UNIT 6 FINAL ACCOUNTS: DETERMINATION OF BUSINESS INCOME

& FINANCIAL PORTION

Structure
6.0 Introduction
6.1 Unit Objectives
6.2 Trading and Profit & Loss Account
6.3 Manufacturing Account
6.4 Balance Sheet
6.5 Adjustment Entries
6.6 Worksheet
6.7 Summary
6.8 Key Terms
6.9 Answers to ‘Check Your Progress’
6.10 Questions and Exercises
6.11 Practical Problems
6.12 Further Reading

6.0 INTRODUCTION
Accuracy of the books of accounts is determined by means of preparing a Trial Balance. Having determined the accuracy of the
books of accounts 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, (ii) Where does he stand now? In other words, what is his
financial position?
The determination of the Profit or Loss is done by preparing a Trading and Profit and Loss Account (or an Income
Statement). The financial position is judged by means of preparing a Balance Sheet of the business. The two statements together,
i.e., Income Statement and the Balance Sheet are termed as Final Accounts. As the term indicates, Final Accounts means accounts
which are prepared at the final stage to give the financial position of the business.
In the present unit we are dealing with the basic principles concerning financial reporting particularly with reference to a
non-corporate entity i.e. a sole proprietary or a partnership firm.

6.1 UNIT OBJECTIVES

After going through this unit, you will be able to:
z Identify the stages of the accounting cycle
z Identify the objectives of preparing final accounts
z List the various statements/accounts which comprise final accounts of business entity
z Understand the treatment of different items in preparation of the final accounts
z Appreciate the meaning and importance of different adjustment entries
z Pass appropriate adjustment entries
z Appreciate the role of work sheet in preparing final accounts
z Prepare Trading, Profit & Loss Account and Balance Sheet

6.2 TRADING AND PROFIT & LOSS ACCOUNT

The Trading and Profit and Loss Account is a final summary of such accounts which affect the profit or loss position of the
business. In other words, the account contains the items of Incomes and Expenses relating to a particular period. The account is
prepared in two parts (i) Trading Account, and (ii) Profit and Loss Account.

6.2.1 Trading Account

Trading Account gives the overall result of trading, i.e., purchasing and selling of goods. In other words, it explains whether
purchasing of goods and selling them has proved to be profitable for the business or not. It takes into account on the one hand
the cost of goods sold and on the other the value for which they have been sold. In case the sales value is higher than the cost
of goods sold, there will be a profit, while in a reverse case, there will be a loss. The profit disclosed by the Trading Account is
termed as Gross Profit, similarly the loss disclosed by the Trading Account is termed as Gross Loss.

Final Accounts: Determination of Business Income & Financial Portion 75

 This will be clear with the help of the following illustration:
Illustration 6.1. Following figures have been taken from the Trial Balance of a trader:
Rs
Purchases 30,000
Purchases Returns 5,000
Sales 40,000
Sales Returns 5,000
Calculate the amount of profit or loss made by the trader.
Solution:
The profit or loss made by the trader can be found out by comparing the cost of goods sold with sales value. This has been
done as follows:
Particulars Amount Rs Amount Rs
Sales 40,000
Less Sales Returns 5,000 35,000
Purchases 30,000
Less Purchases Returns 5,000 25,000
Gross Profit 10,000

