Final Accounts

The Final Accounts of a business consist of three primary statements prepared at the end of an accounting year: the Trading Account, the Profit and Loss Account, and the Balance Sheet. Together, these statements present a complete picture of the financial performance (through the Trading and P&L accounts) and the financial position (through the Balance Sheet) of the business for an accounting period. The Trading Account determines the Gross Profit (revenue from sales minus direct costs), the Profit and Loss Account determines the Net Profit (Gross Profit minus all indirect expenses plus other incomes), and the Balance Sheet presents the Position Statement showing what the business owns (Assets) versus what it owes (Liabilities and Capital).

The preparation of Final Accounts is the culmination of the entire accounting cycle — starting from transaction recording, through journal entries, ledger posting, and trial balance preparation, and culminating in these three statements. For the CS Executive examination, Final Accounts is one of the most heavily tested topics, frequently appearing as a comprehensive 15–20 marks question. A strong command of the Trading Account, P&L Account, and Balance Sheet formats — along with the ability to handle all the common year-end adjustments — is essential for scoring well in this area.

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🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Three Statements and Their Purpose:

Statement	Purpose	Key Figure
Trading Account	Calculate Gross Profit from sales and direct costs	Gross Profit
Profit & Loss Account	Calculate Net Profit from Gross Profit minus indirect expenses	Net Profit
Balance Sheet	Show financial position — assets = liabilities + capital	Nil

Trading Account Format (Vertical Style):

Trading Account for the year ended 31st March 2025

                                                    ₹           ₹
Opening Stock                                            X
Add: Purchases                              X
     Less: Purchases Returns               (X)          X
Add: Carriage Inward                                    X
Add: Wages                                             X
                                                    -----
Add: Goods Purchased for Sale                          X
Less: Closing Stock                                   (X)
                                                    -----
Cost of Goods Sold                                     X
                                                    -----
Gross Profit transferred to P&L A/c      X
                                                    -----
                                                    =====

Sales (Net)                                         X
Less: Cost of Goods Sold                           (X)
Gross Profit                                        X

Key Items in Trading Account:

• Debit side: Opening Stock, Purchases (net), Carriage Inward, Wages, Freight, Duty, Power, Fuel, Factory Expenses
• Credit side: Sales (net), Closing Stock, Other Revenue (e.g., Commission Received from trading activity)
• Result: Gross Profit = Sales – Cost of Goods Sold (transferred to P&L)

P&L Account Format (Vertical Style):

Profit & Loss Account for the year ended 31st March 2025

                                                    ₹           ₹
Gross Profit b/d                                     X
Add: Other Income
     Commission Received                             X
     Rent Received                                   X
     Interest Received                               X
     Discount Received                               X
                                                    -----
                                                    X
Less: Expenses
     Salaries                               X
     Rent                            X
     Office Expenses               X
     Insurance                     X
     Depreciation                  X
     Bad Debts                     X
     Provision for Doubtful Debts  X
     Interest on Capital          X
     Audit Fees                    X
     Bank Charges                  X
     Repairs                      X
                                                    -----
Net Profit (transferred to Capital A/c)             X
                                                    =====

Gross Profit                                         X
Less: All Indirect Expenses                          (X)
Add: Other Incomes                                    X
Net Profit                                            X

Balance Sheet Format:

Balance Sheet as at 31st March 2025

Particulars                      Note    Schedule   Amount    Amount
                                                        (₹)       (₹)
───────────────────────────────────────────────────────────────
EQUITY AND LIABILITIES
1. Shareholders' Funds
   a) Share Capital                              X
   b) Reserves and Surplus          (if any)     X
2. Non-Current Liabilities
   Long-term borrowings                         X
3. Current Liabilities
   a) Short-term borrowings                     X
   b) Trade payables (Creditors)                 X
   c) Other current liabilities                 X
   d) Short-term provisions          (if any)    X
                                                    -----
Total Equity + Liabilities                        X

ASSETS
1. Non-Current Assets
   a) Fixed assets (Tangible + Intangible)       X
   b) Non-current investments                   X
   c) Long-term loans and advances (if any)      X
2. Current Assets
   a) Current investments                       X
   b) Inventories (Closing Stock)               X
   c) Trade receivables (Debtors)               X
   d) Cash and Bank balances                    X
   e) Short-term loans and advances (if any)    X
   f) Other current assets (if any)             X
                                                    -----
Total Assets                                      X
                                                    =====

