 Trial Balance: It is a statement (not an account) prepared with the debit and credit balances of the

Ledger account and Cash book balance to test the arithmetical accuracy of Books.
Or
It is a list of debit and credit balances taken out from the ledger. It also includes the balances of cash
and bank taken from the cash book.

 Trial Balance – Feature:

o It is a list of balance of Ledger Accounts and Cash book.
o It is not a part of double entry system of book keeping. It is a result of double entry
system of book keeping.
o It can be prepared on any date if the accounts are balanced.
o It verifies the arithmetical correctness of posting of entries from journal to ledger, but
it is not a conclusive proof of accuracy of books of accounts since some errors are not
disclosed by Trial Balance.
o It is helpful in preparation of Trading Account, Profit & Loss Account and Balance
Sheet.
 Important point to remember for preparing TB:
o TB is prepared with help of Ledger and cash book.
o If an account does not have balance, it is ignored, it is not written in TB.
o Ledger A/c showing Debit balance are shown on Debit column of TB.
o Ledger A/c showing Credit balance are shown on Credit column of TB.
o Purchase A/c always has a Debit Balance.
o Sales A/c always has a credit balance.
o Return Inward (Sales Return) A/c always has a debit balance.
o Return Outward (Purchase Return) A/c always has a credit balance.
o Opening stock A/c always has a debit balance.
o Accounts of Assets such as Plant, M/c, Furniture, Land & Building, Motor Car, Bill
Receivable, Goodwill, Trade Mark, Patent, Copyright, Cash in Hand etc. have debit
balance.
o Bank balance may be debit or credit.
o Accounts of Income & Gain have credit balance.
o Accounts of Expenses & Losses have debit balance.
 Debit Balance – Asset, Drawings, Debtors, Expenses & Losses
 Credit Balance – Liabilities, Capital, Creditors, Income & Gains
Que: From the following balances of ledger account as on 31st March, extracted from the books of Mr. Kajal
das prepare a Trial Balance as on the same date.

1. Stock (1.4.24) – 32000/- 13. Sales – 1,36,500/-

2. Cash in Hand – 1050/- 14. Purchase return – 750/-
3. Cash in Bank – 2000/- 15. Miscellaneous Expenses – 2,640/-
4. Carriage Inward – 1,500/- 16. Discount – 1,800/-
5. Purchases – 52,350/- 17. Interest – 920/-
6. Sales Return – 400/- 18. Land & Building – 22,250/-
7. Wages – 28,550/- 19. Plant and M/c – 35,600/-
8. Charges general – 10,000/- 20. Sundry Debtors – 57,500/-
9. Salaries – 1,500/- 21. Sundry Creditors – 21,750/-
10. Trade expenses – 6,800/- 22. Miscellaneous Income – 2,600/-
11. Rates and taxes – 300/- 23. Capital – 95,750/-
12. Insurance – 190/-

Sol:
Trial Balance as on 31.03.24

Heads of A/c L.F. Dr. Balance Cr. Balance

1. Stock Balance (Closing Stock) 32,000
2. Cash in Hand 1,050
3. Cash in Bank 2,000
4. Carriage Inward 1,500
5. Purchases 52,350
6. Sales Return 400
7. Wages 28,550
8. Charges General 10,000
9. Salaries 1,500
10. Trade Expenses 6,800
11. Rates and Taxes 300
12. Insurance 190
13. Sales 1,36,500
14. Purchase Return 750
15. Miscellaneous Expenses 2,640
16. Discount 1,800
17. Interest 920
18. Land & Building 22,250
19. Plant & M/c 35,600
20. Sundry Debtors 57,500
21. Sundry Creditors 21,750
22. Miscellaneous Income 2,600
23. Capital 95,750
Total 2,57,350 2,57,350
 Financial Statement (F.S.): It is prepared at the end of the accounting period to determine the
Financial performance, i.e. Profit/ Loss during that period & also the Financial Position of the business
as on the date.
 A Complete set of F.S. –
1. Trading and P&L A/c (*Income Statement) (Tr A/c – Gross P&L, P&L A/c – Net P&L)
2. Balance Sheet (BS)
They are also known as Final A/cs.
(*Income Statement is a summary of accounts that affects the Profit/Loss of an
enterprise)

