After the preparation of trial balance, the next level of

work in accounting is called “Final accounts” level.

Preparation of Final accounts involves the following:-
i. Preparation of a Trading accounts- to know the
gross profit or overall profit.
ii. Preparation of a Profit and Loss accounts- to know
the net profit or clear profit of the business; and
iii. Preparation of a Balance sheet- shows the financial
position of the business on a given date.
 The main objective of preparing the Trading account is to ascertain
gross profit or gross loss of a business during an accounting period.
Gross profit is said to be made when the sale proceeds exceed the
cost of goods sold. Conversely, when sale proceeds are less than the
cost of the goods sold, gross loss is incurred.
Style of a trading account:-
 The closing journal entry is to be made in journal proper.
 At the end of each accounting period, revenues and expenses
accounts (direct) are closed by transferring their balances to Trading
account.
 Trading account can be prepared in either in horizontal format or
vertical format.
Trading account items:-
DEBIT SIDE CREDIT SIDE
1. Sales 1. opening stock
2. Sales returns 2. purchases
3. Closing stock 3. purchases returns
4. direct expenses
 PROFIT AND LOSS ACCOUNT
 The profit and loss account can be defined as a report that summarizes the revenues
and expenses of an accounting period to reflect the changes in various critical areas
of firm’s operations.
 In this, all the expenses, for the period are to be debited to this account- whether
paid or not. If it is paid in advance or outstanding, proper adjustments are to be
made. Likewise, revenues, whether received or not are to be credited. It is received
in advance or accrued but not received, proper adjustment is required.
 After balancing, if the credit side is more than debit side, it indicated net profit of the
period. Conversely, if the debit side is more than the credit side, it indicates net loss of
the period.
 It can also be prepared in horizontal or vertical format.
Profit and Loss account items:-
DEBIT SIDE CREDIT SIDE
1.Management expenses 1. gross profit
2.Maintenance expenses 2.other incomes
3.Selling and distribution expenses 3.non-trading income
4.Financial expenses 4.abnormal gains
5. Abnormal losses
 A balance sheet is a list of assets and claims of a business at some
specific point of time and is prepared from the adjusted Trial balance.
It shows the financial position of a business by detailing the sources of
funds and the utilization of these funds.
 A balance sheet shows the assets and liabilities grouped, properly
classified and arranged in a specific manner.
 A balance sheet can be prepared in two forms:
i. Horizontal(traditional) format ii. Vertical format
Type of:
ASSETS and LIABILITIES
i. Fixed assets i. Fixed
liabilities
ii Current assets ii. Current
liabilities
iii. Fictitious assets iii.
Contingent
liabilities
iv. Intangible assets
  An expense is a cost that is applicable to the current accounting period.
 An expenditure is the increase in a liability or capital or the decrease in another asset
that results when the business acquires goods or services.
TYPES OF EXPENDITURE
i. Capital expenditure- increase earning capacity

ii. Revenue expenditure-maintain earning profit

iii. Differed revenue expenditure

DIRECT EXPENDITURE and INDIRECT EXPENDITURE

i. manufacturing-converts raw materials i. Administration- day to day official
to finished goods. things.
ii. Selling and distribution- salesman
commission, advertisement,
carriage outward.
iii. Department
iv. Interest
1. Closing stock
It will be posted in credit side of Trading account and in the asset side of
Balance sheet.
adjustment entry- Closing stock a/c…….Dr.
To Trading a/c
2. Accrued expenses/outstanding expenses
Amount that is to be paid.
adjustment entry- Expenses a/c……..Dr.
To Outstanding expenses a/c
3. Prepaid expenses
Expenses paid more than the actual value.
adjustment entry- Expenses a/c…..Dr. Then, Prepaid
expenses a/c……Dr.
To Cash a/c To
Expenses a/c
4. Accrued income
Income that is to be received.
adjustment entry- Accrued income……Dr.
To income a/c
5. Income received in advance
Income received more than the actual value.
adjustment entry- Cash a/c…..Dr. Then, Expenses a/c…..Dr.
To Expenses a/c To Income received
in advance
6. Depreciation
Provision maintained Provision not maintained
adjustment entry:
Depreciation a/c….Dr. Depreciation a/c….Dr.
To provision for depreciation a/c. To assets a/c.
Closing entry:-
Profit and loss a/c…. Dr. Profit and loss a/c….Dr.
To Depreciation a/c To depreciation
a/c
7. Interest on capital
Adjustment entry- Interest on capital…..Dr.
To Capital a/c
Closing entry- profit and loss a/c…..Dr.
To Interest on capital
8. Interest on Drawing
adjustment entry- Drawing a/c…..Dr.
To Interest on Drawing a/c
closing entry- Interest on Drawing a/c…..Dr.
To Profit and Loss a/c.
 PARTICULARS DEBIT(Rs.) Credit(Rs.) PARTICULARS DEBIT(Rs.) Credit(Rs.)

Purchases 310000 Furniture and fittings 22000

Sales 415000 Printing and stationery 3000

Stock of goods on 1.4.1997 50000 Motor car 48000

Cash in hand 2100 Bad debts 2000

Cash at bank 12000 Cash discounts 4000

Mr. A's capital 288600 General expenses 14000

Drawings 4000 Carriage inward 10000

Rates and taxes 5000 Carriage outward 22000

Salaries 32000 Wages 20000

Postage and telephone 11500 Outstanding liability for 11000

expenses
Salesman’s commission 35000 Sundry creditors 40000

Insurance 9000 Sundry debtors 1000000

Advertisement 17000 Total 743600 743600

 PARTICULARS Rs. Rs. PARTICULARS Rs. Rs.
To opening stock 50000 By sales 415000
To purchases 310000 Less: goods on sale or 15000 400000
Less: goods for personal use 5000 approval
305000 By closing stock 145000
10000 295000 Add: stock of goods an approval 10000 155000
Less: purchase of furniture 10000 basis
To carriage inward 20000
To wages 180000
To gross profit c/d 555000 555000
To rates and taxes 5000 By gross profit b/d 180000
To salaries 32000 By discount on creditors 3000
To postage and telephone 11500
To salesman’s commission 35000
Add: outstanding 5000 40000
To insurance 9000
To advertisement 17000
To printing and stationary 3000
To bad debts 2000
Add: further bad debts 5000 7000
To provision for doubtful debts 4000
To cash discount 4000
To general expenses 14000
 PARTICULARS Rs. Rs. PARTICULARS Rs. Rs.
To carriage outwards 22000
To depreciation on: 3200
furniture and fixtures 9600 12800
motor car
1700
To net profit(transferred to capital a/c)
183000 183000
Balance sheet
LIABILITIES Rs. Rs. ASSETS Rs. Rs.
Sundry creditors 40000 Cash in hand 2100
Less: discount on creditors 3000 37000 Cash at bank 12000
Salesmen's commission- Sundry debtors 100000
outstanding
5000
Capital: opening 288600 Less: goods on sale or approval 15000
Add: net profit 1700 85000
290300 Less: further bad debts 5000
Less: drawings(4000+5000) 9000 80000
281300 Less: provision for doubtful debts 4000 76000
Less: outstanding liabilities for 11000 270300 Closing stock 145000
exp. (printing and stationery for 88- Add: stock on approval basis 10000 155000
89) Furniture and fixtures(rs.22000+10000)
Less: depreciation 32000
Motor car 3200 28800
Less: depreciation 48000
9600 38400
312300