Key Adjustments (Memorise Entries):

Adjustment	Entry
Closing Stock (given in trial balance or separately)	No entry in the books (already in Trial Balance as a credit). It is credited in Trading A/c and appears on Balance Sheet as an asset.
Outstanding Expenses	Expense A/c Dr. To Outstanding Expense A/c (shown as a current liability in Balance Sheet)
Prepaid Expenses	Prepaid Expense A/c Dr. To Expense A/c (shown as a current asset in Balance Sheet)
Accrued Income	Accrued Income A/c Dr. To Income A/c (shown as a current asset in Balance Sheet)
Income Received in Advance	Income A/c Dr. To Income Received in Advance A/c (shown as a current liability in Balance Sheet)
Depreciation	Depreciation A/c Dr. To Accumulated Depreciation A/c (shown as a deduction from asset in Balance Sheet)
Bad Debts	Bad Debts A/c Dr. To Debtors A/c (shown as an expense in P&L)
Provision for Doubtful Debts (NEW)	Bad Debts / P&L A/c Dr. To Provision for Doubtful Debts A/c (shown as a deduction from Debtors in Balance Sheet)
Provision for Discount on Debtors	Discount Allowed / P&L A/c Dr. To Provision for Discount on Debtors A/c
Goods Destroyed by Fire (uninsured)	Trading A/c Dr. (reduce closing stock)
Goods Withdrawn by Owner	Drawings A/c Dr. To Purchases A/c

⚡ Exam Tip: In the Trading Account, Closing Stock is CREDITED (added to the credit side) — this reduces Cost of Goods Sold. In the Balance Sheet, Closing Stock appears as a Current Asset. Always ensure closing stock is double-counted correctly — once in Trading A/c and once in Balance Sheet (not in the P&L).

⚡ Exam Tip: Outstanding expenses are added to the respective expense in the P&L account (Rent A/c Dr. becomes higher by outstanding amount). They also appear as a Current Liability in the Balance Sheet. Prepaid expenses are subtracted from the expense.

⚡ Exam Tip: Gross Profit = Net Sales – Cost of Goods Sold. Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses – Closing Stock. If Gross Profit is a credit figure (higher than zero), it’s transferred to the Credit side of P&L A/c. If it’s a debit figure (loss), it goes to the Debit side of P&L A/c.

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

1. Trading Account — Purpose and Preparation

Purpose of Trading Account:

The Trading Account is prepared to calculate the Gross Profit or Gross Loss of the business from its trading activities (buying and selling of goods). It compares the revenue from sales against the direct costs incurred to bring the goods to the point of sale — including the cost of purchases, direct expenses, and the change in inventory between the beginning and end of the period.

Why is it Prepared?

1. To determine the profitability of the trading operation (buying and selling goods)
2. To compare gross profit margins across different periods and with industry benchmarks
3. To provide a clear picture of direct costs, which helps in pricing decisions
4. The Gross Profit figure is the starting point for the P&L Account

Direct vs. Indirect Expenses:

Direct Expenses (Trading A/c)	Indirect Expenses (P&L A/c)
Purchases (net of returns)	Salaries, Rent, Office Expenses
Carriage Inward / Freight In	Depreciation, Insurance
Wages (if directly related to production)	Bad Debts, Commission
Import Duty, Customs	Bank Charges, Audit Fees
Power and Fuel (factory)	Repairs, Interest
Factory Rent, Lighting	Legal Expenses, Telephone

Step-by-Step Preparation of Trading Account:

1. Take all items from the Trial Balance relating to trading:

   • Opening Stock (from Trial Balance Debit side)
   • Purchases, Purchases Returns
   • Sales, Sales Returns
   • Direct Expenses: Carriage Inward, Wages, Freight, Duty, Fuel, etc.