 Objective:
1. Trading and P&L A/c
i. Determine Gross and Net P&L
ii. Comparison with previous year
iii. Details of Expenses & Income
iv. Reserves
v. Ratio
2. Balance Sheet
i. Ascertaining the Financial Position
ii. Comparison with previous year
iii. Determine solvency position
 Trading A/c: First stage of preparing Final A/c.
 It is the F.S. which shows result of buying and selling of goods & services during an accounting
period.
 Debited: Opening stock/ inventory, Net purchases & Direct Expenses
 Credited: Closing stock, Sales/ services rendered
 Difference of two sides – Gross P/L

 Features:
1. It is first stage in preparation of Final A/c.
2. Gross P/L is transferred to P&L A/c
3. It is based on Matching Principles, hence revenue from sales of goods/ service
rendered are matched with the cost of goods sold/ service rendered (direct expenses
incurred).
4. Cost of Goods sold = Opening stock + Purchases + Direct Expenses – Closing Stock
Dr. Cr.

1)Opening Stock 1)Sales

2)Purchase Less Sales Return
Less Purchase Return 2)Closing Stock
3)Direct Expenses (related to production):
i)Carriage/Freight/Cartage inward
ii)Wages
iii)Power (Electricity & Fuel)
iv)Factory rent
v)Duty on purchases
vi) Royalties (cost to acquire to use the patent)
vii)Consumable stores (cost for maintenance)
To Gross Profit c/d By Gross Loss c/d
 P&L A/c: It is prepared after preparing Trading A/c.
 It is prepared to determine Net P/L incurred by business during and Accounting period.
 It starts with Gross profit (on credit side) or Gross loss (on debit side)
 All indirect expenses and losses are transferred to debit side and all indirect income and gains
are transferred to credit side of P&L A/c.
 Difference of two side – Net P/L

 Features:
1. It is second stage in preparation of Final A/c.
2. It relates to particular accounting period.
3. It shows the financial performance of enterprise during an accounting period.
4. Accrual basis of accounting is followed in preparation of this account.

Dr. Cr.
1)Gross Loss 1)Gross Profit
2)Salaries 2)Rent Received
3)Rent 3)Discount Received
4)Stationery & Printing 4)Commission Earned
5)Postage & Telegram 5)Interest Received
6)Legal Charges 6)Bad Debts recovered
7)Telephone Expenses 7)Income from investment
8)Insurance Premium 8)Dividend or Shares
9)Business promotion Expenses 9)Miscellaneous Income
10) Repair & Renewals
11)Depreciation
12)Interest
13)Sundry Expenses
14)Conveyance
15)Bank Charges
16)General Expenses
17)Electricity Expenses
18)Loss by Fire or Theft
19)Commission
20)Advertisement
21)Freight & Carriage outwards
22)Discount allowed
23)Travelling Expenses
24)Bad debts

To Net Profit transferred to Capital A/c By Net Loss transferred to Capital A/c

 Difference b/w Trading A/c and P&L A/c:

Basis Trading A/c P&L A/c

1) Relation It is a part of P&L A/c It is the main A/c
2) Nature Gross P/L Net P/L
3) Transfer of Balance To P&L A/c To Capital A/c
4) Items Direct Expenses Indirect Expenses
 Balance Sheet (B.S):
 It is a statement which sets out the Assets & Liabilities of a firm at a certain date.
 It shows the Financial Position of the business at a given time.
 Excess of Assets over outside Liabilities is the Capital and is indicative of the Financial
soundness of a company.
 It is prepared from Real A/c & Personal A/c.
 The Dr. & Cr. Balance of those Ledger A/c which have not been closed by transfer to Trading
and P&L A/c are shown in B.S.

