Final Accounts of Sole Trading Concerns

What are Final Accounts?

Final Accounts consists of
 Trading Account
 Profit and Loss Account
 Balance Sheet
Trading Account
It is a Nominal Account and is prepared for calculating the GROSS PROFIT or GROSS LOSS arising
as a result of trading activities of a business.
According to J.R.Batliboi:-
‘The Trading Account shows the results of buying and selling of goods. In preparing, this
account, the general establishment charges are ignored and only the transactions in goods
are included’
Importance of Trading Account
Trading Account is prepared for the following reasons
 To know the Gross Profit or Gross loss arising due to trading activities of the business.
 To find out the direct expenses incurred by the business for the goods sold during the
year.
 Find out how much closing stock is left as compared to previous years and thus find out
the performance of the business.
 Gives the trader an idea of the increase/decrease in Gross Profit /Gross Loss and to
assess the performance of the business and take corrective measures, if needed.
Preparation of Trading Account
The following items usually appear in a Trading Account
Sales turnover
Both Cash and Credit sales are included. Net Sales is recorded after deducting Sales returns
(Return inwards).
Opening Stock
The closing stock of the previous accounting year is taken as the Opening stock for the present
year. If there is no Opening Stock then no entry is made. Opening stock is derived by balancing
the Stock Account and bringing down its balance to the next period.
Purchases
Purchases include all the Cash and Credit purchases of goods made by the business during the
year.
Purchase returns (Return outwards) is deducted from the Purchases to arrive at Net Purchases.
Direct Expenses
All expenses which are incurred in purchasing the goods and bringing them to the trading place
are recorded under this category.
These include:
 Wages e.g. Warehouse worker wages.
 Carriage Inwards i.e. the cost of transport of goods to the trading place. The expense is
usually borne by the buyer.
 Duty on purchases, for example, Import duty or excise duty.
 Final Accounts of Sole Trading Concerns

Closing Stock
All the goods which remain unsold at the end of the year are known as ‘Closing stock’.
The closing is stock is valued at Cost price or Market price, whichever is lower.
The reason for taking the lower value of the two is in accordance with the ‘Prudence Principle’.
Normally, ‘Closing stock’ is given outside the Trial Balance. This is so because its valuation is
made after the accounts have been closed.

Note: Sometimes, the ‘Closing Stock’ may be given inside the Trail Balance. This means that the
entry to incorporate the closing stock in the books has already been passed and it has already
been deducted from the Purchases Account. In this case, ‘Closing Stock’ will not be shown in
the Trading Account will only appear in the Asset side of Balance Sheet’.
Cost of goods sold
This means the finding the cost of only those goods which have been sold during the year. It
can be calculated as follows:
(Net Purchases + Opening Stock) - Closing Stock

Profit and Loss Account

According to Prof. Carter:
‘A Profit and Loss Account is an account into which all gains and losses are collected, in order
to ascertain the excess of gains over the losses or vice-versa’.
Why Profit and loss account is made?
 To find out the Net Profit or Net Loss
 Compare the net profit of the business with previous years and to assess the
performance of the business.
 Find out the amount of overheads of a business.
Items appearing on a Profit and Loss account
Any Incomes or gains
Any income or gains of the business from sources other than sales are recorded on the Credit
side of Profit and loss account.
Gross Profit or Loss
It is transferred to the P/L account from the Trading Account. Gross Profit is transferred to the
Debit side whereas Gross Loss is transferred to the Credit side.
Office and Administrative expenses
Example include salaries, office rent, lighting, stationery etc.
Selling and Distribution expenses
Include advertising expense, commission, carriage outwards, bad-debts etc.

Miscellaneous expenses Such as, interest on loan, interest on capital, depreciation etc.
 Final Accounts of Sole Trading Concerns

