Final Accounts of Sole Proprietors
Final Accounts of Sole Proprietors
This domain tests the trading account, profit and loss account and balance sheet, including year-end adjustments, for a sole proprietor.
Core rules
- Trading account finds gross profit: sales minus cost of goods sold, where cost of goods sold = opening stock + purchases + direct expenses - closing stock.
- Profit and loss account transfers gross profit and deducts indirect expenses and losses, adding indirect incomes.
- Balance sheet shows assets, liabilities and capital after adjusting entries.
- Adjustments affect two places: for example, outstanding rent is added to rent expense and shown as a liability; closing stock is credited in trading account and shown as an asset.
Worked example
Gross profit is Rs.1,20,000; salaries Rs.30,000; rent paid Rs.12,000 for 10 months, with 2 months outstanding at Rs.1,200 per month. Rent expense = Rs.12,000 + Rs.2,400 = Rs.14,400. Net profit = Rs.1,20,000 - Rs.30,000 - Rs.14,400 = Rs.75,600. The balance sheet shows outstanding rent Rs.2,400 as a current liability. The adjustment raises expense and creates a liability, so it cannot be entered only once.
Traps
Making an adjustment in only one statement; treating drawings as an expense; deducting closing stock only from purchases without crediting trading account; and calculating provision for doubtful debts on debtors before deducting bad debts.