📑 Topics on this page (Jump to Topic):
📌 1. Manufacturing Account
- Prepared by manufacturers to find the cost of goods manufactured; its balance goes to the Trading A/c.
- Prime cost = direct materials consumed + direct wages + direct expenses.
- Raw materials consumed = opening raw materials + purchases − closing raw materials.
- Cost of goods manufactured = prime cost + factory overheads (factory rent, power, machine depreciation) + opening WIP − closing WIP − sale of scrap.
📌 2. Trading Account & Gross Profit
The trading account shows gross profit/loss. Debit: opening stock, net purchases, direct expenses (wages, carriage inward, freight, import duty, factory fuel). Credit: net sales, closing stock.
| Trading Account for the year ended 31 March | |||||
|---|---|---|---|---|---|
| Dr. Date | Particulars | ₹ | Cr. Date | Particulars | ₹ |
| To Opening Stock | 20,000 | By Sales | 1,50,000 | ||
| To Purchases | 80,000 | By Closing Stock | 30,000 | ||
| To Wages | 10,000 | ||||
| To Carriage Inward | 2,000 | ||||
| To Gross Profit c/d | 68,000 | ||||
| Total | 1,80,000 | Total | 1,80,000 | ||
- Gross profit = sales − cost of goods sold; here 1,50,000 − (20,000 + 80,000 + 10,000 + 2,000 − 30,000) = ₹68,000.
- Gross profit ratio = gross profit ÷ net sales × 100 = 68,000 ÷ 1,50,000 × 100 ≈ 45.3%.
📌 3. Profit & Loss Account
- Shows net profit/loss. Debit: indirect expenses — office and administration (salaries, office rent), selling and distribution (advertising, carriage outward, bad debts), financial (interest on loans), depreciation, losses. Credit: gross profit, other incomes (commission, interest, rent, discount received).
- Net profit is added to capital (sole trader); in a partnership it goes to the P&L Appropriation A/c.
- Carriage inward → Trading A/c; carriage outward → P&L A/c.
📌 4. Balance Sheet
- A balance sheet is a statement of financial position as on a date — not an account. Left: capital and liabilities; right: assets (traditional format).
- Marshalling: order of liquidity (most liquid first — cash, bank, debtors…) or order of permanence (most permanent first — goodwill, land and building…; companies).
- Company balance sheets follow the vertical format of Schedule III of the Companies Act 2013.
| Adjustment | In P&L / Trading A/c | In balance sheet |
|---|---|---|
| Closing stock | Credit of Trading A/c | Current asset |
| Outstanding expenses | Add to the expense | Current liability |
| Prepaid expenses | Deduct from the expense | Current asset |
| Accrued income | Add to the income | Current asset |
| Income received in advance | Deduct from the income | Current liability |
| Depreciation | Debit side | Deduct from asset |
| Bad debts and provision for doubtful debts | Debit side | Deduct from debtors |
| Interest on capital | Debit side (expense) | Add to capital |
| Interest on drawings | Credit side (income) | Deduct from capital |
⚠️ Exam Traps:
- Every adjustment appears in two places; an item already in the trial balance appears in only one.
- Goods taken by the owner: deduct from purchases and add to drawings.
- A balance sheet is "as at" a date, not "for the year ended".
💡 Memory Tip: Direct expenses (linked to production/purchase) → Trading A/c; indirect (office, selling, finance) → P&L A/c.
📌 5. Worked Examples
Full example: final accounts with adjustments
Trial balance on 31 March 2026 — Dr.: opening stock 20,000; purchases 1,20,000; wages 10,000; carriage inward 2,000; salaries 18,000; rent 6,000; insurance 4,000; bad debts 1,000; debtors 40,000; cash 12,000; machinery 60,000; drawings 9,000; sales returns 2,000 (total ₹3,04,000). Cr.: capital 1,00,000; sales 1,80,000; creditors 21,000; purchases returns 3,000 (total ₹3,04,000).
Adjustments: (1) closing stock ₹30,000; (2) outstanding wages ₹2,000; (3) outstanding rent ₹1,000; (4) prepaid insurance ₹1,000; (5) depreciation on machinery 10%; (6) provision for doubtful debts 5% on debtors.
