TRADING, PROFIT & LOSS A/C
The Trading A/c is prepared with a view to ascertaining the profitability of
the goods purchased and the goods sold by the trading firm. Expenses and
incomes of a variable nature are taken into consideration to find out the
Gross Profit of the firm.
Trading A/c should be debited with the following items:
Opening Stock
Purchases – cash as well as credit purchase
Purchases, Returns or Returns outwards
Goods withdrawn for personal use
Goods distributed as free samples
Goods given as charity
Direct Expenses such as freight inward, import duty, direct wages, factory
expenses.
Trading A/c should be credited with the following items:
Sales, less Sales returns or Returns inwards, Closing stock
Format for Trading A/c
Trading A/c of ……………..for the Period Ending
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Opening Stock -------- By Sales --------
+ Purchases -------- Less Returns inwards --------
Less Returns outwards -------- Closing Stock --------
Direct Expenses -------- Gross Loss transferred to P&L --------
A/c
Wages --------
Carriage inwards --------
Gross Profit Transferred to P&L
A/c
-------- --------
Ex. From the following information relating to ABC Ltd., prepare Trading A/c for
the year ending on 31st March, 2002. The firm started business on 1st April, 2001
Sales Rs. 50,000 Office Expenses Rs. 2,000
Returns outward 150 Wages 5,000
Salaries & wages 4,000 Fuel 1,000
Carriage inward 2,000 Insurance 3,721
Returns inward 250 Cash 1,500
Freight inward 2,300 Purchases 40,000
Interest 3,000 Rent 700
Closing stock on 31.3.2002 Rs. 3000
Trading A/c of ABC Ltd.
For the year ended 31st March, 2002
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
To Purchases 40,000 By Sales 50,000
Less. Return Outward 150 39,850 Return inward 250 49,750
Carriage Inward 2,000 By closing Stock 3,000
Freight Inward 2,300
Wages 5,000
Fuel 1,000
Gross Profit transferred to P/L 2,600
A/c
52,750 52,750
Profit & Loss A/c
The P&L A/c is prepared to ascertain the Net Profit earned or Net
Loss incurred by the business operations during an accounting
Period .
All the indirect revenue expenses and Loss are charged.
A general format of a P&L A/c is shown below:
A general format of a P&L A/c is shown below:-
Dr…… Profit & Loss A/c of ------ for the Period ending -------Cr
Particulars Rs. Particulars Dr.
To gross Loss b/d ------- By Gross Profit b/d -------
Salaries & wages ------- Interest earned -------
Rent, rates & taxes ------- Commission earned -------
Depreciation ------- Rent recd. -------
Discount allowed ------- Profit on sale of fixed assets -------
Carriage outward ------- Income from investments -------
Advertising ------- Net Loss transferred to Cap. A/c -------
Bad debts -------
Interest on Loan -------
Net profit transferred to -------
capital A/c
-------
Ex. From the following trial balance of Mohan Singh & Sons, prepare
the Trading & P&L A/c for the year ended 31st March, 2001
Trial Balance
As on 31st March, 2001
Particulars Debit Credit Rs.
Mohan’s Capital 29,000
Mohan’s Drawings 760
Purchases & sales 8,900 15,000
Sales & Purchase Returns 280 450
Stock (1-4-2000) 1200
Wages 800
Building 22,000
Freight and Carriage 2,000
Trade expenses 200
Advertisement 240
Interest 350
Taxes & Insurance 130
Particulars Debit Credit Rs.
Debtors & Creditors 6,500 1200
Bills Rec. & Bills Payable 1,500 700
Cash at Bank 1,200
Cash in Hand 190
Salaries 800
46,700 46,700
Closing Stock : Rs. 1500
Trading & P&L A/c of Mohan Singh & Sons
For the year ended 31st March, 2001
Particulars Amount Particulars Amount
Rs. Rs.
Opening Stock 1,200 By Sales 15,000
Purchase 8,900 14,720
Returns 450 8,450 Less Return 280 1500
Wages 800 Closing Stock
Freight & Carriage 2,000
Gross Profit c/d 3,770
16,220 16,220
Trade Expense 200
Advertisement 240 3,770
Taxes & Insurance 130 Gross Loss b/d 350
Salaries 800 Interest
Net Profit 2,750
4,120 4,120
Explanation
Purchases have a debit balance – Rs. 8900 whereas Sales have a credit balance of
Rs. 15000. Purchase returns show credit balance and sales returns show debit
balance. Thus Rs. 280 represents sales returns (Debit Balance) and Rs. 450 is
purchases returns (credit balance)
Balance Sheet of ………..
As at……..
Liabilities Amount Assets Amount
Rs. Rs.
Current Liabilities Current Assets
Bank Overdraft Cash in Hand
Bills Payable Cash at Bank
Outstanding Expenses Bills Receivable
Sundry Creditors Sundry Debtors
Income recd. in advance Prepaid Expenses
Long Term Liabilities Closing Stock
Loan Investments
Capital Fixed Assets
Opening Balance Furniture & Fixtures
Add: Net Profit Plant & Machinery
(Less: Net Loss) Building
Less Drawings Land
Good Will
Ex. Prepare Trading and Profit and Loss A/c and a balance sheet as on 31 st
March, 1999 from the under mentioned Trial Balance of PQR Ltd.
Trial Balance
As on 31st March, 1999
Particulars Amount
Debit Rs. Credit Rs.
Opening Stock 10,000
Purchases and Sales 20,000 40,000
Returns 2,000 1,000
Discount 1,000 2,000
Capital and Drawings 5,000 65,000
Cash and Bank Overdraft 7,000 12,000
Debtors and Creditors 19,000 12,000
Carriage & Cartage 3,000
Freight outward 4,000
Salaries & Wages 6,000
Stationery 4,000
Particulars Amount
Debit Rs. Credit Rs.
