INTRODUCTION

The transactions of a business enterprise for the accounting period are first recorded in the books
of original entry, then posted there from into the ledger and lastly tested as to their arithmetical
accuracy with the help of trial balance. After the preparation of the trial balance, every
businessman is interested in knowing about two more facts. They are: (i) Whether he has earned
a profit or suffered a loss during the period covered by the trial balance the businessman prepares
financial statements for his business i.e. he prepares the Trading and Profit and Loss Account
and Balance Sheet at the end of the accounting period. These financial statements are popularly
known as final accounts. The preparation of financial statements depends upon whether the
business concern is a trading concern or manufacturing concern. If the business concern is a
trading concern, it has to prepare the following accounts along with the Balance Sheet: (i)
Trading Account; and (ii) Profit and Loss Account.
Important points regarding trading account
1. Stock
The term ‘stock’ includes goods lying unsold on a particular date.
The stock may be of two types:
(a) Opening stock
Opening stock refers to the closing stock of unsold goods at the end of previous accounting period
which has been brought forward in the current accounting period. This is shown on the debit side of
the Trading Account.
(b) Closing stock
Closing stock refers to the stock of unsold goods at the end of the current accounting period. Closing
stock is valued either at cost price or at market price whichever is less. Such valuation of stock is
based on the principle of conservatism which lays down that the expected profit should not be taken
into account but all possible losses should be duly provided for. Closing stock is an item which is not
generally available in the trial balance. If it is given in Trial Balance, it is not to be shown on the
credit side of Trading Account but appears only in the Balance Sheet as an asset. But if it is given
outside the trial balance, it is to be shown on the credit side of the Trading Account as well as on the
asset side of the Balance Sheet.
2. Purchases
Purchases refer to those goods which have been bought for resale. It includes both cash and credit
purchases of goods. The following items are shown by way of deduction from the amount of
purchases:
(a) Purchases Returns or Return Outwards.
(b) Goods withdrawn by proprietor for his personal use.
(c) Goods received on consignment basis or on approval basis or on hire purchase.
(d) Goods distributed by way of free samples.
(e) Goods given as charity.
3. Direct Expenses
Direct expenses are those expenses which are directly attributable to the purchase of goods or to
bring the goods in saleable condition. Some examples of direct expenses are as under:
(a) Carriage Inward: Carriage paid for bringing the goods to the godown is treated as carriage
inward and it is debited to Trading Account.
(b) Freight and insurance: Freight and insurance paid for acquiring goods or making them saleable
is debited to Trading Account. If it is paid for the sale of goods, then it is to be charged (debited) to
Profit and Loss Account.
(c) Wages: Wages incurred in a business is direct, when it is incurred on manufacturing or
merchandise or on making it saleable. Other wages are indirect wages. Only direct wages are debited
to the Trading Account. Other wages are debited to the Profit and Loss Account. If it is not
mentioned whether wages are direct or indirect, it should be assumed as direct and should appear in
the Trading Account
d) Fuel, Power and Lighting Expenses: Fuel and power expenses are incurred for running the
machines. Being directly related to production, these are considered as direct expenses and
debited to Trading Account. Lighting expenses of factory is also charged to Trading Account,
but lighting expenses of administrative office or sales office are charged to Profit and Loss
Account.
(e) Octroi: When goods are purchased within municipality limits, generally octroi duty has to be
paid on it. It is debited to Trading Account.
(f) Packing Charges: There are certain types of goods which cannot be sold without a container
or proper packing. These form a part of the finished product. One example is ink, which cannot
be sold without a bottle. These type of packing charges are debited to Trading
Account. But if the goods are packed for their safe despatch to customers, i.e. packing meant for
transportation or fancy packing meant for advertisement will appear in the Profit and Loss
Account.
(g) Manufacturing Expenses: All expenses incurred in manufacturing the goods in the factory
such in factory rent, factory insurance etc. are debited to Trading Account.
(h) Royalties: These are the payments made to a patentee, author or landlord for the right to use
his patent, copyright or land. If royalty is paid on the basis of production, it is debited to Trading
Account and if it is paid on the basis of sales, it is debited to Profit and Loss
Account.
4. Sales
Sales include both cash and credit sales of those goods which were purchased for resale
purposes. Some customers might return the goods sold to them (called sales return) which are
deducted from the sales in the inner column and net amount is shown in the outer column. While
ascertaining the amount of sales, the following points need attention:
(a) If a fixed asset such as furniture, machinery etc. is sold, it should not be included in sales.
(b) Goods sold on consignment or on hire purchase or on sale or return basis should be recorded
separately.
(c) If goods have been sold but not yet dispatched, these should not be shown under sales but are
to be included in closing stock.
(d) Sales of goods on behalf of others and forward sales should also be excluded from sales
Problem;1 The Following is the trial Balance of DhanaLakshmi of Coimbatore as on 1 st
December 2022

