Final Accounts of Sole Proprietor: Trading, Profit & Loss Account and Balance Sheet (Basics) Questions

Question 1

What are final accounts?

Accepted Answer

**Final accounts** are financial statements prepared at the end of an accounting period to determine profit/loss and financial position of a business.

Question 2

What is Trading Account?

Accepted Answer

**Trading Account** is prepared to ascertain **Gross Profit** or **Gross Loss** from buying and selling of goods.

Question 3

What is Profit & Loss Account?

Accepted Answer

**Profit & Loss Account** is prepared to ascertain **Net Profit** or **Net Loss** after considering indirect expenses and other incomes.

Question 4

What is a Balance Sheet?

Accepted Answer

**Balance Sheet** is a statement showing assets, liabilities and capital of a business on a particular date (financial position).

Question 5

State one example of direct expense.

Accepted Answer

**Carriage inward** (or wages, freight, customs duty) is an example of direct expense.

Question 6

Where is closing stock shown?

Accepted Answer

Closing stock is shown in **Trading Account (credit side)** and in **Balance Sheet (asset)**.

Question 7

Explain the purpose of Trading Account (any three points).

Accepted Answer

Purpose of Trading Account (any three):

- to ascertain **Gross Profit / Gross Loss** from trading activities.
- to find **Cost of Goods Sold (COGS)** for the period.
- to show the effect of **opening stock, purchases, direct expenses and closing stock**.

Thus, trading account measures the efficiency of buying/production and selling operations.

Question 8

Differentiate Trading Account and Profit & Loss Account (any three points) with a table.

Accepted Answer

### **Trading A/c vs Profit & Loss A/c**

- Trading A/c calculates **Gross Profit**; P&L calculates **Net Profit**.
- Trading A/c includes **direct items**; P&L includes **indirect expenses/incomes**.
- Trading A/c is prepared first; P&L is prepared after trading account.

Table:

| Basis | Trading A/c | P&L A/c |
|---|---|---|
| Result | Gross Profit | Net Profit |
| Items | direct | indirect |
| Focus | trading performance | overall performance |

Hence, both together give full performance picture.

Question 9

Explain outstanding and prepaid expenses adjustment (any three points) with a small table.

Accepted Answer

### **Outstanding and Prepaid Expenses**

- **Outstanding expense**: expense incurred but not paid; add to expense in P&L and show as liability.
- **Prepaid expense**: expense paid in advance; deduct from expense in P&L and show as asset.

Table:

| Adjustment | P&L effect | Balance Sheet effect |
|---|---|---|
| Outstanding | add to expense | liability |
| Prepaid | subtract from expense | asset |

Thus, these adjustments follow accrual concept and show correct profit and position.

Question 10

Explain depreciation adjustment in final accounts (any three points).

Accepted Answer

Depreciation adjustment (any three points):

- depreciation is the reduction in value of fixed asset due to use/time.
- it is charged as an **expense** in Profit & Loss A/c.
- it is deducted from the asset value in Balance Sheet (to show written down value).

Hence, depreciation ensures correct profit and realistic asset valuation.

Question 11

Explain gross profit and net profit (any three points) with a short comparison table.

Accepted Answer

Gross profit and net profit (any three points):

- **Gross Profit (GP)** is the profit from trading activity only; it is calculated in **Trading A/c**.
- **Net Profit (NP)** is the final profit after adding other incomes and subtracting indirect expenses; it is calculated in **P&L A/c**.
- GP helps judge **pricing/cost of goods sold** efficiency, while NP shows overall business profitability.

Comparison table:

| Basis | Gross Profit | Net Profit |
|---|---|---|
| Statement | Trading A/c | P&L A/c |
| Includes | direct items | indirect items + other incomes |

Thus, GP is the first level profit and NP is the final profit.

Question 12

Classify the following items into Trading A/c, P&L A/c, and Balance Sheet (any three items each).

Accepted Answer

Classification (examples):

- **Trading A/c**: opening stock, purchases, **carriage inward**, wages (factory).
- **P&L A/c**: salaries (office), rent, advertisement, depreciation.
- **Balance Sheet**: closing stock, debtors (less provision), creditors, outstanding expenses.

Rule: Trading includes **direct** items; P&L includes **indirect** expenses/incomes; Balance Sheet shows closing **assets and liabilities**.

Question 13

Explain final accounts format and preparation steps for a sole proprietor (exam-style) with a flowchart.

Accepted Answer

### **Final Accounts of Sole Proprietor — Exam-Style**

A sole proprietor generally prepares:
- **Trading A/c** → gross profit
- **P&L A/c** → net profit
- **Balance Sheet** → financial position

Steps (brief):
- start with Trial Balance.
- pass necessary **adjustments** (closing stock, outstanding, prepaid, depreciation, etc.).
- prepare Trading A/c and transfer GP to P&L.
- prepare P&L A/c and transfer NP to Capital.
- prepare Balance Sheet with adjusted assets and liabilities.

Flowchart:

```text
Trial Balance + Adjustments → Trading A/c (GP) → P&L A/c (NP) → Balance Sheet (Position)
```

**Conclusion:** Correct classification and adjustments are the key to accurate final accounts.

Question 14

Explain how closing stock affects final accounts (exam-style) with a mini table.

Accepted Answer

### **Closing Stock Effect in Final Accounts — Exam-Style**

Closing stock represents unsold goods at the end of the period.

Effects:
- shown on **credit side of Trading Account** (reduces cost of goods sold and increases gross profit).
- shown as **current asset** in Balance Sheet.

Mini table:

| Statement | Treatment |
|---|---|
| Trading A/c | credit (closing stock) |
| Balance Sheet | asset (stock) |

**Conclusion:** Closing stock affects both profit and financial position, so it must be recorded correctly and consistently valued.

Question 15

Explain provision for doubtful debts adjustment (exam-style) with a small worked example and table.

Accepted Answer

### **Provision for Doubtful Debts — Exam-Style**

Businesses may not recover full amount from all debtors, so they create a **provision** as per prudence.

Treatment:
- provision is an **expense** in Profit & Loss A/c.
- it is deducted from **debtors** in Balance Sheet.

Worked example:
- Debtors = Rs. 50,000
- Provision @ 5% = Rs. 2,500
- Debtors shown in B/S = 50,000 − 2,500 = Rs. 47,500

Table:

| Item | Amount (Rs.) |
|---|---:|
| Debtors | 50,000 |
| Less: Provision (5%) | 2,500 |
| Net debtors in B/S | 47,500 |

**Conclusion:** Provision ensures realistic debtor value and prevents overstatement of profit.

Final Accounts of Sole Proprietor: Trading, Profit & Loss Account and Balance Sheet (Basics)

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