Final Accounts: Trading, Profit & Loss Account and Balance Sheet Questions

Question 1

What is a trading account?

Accepted Answer

Trading account is an account prepared to ascertain gross profit or gross loss from trading operations during an accounting period.

Question 2

Define gross profit.

Accepted Answer

Gross profit is the excess of net sales over cost of goods sold during an accounting period.

Question 3

What is a Profit & Loss account?

Accepted Answer

Profit & Loss account is prepared to ascertain net profit or net loss after charging indirect expenses and considering 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.

Question 5

What is meant by closing stock?

Accepted Answer

Closing stock is the value of unsold goods remaining at the end of the accounting period.

Question 6

Define outstanding expenses.

Accepted Answer

Outstanding expenses are expenses incurred during the period but not paid by the end of the period and are treated as liabilities.

Question 7

Explain the purpose of preparing final accounts.

Accepted Answer

Final accounts are prepared to summarise the results and financial position of a business at the end of an accounting period. Their purpose is: (i) to ascertain the profit or loss for the period (gross profit through Trading Account and net profit through Profit & Loss Account); (ii) to show the financial position on the closing date through the Balance Sheet by listing assets, liabilities and capital; (iii) to provide reliable information to owners, creditors, banks and other users for decision-making; and (iv) to incorporate necessary year-end adjustments so that profit and position are shown correctly.

Question 8

Differentiate between trading account and profit & loss account.

Accepted Answer

Trading account is prepared to ascertain **gross profit** or **gross loss** from core trading activities. It considers direct items like opening stock, purchases (net), direct expenses (wages, carriage inward) and sales/closing stock. Profit & Loss account is prepared to ascertain **net profit** or **net loss** after considering indirect expenses (rent, salaries, depreciation, selling and office expenses) and other incomes (commission received, discount received). Thus, trading account shows trading performance; P&L account shows overall profitability.

Question 9

Explain treatment of closing stock.

Accepted Answer

Closing stock represents goods unsold at the end of the period. It is treated in two places: (i) it is credited in the Trading Account to reduce cost of goods sold and to compute gross profit correctly; and (ii) it is shown as a current asset in the Balance Sheet because it is a resource available for sale in the next period. Hence, closing stock affects both profit (through trading account) and financial position (through balance sheet).

Question 10

Explain treatment of outstanding and prepaid expenses.

Accepted Answer

Outstanding expenses are expenses incurred during the period but unpaid at year end. They are added to the related expense in Profit & Loss Account (to charge full expense of the period) and shown as a current liability in the Balance Sheet. Prepaid expenses are amounts paid in advance for future periods. They are deducted from the related expense in Profit & Loss Account (to charge only current period expense) and shown as a current asset in the Balance Sheet. This ensures correct matching of expenses with the period.

Question 11

Differentiate between direct and indirect expenses with examples.

Accepted Answer

Direct expenses are incurred to purchase/produce goods and bring them to a saleable condition, and are charged to Trading Account (e.g., carriage inward, wages, factory power). Indirect expenses are incurred for administration, selling and distribution and are charged to Profit & Loss Account (e.g., rent, salaries, advertising, office expenses, depreciation). Direct expenses help determine gross profit; indirect expenses help determine net profit.

Question 12

Differentiate between gross profit and net profit.

Accepted Answer

Gross profit is the excess of net sales over cost of goods sold, considering only direct costs and direct expenses. Net profit is the profit remaining after deducting all indirect expenses from gross profit and adding other incomes. Therefore, gross profit measures profitability from trading operations, while net profit measures overall profitability after all business expenses.

Question 13

Explain the preparation of trading account, profit & loss account and balance sheet.

Accepted Answer

Trading Account is prepared first to ascertain gross profit/gross loss. Debit side includes opening stock, purchases (net of returns) and direct expenses; credit side includes sales (net of returns) and closing stock. The difference is gross profit (transferred to P&L).

Profit & Loss Account starts with gross profit on credit side and records indirect incomes (commission, discount received). Indirect expenses (salaries, rent, depreciation, selling and office expenses) are debited. The difference is net profit/net loss, which is transferred to capital account.

Balance Sheet is prepared to show financial position by listing liabilities (capital, loans, creditors, outstanding expenses) and assets (fixed assets after depreciation, stock, debtors, cash/bank, prepaid expenses). All year-end adjustments are incorporated so that assets and liabilities reflect true amounts.

Question 14

Explain common year-end adjustments and their treatment in final accounts.

Accepted Answer

Common adjustments are made to ensure correct profit and correct financial position. Closing stock is credited in Trading Account and shown as current asset. Outstanding expenses are added to respective expenses in P&L and shown as liabilities; prepaid expenses are deducted from expenses in P&L and shown as assets. Depreciation is charged as expense in P&L and deducted from fixed assets in Balance Sheet. Accrued income is added to income in P&L and shown as asset; income received in advance is deducted from income in P&L and shown as liability. Bad debts are written off in P&L; provision for doubtful debts is adjusted against debtors in Balance Sheet.

Question 15

Prepare proforma formats of Trading A/c, P&L A/c and Balance Sheet.

Accepted Answer

### Trading Account (Proforma)
**Dr.**: Opening Stock; Purchases (less Purchases Returns); Direct Expenses (Wages, Carriage Inward, Factory Expenses)
**Cr.**: Sales (less Sales Returns); Closing Stock
**Balancing figure**: Gross Profit/Gross Loss

### Profit & Loss Account (Proforma)
**Dr.**: Indirect Expenses (Salaries, Rent, Depreciation, Office & Selling Expenses, Bad Debts, etc.)
**Cr.**: Gross Profit b/d; Indirect Incomes (Commission Received, Discount Received, Interest Received, etc.)
**Balancing figure**: Net Profit/Net Loss

### Balance Sheet (Proforma)
**Liabilities**: Capital (add net profit, less drawings); Long-term liabilities (loans); Current liabilities (creditors, bills payable, outstanding expenses, bank overdraft)
**Assets**: Fixed assets (less depreciation); Current assets (closing stock, debtors less provision, bills receivable, cash/bank, prepaid expenses, accrued income).

Final Accounts: Trading, Profit & Loss Account and Balance Sheet

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