2. Place them in the correct side:

   Debit Side:

   • Opening Stock
   • Purchases (less Returns Inward/Purchases Returns)
   • Direct Expenses (Carriage, Freight, Wages, etc.)
   • Manufacturing Expenses (if applicable)
   • Closing Stock (credited — to reduce cost)

   Credit Side:

   • Sales (less Returns Outward/Sales Returns)
   • Closing Stock (added — value of unsold goods at year end)
   • Other Revenue directly from trading (e.g., commission received on goods sold, export incentives)

3. Calculate Cost of Goods Sold:

   Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses – Closing Stock

4. Calculate Gross Profit:

   Gross Profit = Net Sales – Cost of Goods Sold

   If Sales > Cost of Goods Sold → Gross Profit (Credit) If Cost of Goods Sold > Sales → Gross Loss (Debit)

5. Transfer Gross Profit/Loss to P&L Account

Working Example:

From Trial Balance of M/s ABC Traders:

• Opening Stock: ₹30,000
• Purchases: ₹2,50,000
• Purchases Returns: ₹10,000
• Sales: ₹3,80,000
• Sales Returns: ₹15,000
• Carriage Inward: ₹8,000
• Wages: ₹12,000
• Closing Stock: ₹45,000

Trading Account for the year ended 31st March 2025

                                        ₹           ₹
Opening Stock                           30,000
Add: Purchases (Net)           2,50,000
    Less: Purchases Returns    (10,000)  2,40,000
Add: Carriage Inward                      8,000
Add: Wages                              12,000
                                         -----
Less: Closing Stock                    (45,000)
                                         -----
Cost of Goods Sold                                2,45,000
                                         -----
Gross Profit (3,65,000 – 2,45,000)             1,20,000
                                         =====

Sales (Net: 3,80,000 – 15,000)     3,65,000
Less: Cost of Goods Sold          (2,45,000)
Gross Profit                        1,20,000

2. Profit and Loss Account — Purpose and Preparation

Purpose of Profit and Loss Account:

The Profit and Loss Account starts with the Gross Profit (or Gross Loss) transferred from the Trading Account and then accounts for all indirect expenses and other incomes to arrive at the Net Profit or Net Loss for the period. Net Profit is the true measure of the overall profitability of the business after all operating, administrative, and financial costs are considered.

Structure:

• Credit Side: Gross Profit b/d, Commission Received, Rent Received, Interest Received, Discount Received, Bad Debts Recovered, Dividend Received, Profit on Sale of Asset, Apprentice Premium
• Debit Side: All indirect expenses (Salaries, Rent, Depreciation, Bad Debts, Bank Charges, Interest on Loan, Audit Fees, Insurance, Repairs, Legal Expenses, Telephone, Stationery, etc.) and Net Loss

Key Items in P&L Account:

Expenses (Debit Side):

• Salaries and Wages (including outstanding amounts)
• Rent, Rates and Taxes
• Office Expenses (Printing, Stationery)
• Repairs and Maintenance
• Insurance Premium
• Depreciation (on furniture, buildings, machinery, vehicles)
• Bad Debts (written off)
• Provision for Doubtful Debts
• Interest on Capital (notional — added to Capital in Balance Sheet)
• Interest on Loans/Debentures
• Audit Fees
• Bank Charges
• Discount Allowed
• Travelling Expenses
• Legal Expenses
• Carriage Outward
• Packing Expenses
• Commission Paid
• Net Loss (if any)

Incomes (Credit Side):

• Gross Profit (brought down from Trading A/c)
• Commission Received
• Rent Received
• Interest Received
• Discount Received
• Bad Debts Recovered
• Dividend Received
• Profit on Sale of Asset/Fixed Asset
• Insurance Claim Received
• Apprenticeship Premium
• Sundry Receipts

Preparation Steps:

1. Transfer Gross Profit from Trading Account (Credit side of P&L)
2. List all expense accounts from Trial Balance and add new adjustments for outstanding expenses, depreciation, bad debts, provisions, etc.
3. List all income accounts that appear in the Trial Balance and any accrued income
4. Calculate Net Profit = Total Income – Total Expenses
5. Transfer Net Profit to Capital Account (shown in Balance Sheet)

Net Profit Formula:

Net Profit = Gross Profit + Other Incomes – All Indirect Expenses

3. Balance Sheet — Purpose and Preparation

Purpose of Balance Sheet:

The Balance Sheet is a statement of position (also called Statement of Financial Position) that shows the financial condition of the business at a specific date. It presents the assets (what the business owns), liabilities (what the business owes), and capital (the owner’s stake) as at the balance sheet date. It follows the fundamental accounting equation:

