by The final accounts of a business consist of the Trading Account, Profit and Loss Account, and Balance Sheet. These accounts are prepared at the end of the accounting period to determine the financial performance and position of the business.
1. Trading Account
The Trading Account is prepared to determine the gross profit or gross loss of a business by calculating the difference between sales and cost of goods sold (COGS). COGS includes the opening stock, purchases, and direct expenses like wages, carriage inwards, etc.
Formula:
Gross Profit = Sales – Cost of Goods Sold (COGS)
Structure:
| Particulars | Amount |
|---|---|
| Opening Stock | ₹X |
| Add: Purchases | ₹X |
| Less: Purchase Returns | ₹X |
| Net Purchases | ₹X |
| Add: Direct Expenses | ₹X |
| Cost of Goods Available for Sale | Opening Stock + Net Purchases + Direct Expenses |
| Less: Closing Stock | ₹X |
| Cost of Goods Sold | ₹X |
| Sales | ₹X |
| Gross Profit | ₹(Sales – COGS) |
2. Profit and Loss Account
The Profit and Loss Account is prepared to determine the net profit or net loss of the business. It considers indirect incomes (such as interest income), indirect expenses (such as salaries, rent, and advertising), and the gross profit or loss from the Trading Account.
Formula:
Net Profit = Gross Profit – Indirect Expenses + Indirect Income
Structure:
| Particulars | Amount |
|---|---|
| Gross Profit c/d | ₹X |
| Add: Other Income | ₹X |
| Less: Indirect Expenses | ₹X |
| Net Profit | ₹(Gross Profit – Expenses + Other Income) |
3. Balance Sheet
The Balance Sheet is a snapshot of the business’s financial position at a particular point in time. It lists assets (what the business owns) and liabilities (what the business owes).
Structure:
| Liabilities | Amount | Assets | Amount |
|---|---|---|---|
| Owner’s Equity | ₹X | Fixed Assets | ₹X |
| Loan Liabilities | ₹X | Current Assets | ₹X |
| Creditors (Liabilities) | ₹X | Cash & Bank | ₹X |
| Outstanding Expenses | ₹X | Inventory (Stock) | ₹X |
| Net Worth | ₹X | Receivables (Debtors) | ₹X |
| Total Liabilities | ₹X | Total Assets | ₹X |
Example of Final Accounts
Let’s assume the following balances for a small business at the end of the accounting period:
- Opening Stock = ₹10,000
- Purchases = ₹50,000
- Purchase Returns = ₹5,000
- Direct Expenses = ₹2,000 (Wages, Carriage Inwards)
- Sales = ₹80,000
- Closing Stock = ₹8,000
- Indirect Expenses = ₹12,000 (Rent, Salaries, Advertising)
- Other Income = ₹1,000 (Interest Income)
Step 1: Trading Account
| Particulars | Amount (₹) |
|---|---|
| Opening Stock | 10,000 |
| Add: Purchases | 50,000 |
| Less: Purchase Returns | 5,000 |
| Net Purchases | 45,000 |
| Add: Direct Expenses | 2,000 |
| Cost of Goods Available for Sale | 57,000 |
| Less: Closing Stock | 8,000 |
| Cost of Goods Sold (COGS) | 49,000 |
| Sales | 80,000 |
| Gross Profit | 31,000 |
Step 2: Profit and Loss Account
| Particulars | Amount (₹) |
|---|---|
| Gross Profit b/d | 31,000 |
| Add: Other Income | 1,000 |
| Less: Indirect Expenses | 12,000 |
| Net Profit | 20,000 |
Step 3: Balance Sheet
| Liabilities | Amount (₹) | Assets | Amount (₹) |
|---|---|---|---|
| Owner’s Equity | 20,000 | Fixed Assets | 15,000 |
| Loan Liabilities | 10,000 | Current Assets | 15,000 |
| Creditors | 8,000 | Cash & Bank | 5,000 |
| Outstanding Expenses | 5,000 | Inventory (Stock) | 8,000 |
| Total Liabilities | 43,000 | Total Assets | 43,000 |