Debit Balances Credit Balances

Opening Stock 6,200 Sales 82,920
Buildings 34,000 Capital 24,000
Furniture 2,000 Bank Loan 6,000
Purchases 42,400 Sundry creditors 9,840
Salaries 4,400 Interest 260
Rent 1,200 Dividend 220
Miscellaneous expenses 1,000 Return Outwards 2040
Postage 560
Stationery 520
Wages 10,400
Freight on purchases 1,120
Carriage on sales 1,600
Repairs 1800
Sundry Debtors 12,000
Bad debts 240
Cash in hand 2,600
Return inwards 840
Total 1,24,080 1,24,080
The value of stock on 31-12-2021 was estimated at Rs. 5,960 you are required to make the
necessary closing entries and prepare Trading profit& Loss A/c and Balance Sheet as on 31st
Dec 2022

Solution:

Closing Entries

Date Particulars Dr. Cr.

2017 Trading A/c Dr. 61,040
Dec 31. To Opening Stock 6,200
To Purchases 42,400
To Return outwards 10,400
To Freight on Purchases A/c 2,040
(Being transfer)
31 Sales A/c Dr. 82,920
Return Inwards A/c Dr. 840
To Trading A/c 83,760
(Being sales
31 Trading A/c Dr. 27560
To Profit & Loss A/c 27560
 (Being Gross Profit Transferred)
31 Closing Stock A/c Dr. 5,960
To Trading A/c 5960
(Being incorporation of closing stock in trading A/c)
31 Profit& Loss A/c Dr. 11,320
To Salaries A/c 4,400
To Rent A/c 1200
To Miscellaneous Expenses A/c 1000
To Postage A/c 560
To Stationery A/c 520
To Carriage on sales A/c 1600
To Repairs A/c 1800
To Bad Debts A/c 240
(Being the various expenses transferred)
31 Interest A/c Dr. 260
Dividend A/c Dr. 220
To Profit loss A/c 480
(Being interest and dividend Transferred)
31 Profit &Loss A/c Dr. 16720
To Capital A/c 16720
(Being Net Profit transferred)
Trading &Profit &Loss A/c of Dhanalakshmi for the year ending 31-12-2022

Particulars Amount Particulars Amount

To Opening Stock 6,200 By Sales 82,920 80880
-Sales Return 2040
To Purchases 42400 41560 By Closing stock 5960
-Returns Inward 840
To Wages 10400
To Freight on purchases 1,120
To Gross Profit C/d 27560
 86840 86840
To Salaries 4,400 By Gross Profit C/d 27560
To Rent 1,200 By Interest 260
To Miscellaneous Exp 1,000 By Dividend 220
To Postage 560
To Stationery 520
To Carriage on sales 1600
To Repairs 1800
To Bad Debts 240
To Net Profit 16720
28040 28040

Balance sheet of Dhanalakshmi as on 31st Dec 2022

Liabilities Amount Assets Amount

Sundry Creditors 9840 Cash in Hand 2,600
Bank Loan 6000 Sundry Debtors 12,000
Capital A/c 40720 Closing Stock 5,960
Balance 24000 Furniture 2,000
Add: Net Profit 16720 Buildings 34,000

56,560 56,560

2. From the following particulars of Vinu prepare the manufacturing Trading P&L A/c for the
year ended 31st March 2023 and a balance sheet as on the date.