Assets = Liabilities + Capital
(or: Capital = Assets – Liabilities)

Classification of Items:

LIABILITIES AND EQUITY (Right Side / Top):

1. Shareholders’ Funds / Capital:

   • Opening Capital (from Trial Balance)
   • Add: Net Profit transferred from P&L
   • Less: Drawings (net of any)
   • Add: Additional Capital introduced during the year = Closing Capital (also called “Net Worth”)

2. Non-Current Liabilities (Long-term):

   • Long-term Loans (from banks, financial institutions)
   • Debentures
   • Mortgage loans
   • Public Deposits (if applicable)

3. Current Liabilities (Short-term):

   • Sundry Creditors / Trade Payables (from Trial Balance)
   • Bills Payable (from Trial Balance)
   • Bank Overdraft (from Trial Balance)
   • Outstanding Expenses (adjustments — added to respective expense)
   • Income Received in Advance (adjustments)
   • Provision for Tax (if any)
   • Proposed Dividend (if any)

ASSETS (Left Side / Bottom):

1. Non-Current Assets (Long-term):

   • Fixed Assets (at written down value after depreciation):
     • Land and Buildings
     • Plant and Machinery
     • Furniture and Fixtures
     • Vehicles
     • Computers
     • Trademarks, Patents, Goodwill (Intangible assets)
   • Non-Current Investments (long-term investments not intended for trading)

2. Current Assets (Short-term):

   • Closing Stock (from Trial Balance / given in adjustments)
   • Sundry Debtors (Net of PDD — show after deducting Provision for Doubtful Debts)
   • Bills Receivable (from Trial Balance)
   • Cash at Bank (from Trial Balance)
   • Cash in Hand (from Trial Balance)
   • Prepaid Expenses (adjustments)
   • Accrued Income (adjustments)
   • Current Investments (if any — short-term tradable securities)

Important Balance Sheet Notes:

• Depreciation is ALWAYS deducted from the respective Fixed Asset (Book Value = Cost – Accumulated Depreciation)
• Provision for Doubtful Debts is deducted from Debtors (Net Debtors = Gross Debtors – PDD)
• Provision for Discount on Debtors is also deducted if created
• Outstanding expenses appear as Current Liabilities
• Prepaid expenses appear as Current Assets
• Accrued income appears as Current Assets
• Income received in advance appears as Current Liability
• Drawings reduce Capital
• Net Profit increases Capital

4. Comprehensive Treatment of Adjustments

The quality of Final Accounts preparation is determined largely by how correctly and comprehensively the year-end adjustments are handled. Here is a detailed treatment of each adjustment:

Adjustment 1: Closing Stock

In the Trial Balance: If closing stock appears in the Trial Balance (on the credit side as a credit balance), it means it has been extracted and is ready to be used. The entry is:

• In Trading Account: Credit side — “To Closing Stock A/c” (or “By Closing Stock” in the credit side of Trading A/c)
• In Balance Sheet: Appears under Current Assets as “Closing Stock”

Entry to incorporate closing stock:

Trading A/c           Dr.  [closing stock value]
   To Closing Stock A/c                    [closing stock value]
(Being closing stock brought into books)

(Note: This entry is passed when closing stock does NOT appear in Trial Balance. When it does appear in Trial Balance, no entry is needed for Trading A/c — just show it in the Credit side of Trading A/c and as Current Asset in Balance Sheet.)

Note: Closing Stock should never be mixed with opening stock or purchases. It is always:

• Credited in Trading A/c (reduces cost of goods sold)
• Shown as Current Asset in Balance Sheet

Adjustment 2: Outstanding Expenses

These are expenses that have been incurred during the year but NOT YET PAID. They need to be accounted for in the period they relate to (accrual basis).

