Final Accounts of Sole Proprietors
What the domain tests
Final Accounts of Sole Proprietors tests preparation of Trading Account, Profit and Loss Account and Balance Sheet, including year-end adjustments, from a trial balance.
Core rules
- Trading Account finds gross profit: Sales − Cost of Goods Sold; COGS = Opening stock + Purchases + Direct expenses − Closing stock. Returns and carriage inward adjust purchases.
- Profit and Loss Account starts with gross profit and deducts indirect expenses, adding indirect incomes, to find net profit.
- Balance Sheet shows assets, liabilities and capital on the closing date. Closing capital = opening capital + additional capital + net profit − drawings.
- Adjustments follow double effect: closing stock appears as credit in Trading A/c and asset in Balance Sheet; outstanding expense is expense plus liability; prepaid expense is asset and expense reduction; depreciation is expense plus asset reduction; bad debts reduce debtors and are expense.
Worked example
Sales ₹1,00,000; opening stock ₹10,000; purchases ₹60,000; closing stock ₹15,000; direct wages ₹5,000; indirect expenses ₹10,000. COGS = 10,000 + 60,000 + 5,000 − 15,000 = ₹60,000. Gross profit = 1,00,000 − 60,000 = ₹40,000. Net profit = 40,000 − 10,000 = ₹30,000. Closing stock also appears as a current asset ₹15,000 in the Balance Sheet; it is not an expense.
Traps
Do not deduct closing stock twice; do not put drawings in Profit and Loss Account-they reduce capital; do not ignore outstanding or prepaid items because every adjustment has two effects; and do not confuse gross profit with net profit. A debit balance in the P&L is loss, not an asset.