Land & Buildings 35,000
Plant and Machinery 15,000
Fixtures and Fittings 5,000
Bills Receivable and Payable 6,000 4,000
General Reserve 6,000
1,42,000 1,42,000
Closing Stock: Rs. 9,000
Trading Account
For the year ended 31st March, 1999
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
Opening Stock 10,000 Sales 40,000
Purchase 20,000 Less Returns 2000
Less Returns 1000 19,000 38,000
Carriage & Cartage 3,000 Closing Stock 9,000
Gross Profit Transferred to
P/L A/c
15,000
47,000 47,000
Profit and Loss A/c of PQR Ltd
For the year ended 31st March, 1999
Dr. Cr.
Particulars Amount Particulars Amount
Rs. Rs.
Discount 1000 Gross Profit b/d 15,000
Freight Outward 4,000 Discount recd. 2,000
Salaries & Wages 6,000
Stationery 4,000
Net Profit Transferred to 2,000
Capital A/c
17,000
17,000
Balance Sheet of PQR Ltd.
As on 31st March, 1999
Liabilities Amount Assets Amount
Rs. Rs.
Bank overdraft 12000 Cash in Hand 7,000
Creditors 12000 Debtors 19,000
Bills Payable 4000 Closing Stock 9,000
Capital 65,000 Bills Receivable 6,000
Add: Net Profit 2000 Land & Buildings 35,000
Less: Drawings -5,000 62,000 Plant & Machinery 15,000
General Reserve 6,000 Fixtures & Fittings 5,000
96,000 96,000
Notes
i) Purchases & Sales: Purchases have a debit balance; sales have a credit
balance.
ii) Purchase Returns have a credit balance (the reverse of Purchases). Sales return
have a debit balance (reverse of sales)
iii) Discount allowed has debit balance, discount recd. has credit balance.
iv) Capital has credit balance. Drawings have debit.
v) Cash always has debit balance (asset). Overdraft (liability) has credit balance.
vi) Debtors (asset) – debit balance. Creditors (liability) credit balance.
Explanation
Salaries & Wages: The wages paid to workers, Works manager, Foreman Etc. are
direct expenses. Salaries paid to office staff, even partners, are an indirect expense.
Rent of office, shop, showroom is an indirect expense. Rent of factory is a direct
expense.
Interest on Loans, overdrafts is an indirect expense. Commission paid,all expenses
incurred for sales promotion are indirect.
Carriage & freight outward are incurred after sale & hence are indirect.
Printing and Stationery are indirect expenses
Advertising is an indirect expense.
Samples to prospective customers – indirect
Discount allowed – indirect expense
Discount recd – income – credit to P&L A/c
Insurance on office premises etc is indirect. Insurance paid on the life of a partner
is a drawing & not an expense of the firm.
Methods of Presenting the Final Accounts
1. Horizontal Form
2. Vertical Form
Vertical Format of Profit & Loss Account
Particulars Rs.
A Sales
Less returns
B Cost of Goods Sold
Opening Stock
Add-Purchases
Less Returns
Add. Direct Expenses
- Carriage, Wages & Salaries
COGS available for sale
Less Closing Stock
Particulars Rs.
C Gross Profit (A - B)
D Operating Expenses
Carriage outward
Discount Allowed
Commission Allowed
Traveling Expenses
Bad Debts
Rent, Rates & Taxes
Salaries & Wages
Depreciation
E Operating Profit/Loss
Particulars Rs.
F Non-operating Results
a) Interest earned
Discount earned
Misc. Income
b) Non-operating expenses
Interest paid
Loss on Sale of a fixed asset
Net Profit
Vertical Form of Balance Sheet
Particulars Rs.
Source of Funds
Shareholders Funds
Long Term Debts
Application of Funds
Current Assets
Cash in hand
Cash in Bank
Bills Receivables
Debtors
Stock
Prepaid Expense
Current Liabilities
Bills Payable
Creditors
Particulars Rs.
Income recd. In advance
Investments
Fixed Assets
Furniture & Fixtures
Plant and Machinery
Building
Land
Goodwill
Final Accounts with Adjustments
From the following Trial Balance of M/s Jackson Ltd.
Prepare- i) Profit and Loss Account for the year ending on 31st March 2002; &
ii) Balance sheet as on that date.
Debit Rs. Credit Rs.
Purchases 21,750
Discount allowed 1,300
Wages 6,500
Salaries 2,000
Sales 35,000
Traveling Expenses 400
Commission paid 425
Carriage inward 275
Administration expenses 105
Trade Expenses 600
Interest Paid 250
Building 5,000
Furniture 200
Debit Rs. Credit Rs.
Debtors 4,250
Capital 13,000
Creditors 2,100
Cash 7,045
Stock on 31st March 2002 was Rs. 6000
Adjustments: i) Depreciate buildings by 20%
ii) Create a provision for bad debts at 10% on debtors; &
iii) Outstanding wages are Rs. 475/-
Profit & Loss Account of M/s Jackson Ltd.
For the year ended 31st March, 2002
Liabilities Amount Assets Amount
Rs. Rs.
Purchases 21,750 Sales 35,000
Wages 6500
Add outstanding wages 475 6975
Carriage inward 275
Salaries 2000
Discount allowed 1300
Traveling expenses 400
Commission paid 425
Admin Expenses 600
Interest paid 250
Depn. on buildings 1000
Prov. For bad debts 425
Net Profit 5495 35,000
CASHFLOW STATEMENT.
This is a relatively new statement that reflects a firm’s major sources of cash
receipts and cash payments. It reports the cash effects during a period of not only
the firm’s operations but also its investing and financing activities. Neither of the
other two statements describes then investments in assets during the period and
how these investments are financed.
