Trading and Profit & Loss Account
"From sales to net profit - the journey through final accounts."
After learning the introduction to final accounts, let's dive deep into Trading Account and Profit & Loss Account preparation with adjustments.
The Flow
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Trading Account - Detailed Format
Dr. Trading Account for Year Ending 31st March 202X Cr.
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Particulars | Amount (₹) || Particulars | Amount (₹)
-------------------------------|------------||--------------------------|------------
To Opening Stock | XX,XXX || By Sales | X,XX,XXX
To Purchases XX,XXX | || Less: Sales Returns | (X,XXX)
Less: Purchase Returns (X,XXX) | XX,XXX || Net Sales | X,XX,XXX
Net Purchases | || |
To Direct Expenses: | || By Closing Stock | XX,XXX
- Wages | X,XXX || |
- Carriage Inward | X,XXX || |
- Factory Rent | X,XXX || |
- Power & Fuel | X,XXX || |
- Octroi/Import Duty | X,XXX || |
- Clearing Charges | X,XXX || |
To Gross Profit c/d | XX,XXX || |
(transferred to P&L) | || |
-------------------------------|------------||--------------------------|------------
Total |X,XX,XXX || Total | X,XX,XXX
Direct vs Indirect Expenses
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Profit & Loss Account - Detailed Format
Dr. Profit & Loss Account for Year Ending 31st March 202X Cr.
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Particulars | Amount (₹) || Particulars | Amount (₹)
-------------------------------|------------||--------------------------|------------
To Gross Loss b/d (if any) | XX,XXX || By Gross Profit b/d | XX,XXX
To Operating Expenses: | || By Other Incomes: |
- Salaries | XX,XXX || - Commission Received | X,XXX
- Office Rent | XX,XXX || - Discount Received | X,XXX
- Insurance | X,XXX || - Interest Received | X,XXX
- Printing & Stationery | X,XXX || - Rent Received | X,XXX
- Advertising | X,XXX || - Profit on sale of |
- Traveling Expenses | X,XXX || assets | X,XXX
- Bad Debts | X,XXX || |
- Depreciation | XX,XXX || |
- Repairs | X,XXX || |
To Non-Operating Expenses: | || |
- Interest on Loan | X,XXX || |
- Loss on sale of assets | X,XXX || |
To Net Profit | XX,XXX || |
(transferred to Capital) | || |
-------------------------------|------------||--------------------------|------------
Total | X,XX,XXX || Total | X,XX,XXX
Common Adjustments
1. Outstanding Expenses
Adjustment: Salary outstanding ₹5,000
Treatment:
- P&L: Add ₹5,000 to Salary
- Balance Sheet: Show ₹5,000 as liability (Outstanding Salary)
2. Prepaid Expenses
Adjustment: Insurance prepaid ₹3,000
Treatment:
- P&L: Deduct ₹3,000 from Insurance
- Balance Sheet: Show ₹3,000 as asset (Prepaid Insurance)
3. Accrued Income
Adjustment: Interest accrued ₹2,000
Treatment:
- P&L: Add ₹2,000 to Interest Received
- Balance Sheet: Show ₹2,000 as asset (Accrued Interest)
4. Income Received in Advance
Adjustment: Commission received in advance ₹4,000
Treatment:
- P&L: Deduct ₹4,000 from Commission Received
- Balance Sheet: Show ₹4,000 as liability (Unearned Commission)
5. Closing Stock
Adjustment: Closing stock ₹50,000
Treatment:
- Trading A/c: Credit side (Dr. Stock A/c, Cr. Trading A/c)
- Balance Sheet: Show ₹50,000 as asset (Closing Stock)
6. Depreciation
Adjustment: Depreciate machinery @ 10% on ₹1,00,000
Treatment:
- P&L: Add ₹10,000 as Depreciation expense
- Balance Sheet: Show Machinery at ₹90,000 (or with provision)
Comprehensive Example
Important Points
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Common Exam Questions
Q1: "Where does carriage outward appear?"
A: Profit & Loss Account (indirect expense - selling expense)
Q2: "Closing stock appears in which accounts?"
A: Trading Account (credit side) AND Balance Sheet (asset)
Q3: "What is the treatment of outstanding wages?"
A: Add to Wages in Trading A/c, show as liability in Balance Sheet
Quiz: Trading and P&L Account
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