Session 16 - Preparation of Trading and Profit and Loss Account and Balance Sheet

Session Plan : Preparation of Trading and Profit and Loss Account and Balance Sheet

Introduction (5 min): Explain the purpose of final accounts – Trading A/c, P&L A/c, and Balance Sheet.

Concepts (10 min): Discuss structure and items in each statement (direct expenses, indirect expenses, assets, liabilities).

Illustration (15 min): Prepare complete final accounts from a sample Trial Balance with adjustments.

Class Activity (10 min): Students prepare Trading, P&L A/c, and Balance Sheet from given data.

Recap & Q/A (5 min): Summarize importance of final accounts in showing profit and financial position.

Lecture Material : (PDF, PPT)

Final_Accounts.pptx 

Learning Material (IV Quadrant Approach)

(Q1) : Text and Image based Content (PDF/Image Formats)

Final Accounts: Trading, Profit & Loss Account, and Balance Sheet

1. Meaning

• Final Accounts are prepared at the end of an accounting year to know the profitability and financial position of a business.

• They consist of:

  1. Trading Account → to find Gross Profit/Loss.

  2. Profit & Loss Account → to find Net Profit/Loss.

  3. Balance Sheet → to show Assets & Liabilities.

2. Objectives

• To determine Gross Profit and Net Profit.

• To ascertain the financial position of the business.

• To provide information for management, investors, creditors, and tax authorities.

3. Formats

(A) Trading Account

Debit (Dr.) Side – Opening Stock, Purchases (– Returns), Direct Expenses (wages, carriage inward).
Credit (Cr.) Side – Sales (– Returns), Closing Stock.
Balancing figure → Gross Profit or Gross Loss.

(B) Profit & Loss Account

Debit (Dr.) Side – Indirect Expenses (salaries, rent, depreciation, interest paid, bad debts).
Credit (Cr.) Side – Gross Profit b/d, Indirect Incomes (commission, interest received, rent received).
Balancing figure → Net Profit or Net Loss.

(C) Balance Sheet

Liabilities – Capital, Reserves, Creditors, Loans, Outstanding Expenses.
Assets – Fixed Assets (land, machinery), Current Assets (cash, stock, debtors, prepaid expenses).
Shows true financial position of the business.

4. Steps for Preparation

1. Prepare Trading A/c from Trial Balance to find Gross Profit/Loss.

2. Transfer Gross Profit/Loss to Profit & Loss A/c and adjust indirect expenses/incomes to find Net Profit/Loss.

3. Prepare Balance Sheet by arranging assets and liabilities.

4. Incorporate adjustments like closing stock, outstanding/prepaid expenses, accrued incomes, depreciation, provisions.

5. Solved Example

Trial Balance (Extract) as on 31st March 2024:

• Opening Stock ₹20,000

• Purchases ₹80,000

• Wages ₹10,000

• Salaries ₹15,000

• Rent ₹5,000

• Sales ₹1,50,000

• Commission Received ₹2,000

• Furniture ₹30,000

• Sundry Debtors ₹40,000

• Sundry Creditors ₹20,000

• Cash ₹10,000

• Closing Stock ₹25,000

Step 1 – Trading A/c

Debit: Opening Stock (20,000) + Purchases (80,000) + Wages (10,000) = ₹1,10,000
Credit: Sales (1,50,000) + Closing Stock (25,000) = ₹1,75,000
Gross Profit = 65,000

Step 2 – Profit & Loss A/c

Debit: Salaries (15,000) + Rent (5,000) = ₹20,000
Credit: Gross Profit (65,000) + Commission Received (2,000) = ₹67,000
Net Profit = 47,000

Step 3 – Balance Sheet

Liabilities:

• Capital + Net Profit = (Balancing Figure)

• Sundry Creditors = ₹20,000

Assets:

• Furniture = ₹30,000

• Sundry Debtors = ₹40,000

• Closing Stock = ₹25,000

• Cash = ₹10,000
    Total Assets = ₹1,05,000
    Liabilities + Capital = ₹1,05,000 (Balanced ✅)

6. Importance of Final Accounts

• Shows profitability (Gross & Net).

• Presents true financial position.

• Helps in decision-making, taxation, and planning.

• Provides basis for comparisons and performance evaluation.

(Q2) : Video Based Content (Youtube): www.youtube.com/watch?v=Yn70n37sLxE&list=PLLhSIFfDZcUXEs3UhIv5tMn6AAU1GNnPr&index=31 

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform)

forms.fillout.com/t/vdDndcoB4Yus