📘 Final Accounts: Profit & Loss Account and Balance Sheet (with Adjustments & Practice
Questions)
1. Introduction
Final accounts are prepared at the end of each accounting year to determine the financial
performance (profit/loss) and the financial position (assets, liabilities, equity) of a business.
They usually include:
1. Trading Account → Calculates gross profit or gross loss.
2. Profit & Loss Account → Calculates net profit or net loss.
3. Balance Sheet → Shows assets, liabilities, and capital.
2. Structure of Final Accounts
(A) Trading Account
Particulars Debit (Dr) Credit (Cr)
Opening Stock XXXX
Purchases (less Returns) XXXX
Direct Expenses (Wages, Carriage Inwards) XXXX
Closing Stock XXXX
Sales (less Returns) XXXX
Gross Profit (c/d) XXXX
Total XXXX XXXX
,(B) Profit & Loss Account
Particulars Debit (Dr) Credit (Cr)
Gross Loss b/d XXXX
Indirect Expenses (Salaries, Rent, Depreciation, Bad Debts) XXXX
Net Profit (c/d) XXXX
Gross Profit b/d XXXX
Other Income (Commission, Interest, Rent received) XXXX
Total XXXX XXXX
(C) Balance Sheet Format
Liabilities
Capital + Net Profit – Drawings
Long-Term Liabilities (Loans, Debentures)
Current Liabilities (Creditors, Bills Payable, Outstanding Expenses)
Assets
Fixed Assets (Land, Building, Machinery) – Depreciation
Current Assets (Cash, Debtors, Stock, Prepaid Expenses)
Investments
, 3. Common Adjustments in Final Accounts
Adjustments are made at the year end to ensure accrual accounting. Some important ones:
1. Closing Stock → Shown in Trading A/c (Cr) & Balance Sheet (Asset).
2. Depreciation → Expense in P&L A/c & deducted from asset in Balance Sheet.
3. Outstanding Expenses (e.g., salaries due but unpaid) → Added to expense in P&L &
shown as liability.
4. Prepaid Expenses (e.g., rent paid in advance) → Deducted from expense in P&L & shown
as asset.
5. Accrued Income (income earned but not received) → Added in P&L & shown as asset.
6. Income Received in Advance → Deducted from income in P&L & shown as liability.
7. Bad Debts Written Off → Expense in P&L.
8. Provision for Doubtful Debts → Deducted from Debtors in Balance Sheet.
9. Provision for Discount on Debtors/Creditors → Shown in P&L and Balance Sheet
adjustments.
Questions)
1. Introduction
Final accounts are prepared at the end of each accounting year to determine the financial
performance (profit/loss) and the financial position (assets, liabilities, equity) of a business.
They usually include:
1. Trading Account → Calculates gross profit or gross loss.
2. Profit & Loss Account → Calculates net profit or net loss.
3. Balance Sheet → Shows assets, liabilities, and capital.
2. Structure of Final Accounts
(A) Trading Account
Particulars Debit (Dr) Credit (Cr)
Opening Stock XXXX
Purchases (less Returns) XXXX
Direct Expenses (Wages, Carriage Inwards) XXXX
Closing Stock XXXX
Sales (less Returns) XXXX
Gross Profit (c/d) XXXX
Total XXXX XXXX
,(B) Profit & Loss Account
Particulars Debit (Dr) Credit (Cr)
Gross Loss b/d XXXX
Indirect Expenses (Salaries, Rent, Depreciation, Bad Debts) XXXX
Net Profit (c/d) XXXX
Gross Profit b/d XXXX
Other Income (Commission, Interest, Rent received) XXXX
Total XXXX XXXX
(C) Balance Sheet Format
Liabilities
Capital + Net Profit – Drawings
Long-Term Liabilities (Loans, Debentures)
Current Liabilities (Creditors, Bills Payable, Outstanding Expenses)
Assets
Fixed Assets (Land, Building, Machinery) – Depreciation
Current Assets (Cash, Debtors, Stock, Prepaid Expenses)
Investments
, 3. Common Adjustments in Final Accounts
Adjustments are made at the year end to ensure accrual accounting. Some important ones:
1. Closing Stock → Shown in Trading A/c (Cr) & Balance Sheet (Asset).
2. Depreciation → Expense in P&L A/c & deducted from asset in Balance Sheet.
3. Outstanding Expenses (e.g., salaries due but unpaid) → Added to expense in P&L &
shown as liability.
4. Prepaid Expenses (e.g., rent paid in advance) → Deducted from expense in P&L & shown
as asset.
5. Accrued Income (income earned but not received) → Added in P&L & shown as asset.
6. Income Received in Advance → Deducted from income in P&L & shown as liability.
7. Bad Debts Written Off → Expense in P&L.
8. Provision for Doubtful Debts → Deducted from Debtors in Balance Sheet.
9. Provision for Discount on Debtors/Creditors → Shown in P&L and Balance Sheet
adjustments.