 Purpose:
1. To ascertain the Financial Position at point of time.
2. To know the amount of Assets it owns under various heads say debtors, fixed Assets
etc.
3. To know the amount of Liabilities it owes to outsiders and the proprietor.
4. It is the base for the opening entry for the next accounting years.
5. It determines whether the firm is solvent or not.

Liabilities ₹ Assets ₹
1)Capital 1)Cash in hand/ Bank
Add 2)Bill Receivable
i)Net Profit 3)Sundry Debtors
ii)Interest on Capital 4)Loans & Advances given
Less 5)Investment
i)Drawing 6)Furniture & Fittings
ii)Income Tax 7)Plant & M/c
iii)Interest on Drawing 8)Lands & Buildings
iv)Net Loss 9)Business Premises
2)Sundry Creditors 10)Patent & Trademark
3)Bill Payable 11)Goodwill
4)Bank Overdraft
5)Employee P.F.
6)Loans & Advances taken
7)Reserve or Reserve fund

 Features:
1. It is prepared at a particular date and not for a particular period.
2. After the preparation of Trading and P&L A/c
3. It shows Financial Position.
4. It is not an A/c, but only a statement.
5. Asset side = Liability side
 Grouping & Marshalling in B.S.: (Arrangement of Asset & Liabilities)
 Grouping means putting items of a similar nature under a common Accounting head.
 The arrangement of Assets and Liabilities in a particular order in B.S. is called Marshalling.
 Asset & Liabilities are shown in B.S either
I. In order of Liquidity:
 Asset side: More liquid Asset first (Current Asset)
Less liquid Asset last (Fixed Asset)
 Liability side: Short term Liabilities first
Long term Liabilities last
II. In order of Permanence:
 Asset side: Used permanently in business first (not meant to be sold)
Most Liquid Asset last
 Liability side: Permanency in business first (capital)
Long term Liability
Short Term Liability

 Important point Final A/c:

1. Trial Balance should be prepared to ensure the two sides (Dr. / Cr.) are matching
(Arithmetical accuracy).
2. If the Trial Balance doesn’t match, the difference is places under the head “Suspense
A/c” in the side with lesser total.
(Remember that Suspense A/c may have Dr. or Cr. Balance. It is accordingly placed in
Assets side if Dr. and in Liabilities side if Cr.)
3. Items appearing in Trial Balance are shown either in Trading A/c or P&L A/c or B.S.
4. Items appearing outside the Trial Balance are shown at two places.
(Either Trading A/c and B.S. or P&L A/c and B.S. following Dual aspect concept)
E.g. Closing Stock is shown in credit side of Trading A/c and in Asset side of B.S.
5. It should be determined whether items on credit side of Trial Balance are Income or
Liabilities or Capital.
 If Income from Business: - Credited to Trading A/c
 If other Income: - Credited to P&L A/c
 If Liability: - Shown in Liability side of B.S.
6. It should be determined whether items on debit side of Trial Balance are Direct
Expenses or Indirect Expenses or Asset.
 Direct Expense: - Debited to Trading A/c
 Indirect Expense: - Debited to P&L A/c
 If Assets: - Shown in Asset side of B.S.
Que: Following was the Trial Balance of Ranjit Traders as on 31 st December, 2023:
Trial Balance as on 31st December, 2023