Examples: Salary due but not paid, Rent outstanding, Interest on loan due but not paid, Wages outstanding

Entry:

Expense A/c              Dr.  [amount]
   To Outstanding Expense A/c             [amount]
(Being [salary/rent] outstanding for the year)

Impact on Final Accounts:

• P&L A/c: The expense is higher (added to the expense already in Trial Balance) → Net Profit is lower
• Balance Sheet: Outstanding Expense A/c appears as a Current Liability

Working: Salary paid during the year per Trial Balance = ₹1,20,000 Outstanding salary at year end = ₹10,000 Total salary expense for the year (P&L) = ₹1,30,000 Outstanding salary (Balance Sheet as Current Liability) = ₹10,000

Adjustment 3: Prepaid Expenses

These are expenses that have been PAID in advance for the next accounting year. The benefit will be received in the next period, so only the portion relating to the current period should be charged as expense.

Example: Insurance premium of ₹12,000 paid on 1st October for one year (Oct to Sep next year). For the current year ending 31st March, only 6 months (Oct–Mar) are consumed. So ₹6,000 is expense, and ₹6,000 is prepaid (asset).

Entry:

Prepaid Insurance A/c     Dr.  6,000
   To Insurance A/c                        6,000
(Being insurance premium prepaid for next year — 6 months used)

Impact on Final Accounts:

• P&L A/c: Insurance expense is reduced by ₹6,000 → Net Profit is higher
• Balance Sheet: Prepaid Insurance appears as Current Asset

Adjustment 4: Accrued Income (Income Receivable)

This is income that has been EARNED during the year but NOT YET RECEIVED.

Example: Interest on Fixed Deposit — interest earned but not yet credited by bank.

Entry:

Accrued Interest A/c      Dr.  [amount]
   To Interest Received A/c                    [amount]
(Being interest income earned but not yet received)

Impact on Final Accounts:

• P&L A/c: Other Income is higher → Net Profit is higher
• Balance Sheet: Accrued Interest appears as Current Asset

Adjustment 5: Income Received in Advance

This is income that has been RECEIVED in cash but the service/benefit is yet to be provided (unearned income). It is a liability.

Example: Rent received in advance for the next quarter.

Entry:

Rent Received A/c         Dr.  [amount]
   To Rent Received in Advance A/c            [amount]
(Being rent received in advance — not yet earned)

Impact on Final Accounts:

• P&L A/c: Rent income is reduced (only the earned portion is taken)
• Balance Sheet: Rent Received in Advance appears as Current Liability

Adjustment 6: Depreciation

Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. It represents the wear and tear, obsolescence, or depletion of an asset.

Entry:

Depreciation A/c          Dr.  [amount]
   To Accumulated Depreciation A/c          [amount]
(Being depreciation charged on [asset] for the year)

Impact on Final Accounts:

• P&L A/c: Depreciation is an expense → reduces Net Profit
• Balance Sheet: Accumulated Depreciation appears as a deduction from the asset’s cost in the Fixed Assets section. The net book value (Cost – Accumulated Depreciation) is shown.

Methods of Depreciation:

• Straight Line Method (SLM): (Cost – Residual Value) / Useful Life
• Written Down Value Method (WDV): Rate applied to Book Value each year

Working: Machine purchased for ₹2,00,000 on 1st April. Depreciation @ 10% p.a. (SLM). Residual value = ₹20,000. Annual Depreciation = (2,00,000 – 20,000) / 10 = ₹18,000 per year

First Year Balance Sheet Extract:

Machine A/c	Cost	Accumulated Depreciation	Book Value
	₹2,00,000	₹18,000	₹1,82,000

Adjustment 7: Bad Debts

Bad debts are amounts owed by debtors that are irrecoverable — they must be written off as an expense.

Entry:

Bad Debts A/c            Dr.  [amount]
   To Sundry Debtors A/c                      [amount]
(Being bad debts written off as irrecoverable)

Impact on Final Accounts:

• P&L A/c: Bad Debts is an expense → reduces Net Profit
• Balance Sheet: Debtors (Sundry Debtors) are reduced

Adjustment 8: Provision for Doubtful Debts (PDD)

A provision is created to anticipate possible bad debts based on the probability of non-recovery, following the prudence principle.

