of the previous accounting year is brought forward as opening
stock of the current accounting year. In the case of new business, there will not be any
opening stock.
2. Purchases: Purchases made during the year, includes both cash and credit purchases
of goods. Purchase returns must be deducted from the total purchases to get net
purchases.
3. Direct Expenses: Expenses which are incurred from the stage of purchase to the stage
of making the goods in saleable condition are termed as direct expenses. Some of the
direct expenses are:
i. Wages: It means remuneration paid to workers.
ii. Carriage or carriage inwards: It means the transportation charges paid to bring
the goods from the place of purchase to the place of business.
iii. Octroi Duty: Amount paid to bring the goods within the municipal limits.
iv. Customs duty, dock dues, clearing charges, import duty etc.: These expenses
are paid to the Government on the goods imported.
v. Other expenses: Fuel, power, lighting charges, oil, grease, waste related to
production and packing expenses.
Items appearing in the credit side
i. Sales: This includes both cash and credit sale made during the year. Net sales is derived
by deducting sales return from the total sales.
ii. Closing stock: Closing stock is the value of goods which remain in the hands of the
trader at the end of the year. It does not appear in the trial balance. It appears outside the
trial balance. (As it appears outside the trial balance, first it will be recorded in the credit
side of the trading account and then shown in the assets side of the balance sheet).
Closing Entries
Like ledger accounts, trading account will be closed by transferring the gross profit or
gross loss to the profit and loss account.
i. If gross profit
Trading A/c .............
Dr
xxx
To profit and loss account
xxx
(Gross Profit transferred to
Profit and loss A/c)
ii. If gross loss.
Profit and loss A/c .........
Dr
xxx
To Trading A/c
xxx
(Gross Loss transferred to
Profit and loss A/c)
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 particular period.
2

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur

Format
Profit and Loss Account for the year ended......................

Items appearing in the debit side

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.
i. Office and Administrative Expenses: Expenses incurred for the functioning of an
office are office and administrative expenses office salaries, office rent, office lighting,
printing and stationery, postages, telephone charges etc.
ii. Repairs and Maintenance Expenses: These expenses relates to the maintenance of
assets - repairs and renewals, depreciation etc.
iii. Financial Expenses: Expenses incurred on borrowings Interest paid on loan.
iv. Selling and Distribution Expenses: All expenses relating to sales and distribution of
goods - advertising, travelling expenses, salesmen salary, commission paid to salesmen,
discount allowed, repacking charges etc.
Items appearing in the credit side
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.
i. Interest received on investment
3

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
ii. Interest received on fixed deposits.
iii. Discount earned.
iv. Commission earned.
v. Rent Received
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.
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.
Need:
The need for preparing a Balance sheet is as follows:
i. To know the nature and value of assets of the business
ii. To ascertain the total liabilities of the business.
iii. To know the position of owners equity.
Format
The Balance sheet of a business concern can be presented in the following two forms
i. Horizontal form or the Account form
ii. Vertical form or Report form
i) Horizontal form of Balance Sheet:
The right hand side of the balance sheet is asset side and the left hand side is liabilities
side. All accounts having debit balance will appear in the asset side and all those having
credit balance will appear in the liability side.
Balance Sheet of................
as on..................

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur

ii) Vertical form of Balance Sheet

In this, Balance Sheet is presented in a statement form.
Balance Sheet as on..............................

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur

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:
Assets
Tangible
Fixed

Intangible

Fictitious

Current

a) Tangible Assets:
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BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur
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:
i. 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.
ii. Current assets:
Assets which can be converted into cash in the ordinary course of business and are held
for a short period is known as current assets. This is also termed as floating assets.
For example, cash in hand, cash at bank, sundry debtors etc.
b) 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.
c) Fictitious Assets
These assets are nothing but the unwritten off losses or non-recoupable expenses. They
are really not assets but are worthless items. For example, Preliminary expenses.
Liabilities
The amount which a business owes to others is liabilities. Credit balance of personal and
real accounts together with the capital account are liabilities.
Liabilities
Long Term
Current
Contingent
a) 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.
b) Current Liabilities
Current liabilities are those which are repayable within a year. For example, creditors for
goods purchased short term loans etc.
c) Contingent liabilities
It is an anticipated liability which may or may not arise in future. For example, liability
arising for bills discounted. Contingent liabilities will not appear in the balance sheet, But
shown as foot note.
Marshalling of Assets and Liabilities
The term Marshalling refers to the order in which the various assets and liabilities are
shown in the balance sheet. The assets and liabilities can be shown either in the order of
liquidity or in the order of permanence.
a) In order of liquidity
Liquidity means convertibility into cash. Assets will be said to be liquid if it can be
converted into cash easily, they are placed at the top of the balance sheet. Liabilities are
arranged in the order of their urgency of payment. The most urgent payment to be made
is listed at the top of the balance sheet.
b) In order of permanence
This order is exactly the reverse of the above. Assets and liabilities are recorded in the
order of their life in the business concern.

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur

BINAYAK ACADEMY,
Gandhi Nagar 1st Line, Near NCC Office,
Berhampur