Final Accounts of Sole Proprietorship
What this domain tests
Final accounts questions require the preparation of Trading and Profit & Loss Account and Balance Sheet from a trial balance with adjustments - closing stock, outstanding and prepaid items, depreciation, bad debts and provision for doubtful debts, drawings of goods and interest on capital.
Core rules
- Trading Account gives gross profit: net sales − cost of goods sold, where cost of goods sold = opening stock + net purchases + direct expenses − closing stock.
- Profit & Loss Account gives net profit after indirect expenses and incomes.
- Balance Sheet is a statement of assets and liabilities, marshalled in order of liquidity or permanence.
- Each adjustment follows double entry: closing stock is credited in Trading A/c and shown as an asset; an outstanding expense is added to that expense and shown as a liability; a prepaid expense is deducted from the expense and shown as an asset; depreciation is charged in P&L and deducted from the asset.
- Bad debts are written off first; the provision is then computed on the remaining debtors. The P&L charge = bad debts + closing provision − opening provision.
Worked example
Gross profit ₹2,40,000; bad debts ₹6,000; debtors after bad debts ₹1,20,000; opening provision ₹4,000; create a 5% provision. New provision = 5% × 1,20,000 = ₹6,000. P&L charge = 6,000 + 6,000 − 4,000 = ₹8,000. Net profit = 2,40,000 − 8,000 = ₹2,32,000 before other items. In the balance sheet, debtors appear at 1,20,000 − 6,000 = ₹1,14,000. Reasoning: bad debts are deducted from debtors before applying the percentage; the old provision is released because it is no longer required; the balance sheet shows net realisable value.
Traps
Deducting the provision from gross profit; computing the percentage before writing off bad debts; showing closing stock only in the Trading Account; treating outstanding expenses as assets; omitting drawings while computing closing capital.