Entry:

Bad Debts / P&L A/c      Dr.  [amount]
   To Provision for Doubtful Debts A/c         [amount]
(Being provision for doubtful debts created @ [X]% on debtors)

Impact on Final Accounts:

• P&L A/c: Additional expense → Net Profit reduced
• Balance Sheet: Debtors shown as:

  Sundry Debtors (Gross)              XXX
  Less: Provision for Doubtful Debts  (XXX)
                                    -------
  Sundry Debtors (Net)                XXX
                                    -------

Working: Debtors = ₹80,000; PDD required @ 5% = ₹4,000

Balance Sheet Presentation:

Sundry Debtors                    80,000
Less: Provision for Doubtful Debts (4,000)
                                   ------
                                   76,000

Change in PDD:

• If new PDD > Old PDD: Additional amount charged to P&L
• If new PDD < Old PDD: Excess credited to P&L (reversed income)

Adjustment 9: Provision for Discount on Debtors

A provision is created to anticipate cash discounts that debtors might take for early payment.

Entry:

Discount Allowed / P&L A/c    Dr.  [amount]
   To Provision for Discount on Debtors A/c     [amount]
(Being provision for discount on debtors @ X% on net debtors)

Calculation: Rate applied on Net Debtors (Gross Debtors – PDD). The net debtors figure reduces further after deducting this provision.

Adjustment 10: Goods Withdrawn by Owner

Goods taken out of the business for personal use by the owner reduce the trading stock and are not a sale (no profit element).

Entry:

Drawings A/c              Dr.  [amount]
   To Purchases A/c                       [amount]
(Being goods withdrawn by owner for personal use)

Impact: Purchases are reduced (less cost of goods sold → higher gross profit), drawings increase (reduces capital in Balance Sheet).

Adjustment 11: Goods Destroyed by Fire

If goods are destroyed (not insured): Reduce the closing stock in Trading A/c.

Trading A/c           Dr.  [amount]
   To Goods Destroyed A/c                [amount]
(Being goods destroyed by fire — not insured)

If insured (partial or full claim):

• Loss: Trading A/c Dr. (if closing stock reduced)
• Claim receivable: Appears as Current Asset in Balance Sheet

5. PYQ Patterns

1. Trading Account, P&L Account, and Balance Sheet — Full question 15–20 marks. Given Trial Balance and adjustments, prepare all three statements. Most common and highest scoring.
2. Calculate Gross Profit and Net Profit from given figures — 6–8 marks, can be a small calculation-based question
3. Vertical format final accounts — Very common in recent CS Executive exams; students must be comfortable with the vertical format (not the T-shape)
4. Adjustments only — Given the adjusted Trial Balance or given adjustments, prepare the final accounts — 10–12 marks

Question from June 2023 CS Executive: “From the following Trial Balance and additional information of M/s XYZ Enterprises, prepare Trading Account, Profit & Loss Account for the year ended 31st March 2023 and Balance Sheet as on that date. Adjustments: (a) Closing Stock ₹45,000, (b) Outstanding salaries ₹8,000, (c) Prepaid rent ₹3,000, (d) Provide depreciation on furniture @ 10% p.a., (e) Create Provision for Doubtful Debts @ 5% on debtors, (f) Goods withdrawn by owner ₹2,000.” [16 marks]

Approach for Final Accounts Question:

1. Copy all items from Trial Balance to Trading Account, P&L, or Balance Sheet as appropriate
2. First pass adjustment entries in the books (journal)
3. Incorporate adjustments in the respective accounts
4. Prepare Trading Account → find Gross Profit
5. Transfer Gross Profit to P&L A/c → add other incomes, deduct all expenses (including adjustments) → find Net Profit
6. Transfer Net Profit to Capital A/c in Balance Sheet
7. Prepare Balance Sheet with all assets and liabilities after adjustments

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🔴 Extended — Deep Study (3mo+)

Comprehensive coverage for students on a longer study timeline.

1. Vertical Format of Final Accounts (ICSI Standard)

The vertical (statement) format has become the preferred format in professional examinations and is standard for Schedule III company financial statements. Students must master both T-shape and vertical formats.

