TRADING, PROFIT & LOSS A/C The Trading A/c is prepared with a view to ascertaining the profitability of the goods purchased and the goods sold by the trading firm. Expenses and incomes of a variable nature are taken into consideration to find out the Gross Profit of the firm. Trading A/c should be debited with the following items: Opening Stock Purchases – cash as well as credit purchase Purchases, Returns or Returns outwards Goods withdrawn for personal use Goods distributed as free samples Goods given as charity Direct Expenses such as freight inward, import duty, direct wages, factory expenses. Trading A/c should be credited with the following items: Sales, less Sales returns or Returns inwards, Closing stock

Trading A/c of ……………..for the Period Ending Format for Trading A/c Trading A/c of ……………..for the Period Ending Dr. Particulars Amount Rs. Cr. To Opening Stock + Purchases Less Returns outwards Direct Expenses Wages Carriage inwards Gross Profit Transferred to P&L A/c -------- By Sales Less Returns inwards Closing Stock Gross Loss transferred to P&L A/c

Ex. From the following information relating to ABC Ltd Ex. From the following information relating to ABC Ltd., prepare Trading A/c for the year ending on 31st March, 2002. The firm started business on 1st April, 2001 Sales Returns outward Salaries & wages Carriage inward Returns inward Freight inward Interest Rs. 50,000 150 4,000 2,000 250 2,300 3,000 Office Expenses Wages Fuel Insurance Cash Purchases Rent Rs. 2,000 5,000 1,000 3,721 1,500 40,000 700 Closing stock on 31.3.2002 Rs. 3000

For the year ended 31st March, 2002 Trading A/c of ABC Ltd. For the year ended 31st March, 2002 Dr. Particulars Amount Rs. Cr. To Purchases 40,000 Less. Return Outward 150 Carriage Inward Freight Inward Wages Fuel Gross Profit transferred to P/L A/c 39,850 2,000 2,300 5,000 1,000 2,600 By Sales 50,000 Return inward 250 By closing Stock 49,750 3,000 52,750

Profit & Loss A/c The P&L A/c is prepared to ascertain the Net Profit earned or Net Loss incurred by the business operations during an accounting Period . All the indirect revenue expenses and Loss are charged. A general format of a P&L A/c is shown below:

Dr…… Profit & Loss A/c of ------ for the Period ending -------Cr A general format of a P&L A/c is shown below:- Dr…… Profit & Loss A/c of ------ for the Period ending -------Cr Particulars Rs. Dr. To gross Loss b/d Salaries & wages Rent, rates & taxes Depreciation Discount allowed Carriage outward Advertising Bad debts Interest on Loan Net profit transferred to capital A/c ------- By Gross Profit b/d Interest earned Commission earned Rent recd. Profit on sale of fixed assets Income from investments Net Loss transferred to Cap. A/c

Sales & Purchase Returns Stock (1-4-2000) Wages Building Ex. From the following trial balance of Mohan Singh & Sons, prepare the Trading & P&L A/c for the year ended 31st March, 2001 Trial Balance As on 31st March, 2001 Particulars Debit Credit Rs. Mohan’s Capital Mohan’s Drawings Purchases & sales Sales & Purchase Returns Stock (1-4-2000) Wages Building Freight and Carriage Trade expenses Advertisement Interest Taxes & Insurance 760 8,900 280 1200 800 22,000 2,000 200 240 130 29,000 15,000 450 350

Particulars Debit Credit Rs. Debtors & Creditors Bills Rec. & Bills Payable Cash at Bank Cash in Hand Salaries 6,500 1,500 1,200 190 800 46,700 1200 700 Closing Stock : Rs. 1500

Trading & P&L A/c of Mohan Singh & Sons For the year ended 31st March, 2001 Particulars Amount Rs. Opening Stock Purchase 8,900 Returns 450 Wages Freight & Carriage Gross Profit c/d Trade Expense Advertisement Taxes & Insurance Salaries Net Profit 1,200 8,450 800 2,000 3,770 16,220 200 240 130 2,750 4,120 By Sales 15,000 Less Return 280 Closing Stock Gross Loss b/d Interest 14,720 1500 350

Explanation Purchases have a debit balance – Rs. 8900 whereas Sales have a credit balance of Rs. 15000. Purchase returns show credit balance and sales returns show debit balance. Thus Rs. 280 represents sales returns (Debit Balance) and Rs. 450 is purchases returns (credit balance)

Balance Sheet of ……….. As at…….. Liabilities Amount Rs. Assets Current Liabilities Bank Overdraft Bills Payable Outstanding Expenses Sundry Creditors Income recd. in advance Long Term Liabilities Loan Capital Opening Balance Add: Net Profit (Less: Net Loss) Less Drawings Current Assets Cash in Hand Cash at Bank Bills Receivable Sundry Debtors Prepaid Expenses Closing Stock Investments Fixed Assets Furniture & Fixtures Plant & Machinery Building Land Good Will