Balance Sheet
Balance Sheet is a statement which shows the financial position of the business on a particular
day.
According to A. Palmer
“The Balance Sheet is a statement at a particular date showing on one side the trader’s
property and possessions and on the other hand the liabilities”.
Thus we can say that
 Balance sheet is a statement not an account.
 It is prepared to show the financial position of the business.
 It records all the assets and liabilities of the business.
 It shows the financial position on a particular day not for a period of time.
Need and Importance of Preparing a Balance Sheet
A Balance Sheet serves the following purposes:
 The true financial position of the business can be ascertained at a particular point of
time.
 Reveals the amount of assets owned by the business for example machinery, cash,
debtors and so on.
 Show the liabilities of the business such as total creditors, share capital etc.
 To adjudge weather the firm is solvent or not.
 Opening entries for the next financial year are based on the Balance Sheet of the
previous year.
Items appearing on a Balance Sheet
Assets
Assets of a business are what it owns. They can be classified as:
Fixed assets: All those assets which are owned by the business and last for more than an
accounting year. Examples include Land, building, machinery, vehicle, furniture and fixtures and
the like.
Current assets: It includes all those assets which either in the form of cash or can be easily
converted into cash within one accounting period. Current Assets include Cash, Debtors and
Stock.
Liabilities
Liabilities represents what the business owes to outside persons other than owners. These
liabilities are classified on basis of time period of repayment.
Long term liabilities: These are liabilities which the business owes for more than one
accounting period, e.g. long-term bank loans, debentures etc.
Current liabilities: These are short term debts of the business that are to be repaid within one
accounting period, e.g. creditors and bank overdraft.
Owner’s Equity
Owner’s equity represents what the business owes its owner.
It is equal to total assets minus total liabilities.
Important points regarding Balance Sheet
 The Balance Sheet is not an account but a statement.
 It does not have debit or credit side but has two sections i.e. assets and liabilities.
 The heading of Balance Sheet is ‘as on a particular date’. Thus, a Balance Sheet may
have different figure on different dates.
 The balances shown in the Balance Sheet act as Opening Balances for the next
accounting period.
 Final Accounts of Sole Trading Concerns

 Balance Sheet is based on the accounting equation

Assets= Owner’s Equity + Liabilities

Difference between Trial Balance and Balance Sheet

Objective
Trial Balance is prepared to verify the arithmetical accuracy of the books of account whereas
Balance Sheet shows the financial position of the business.
Headings
Trial Balance is two sides i.e. Debit and Credit whereas Balance Sheet has Assets and Liabilities.
Profit and Loss Trial Balance does not show any information about the profit or loss of a
business, whereas Balance Sheet records the Profit or Loss of the business.
Closing stock
The valuation of closing stock is not necessary to prepare a Trial Balance whereas Balance Sheet
cannot be prepared unless the Closing stock for that particular accounting year is not
ascertained.
Types of Accounts
Balances of all types of accounts are recorded in a Trial Balance i.e. Personal, real and nominal.
Balance Sheet records balances of personal and real accounts only.
Adjustments
Adjustment for outstanding expenses, prepaid expenses and accrued incomes are not required
for the preparation of Trial Balance. A Balance sheet is only complete after all the necessary
adjustments are made.

Closing Stock
Closing stock refers to the goods remaining unsold during the year.
They are valued at Cost price or Market Price whichever is lower.
Closing entries
Closing Stock Account Dr.
Trading Account
(For closing Stock transferred to trading
account)
Treatment in Final Accounts
When closing stock is given outside the Trial Balance
It will appear on
 The credit side of the Trading Account
 Under Current Assets in the Balance Sheet.
When closing stock appears inside the Trail Balance
This means that the Closing stocks have already been deducted from the Purchases and thus it
will ONLY appear in the Balance Sheet under Current Assets.
 Final Accounts of Sole Trading Concerns

Accrued expenses or outstanding expenses

Expenses which have been incurred but not been paid for till the end of the accounting year are
known as Accrued expenses or outstanding expenses.
For example,
Total salaries to be paid for the year were $10,000, but by the end of the year $1000 were not
paid and will be treated as outstanding salary.
Adjusting Entry
Salaries Account Dr.
Outstanding Salaries Account
(Being salaries outstanding)
Accounting treatment
Outstanding expense amount is added to that particular expense account in the Profit and loss
or Trading Account because it was the expense for that year. (Based on the matching principle)
Outstanding expenses are liabilities for the business. Thus they will appear under the Current
Liabilities in the Balance Sheet.
Note: If the Outstanding expense appears in the Trial Balance then it will only be recorded in the
Liabilities side of the Balance Sheet.

Prepaid Expenses
All those expenses which are due next year but paid for in advance during the current year are
termed as Prepaid Expenses.
Adjustment Entries

Prepaid Expense Account Dr.

