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PROCARE
CONCENTRATION IS THE KEY
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FINANCIAL STATEMENTS
After the agreement of the Trial Balance, a business enterprise proceeds to prepare Financial
Statements. Financial Statements present periodic reports on the progress of a business enterprise and the
results achieved during a given period. Financial statements include -
(i) Income Statement i.e. Trading and Profit & Loss Account (For a particular period)
(ii) Position Statement i.e. Balance Sheet. (On a particular Day)

TRADING AND PROFIT & LOSS ACCOUNT

For the year ending 31 st March ……….

PARTICULARS AMOUNT PARTICULARS AMOUNT

To Opening Stock xxx By Sales xxx

To Purchases xxx Less : Sales Return - xxx
Less : Purchase Return - xxx
To DIRECT EXPENSES
[Exp. related to mfg. & Purchase] By Closing Stock xxx
Carriage Inwards -
Royalties -
Import/Custom duty -
Power & Fuel - By GROSS LOSS c/d (B/f)
Wages -
Frieght -
Factory and Mfg. Exp. -
Dock Charges -
Octroi -
Coal & coke -
Stores consumed -
To GROSS PROFIT c/d (Bal. fig.)
xxx xxx

To Gross Loss b/d xxx By Gross Profit b/d xxx

To Rent,rates & taxes xxx By Interest recd. xxx
To Office salaries xxx By Discount/Commission recd. xxx
To Printing & Stationery xxx By Rent recd. xxx
To Postage & Telephone xxx By Income from Investment xxx
To Electricity charges xxx By Profit on sale of assets xxx
To Advertisement xxx
To Bad debts xxx
To Carriage Outward xxx By Net Loss (B/f) xxx
To Depreciation xxx
To Repairs and Maintenance xxx
To Discount allowed xxx
To Interest on loan\Capital xxx
To Trade Expenses xxx
To NET PROFIT (Bal. Fig.)
(Transfer to capital a/c) = =
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 BALANCE SHEET AS ON ……………
LIABILITIES AMOUNT ASSETS AMOUNT

Capital xxx FIXED ASSETS

Land and Building
Add: Net Profit +
Plant and Machinery
Additional Capital +
= Furniture & Fixtures
Less: Net Loss -
Goodwill, Live Stock
Drawings -_
Patents & Copyrights
Loan Payable Investments

CURRENT LIABILITIES CURRENT ASSETS

Bank Overdraft Cash in hand
Bills Payable Cash at Bank
Creditors Closing Stock and Stores
Outstanding Salary Bills Receivables
Advance Income Sundry Debtors
Prepaid Rent
Accrued Income

NOTE 1 ; CONTINGENT LIABILITIES ARE SHOWN AS A FOOT NOTE UNDER THE BALANCE SHEET.

Note:2- If Cl. stock is given in the trial balance then it is shown to the assets side of B/S only.

NOTE 3- CLOSING STOCK MAY BE IN FORM OF RAW MATERAL, WORK IN PROGRESS AND FINISH GOODS.

CLOSING STOCK IS VALUED AT COST PRICE OR NET REALISABLE VALUE, WHICHEVER IS LESS

PRUDENCE CONCEPT

COST OF GOODS SOLD

1. = NET SALES – GROSS PROFIT

2. = OPENING STOCK + NET PURCHASES + DIRECT EXP. – CLOSING STOCK

ADJUSTED PURCHASE = OPENING STOCK + NET PURCHASES – CLOSING STOCK

THEREFORE; COGS = ADJUSTED PURCHASE + DIRECT EXPENSES.

OPERATING PROFIT = GROSS PROFIT - OPERATING EXP.