Vertical Trading and P&L Account (Combined):

Trading and Profit & Loss Account
for the year ended 31st March 2025

Particulars                              Note    Amount (₹)
-----------------------------------------------------------
REVENUE FROM OPERATIONS
Sales (Net)                                           X
Other Operating Revenues (if any)                     X
                                                    -----
                                                    X

EXPENSES
Purchases (Net)                              X
Change in Inventories (Opening – Closing)    X
Employee Benefits Expense                    X
Finance Costs                                X
Depreciation and Amortisation                 X
Other Operating Expenses                     X
                                                    -----
Total Expenses                                        X

PROFIT FROM OPERATIONS (EBIT)                         X

OTHER INCOME
Interest Received                             X
Dividend Received                             X
Rent Received                                  X
Other Non-operating Income                     X
                                                    -----
                                                    X

PROFIT BEFORE EXCEPTIONAL ITEMS                        X

EXCEPTIONAL ITEMS (if any)                           (X)
                                                    -----
PROFIT BEFORE TAX                                    X

TAX EXPENSE                                         (X)
                                                    -----
PROFIT FOR THE YEAR (Net Profit)                    X
                                                    =====

NOTE: In CS Executive context, the exam usually expects the traditional
format: Trading Account (Gross Profit), then P&L Account (Net Profit).
The Schedule III format above is shown for company context.

For CS Executive purposes, the traditional format is most commonly examined:

• Trading Account separately shown to get Gross Profit
• P&L Account starts with Gross Profit and arrives at Net Profit
• Balance Sheet follows the accounting equation format

2. Comprehensive Practice Problem

Problem:

From the following Trial Balance and additional information of M/s Bright Traders, prepare the Trading Account, Profit & Loss Account, and Balance Sheet as on 31st March 2025:

Trial Balance as on 31st March 2025:

Particulars	Dr. (₹)	Cr. (₹)
Opening Stock	40,000
Purchases	2,80,000
Sales		4,20,000
Sales Returns	15,000
Purchases Returns		12,000
Carriage Inward	8,000
Wages	20,000
Salaries	45,000
Rent	18,000
Insurance	6,000
Machinery	2,00,000
Furniture	50,000
Sundry Debtors	80,000
Sundry Creditors		55,000
Bills Receivable	15,000
Bills Payable		10,000
Cash at Bank	60,000
Cash in Hand	10,000
Drawings	20,000
Bad Debts	2,000
Commission Received		7,000
Discount Received		5,000
Bank Charges	1,500
Provision for Doubtful Debts		3,000
Capital		3,50,000
Total	8,70,500	8,70,500

Additional Adjustments:

1. Closing Stock as on 31st March 2025: ₹55,000
2. Outstanding salaries: ₹10,000
3. Prepaid insurance (included in insurance paid): ₹2,000
4. Depreciate Machinery @ 10% p.a. and Furniture @ 15% p.a. (on straight line)
5. Create provision for doubtful debts @ 5% on debtors
6. Goods withdrawn by owner: ₹3,000 (not recorded)
7. Interest on capital @ 5% p.a. to be provided

Solution:

Step 1: Pass Adjustment Entries

1. Closing Stock
   Trading A/c            Dr.  55,000
      To Closing Stock A/c                 55,000

2. Outstanding Salaries
   Salary A/c             Dr.  10,000
      To Outstanding Salaries A/c          10,000

3. Prepaid Insurance
   Prepaid Insurance A/c  Dr.  2,000
      To Insurance A/c                     2,000
   (Insurance expense for year = 6,000 – 2,000 = 4,000)

4. Depreciation on Machinery
   Depreciation A/c       Dr.  20,000
      To Accumulated Depreciation A/c     20,000
   (2,00,000 × 10% = 20,000)

5. Depreciation on Furniture
   Depreciation A/c       Dr.  7,500
      To Accumulated Depreciation A/c      7,500
   (50,000 × 15% = 7,500)

6. Goods Withdrawn
   Drawings A/c          Dr.  3,000
      To Purchases A/c                     3,000

7. Interest on Capital
   Interest on Capital A/c   Dr.  17,500
      To Capital A/c                   17,500
   (3,50,000 × 5% = 17,500)

Step 2: Trading Account

Trading Account for the year ended 31st March 2025

                                         ₹           ₹
Opening Stock                           40,000
Add: Purchases                2,80,000
    Less: Purchases Returns  (12,000)  2,68,000
    Less: Goods Withdrawn     (3,000)  2,65,000
Add: Carriage Inward                      8,000
Add: Wages                               20,000
                                        ------
Less: Closing Stock                     (55,000)
                                        ------
Cost of Goods Sold                                2,78,000
                                        ------
Gross Profit transferred to P&L A/c            1,27,000
                                        =====

