Final Accounts of Sole Proprietors (without adjustments)
Structure
The final accounts of a sole proprietor are the trading account, the profit and loss account and the balance sheet. With no adjustments, every figure comes straight from the trial balance; only closing stock, when given outside the trial balance, has to be brought in.
Trading account - debit: opening stock, purchases less purchase returns, and direct expenses such as carriage inward, wages, fuel, factory rent, octroi and customs duty; credit: sales less sales returns and closing stock. The balance is gross profit or gross loss.
Profit and loss account - debit: indirect expenses such as salaries, rent, office expenses, depreciation, discount allowed, bad debts, interest paid and loss on sale of an asset; credit: gross profit, discount received, interest received, commission received and rent received. The balance is net profit or net loss.
Balance sheet - liabilities: capital plus net profit less drawings, long-term loans, creditors, bank overdraft and outstanding expenses; assets: fixed assets less depreciation, investments, closing stock, debtors, bills receivable, cash and bank. Both sides must agree.
Worked example
Gross profit ₹1,20,000; salaries ₹30,000; rent ₹18,000; discount received ₹4,000; depreciation ₹12,000. Net profit = 1,20,000 + 4,000 − (30,000 + 18,000 + 12,000) = ₹64,000. Gross profit and other incomes are credited first; every indirect expense is then deducted.
Traps
Putting carriage inward in the profit and loss account instead of the trading account; showing closing stock in the trading account but not in the balance sheet; forgetting to deduct drawings from capital; adding a net loss to capital; showing a bank overdraft as an asset.