| Trading Account (year ended 31 March 2026) | |||
|---|---|---|---|
| Dr. Particulars | ₹ | Cr. Particulars | ₹ |
| Opening stock | 20,000 | Sales 1,80,000 − returns 2,000 | 1,78,000 |
| Purchases 1,20,000 − returns 3,000 | 1,17,000 | Closing stock | 30,000 |
| Wages 10,000 + outstanding 2,000 | 12,000 | Total | 2,08,000 |
| Carriage inward | 2,000 | ||
| Gross profit (to P&L A/c) | 57,000 | ||
| Total | 2,08,000 | ||
| Profit & Loss Account | |||
|---|---|---|---|
| Dr. Particulars | ₹ | Cr. Particulars | ₹ |
| Salaries | 18,000 | Gross profit | 57,000 |
| Rent 6,000 + outstanding 1,000 | 7,000 | Total | 57,000 |
| Insurance 4,000 − prepaid 1,000 | 3,000 | ||
| Bad debts | 1,000 | ||
| Provision for doubtful debts (5% × 40,000) | 2,000 | ||
| Depreciation on machinery (10%) | 6,000 | ||
| Net profit (to capital) | 20,000 | ||
| Total | 57,000 | ||
| Balance Sheet as at 31 March 2026 (Liabilities | Assets) | |||
|---|---|---|---|
| Dr. Particulars | ₹ | Cr. Particulars | ₹ |
| Capital 1,00,000 + profit 20,000 − drawings 9,000 | 1,11,000 | Machinery 60,000 − depreciation 6,000 | 54,000 |
| Creditors | 21,000 | Closing stock | 30,000 |
| Outstanding wages | 2,000 | Debtors 40,000 − provision 2,000 | 38,000 |
| Outstanding rent | 1,000 | Prepaid insurance | 1,000 |
| Total | 1,35,000 | Cash | 12,000 |
| Total | 1,35,000 | ||
Remember: every adjustment appears twice — once in the trading/P&L account and once in the balance sheet. The balance sheet agreeing (₹1,35,000 = ₹1,35,000) checks the solution.
📌 6. Practice MCQs
📝 Practice MCQs (prepared by SF Prep — not PYQs)
Q1. The trading account shows the: Practice
Correct answer: (C)
Net profit comes from the P&L account.
Net profit comes from the P&L account.
Q2. Carriage inward is shown in the: Practice
Correct answer: (C)
It is a direct expense.
It is a direct expense.
Q3. Carriage outward is a: Practice
Correct answer: (D)
The cost of delivering goods to customers.
The cost of delivering goods to customers.
Q4. Opening stock ₹20,000, purchases ₹80,000, wages ₹10,000, carriage inward ₹2,000, sales ₹1,50,000, closing stock ₹30,000. Gross profit is: Practice
Correct answer: (A)
1,80,000 − 1,12,000 = 68,000.
1,80,000 − 1,12,000 = 68,000.
Q5. Prime cost equals: Practice
Correct answer: (B)
The first sub-total in the manufacturing account.
The first sub-total in the manufacturing account.
Q6. The balance of the manufacturing account is transferred to the: Practice
Correct answer: (A)
The cost of goods manufactured goes to the debit of the Trading A/c.
The cost of goods manufactured goes to the debit of the Trading A/c.
Q7. A balance sheet is a: Practice
Correct answer: (C)
It is prepared "as at" a date.
It is prepared "as at" a date.
Q8. Arranging assets from most permanent to most liquid is the: Practice
Correct answer: (D)
Companies usually follow this order.
Companies usually follow this order.
Q9. Outstanding salary is shown in the balance sheet as a: Practice
Correct answer: (B)
It is an amount payable.
It is an amount payable.
Q10. Effect of prepaid insurance in the P&L account: Practice
Correct answer: (B)
The part for next year is not this year's expense.
The part for next year is not this year's expense.
Q11. Rent received in advance appears in the balance sheet as a: Practice
Correct answer: (C)
The service is still to be given.
The service is still to be given.
Q12. The format of a company balance sheet is given in: Practice
Correct answer: (D)
A vertical format.
A vertical format.
Q13. Office rent is shown in the: Practice
Correct answer: (A)
An indirect (administrative) expense.
An indirect (administrative) expense.
Q14. For a manufacturer, factory rent goes to the: Practice
Correct answer: (D)
It is a factory overhead.
It is a factory overhead.
Q15. Raw materials consumed equals: Practice
Correct answer: (A)
The basic formula.
The basic formula.
Q16. Interest on capital is: Practice
Correct answer: (B)
It is an expense for the business and income for the owner.
It is an expense for the business and income for the owner.
Q17. Interest on drawings is: Practice
Correct answer: (C)
It is income for the business.
It is income for the business.
Q18. With gross profit ₹68,000 and net sales ₹1,50,000, the gross profit ratio is about: Practice
Correct answer: (C)
68,000 ÷ 1,50,000 × 100 ≈ 45.3.
68,000 ÷ 1,50,000 × 100 ≈ 45.3.
Q19. In the balance sheet, depreciation is: Practice
Correct answer: (D)
The asset is shown net.
The asset is shown net.
Q20. Interest paid on a loan is a: Practice
Correct answer: (A)
An indirect financial expense.
An indirect financial expense.