Trading A/c & Profit and
Loss Account, Balance
Sheet
Dr. Rajeev Kumar
INTRODUCTION
• The transactions of a business enterprise for the
accounting period are first recorded in the books of
original entry, then posted there from into the ledger
and lastly tested as to their arithmetical accuracy with
the help of trial balance.
• After the preparation of the trial balance, every
businessman is interested in knowing about two more
facts. They are:
• (i) Whether he has earned a profit or suffered a loss
during the period covered by the trial balance, and
• (ii) Where does he stand now?
• In other words, what is his financial position?
Introduction ………….(2)
• For the above said purposes, the businessman
prepares financial statements for his business i.e. he
prepares the Trading and Profit and Loss Account and
Balance Sheet at the end of the accounting period.
• These financial statements are popularly known as
final accounts.
• The preparation of financial statements depends upon
whether the business concern is a trading concern or
manufacturing concern.
• If the business concern is a trading concern, it has to
prepare the following accounts along with the Balance
Sheet: (i) Trading Account; and (ii) Profit and Loss
Account.
Introduction ………….(3)
• Trading Account is prepared to know the Gross
Profit or Gross Loss.
• Profit and Loss Account discloses net profit or net
loss of the business.
• Balance sheet shows the financial position of the
business on a given date.
1. TRADING ACCOUNT
• After the preparation of trial balance, the next step
is to prepare Trading Account.
• Trading Account is one of the financial statements
which shows the result of buying and selling of
goods and/or services during an accounting
period.
• The main objective of preparing the Trading
Account is to ascertain gross profit or gross loss
during the accounting period.
• Gross Profit is said to have made when the sale
proceeds exceed the cost of goods sold.
1. TRADING ACCOUNT …………(2)
• Conversely, when sale proceeds are less than the
cost of goods sold, gross loss is incurred.
• For the purpose of calculating cost of goods sold,
we have take into consideration opening stock,
purchases, direct expenses on purchasing or
manufacturing the goods and closing stock.
• The balance of this account i.e. gross profit or
gross loss is transferred to the Profit and Loss
Account.
Practice Question……..do it
Solution: Illustration 1
2. Profit & Loss Account……………..(1)
• Profit & Loss Account is the second part of Trading
and Profit & Loss Account.
• Trading Account shows the gross profit which is
the difference of sales and cost of sale.
• Thus the gross profit can not treated as net profit
while the businessman wants to know how much
net profit he has earned from the operating
activities during a period.
• For this purpose Profit & Loss Account is prepared
keeping in mind all the operating and non-
operating incomes and losses of the business.
2. Profit & Loss Account……………..(2)
• In the debit (left hand side) side all the expenses
and losses are disclosed and in the credit side
(right hand side) all the incomes are disclosed.
• The excess of credit side over debit side is called
net profit while the excess of debit side over
credit side shows net loss.
• Net profit increases the net worth of the business,
therefore, it is added to the capital of owner.
• Net loss decreases the net worth of business so it
is subtracted from capital.
Practice Question……do it
Solution….
3. Balance Sheet
• After the determination of the net profit of the
business through the Trading and Profit and Loss
Account, the businessman wants to know the financial
position of the business.
• For this purpose he prepares a statement which is
called the Balance Sheet.
• The Balance Sheet depicts the financial position of
the business on a fixed date.
• A Balance Sheet has two sides –assets side and
liabilities side.
Practice Question….do it
The closing stock was valued at Rs.12,500.
Solution
Solution …………(2)
Balance Sheet prepared in Permanency
Order
• Balance Sheet prepared under this order is the
reverse of the Balance Sheet prepared in liquidity
order.
• In this case first those assets are shown which are
more permanent means fixed assets and then less
permanent assets (Current Assets) are shown.
• Similarly, first long-term liabilities (more
permanent) are shown then less permanent
(short-term on current) liabilities are shown.