NET PROFIT = OPRATING PROFIT + NON OPERATING INCOME - NON OPERATING EXP.
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 ADJUSTMENTS IN MAKING OF FINANCIAL STATEMENTS
Income statement shows the result of a particular period. Only those items should be included
in it, which are related to such period. But sometimes items of other years are included in current
years a/c's or items of current year are omitted to be recorded, in such case following adjustment
are made to make Final Accounts Correct:-
Before closing books of a/cs After closing books of a/cs
1) Closing stock Closing stock a/c Dr. Closing stock a/c Dr.
To Purchase a/c To Trading a/c

Effects:- a. Trading a/c:- Credit side

b. Balance sheet:- Assets side

Note:- If closing stock is given inside the trial balance then closing stock is not credited to Trading a/c,
because it is already being subtracted from Purchase a/c. Therefore it is shown to the assets side of B/S
only.

2) Outstanding expenses : Expenses due during the current year, but not yet paid.
Closing entry:- At the end of current year
Expenses a/c Dr.
To Outstanding expenses a/c
Reverse Entry (Next year)
Outstanding expenses a/c Dr.
To Expenses a/c

Effects:- I Trading & P&L a/c :- Add

II. Balance sheet :- To be shown in liability side.

3) Prepaid expenses/Unexpired expenses Expenses of next year paid in advance during C.Y.
Closing Entry:- Prepaid Expenses a/c Dr.
To Expenses a/c
Reverse entry:- Expenses a/c Dr.
To Prepaid Expenses a/c

Effects:- a. Trading & P&L a/c :- Less

B. Balance sheet :- Asset side

4) Accrued/Outstanding income : Income earned in the current year but not yet received.
Closing Entry:- Accrued income a/c Dr.
To Income a/c

Reverse entry:- Income a/c Dr.

To Accrued income a/c
Effects:-
a. Trading & P&L a/c :- Add
b. Balance sheet :- Asset side

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5) Unearned/Advance Income : Income of next year, received in advance during current year.
Closing Entry:- Income a/c Dr.
To Unearned income a/c
Reverse entry:- Unearned income a/c Dr.
To Income a/c

Effects:-
a. Trading & P&L a/c :- Less
b. Balance sheet :- Liability side

6) Depreciation “ Reduction in the value of assets due to normal wear & tear”.
Closing Entry:- Depreciation a/c Dr.
To Assets a/c
Effects :-
a. Dr to P&L a/c
b. Less from Assets. NO REVERSE ENTRY REQUIRED

7) Exceptions of Purchase a/c:-

i) Drawings of Goods:- Drawings a/c Dr.
To Purchase a/c

Effects:- a. Less from Purchase b. Less from Capital.

ii) Loss by Fire, Loss by Theft, Charity, Free sample of goods:-

Loss by fire etc. a/c Dr.
To Purchase a/c
Effects:-
a. Less from Purchase b. Dr. to P&L a/c

ANY CLAIM RECD. FROM INS. CO. WILL BE SHOWN TO THE ASSETS SIDE.

8) Sale on Approval Basis This is usually entered as sales. If the approval is not yet received till the
date of final a/c, then sales should be cancelled and closing stock should be increased.

Closing entries:-
i) Sales a/c Dr. [Amount:- selling price]
To Customer/Debtors a/c

ii) Closing stock a/c Dr. [Amount:- Cost price]

To Trading a/c
Effects:-
a. Selling price should be subtracted from sales and debtors.
b. Cost price should be added in closing stock.

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 9) Provision for Bad debts
i) When Provision is to be maintained at some specific Rate/Amount

Amount of New Provision

= Sundry - Further x Rate
Debtors bad debts 100
(outside T.B.)

AMOUNT DR. TO P&L A/C = Total Bad Debts + New Provision - Old Provision
(IN + OUT) (inside Trial Bal.)

Note:- IF THE ABOVE AMOUNT IS NEGATIVE THEN IT WILL BE CREDITED TO P&L A/C.