Expense Account
(For expense paid in advance)
Accounting Treatment
The concerned expense will be deducted by the prepaid amount in the Trading Account or
Profit & Loss account.
Prepaid expenses are assets for the business thus it will appear under the Current Assets in the
Balance Sheet.
Note: If the Prepaid expense is given inside the Trial Balance, then the prepaid expense will only
appear in the Current Asset of the Balance Sheet.

Depreciation
Depreciation is the fall in the value of fixed assets over a period of time.
Adjustment Entries
Depreciation Account Dr.
Assets Account
(Being depreciation charged)
Accounting Treatment
Depreciation amount is entered as expense on the Debit Side of Profit and Loss account.
Depreciation is deducted from the value of the concerned asset in the Balance Sheet.
 Final Accounts of Sole Trading Concerns

Accrued Income
Incomes which are earned during the year but not received till the end of the accounting year
are termed as Accrued Income / Earned Incomes/ Income Receivable.
Adjustment Entries

Accrued Income Account Dr.

Income Account
(Being income received in advance)
Accounting treatment
Accrued income will be added to the concerned income account in the Profit and Loss account
because it the income for that particular year (matching principle)
Accrued incomes are asset for the business and appear under the Current Assets in the Balance
Sheet.
Note: If Accrued Incomes appear inside the Trial Balance then it will ONLY appear under the
Current Assets in the Balance Sheet.

Unearned Income/Revenue
All incomes or revenues which are received in advance but not earned during the year are
treated as unearned revenue. There may be times when a certain income is received in the
current year but the whole amount of it does not belong to the current year.
Adjusting Entries
Revenue Account Dr.
Revenue received in advance Account
(For revenue received in advance)
Accounting Treatment
Unearned incomes/revenues are not the actual income for that particular year and thus
deducted from that particular revenue account in the Profit and Loss Account.
Unearned incomes/revenues are treated as liability for the business and thus appear under the
Current Liabilities in the Balance Sheet.
Note: If unearned income/revenue appears inside the Trial balance then it will ONLY appear
under the Liabilities in the Balance Sheet.

Interest on Capital
Usually the owner gets an Interest on his investment the business. According to the principle of
separate entity, Capital is considered as Liability for the business and the owner is paid a certain
amount of interest on the capital employed.
Accounting Entries
Interest on Capital Dr.
Capital Account
(Interest allowed on Capital)
Accounting Treatment in Final Accounts
Interest on Capital is an expense for the business and thus appears on the Debit side of the
Profit and Loss account.
It is a gain for the owner and thus it is added to the Capital in the Balance Sheet.
 Final Accounts of Sole Trading Concerns

Interest on Drawings
Many times, during the operation of business, the owner may take out some cash from the
business for his personal use. These withdrawals from the business are considered as
Drawings. Considering the fact that the business is a separate accounting entity, it charges an
interest on the drawings to the owner.
Adjusting Entries

Drawing Account Dr.

Interest on drawings account
(Being interest charged on drawings)
Accounting Treatment
Interest on drawings is an income for the business and appears on the Credit side of the Profit
and Loss Account.
Interest on drawings is an expense for the proprietor and thus it is deducted from the Capital
Account in the Balance Sheet.

Interest on Loan
Interest paid on loans taken by the business is treated as expense and will appear on the Debit
side of the Profit and loss account.
Sometimes the interest on loan may not be fully paid and may be outstanding when the final
account is prepared. In this case, the Interest on loan account will be debited by the
outstanding interest amount.
Adjusting Entries
Interest on Loan account Dr.
Outstanding Interest account
(Being outstanding interest on loan)
Accounting treatment
Interest on loan is an expense for the business and appears on the Debit side of the Profit and
Loss account.
Interest on loan is a liability for the business and is added to the Loan Account in the Liabilities
section of the Balance Sheet.

Writing off Bad Debts

There may be occasions when the business might not be able to collect its debts. This may be
due to the dishonesty of a debtor or may be due to the death or insolvency of a debtor.
Bad Debts Account Dr.
Debtors Account
(Bad debts written off)
This amount is then written off the books as ‘Bad debts’. It is a loss for the business and thus it
is written on the debit side of the Profit and Loss account
Closing Entry

Profit and Loss Account Dr.

