Ledger, Trial Balance and Final Accounts
This domain tests posting and balancing of ledger accounts, the limits of a trial balance, and preparation of trading account, profit and loss account and balance sheet with simple adjustments.
Ledger and balancing
Each journal entry is posted to the concerned accounts. Balance c/d is written on the smaller side; the difference is the balance b/d. Debit balances are assets or expenses; credit balances are liabilities, income or capital.
Trial balance
A statement (not an account) listing debit and credit balances on a date; equal totals show arithmetical accuracy only. Errors not disclosed: complete omission, error of principle, compensating errors, posting to the wrong account on the correct side, and equal wrong amounts on both sides.
Final accounts
- Trading account → gross profit = sales − cost of goods sold; COGS = opening stock + purchases + direct expenses − closing stock.
- Profit and loss account → net profit after indirect expenses and incomes.
- Balance sheet → assets = liabilities + capital (adjusted for net profit and drawings).
Adjustments
Closing stock appears in the trading account and the balance sheet; outstanding expenses are added to the expense and shown as a liability; prepaid expenses are deducted; depreciation is charged to P&L and deducted from the asset; bad debts and provision reduce debtors.
Worked example
Sales ₹2,00,000; opening stock ₹30,000; purchases ₹1,20,000; wages ₹10,000; closing stock ₹25,000; outstanding wages ₹2,000. COGS = 30,000 + 1,20,000 + 12,000 − 25,000 = ₹1,37,000; gross profit = 2,00,000 − 1,37,000 = ₹63,000, and ₹2,000 appears as a liability.
Traps
Showing closing stock in the trial balance and also as an adjustment; forgetting to deduct drawings; charging depreciation to the trading account; assuming equal trial balance totals prove there are no errors.