Sales (4,20,000 – 15,000)                     4,05,000
Less: Cost of Goods Sold                      (2,78,000)
Gross Profit                                  1,27,000

Step 3: Profit & Loss Account

Profit & Loss Account for the year ended 31st March 2025

                                         ₹           ₹
Gross Profit b/d                          1,27,000
Add: Commission Received                     7,000
Add: Discount Received                       5,000
                                        ------
                                        1,39,000
Less: Salaries (45,000 + 10,000)           55,000
Less: Rent                                18,000
Less: Insurance (6,000 – 2,000 prepaid)    4,000
Less: Depreciation on Machinery           20,000
Less: Depreciation on Furniture            7,500
Less: Bad Debts                            2,000
Less: Interest on Capital                 17,500
Less: Bank Charges                        1,500
                                        ------
Net Profit transferred to Capital A/c     13,500
                                        =====

Gross Profit                              1,27,000
Less: Total Indirect Expenses             (1,25,500)
Add: Other Incomes                        (12,000)
Net Profit                                   13,500

Step 4: Balance Sheet

Balance Sheet as at 31st March 2025

LIABILITIES                            ₹           ASSETS                   ₹
---------------------------------------------------------  --------------------
Capital                        3,50,000    Fixed Assets (Net)
Add: Interest on Capital        17,500     Machinery (2,00,000-20,000) 1,80,000
Add: Net Profit                  13,500    Furniture (50,000-7,500)      42,500
                               3,81,000                            ------
Less: Drawings (20,000+3,000)  (23,000)   Current Assets
                               --------    Closing Stock              55,000
Closing Capital                3,58,000    Sundry Debtors (80,000-4,000) 76,000
                               --------    Bills Receivable            15,000
Sundry Creditors                55,000     Cash at Bank                60,000
Bills Payable                   10,000     Cash in Hand                10,000
Outstanding Salaries           10,000     Prepaid Insurance            2,000
Provision for Doubtful Debts    (4,000)   (Note: shown as deduction from debtors)
                               --------    ------
                               --------    
                               4,33,000    Total Assets               4,33,000
                               ======     ======

Note on Provision for Doubtful Debts:

• Required PDD @ 5% on ₹80,000 = ₹4,000
• Existing PDD (from Trial Balance) = ₹3,000
• Additional provision needed = ₹1,000
• Journal: P&L A/c Dr. 1,000, To PDD A/c 1,000
• In Balance Sheet: Debtors shown as ₹80,000 less PDD ₹4,000 = ₹76,000 net

3. Common Mistakes to Avoid

1. Mixing Closing Stock: Some students credit closing stock to Trading A/c AND debit it in the P&L A/c by mistake — closing stock only appears in one place: Credit side of Trading A/c and Current Asset in Balance Sheet.

2. Forgetting Outstanding Expenses in Balance Sheet: When outstanding salaries is added to P&L expense, it must also appear as a Current Liability in the Balance Sheet. If you miss it, the Balance Sheet total won’t agree.

3. Depreciation on Wrong Base: Make sure depreciation is always calculated on the ORIGINAL COST (not on the reduced value unless using WDV method). For SLM, it is always on original cost minus residual value.

4. Showing Drawings in P&L: Drawings is NOT an expense. It is not shown in the P&L Account. It reduces Capital in the Balance Sheet only.

5. Showing Goodwill at Cost in Balance Sheet: Goodwill is an intangible asset — if it appears in the books, it is shown under Non-Current Assets at cost (or net of amortization if amortised). Don’t deduct it from any other asset.

6. Adding Proposed Dividend to Balance Sheet: Proposed dividend is a provision and should appear under Current Liabilities. However, for CS Executive purposes, check whether the exam wants it as a provision or not (some questions explicitly state it).

7. Not Adjusting for Prepaid Expenses: When an expense has a prepaid component, the P&L should only be charged with the expired portion. The unexpired portion appears as Current Asset.

8. Incorrect Order of Preparing Statements: Always follow the correct sequence:

   • Trial Balance →
   • Pass Adjustment Entries →
   • Trading Account → Gross Profit →
   • P&L Account → Net Profit →
   • Balance Sheet (from adjusted figures)

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