Preparation of Final Accounts of a Sole Trading Concerns

Final Accounts refer to the financial statements prepared at the end of an accounting period to ascertain the financial performance and position of a business. They typically are:

1. Trading Account: Determines the gross profit or loss from core business activities.
2. Profit and Loss Account: Calculates the net profit or loss after considering all expenses and incomes.
3. Balance Sheet: Provides a snapshot of the financial position by listing assets, liabilities, and equity.

Steps in Preparing Final Accounts

1. Preparation of the Trading Account

   • The trading account calculates the gross profit or loss of the business from its core operations.

Format:

• • • Debit Side: Opening stock, purchases, direct expenses (e.g., wages, freight).
    • Credit Side: Sales and closing stock.
  • Formula: Gross Profit = (Sales + Closing Stock) – (Opening Stock + Purchases + Direct Expenses)

• • If the result is negative, it represents a gross loss.

2. Preparation of the Profit and Loss Account

This account determines the net profit or loss by considering indirect expenses and incomes.

Format:

• • • Debit Side: Indirect expenses (e.g., salaries, rent, depreciation, advertising).
    • Credit Side: Incomes other than sales (e.g., commission received, interest earned).
  • Formula: Net Profit = Gross Profit + Other Incomes − Indirect Expenses

• • The net profit is transferred to the capital account of the owner.

3. Preparation of the Balance Sheet

The balance sheet provides a snapshot of the financial position by listing assets and liabilities.

Format:

• • • Assets Side: Includes fixed assets (e.g., machinery, land) and current assets (e.g., cash, debtors, stock).
    • Liabilities Side: Includes long-term liabilities (e.g., loans) and current liabilities (e.g., creditors).
    • The capital account of the proprietor is adjusted for net profit and drawings.

Key Adjustments in Final Accounts

To ensure accuracy, certain adjustments must be incorporated:

• Outstanding Expenses:

Expenses incurred but not paid are added to the respective expense account and shown as a liability.

• Prepaid Expenses:

Expenses paid in advance are deducted from the respective expense account and shown as an asset.

• Accrued Income:

Income earned but not received is added to the respective income account and shown as an asset.

• Unearned Income:

Income received in advance is deducted from the respective income account and shown as a liability.

• Depreciation:

The decrease in the value of fixed assets is recorded as an expense in the Profit and Loss Account.

• Bad Debts:

Irrecoverable debts are written off as an expense, and a provision for doubtful debts may also be created.

• Closing Stock:

Closing stock is credited to the Trading Account and shown as a current asset.

illustrative Example

Assume the following trial balance for a sole trading concern:

Adjustments

1. Closing stock: ₹25,000.
2. Depreciation on machinery: 10%.
3. Outstanding rent: ₹1,000.

Trading Account

Profit and Loss Account

Balance Sheet