Bad Debts Account
(Transfer of bad debts to Profit and loss
Account)
 Final Accounts of Sole Trading Concerns

Accounting Treatment
Bad debts appear on the debit side of the Profit and Loss account because it is a loss.
Bad debts are deducted from the Debtors in the Current assets in the Balance Sheet.

Recovery of Bad Debts

Sometime a debts written off as Bad debts may be recovered later on. Cash is coming in thus
Cash account is debited whereas ‘Recovery of bad debts’ is credited because it a gain.
Accounting Entries
Cash Account Dr.
Recovery of bad debts
(Being bad debts recovered)

Recovery of bad debts Dr.

Profit and Loss account
(Being transfer of recovery of bad debts to Profit
and Loss Account)

Partial Settlement of Debtors

Sometimes, a business might only be able to recover a part of the debts. This means the rest of
the unrecovered debts will be written off as bad debts.
Accounting Entries

Cash Account Dr.

Bad Debts Account Dr.
Debtor’s Account
(Being partial recovery of debts)

Provision for Doubtful Debts

Even after deducting the amount of actual bad-debts from the Debtors, there may still be some
debts which may be regarded as bad or doubtful. Thus a business might make an estimate of
the amount of such doubtful debts, that is, debts that are likely to become bad, and charge
them as an expense against the current period’s revenue.
When Provision for Doubtful Debts is set up for the first time
Accounting Entries
Doubtful Debts Account Dr.
Provision for doubtful debts
(Being creation of provision for doubtful debts)
Closing Entries
Doubtful Debts Account is an expense for the business and thus it will be debited to the Profit
and Loss account
Profit and Loss Account Dr.
Doubtful debts Account
(Being transfer of doubtful debts expense to the Profit and Loss
Account)
It will be deducted from the Sundry Debtors in the Balance Sheet.
Increasing the Existing Provision for Doubtful Debts
 Final Accounts of Sole Trading Concerns

Adjusting Entry

Doubtful debts Account Dr.

Provision for doubtful debts Account
(Being increase of provision for doubtful debts)
Closing Entry
Being a loss for the business the Doubtful Debts Account is transferred to the debit side of
Profit and Loss Account.

Profit and Loss Account Dr.

Doubtful Debts
(Being transfer of doubtful debts expense to the Profit and Loss
Account)
Decreasing the Existing Provision for Doubtful Debts
Adjusting Entry

Provision for doubtful debts Account Dr.

Doubtful debts Account
(Being decrease of provisions for doubtful debts)
Closing Entry
Being a gain for the business the Doubtful Debts Account is transferred to the Credit side of
Profit and Loss Account.

Doubtful Debts Account Dr.

Profit and Loss Account
(Being transfer of doubtful debts expense to the Profit and Loss
Account)
In the Balance Sheet the debtors will appear net of the Provision for Doubtful debts.
Provision for Discount on Debtors
A provision for discounts to debtors who pay early is created in the current year itself.
Accounting Entries
Profit and Loss Account Dr.
Provision for Discount on Debtors Account

(For provision for discount created on Debtors)

It is shown on the Debit side of the Profit and Loss Account. Provision for Discount on Debtors is
deducted from the Debtors in the Balance Sheet.

Note: Provision for discount on debtors will be deducted after ‘Further bad debts’ and
‘Provision for doubtful debts’ are deducted from the Debtors.
 Final Accounts of Sole Trading Concerns

Provision for Discount on Creditors

When the business makes prompt payments of its debts, it is bound to receive Discounts from
its creditors. Although the discounts will be earned in the next year, the discounts so earned are
an income of the current year. A Provision for such discount is made in the current year itself so
that that the discounts thus earned may be credited to the Profit and Loss Account of the
current year.

Provision for Discount on Creditors Account Dr.

Profit and Loss Account
(For provision for discount on Creditors)

Accounting Treatment
Provision for Discount on Creditors will be shown on the Credit side of the Profit and Loss
Account.
It is deducted from Sundry Creditors on the Liabilities side of the Balance Sheet.
 Final Accounts of Sole Trading Concerns

Proformas/Formats/Sample Trading Account of Sole Trading Concern

HORIZONTAL FORM

Trading Account of XYZ for The Year Ending On……….

