Final Accounts of Sole Proprietors: Manufacturing, Trading, Profit & Loss and Balance Sheet
Final Accounts of Sole Proprietors tests preparation of manufacturing, trading and profit & loss accounts and the balance sheet, including adjustments.
Core rules
- Manufacturing account finds cost of production: raw material consumed + direct wages + direct expenses + factory overheads + opening WIP − closing WIP.
- Trading account finds gross profit: sales − cost of goods sold (opening stock + purchases + direct expenses − closing stock).
- Profit & loss account deducts indirect expenses and adds indirect incomes to give net profit.
- Balance sheet classifies assets and liabilities. Every adjustment has two effects; for example, closing stock appears in trading account and balance sheet.
Worked example
Gross profit is ₹80,000 before closing stock; closing stock is ₹10,000; salaries ₹20,000; rent ₹5,000; depreciation ₹6,000; bad debts ₹2,000. Adjusted gross profit = 80,000 + 10,000 = ₹90,000. Net profit = 90,000 − 20,000 − 5,000 − 6,000 − 2,000 = ₹57,000. The balance sheet shows closing stock ₹10,000 as a current asset and net profit added to capital.
Traps
If closing stock is already in the trial balance, do not add it again to gross profit; outstanding expenses are added to the expense and shown as a liability; prepaid expenses are deducted and shown as an asset; calculate provision for doubtful debts on debtors after bad debts; drawings reduce capital, not profit.