TRADING AND PROFIT AND LOSS ACCOUNT

Final Accounts of sole Traders: show the calculation of profit earned or the loss incurred during the period
and the financial position of the business at the end of the period. Final accounts usually prepared from a
trial balance.

1. Trading Account: deals with trading (buying and selling). The account shows the calculation of profit
earned on goods sold.
Gross Profit = Sales Cost of Goods Sold
Cost of goods sold = opening stock + purchases + carriage inwards - closing stock
Drawings of goods for personal use is deducted from purchases
Carriage inwards is added to the purchases
2. Profit and Loss Account: shows the calculation of final or true profit. This is the profit after all
running expenses and any other items of income.
Net Profit = Gross profit + other incomes - Expenses

Specimen of Profit and Loss Account

Sales Sales Returns
Less: Cost of goods sold:
Opening stock of goods
Add: Purchases
Add: Carriage inwards/Carriage on purchases
Less: Closing stock
Gross Profit
Add: Rent received
Add: Discount received
Add: Commission received
Add : Decrease in provision for bad debts
Less: Expenses:
Rent paid + Accrued/unpaid
Salary paid + Accrued/ unpaid
Bad debt
General expenses
Office expenses
Insurance prepaid/ paid in advance
Increase in provision for bad debts
Depreciation of fixed assets
Bank charges
Loan interest paid
Repairs to building
Delivery van expenses
Net profit for the year transferred to capital a/c in the balance sheet

Amount
X
X
X
X

(-)

Xx
Xx
Xx
Xx
Xx
xxx

X
X
X
X
X
X
X
X
X
X
X
x

(-)

xxx

xxx

3. Balance Sheet: is a statement of the financial position of the business on a certain date. It shows
what the business
owns, and amounts owing to the business- the assets and what the business
owes, the liabilities and the capital.
Specimen of Balance Sheet
Amount
FIXED ASSETS:
Freehold Premises / Land and Buildings
X
Equipment less depreciation
X
Furniture (depreciation of current year+ previous years)
X
Motor van / Motor vehicle depreciation
X
Goodwill
X
CURRENT ASSETS:
Cash in hand/ cash at bank
Debtors less provision for bad debts
X
(+)
Closing stock
X
Prepaid rent/insurance etc.
X
LESS: CURRENT LIABILITIES
Creditors for goods
Creditors for expenses such as accrued rent, delivery van expenses
Bank overdraft
WORKING CAPITAL

X
xx
xx
x
x
Xx

FINANCED BY:
Capital
Add: Net profit from P&L account

Xx
Xxx

X
X

Less: (Drawings of cash + goods)

LONG TERM LIABILITIES
Bank Loan

Xx
(+)
x
xxx

Adjustment of items in Final accounts

Items
1. unpaid expenses
2. Prepaid expenses
3. Drawings of goods
4. Bank charges
5. Provision for bad debts
6. Provision for depreciation on fixed
assets
7. Accrued income
8. Purchases, purchase returns, sales,
sales returns

Trading, Profit and Loss a/c

+ to the expenses
- from the expenses
- from purchases in trading a/c
Expenses in profit and loss a/c
Expenses
Expenses
Add to the g/p
Trading a/c

Balance Sheet
Current liability
Current assets
Added to drawings
Deducted from cash at bank
Deducted from debtors
Deducted from fixed assets
Current asset
..

9. Discount/commission/rent received
10. Discount allowed, commission paid,
rent,
bad debt, wages, salaries, bank
charges,
general expenses, office expenses,
repairs to building
11. Machinery, equipment, furniture,
premises, land and buildings
12. Cash in hand, debtors, cash at bank
13. Creditors, bank overdraft
Club Accounts
1. subscription received in advance at
start
2. subscription received in advance at end
3. subscription in arrear in the beginning
4. subscription in arrear at the end

Added to gross profit

Expenses in p&l a/c

..

..

Fixed asset

.
..