Dr. Cr
Particulars Amount Particulars Amount
To Opening Stock XXXX By Sales Xxxx
To Purchases Xxxx Less: - Returns Xxx xxxxx
Less_ Returns Xxx XXXX By Closing Stock Xxxx
To Direct Expanses
Wages Xx By Gross Loss Xxxxx
Factory Expanses xx [Transfer to P & l A/c
Carriage inwards Xx
Cartage Xx
Freight Xx
Factory Rent Xx
Belting xx
Motive Power Xx
Tallow & Oil, Coal, Xx
Gas & Water
Excise Duty xx
Doc Charges xx
Octroi Charges xx
Royalties xx

To Gross Profit Xxxx

[Transfer to P& L A/c]

XXXX XXXX
 Final Accounts of Sole Trading Concerns

Proformas/Formats/Sample P & L Account of Sole Trading Concern

HORIZONTAL FORM
Dr. P & L Account of XYZ for The Year Ending On………. Cr
Particulars Amount Particulars Amount
To Gross Loss XXXX By Gross Profit Xxxx
[Transferred from Trading A/C] [Transferred from Trading A/c]
To Administration Expanses BY Income from investment
Salaries xx Dividend on shares XXX
Wages xx Miscellaneous income XXX
Rent & Taxes Xx Interest On money deposit XXX Xxx
Office Lighting xx By Commission Received Xxx
Printing & Stationery Xx By Bad Debts Recovered Xxx
Telephone Charges Xx By Income from other sources Xxx
Fees & Expanses Xx By Discount Received Xxx
Postage & Telegram Xx By Income From Investment Xxx
Audit Fees xx By Profit earned from sale of assets Xxx
Office Car keeping Xx
Office General Expanses Xx XXX
To Selling & distribution Expanses
Ware house & Store Rent xx
Packing Expanses xx
Freight & Carriage Outwards xx
Sampling Expanses xx
Cost of Catalogues xx
Bad Debts xx
Commission xx
Advertisement Xx
Expert Expanses Xx
Insurance Premium Xx
Brokerage Xx
Noting Chagres xx
xxx
Entertainment Exp. Xx
To Financial Expanses
Discount allowed Xx
Interest on Capital xx
Loss in Exchange xx
Discounting Bill Xx
Discount on issue on Debentures Xx XXX
Preliminary Expanses written Off Xx
To Depreciation & Maintenance
Repairs & Renewals Xx
Loss by fire or theft Xx XXX
Depreciation of Asset XX
To Net profit XXXX
[Transferred to Balance Sheet] XXXX XXXX
 Final Accounts of Sole Trading Concerns

Proformas/Formats/Sample Balance Sheet of Sole Trading Concern

HORIZONTAL FORM
Balance sheet of XYZ for The Year Ending On……….
LIABILITIES Amount Assets Amount
Current Liabilities: Current Assets
Bank overdraft XXX Cash In Hand xxx
Bills payable XXX Cash at Bank xxx
Outstanding Expenses XXX Bills receivable xxx
Income received in advance XXX Prepaid expenses Xxx
Sundry Creditors XXX Accrued income Xxx
Short term loans XXX Investment Xxx
Fixed Liabilities Sundry debtors Xxx
Long term loan XXX Stock (Closing)/closing Stock Xxx
Reserves XXX Loose Tools Xxx
Capital xxx Fixed Assets
Add: Net Profit Xxx Goodwill xxx
Add: Interest On Capital Xxx Furniture & Fixtures xxx
xxxx Plant & Machinery xxx
Less: Drawings xxx Long Term Investment xxx
xxx XXX
Less: invest on drawings XXXX XXXX
ALTERNATE STRUCTURE OF BALANCE SHEET
LIABILITIES Amount Assets Amount
Capital xxx Fixed Assets
Add: Net Profit Xxx Goodwill xxx
Add: Interest On Capital Xxx Furniture & Fixtures xxx
xxxx Plant & Machinery xxx
Less: Drawings xxx Long Term Investment xxx
Less: invest on drawings xxx
xxx XXX Current Assets
Fixed Liabilities Cash In Hand xxx
Long term loan XXX Cash at Bank xxx
Reserves XXX Bills receivable xxx
Current Liabilities: Prepaid expenses Xxx
Bank overdraft XXX Accrued income Xxx
Bills payable XXX Investment Xxx
Outstanding Expenses XXX Sundry debtors Xxx
Income received in advance XXX Stock (Closing)/ Closing Stock Xxx
Sundry Creditors XXX Loose Tools Xxx
Short term loans XXX

XXXX XXXX