Purpose and structure
Financial statements summarise performance and financial position. Trading Account determines gross profit: net sales less cost of goods sold. Cost of goods sold = opening inventory + net purchases + direct expenses − closing inventory. Profit and Loss Account derives net profit after indirect expenses and other incomes. Balance Sheet reports assets, liabilities and capital at a date, grouped and marshalled consistently.
Capital receipts and expenditure relate to financing or long-term assets; revenue items arise in ordinary operations. Classification depends on substance and benefit, not just cash paid.
Adjustments
Each year-end adjustment has matching effects. Outstanding expense: add to expense and show liability. Prepaid expense: deduct from expense and show current asset. Accrued income: add to income and show asset. Income received in advance: deduct from income and show liability. Closing inventory is credited to Trading Account and shown as an asset when not already in the trial balance. Bad debts reduce receivables; provisions for doubtful debts and discount on debtors are calculated on the appropriate remaining debtor balances in the order required by the problem. Depreciation reduces profit and asset carrying amount. Goods withdrawn for personal use reduce purchases and capital; goods used for staff welfare are treated as an expense and reduce purchases. For abnormal loss, show the loss and any insurance claim separately.
Manager commission depends on the stated base. If it is p% of profit before commission, commission = p/100 × profit before commission. If it is p% of profit after charging commission, commission = p/(100+p) × profit before commission. Read the wording carefully before calculating.
Worked gross-profit calculation
Opening inventory ₹20,000; purchases ₹80,000; purchase returns ₹5,000; direct carriage ₹2,000; closing inventory ₹25,000; sales ₹1,20,000; sales returns ₹4,000. Net purchases = ₹75,000. Cost of goods sold = 20,000 + 75,000 + 2,000 − 25,000 = ₹72,000. Net sales = ₹1,16,000. Gross profit = ₹44,000. Show each working note and ensure all amounts relate to the same accounting period.
Incomplete records
When full double-entry records are unavailable, opening and closing capital may be found from assets less liabilities. Profit by statement of affairs = closing capital + drawings − additional capital introduced − opening capital. Adjust non-cash items as required. The method estimates profit from net-worth changes and is less reliable than complete books because missing records can hide errors.
Example: Opening capital ₹70,000, closing capital ₹95,000, drawings ₹12,000 and additional capital ₹5,000: profit = 95,000 + 12,000 − 5,000 − 70,000 = ₹32,000.
Computerised accounting and project work
A computerised accounting system captures transaction data, validates it, posts to ledgers and produces reports. Understand accounts, vouchers, database fields, access control, backups and audit trails. CBSE project choices include collecting source documents and preparing vouchers, preparing a Bank Reconciliation Statement from 20–25 transactions, or a comprehensive sole-proprietorship project covering journal, ledger, trial balance and financial statements. A comprehensive project may use bar or pie charts and simple GST transactions. Follow teacher guidance and cite sources.
Practice and revision
- Rent paid ₹24,000 includes ₹4,000 prepaid at year end. State the P&L and Balance Sheet treatment.
- Explain why a trial balance is not a guarantee that the Balance Sheet is correct.
- Prepare the gross-profit calculation above independently and show the cost of goods sold working.