FINAL ACCOUNTS OF A SOLE PROPRIETOR

The final accounts of a sole proprietor are prepared to summarize the financial performance and
position of the business at the end of an accounting period. These include:
1. Trading Account
Purpose:
The Trading Account calculates the Gross Profit or Gross Loss, which shows the profitability
of the core trading activities.
Key Elements:
• Opening Stock: Goods available for sale at the beginning of the period.
• Purchases: Total goods purchased for resale during the period (adjusted for purchase
returns).
• Direct Expenses: Costs directly associated with the production or procurement of goods
(e.g., wages, freight, carriage inwards).
• Sales: Revenue earned from selling goods during the period (adjusted for sales returns).
• Closing Stock: Value of unsold goods at the end of the period.
Formula for Gross Profit:
Gross Profit = Sales + Closing Stock − (Opening Stock + Purchases + Direct Expenses)

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2. Profit and Loss Account
Purpose:
The Profit and Loss Account determines the Net Profit or Net Loss by incorporating indirect
expenses and other incomes.
Key Elements:
• Gross Profit or Gross Loss: Brought forward from the Trading Account.
• Operating Expenses: Indirect expenses necessary for running the business, such as rent,
salaries, office expenses, and depreciation.
• Other Incomes: Revenues from non-operating activities, such as commission received,
discount earned, or rent received.
Formula for Net Profit:
Net Profit = Gross Profit + Other Incomes − Operating Expenses
Net Profit is transferred to the Capital Account.

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3. Balance Sheet

Purpose:
The Balance Sheet presents the financial position of the business by listing assets, liabilities, and the
proprietor's capital.

Key Elements:

1. Liabilities:
o Capital: The proprietor’s investment in the business.
o Long-term Liabilities: Debts payable after a long period (e.g., loans).
o Current Liabilities: Short-term obligations like creditors and outstanding expenses.
2. Assets:
o Fixed Assets: Long-term resources such as land, buildings, and machinery.
o Current Assets: Short-term resources like cash, debtors, and inventory.
o Investments: Money invested in securities or other ventures.

Formula for Capital:

Capital = Opening Capital + Net Profit − Drawings

The total of Assets and Liabilities must always balance.

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ADJUSTMENTS IN THE FINAL ACCOUNTS DETERMINE HOW ENTRIES ARE
MADE IN THE RESPECTIVE ACCOUNTS (DEBIT OR CREDIT). HERE'S HOW
COMMON ADJUSTMENTS ARE TREATED, SPECIFYING WHICH ACCOUNT IS
DEBITED OR CREDITED:

1. Closing Stock
• Credit: Trading Account (Shown on the credit side)
• Asset: Added to the Balance Sheet under Current Assets.

2. Outstanding Expenses (Expenses not yet paid)

• Add to Expense: Respective Expense Account (Debit in P&L Account).
• Liability: Added to the Balance Sheet under Current Liabilities.

3. Prepaid Expenses (Expenses paid in advance)

• Deduct from Expense: Respective Expense Account (Credit in P&L Account).
• Asset: Shown in the Balance Sheet under Current Assets.

4. Accrued Income (Income earned but not received)

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 • Add to Income: Respective Income Account (Credit in P&L Account).
• Asset: Shown in the Balance Sheet under Current Assets.

5. Income Received in Advance (Income received for the next period)

• Deduct from Income: Respective Income Account (Debit in P&L Account).
• Liability: Shown in the Balance Sheet under Current Liabilities.

6. Depreciation (Decrease in the value of assets)

• Debit: Depreciation Account in P&L (Expense).
• Deduct from Asset: Shown as a reduction in the Balance Sheet under Fixed Assets.

7. Provision for Bad Debts (Expected loss on debtors)

• Debit: Profit and Loss Account (Expense).
• Deduct from Asset: Reduced from Sundry Debtors in the Balance Sheet.

8. Interest on Capital (Reward to proprietor for investment)

• Debit: Profit and Loss Account (Expense).
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 • Credit: Added to Capital Account in Balance Sheet.

9. Interest on Drawings (Charge for personal withdrawals)

• Credit: Profit and Loss Account (Income).
• Debit: Reduced from Capital Account in Balance Sheet.

10. Goods Taken for Personal Use (Drawings in kind)

• Credit: Trading Account (Reduce purchases or goods available for sale).
• Debit: Drawings Account (Reduce Capital in Balance Sheet).

11. Goods Distributed as Free Samples

• Credit: Trading Account (Reduce purchases or goods available for sale).
• Debit: Advertisement Expense Account (Increase expenses in P&L Account).

12. Goods Lost by Fire (Insured)

• Credit: Trading Account (Reduce purchases or goods available for sale).
• Debit: Insurance Claim Account (Recorded as a receivable in the Balance Sheet).
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13. Goods Lost by Fire (Uninsured)
• Credit: Trading Account (Reduce purchases or goods available for sale).
• Debit: Profit and Loss Account (Recorded as an expense).

14. Abnormal Loss (e.g., due to theft, accident, etc.)

• Credit: Trading Account (Reduce purchases or goods available for sale).
• Debit: Profit and Loss Account (Recorded as an expense).

15. Provision for Discount on Debtors

• Debit: Profit and Loss Account (Recorded as an expense).
• Credit: Provision for Discount on Debtors Account (Reduce Sundry Debtors in Balance

Sheet).

16. Provision for Discount on Creditors

• Credit: Profit and Loss Account (Recorded as income).
• Debit: Provision for Discount on Creditors Account (Reduce Sundry Creditors in Balance
Sheet).

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17. Bad Debts Written Off
• Debit: Profit and Loss Account (Recorded as an expense).
• Credit: Sundry Debtors Account (Reduce Sundry Debtors in Balance Sheet).

