Final Accounts of Sole Proprietors and Partnership Firms
This domain tests preparation of manufacturing, trading and profit and loss accounts and the balance sheet for sole traders, plus partnership appropriation and admission/retirement adjustments. Marks are lost in adjustments, not in the basic format.
Core rules
- Apply accrual adjustments before closing: outstanding expenses add to expense and create a liability; prepaid expenses reduce expense and create an asset; accrued income creates an asset and income; income received in advance creates a liability.
- Closing stock is credited to the trading account and shown as a current asset. Opening stock is debited. Gross profit is sales less cost of goods sold.
- Depreciation is an expense with a corresponding accumulated depreciation or asset reduction. Bad debts are written off; a provision for doubtful debts is created after writing off bad debts.
- Partnership profit is distributed through a profit and loss appropriation account: interest on capital, partners' salaries, interest on drawings, then residual profit in the profit-sharing ratio. Admission/retirement uses sacrifice/gain ratio, revaluation and goodwill adjustments.
Worked example
A sole trader's draft profit is ₹80,000 before: omitted closing stock ₹10,000; outstanding rent ₹3,000; depreciation ₹5,000; bad debts ₹2,000. Correct profit = 80,000 + 10,000 - 3,000 - 5,000 - 2,000 = ₹80,000. The omitted stock increases profit; the other three adjustments reduce it.
Traps
Do not expense drawings. Interest on drawings is income to the firm and is credited to partners; interest on capital is an expense of appropriation. Calculate the provision on debtors after bad debts and after any further bad debts. Do not show closing stock twice. In admission, do not distribute revaluation profit in the new ratio; use the old ratio.