10) Provision for Discount on debtors

Amount of new provision
= Sundry - Further - New Provision x Rate
Debtors bad debts for bad debt 100

Amount Dr. to P&L a/c = Discount Allowed + New Provision for Discount - Old Provision for Discount
PRESENTATION IN BALANCE SHEET
` Sundry Debtors xxx
Less: - Further Bad Debtors -
- Sale on Approval -
+ Mistakes +-
xxx
Less: New Provision for Bad Debts -
Less: New Provision for Discount - xxx

11) Outstanding managers commission:-

i) ON NET PROFIT BEFORE CHARGING SUCH COMMISSION
O/S commission = N.P. x Rate
100
ii) ON NET PROFIT AFTER CHARGING SUCH COMMISSION

O/S commission = N.P. x Rate

100 + Rate

Effects:- a. Dr. to P&L a/c b. Balance sheet:- Liability side

12) INTEREST ON CAPITAL : Interest paid by Business to the Owner

Closing Entry Interest on Capital a/c Dr.

To Capital a/c

EFFECTS ; i. Dr. to P & L a/c ii. Add to Capital a/c

13) INTEREST ON DRAWINGS : Interest paid by Owner to Business.

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 Closing entry : Drawings a/c Dr.
To Interest on Drawings a/c

EFFECTS ; i. Cr. to P & L a/c ii. Less from Capital a/c

ADJUSTMENTS EFFECTS ON EFFECT ON

TRADING AND P & L A/C BALANCE SHEET

1. Closing stock Trading a/c:- Credit side. Assets side

2. Outstanding expenses Added to the related exp. Shown in liability side.

3. Prepaid expenses Less from related exp. Shown in Assets side.

4. Accrued/Outstanding income Added to the related Income Shown in Assets side.

5. Unearned/Advance Income Less from related Income Shown in liability side.

6. Depreciation Dr. to P&L a/c. Less from related Assets.

7. Exceptions of Purchase a/c:-

i. Drawings of Goods:- Less from Purchase Less from Capital.

ii. Loss by Fire, Charity etc Less from Purchase & Dr. to P&L a/c.

8. Provision for Bad debts Total Bad debts + New Provision FBD & New Provision NEW
PROVISION = – old provision = Dr. to P&L a/c. Less from Debtors.

[DEBTORS – FBD ] X RATE/100

9. Provision for Dis. on debtors Total dis. allowed + New Provision FBD & New Provision (BOTH)

NEW PROVISION FOR DIS. = – old provision = Dr. to P&L a/c. Less from Debtors.

[DEBTORS – FBD - NEW PROV. FOR BAD DEBTS] X RATE/100

10. Outstanding managers’ commission:- Dr. to P&L a/c. Shown in liability side.

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11. INTEREST ON CAPITAL Dr. to P&L a/c. Added in Capital.

12. INTEREST ON DRAWINGS Cr. to P&L a/c. Less from Capital.

13. GOODS AND SERVICE TAX

1. When GST is given only to the Dr. side of Trial Balance It is Subtracted from Sales.
2. When GST is given only to the Cr. Side of Trial Balance It is Shown to the Liabilities side.
3. When GST is included in Sales in Trial Balance Less from Sales & Shown to Liab. Side.

4. When GST is given to Both sides in Trial Balance

If Cr. Amount is >Dr. Amt – Then the Difference is shown to the Liabilities side.
If Dr. Amount is >Cr. Amt – Then the Difference is shown to the Assets side.

i) If Provision is to be increased by a certain Rate/Amount:-

Amount Dr. to P&L a/c = New provision
Amount to less from Debtors = Opening balance+ New provision- Total Bad debts.

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 Provision for Bad Debts a/c

To Total Bad 2 By Balance b/d 1(Trial Balance)

debts 3 (Old Provision)
To Balance c/d By P&L (B/F) 4
(New Provision) xxx xxx
OR
Provision For Bad Debts a/c
To Total Bad debts 2 By balance b/d 1

To balance c/d 4(b/f) By P&L (New provision) 3

formula
xxx xxx