18. Goods Sent on Approval Basis

• If goods are unsold at the end of the period:
o Credit: Trading Account (Reduce sales or goods sold).
o Add to Closing Stock: Shown as an asset in the Balance Sheet.

19. Manager’s Commission

• Debit: Profit and Loss Account (Recorded as an expense).
• Credit: Manager’s Commission Payable Account (Shown as a Current Liability in Balance

Sheet).

20. Interest on Loan Taken

• Debit: Profit and Loss Account (Expense).
• Credit: Loan Account (Increase loan liability in Balance Sheet).

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21. Interest on Loan Given
• Credit: Profit and Loss Account (Income).
• Debit: Loan Account (Increase loan receivable in Balance Sheet).

22. Drawings (Cash)

• Debit: Drawings Account (Reduce Capital in Balance Sheet).
• Credit: Cash/Bank Account (Reduce Cash or Bank balance in Balance Sheet).

23. Capital Introduced During the Year

• Credit: Capital Account (Increase capital in Balance Sheet).
• Debit: Cash/Bank Account (Increase Cash or Bank balance in Balance Sheet).

24. Income Tax Paid (If treated as personal expense of the proprietor)
• Debit: Drawings Account (Reduce Capital in Balance Sheet).
• Credit: Cash/Bank Account (Reduce Cash or Bank balance in Balance Sheet).

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25. Unearned Revenue (Advance Received)
• Debit: Profit and Loss Account (Reduce income).
• Credit: Unearned Revenue Account (Shown as a Current Liability in Balance Sheet).

26. Depreciation on Assets

• Debit: Profit and Loss Account (Expense).
• Credit: Respective Asset Account (Reduce value of Fixed Asset in Balance Sheet).

27. Reserve Creation (e.g., General Reserve, Workmen Compensation Reserve)

• Debit: Profit and Loss Appropriation Account (If applicable).
• Credit: Reserve Account (Shown under Reserves & Surplus in Balance Sheet).

28. Loan Taken from Bank or Others

• Debit: Cash/Bank Account (Increase Cash/Bank balance).
• Credit: Loan Account (Increase loan liability in the Balance Sheet).

29. Loan Repaid (Including Interest)

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 • Debit: Loan Account (Reduce loan liability in the Balance Sheet).
• Debit: Interest on Loan Account (Recorded as an expense in P&L Account).
• Credit: Cash/Bank Account (Reduce Cash/Bank balance in the Balance Sheet).

30. Goods Used for Office Use

• Credit: Trading Account (Reduce purchases or goods available for sale).
• Debit: Office Expenses Account (Expense in P&L Account).

31. Goods Sent to Branch

• Credit: Trading Account (Reduce purchases or goods available for sale).
• Debit: Branch Account (Shown as an Asset in Balance Sheet).

32. Recovery of Bad Debts Previously Written Off

• Debit: Cash/Bank Account (Increase Cash/Bank balance).
• Credit: Profit and Loss Account (Recorded as income).

33. Investment Made During the Year

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 • Debit: Investment Account (Shown as a Non-Current Asset in Balance Sheet).
• Credit: Cash/Bank Account (Reduce Cash/Bank balance).

34. Sale of Fixed Assets (At Profit)

• Debit: Cash/Bank Account (Increase Cash/Bank balance).
• Debit: Accumulated Depreciation Account (Remove accumulated depreciation on asset).
• Credit: Fixed Asset Account (Remove asset from Balance Sheet).
• Credit: Profit on Sale of Asset (Recorded as income in P&L Account).

35. Sale of Fixed Assets (At Loss)

• Debit: Cash/Bank Account (Increase Cash/Bank balance).
• Debit: Accumulated Depreciation Account (Remove accumulated depreciation on asset).
• Debit: Loss on Sale of Asset (Recorded as an expense in P&L Account).
• Credit: Fixed Asset Account (Remove asset from Balance Sheet).

36. Investment Income Earned (e.g., Dividend, Interest)

• Debit: Cash/Bank Account (Increase Cash/Bank balance).
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 • Credit: Profit and Loss Account (Recorded as income).

37. Expenses Paid in Advance for Next Year

• Debit: Prepaid Expenses Account (Shown as a Current Asset in Balance Sheet).
• Credit: Cash/Bank Account (Reduce Cash/Bank balance).

38. Rent Earned but Not Received (Accrued Rent)

• Debit: Rent Receivable Account (Shown as a Current Asset in Balance Sheet).
• Credit: Profit and Loss Account (Recorded as income).

39. Interest Earned on Fixed Deposit

• Debit: Bank Account (Increase Cash/Bank balance).
• Credit: Profit and Loss Account (Recorded as income).

40. Withdrawals by Owner in Cash

• Debit: Drawings Account (Reduce Capital in Balance Sheet).
• Credit: Cash Account (Reduce Cash balance in Balance Sheet).
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41. Provision for Warranty
• Debit: Profit and Loss Account (Expense).
• Credit: Provision for Warranty Account (Shown as a Liability in Balance Sheet).

42. Transfer of Net Profit to Capital Account

• Debit: Profit and Loss Appropriation Account (Reduce retained profits).
• Credit: Capital Account (Increase capital in Balance Sheet).

43. Advance Paid to Suppliers

• Debit: Advance to Suppliers Account (Shown as a Current Asset in Balance Sheet).
• Credit: Cash/Bank Account (Reduce Cash/Bank balance).

44. Cheque Dishonored from Customer

• Debit: Customer's Account (Sundry Debtors) (Increase receivables).
• Credit: Bank Account (Reduce Cash/Bank balance).

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45. Purchase of Machinery (Including GST)
• Debit: Machinery Account (Value excluding GST).
• Debit: GST Input Credit Account (Claimable GST portion).
• Credit: Cash/Bank Account (Total amount paid).

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