4% Govt. Promissory Notes 20,000

(Subscribed on 1.1.2016)
Advertisement 20,000
Bad Debts Written Off 10,000
Capital 732000
Carriage 20,000
Cash at Bank 1,94,500
Cash Discount Allowed 2,000
Cash Discount Received 15,000
Cash in Hand 45,500
Drawings 1,00,000
Factory & Insurance 6,000
Factory &Buildings 2,00,000
Factory Power 16,000
Fuel &Coal 14,000
Furniture &Fixture 51,500
Patents 12,000
Plant& Machinery 95,000
Postage and Telegram 13,000
Purchases 21,05,000
Rates and Taxes 25,000
Salaries 1,00,000
Sales 25,33,000
Sundry Creditors 1,05,000
Sundry Debtors 1,87,000
Sundry Expenses
Opening Stock: Raw Materials 60,000
Finished Goods 50,000
Wages 35,000
Additional Information:

i) Depreciation to be provided at the following rates Plant &Machinery- 10% Patents-

10% Buildings-2.5% Furniture- 5%
ii) Provide 2.5% on debtors for doubtful debts
iii) Purchases invoice aggregating 25,000 were omitted to be entered in the purchase day
book
iv) Debtors include Rs.5,000 due from the proprietor
v) A amount of Rs.5,000 received in respect of a private loan advanced by the proprietor
which was wrongly credited to sundry debtors A/c
vi) Purchase invoices of the value of Rs.75,000 were entered in the purchase day book on
19 Oct 2016 but the goods in respect there were received on 3rd January 2017
vii) An Amount of Rs.3,500 received from a debtor was wrongly credited to sales A/c
viii) The annual interest on Government Promissory notes accrued due on 31st Dec 2016
ix) Carriages include Rs.8,000 towards outwards charges
x) Stock in trade as on 31-12-16 Raw Materials-50,000 Finished Goods 40,000
Manufacturing Trading Profit &Loss A/c of Vinu for the year ended as on 31 st
March

Particulars Amount Particulars Amount

To Cost Material consumed 20,77,000 By Cost of finished 21,63,700
60,000+21,30,000+12,000-125000) goods
To Wages 35,000
To Factory Expenses:
Fuel 14,000
FactoryInsurance 6,000
Factory Power 16,000
To Depreciation:
Plant &Machinery 9500
Patents 1,200
Factory Buildings 5,000 15,700
21,63,700 21,63,700
To Opening Stock 50,000 By Sales(25,33,000- 25,29,500
3,500)
To Cost of finished Goods 21,63,700 By Closing stock 40,000
To Gross Profit C/d 3,35,800
25,69,500 25,69,500
To Rent Rates& Taxes 25,000 By Gross Profit 3,55,800
 To Salary 1,00,000 By Discount Received 15,000
To Carriage outwards 8,000 By Interest On Govt. 800
To Advertisement 20,000 Promissory Note
To Bad Debts 10,000 (4%20,000)
Add; Provision for Bad debts 4588 14,588
To Depreciation on Furniture 2,576
To Discount Allowed 2,000
To Sundry Expenses 3,500
To Postage& Telegram 13,000
To Net Profit- Transferred to 1,82,936
Capital A/c
3,71,600 3,71,600

Balance Sheet of Vinu as on 31st March 2023

Liabilities Amount Assets Amount

Capital 7,32,000 Factory Buildings 2,00,000 195000
Add; Additional Capital 5,000 -Dep 5000
Add: Net Profit 1,82,936 Plant & Machinery 95000 85,500
9,19,936 -Dep 9500
Less: Drawings 1,05,000 8,14,936 Furniture fittings 51500 48925
Sundry Creditors 1,30,000 -Dep 2575
Patents 12000 10,800
-Dep 1200
4% promissory notes 20,000
Raw materials 125000
Finished Goods 40,000
Sundry Debtors 178912
(187000-5000+5000-3500) 183500
Less:Provision for BD 4,588
Accrued interest on govt 800
 Cash at Bank 194500
Cash in hand 45,500
9,44,936 9,44,936