Final Accounts of a Proprietary Concern
Structure and adjustments
Final accounts include Trading A/c, Profit and Loss A/c and Balance Sheet. Trading A/c finds gross profit or loss from sales, opening stock, purchases, direct expenses and closing stock. Profit and Loss A/c finds net profit after indirect expenses and incomes. The Balance Sheet shows assets, liabilities and capital on a given date. Adjustments are made for closing stock, outstanding and prepaid expenses, accrued and unaccrued incomes, depreciation, bad debts, provision for doubtful debts, drawings and interest.
Worked example
Gross profit is ₹2,00,000. Salaries paid are ₹40,000, but ₹5,000 is outstanding. Depreciation is ₹10,000. Net profit = ₹2,00,000 − ₹40,000 − ₹5,000 − ₹10,000 = ₹1,45,000. In the Balance Sheet, outstanding salary ₹5,000 is a liability and the asset is reduced by depreciation ₹10,000. Reasoning: outstanding salary is an expense of this year even though unpaid; depreciation allocates the asset's cost as an expense.
Traps that cost marks
Closing stock appears on the credit side of Trading A/c and as a current asset; do not show it only in the Balance Sheet. Drawings are not an expense; deduct them from capital. Outstanding expenses are added to the expense and shown as liabilities. Prepaid expenses are deducted from the expense and shown as assets. Do not include capital expenditure in Profit and Loss A/c. Bad debts and provision are separate adjustments.