Cash and Bank Overdraft Debtors and Creditors Carriage & Cartage Ex. Prepare Trading and Profit and Loss A/c and a balance sheet as on 31st March, 1999 from the under mentioned Trial Balance of PQR Ltd. Trial Balance As on 31st March, 1999 Particulars Amount Debit Rs. Credit Rs. Opening Stock Purchases and Sales Returns Discount Capital and Drawings Cash and Bank Overdraft Debtors and Creditors Carriage & Cartage Freight outward Salaries & Wages Stationery 10,000 20,000 2,000 1,000 5,000 7,000 19,000 3,000 4,000 6,000 40,000 65,000 12,000

Particulars Amount Debit Rs. Credit Rs. Land & Buildings Plant and Machinery Fixtures and Fittings Bills Receivable and Payable General Reserve Closing Stock: Rs. 9,000 35,000 15,000 5,000 6,000 1,42,000 4,000

For the year ended 31st March, 1999 Trading Account For the year ended 31st March, 1999 Dr. Particulars Amount Rs. Cr. Opening Stock Purchase 20,000 Less Returns 1000 Carriage & Cartage Gross Profit Transferred to P/L A/c 10,000 19,000 3,000 15,000 47,000 Sales 40,000 Less Returns 2000 Closing Stock 38,000 9,000

Profit and Loss A/c of PQR Ltd For the year ended 31st March, 1999 Dr. Particulars Amount Rs. Cr. Discount Freight Outward Salaries & Wages Stationery Net Profit Transferred to Capital A/c 1000 4,000 6,000 2,000 17,000 Gross Profit b/d Discount recd. 15,000

Balance Sheet of PQR Ltd. As on 31st March, 1999 Liabilities Amount Rs. Assets Bank overdraft Creditors Bills Payable Capital 65,000 Add: Net Profit 2000 Less: Drawings -5,000 General Reserve 12000 4000 62,000 6,000 Cash in Hand Debtors Closing Stock Bills Receivable Land & Buildings Plant & Machinery Fixtures & Fittings 7,000 19,000 9,000 35,000 15,000 5,000 96,000

Notes Purchases & Sales: Purchases have a debit balance; sales have a credit balance. Purchase Returns have a credit balance (the reverse of Purchases). Sales return have a debit balance (reverse of sales) Discount allowed has debit balance, discount recd. has credit balance. Capital has credit balance. Drawings have debit. Cash always has debit balance (asset). Overdraft (liability) has credit balance. Debtors (asset) – debit balance. Creditors (liability) credit balance.

Explanation Salaries & Wages: The wages paid to workers, Works manager, Foreman Etc. are direct expenses. Salaries paid to office staff, even partners, are an indirect expense. Rent of office, shop, showroom is an indirect expense. Rent of factory is a direct expense. Interest on Loans, overdrafts is an indirect expense. Commission paid,all expenses incurred for sales promotion are indirect. Carriage & freight outward are incurred after sale & hence are indirect. Printing and Stationery are indirect expenses Advertising is an indirect expense. Samples to prospective customers – indirect Discount allowed – indirect expense Discount recd – income – credit to P&L A/c Insurance on office premises etc is indirect. Insurance paid on the life of a partner is a drawing & not an expense of the firm.

Methods of Presenting the Final Accounts Horizontal Form Vertical Form Vertical Format of Profit & Loss Account Particulars Rs. A Sales Less returns B Cost of Goods Sold Opening Stock Add-Purchases Less Returns Add. Direct Expenses - Carriage, Wages & Salaries COGS available for sale Less Closing Stock

Particulars Rs. C Gross Profit (A - B) D Operating Expenses Carriage outward Discount Allowed Commission Allowed Traveling Expenses Bad Debts Rent, Rates & Taxes Salaries & Wages Depreciation E Operating Profit/Loss

Particulars Rs. F Non-operating Results Interest earned Discount earned Misc. Income Non-operating expenses Interest paid Loss on Sale of a fixed asset Net Profit

Vertical Form of Balance Sheet Particulars Rs. Source of Funds Shareholders Funds Long Term Debts Application of Funds Current Assets Cash in hand Cash in Bank Bills Receivables Debtors Stock Prepaid Expense Current Liabilities Bills Payable Creditors

Particulars Rs. Income recd. In advance Investments Fixed Assets Furniture & Fixtures Plant and Machinery Building Land Goodwill

Adjustments Closing Stock For Outstanding Expenses For Prepaid Expenses of the Business For the Depreciation on Assets Interest on Capital Interest on Drawings For Bad Debts For Provision for Bad and Doubtful Debts