Debit Balance ₹ Credit Balance ₹

1)Opening Stock (TR.) 3,000 18)Purchase Return (TR.) 1,000
2)Purchases (TR.) 48,000 19)Capital (B.S.) 40,000
3)Wages (TR.) 7,000 20)Sales (TR.) 1,00,000
4)Salary (P&L) 12,000 21)10% Loan (1st Oct,2023) (B.S.) 12,000
5)Trade Expenses (P&L) 2,000 22)Discount Received (P&L) 1,500
6)Machinery (B.S.) 28,000 23)Bad debts Recovery (P&L) 2,500
7)Furniture (B.S.) 12,000 24)Bank Interest (P&L) 3,000
8)Rent (P&L) 8,000 25)Provision for Bad Debt (P&L) 1,000
9)Repairs (P&L) 1,200 26)Creditors (B.S.) 24,000
10)Advertisement (P&L) 1,800 27)Bills Payable (B.S.) 6,000
11)Debtors (B.S.) 26,000
12)Bad Debts (P&L) 1,500
13)Bills Receivable (B.S.) 6,500
14)Insurance (P&L) 4,000
15)Sales Return (TR.) 2,000
16)Cash at Bank (B.S.) 21,000
17)Cash in Hand (B.S.) 7,000

Total 1,91,000 Total 1,91,000

Additional Information:
i. Closing Stock valued on 31st December, 2023: - ₹ 6,000. (TR. & B.S)
ii. Goods valuing ₹ 2,000 taken by the proprietor from business for personal use. (TR. & B.S)
iii. Further Bad Debts to be written off ₹ 1,000 and Provision for Bad Debts to be created at
10%. (P&L & B.S.)
iv. Depreciation to be charged on all Fixed Assets @ 10% per annum. (P&L & B.S.)
v. Interest on Loan is to be provided. (P&L & B.S.)

Prepare Trading A/c and P&L A/c for the year ended 31 st December, 2023 and a Balance
Sheet as on that date.
[Gross Profit - ₹ 49,000; Net Profit - ₹ 18,700; Balance Sheet Total - ₹ 99,000]
Sol:
Trading A/c for the year ended on 31st December, 2023
Dr. Cr.

Particulars ₹ Particulars ₹
1)To Opening Stock 3,000 20)By Sales 1,00,000
2)To Purchase 48,000 Less
Less 15)Sales Return 2,000 98,000
18)Purchase Return 1,000 i)By Closing Stock 6,000
iii)Goods Drawn 2,000 45,000
3)To Wages 7,000
To Gross Profit c/d 49,000

1,04,000 1,04,000
 Profit & Loss A/c for the year ended on 31st December, 2023
Dr. Cr.

Particulars ₹ Particulars ₹
4)To Salary 12,000 By Gross Profit b/d 49,000
5)To Trade Expense 2,000 22)By Discount Received 1,500
8)To Rent 8,000 23)By Bad Debts Recovery 2,500
9)To Repairs 1,200 24)By Bank Interest 3,000
10)To Advertisement 1,800
12)To Bad Debts 1,500
Add
iii)Bad Debts Written Off 1,000
iii)Provision for Bad Debt 2,500
(10% of 26k-1k=25k)
Less
25)Provision for bad Debt 1,000 4,000
14)To Insurance 4,000
iv)To Depreciation
M/c 2,800
Furniture 1,200 4,000
v)To Interest on Loan 300

To Net profit Transferred to Capital 18,700

56,000 56,000

Balance Sheet as on 31st December, 2023

Liabilities ₹ Assets ₹
19)Capital 40,000 6)Machinery 28,000
Add Less
Net Profit 18,700 iv)Depreciation on M/c 2,800 25,200
Less 7)Furniture 12,000
ii)Drawing 2,000 56,700 Less
21)10% Loan 12,000 iv)Depreciation on Fur. 1,200 10,800
Add 11)Debtors 26,000
v)Interest on Loan 300 12,300 Less
26)Creditors 24,000 iii)Written off Bad Debts 1,000
27)Bills Payable 6,000 iii)Provision for Bad Debts 2,500 22,500
13)Bills Receivable 6,500
16)Cash in Bank 21,000
17)Cash in Hand 7,000
i)Closing Stock 6,000
Total 99,000 Total 99,000