Current asset
Current liability

Added to subscriptions in I&E

a/c
Deducted from subscription
Deducted from subscriptions
Added to subscriptions

Current liability in the opening

b/s
Current liability in the closing
b/s
Current asset in the opening b/s
Current asset in the closing b/s

List of some common Expenses, Income, Assets and Liabilities

EXPENSES.
Carriage inwards, carriage outwards
Purchases, wages and salaries,
Rent and insurance, electricity
charges, advertising charges, bank
charges,
Discount allowed, bad debts,
Depreciation of fixed assets,
Provision for bad debts, office
expenses,
Provision for discount on debtors
General expenses, motor expenses,
Motor vehicle expenses
Repairs to building or machinery
Interest on loan

FIXED ASSETS
Plant and Machinery
Land and Buildings
Premises
Equipment
Furniture and Fittings
Fixtures and Fittings
Lawn Mover
Computers
Motor van/Motor vehicle
Motor car

CURRENT LIABILITY
Creditors for goods
Creditors for expenses:
Eg. Rent owing,
Salary accrued
Wages unpaid
General expenses unpaid
Commission outstanding
Bank overdraft
[ all unpaid amounts]

INCOMES:
Sales, discount received,
Commission received
Interest received, rent received,
profit on sale of old fixed assets

CURRENT ASSETS
Cash in hand
Cash at bank
Debtors
Closing stock
Prepaid rent, insurance, rates

LONG TERM LIABILITIES

Loan from bank
Mortgage loans
Debenture

The trading and profit & loss account and balance sheet prepared at the end of a year is known as Final
accounts. While preparing the final accounts, there may be some items so far not adjusted. These items
are to be adjusted in the final accounts for calculating the correct profit or loss of the business. The usual
adjustments in the final accounts are:
a. Expenses owing: These are the expenses incurred during the year but not paid in cash. This amount
will be paid in the near future (next year). The owing expense is to be added with the amount of same

expense already paid given in the trial balance and it should be shown in the balance sheet as a current
liability.
The double entry for recording the expenses owing is
Debit
Expenses account
Credit Expenses owing account
This expense is also known as outstanding expenses, expenses payable or expensepayable.
b. Prepaid expense. : This is the expense paid during the year for the benefit of the next year. The
portion of the expense which is prepaid is to be deducted from the total expenses already paid during the
year (given in the trial balance) and shown as current asset in the balance sheet.
The double entry for recording the prepaid expense is
Debit
Prepaid expense account and
Credit Expense account
This expense is also known as expense paid in advance or unexpired expense
c. Accrued income: The income earned during the year but not received in cash is known as accrued
income. The amount of accrued income is to be considered as current years income and added with the
concerned income received during the year (given in the trial balance) and shown as a current asset in
the balance sheet.
The double entry for recording the accrued income is:
Debit
Accrued income account and
Credit Income account
The accrued income is also known as outstanding income.
d. Income received in advance: This is the income received during the year for the services to be
rendered during the next year. Since this income is not related to the current year, it should be deducted
from the concerned income (given in the trial balance) and shown as a current liability in the balance
sheet.
The double entry for recording the income received in advance is:
Debit
Income account and
Credit Income received in advance
This is also known as unexpired income.
e. Depreciation: The part of the cost of a fixed asset that is consumed by a business during the period of its use
is known as depreciation. It is considered as an expense in the business therefore shown as an expense
in the profit & loss account and deducted from the cost price of the concerned fixed asset in the balance
sheet.
The double entry for recording depreciation is:
Debit
Profit & loss account and
Credit Depreciation account
f. Bad debt: The part of the amount of debtors which cannot be recovered is known as bad debt. It is an expense
to be shown in the profit & loss account. If the bad debt appears in the trial balance, it is known as bad
debt written off and shown in the profit & loss account only. If bad debt information appears among the

adjustment points below the trial balance, then it should be shown as an expense in the profit & loss
account and shown as a deduction from the debtors in the balance sheet under the heading current
assets.
The double entry for recording the bad debt is:
Debit
Bad debt account and
Credit Debtors account
g. Goods drawings by the owner for his personal use:The amount of goods withdrawn by the owner for his personal use is to be considered as drawing.
The double entry for recording the goods drawings is:
Debit
Drawings account and
Credit Purchase account or sales account
The amount of goods drawings should be deducted form purchases and capital in the balance sheet.