Opening and Closing Stocks

In the Illustration 6.1, we have presumed that all goods purchased have been sold away by the trader. However, it does not
normally happen. At the end of the accounting year, a trader may be left with certain unsold goods. Such stock of goods with a
trader unsold at the end of the accounting period is termed as Closing Stock. Such a stock will become the opening Stock for the
next period. For example, if a trader has with himself goods amounting to Rs 5,000 unsold at the end of the year 1998, this stock of
Rs 5,000 will be termed as his Closing Stock. For the year 1999, this stock of Rs 5,000 will be termed as his Opening Stock. While
calculating the amount of profit or loss on account of trading, a trader will have to take such Opening and Closing Stocks into
consideration. This will be clear with the help of the following illustration:
Illustration 6.2. Taking the figures given in Illustration 6.1, calculate the amount of Gross Profit if stock of Rs 5,000 is left at
the end of the accounting period.
Solution:
In case all goods purchased have not been sold, goods of Rs 5,000 are still left with the trader. Stock of such goods is termed
as Closing Stock. Thus, cost of goods sold will be calculated as follows:
COST OF GOODS SOLD = NET PURCHASES – CLOSING STOCK
= Rs 25,000 – 5,000
= Rs 20,000
The Gross Profit now can be computed as follows:
Gross Profit = Net Sales – Cost of goods sold
= Rs 35,000 – 20,000
= Rs 15,000
Illustration 6.3. From the following date calculate the profit made by a trader in 1988:
Rs
Stock of goods on 1.1.1998 10,000
Purchases during the year 40,000
Purchases Returns during the year 3,000
Sales during the year 60,000
Sales returns during the year 10,000
Stock of goods on 31.12.1998 15,000
Solution:
Particulars Amount Rs Amount Rs
Sales 60,000
Less: Sales Returns 10,000 50,000
Cost of goods sold:
Opening Stock 10,000
Add: Net Purchases (Rs 40,000–5,000) 35,000
45,000
Less: Closing Stock 15,000 30,000
Gross Profit 20,000

76 Final Accounts: Determination of Business Income & Financial Portion

Expenses on Purchases etc.
In the Illustrations given above, we have presumed that the trader has not incurred any expenses for purchase of goods and
bringing them to his shop for sale. However, a trader has to incur various types of expenses for purchasing of goods as well as for
bringing them to his shop for sale. Such expenses may include brokerage or commission paid to agents for purchase of goods,
cartage or carriage charges for bringing the goods to the trader’s shop, wages paid to coolies for transportation of goods etc. All
such expenses increase the cost of the goods sold and hence they have also to be included in the cost of purchasing the goods.
In other words, cost of goods sold will be calculated as follows:

COST OF GOODS SOLD = OP. STOCK + NET PURCHASES + EXPS ON

PURCHASING OF GOODS – CL. STOCK

Cost of goods sold calculated as above will then be compared with the net sales to find out the amount of profit or loss made
by the business. This will be clear with the following illustrations:
Illustration 6.4. Calculate the amount of the profit made by the trader with the help of data given in Illustration 6.3, if the
wages, carriage charges etc. incurred for bringing the goods to the trader’s shop amount to Rs 5,000.
Particulars Amount Rs
Net Sales 50,000
Less: Cost of goods sold (30,000 + 5000) 35,000
Gross Profit 15,000

The term ‘merchandise’ is also used for the term ‘goods’.

Thus:

COST OF GOODS = COST OF MERCHANDISE

COST OF GOODS PURCHASED = COST OF MERCHANDISE PURCHASED
COST OF GOODS SOLD = COST OF MERCHANDISE SOLD

Illustration 6.5. Find out the cost of merchandise purchased, cost of merchandise sold, cost of merchandise unsold and
Gross Profit from the following transactions:
Rs
Purchases (3,000 articles) 25,000
Freight 1,000
Local Taxes 1,000
Salaries 2,500
Shop Rent 500
Godown Rent 500
Electrical Charges 600
Municipal Taxes 200
Stationery 250
Furniture (estimated life 5 years) 12,000
Sales (2,700 articles) 32,000
Solution:
Particulars Amount Rs
Cost of Merchandise purchased
This consists of:
Purchases 25,000
Freight 1,000
Local Taxes 1,000
27,000
Cost of Merchandise sold
Cost of 3,000 units of merchandise purchased 27,000
Cost of one unit of merchandise 9
Cost of 2,700 units of merchandise sold 24,300
Gross Profit
Sales of 2,700 units of merchandise 32,000
Less: Cost of merchandise sold 24,300
7,700
Cost of Merchandise unsold
300 units @ Rs 9 per unit 2,700

Final Accounts: Determination of Business Income & Financial Portion 77

 All other expenses including annual depreciation of furniture (amounting in all to Rs 6,950) will be considered for computing
the Net Profit of the business. The concept of Net Profit has been explained later in the chapter.
Equation for Preparing Trading Account
On the basis of the illustrations given in the preceding pages, the following equation can be derived for preparing the
Trading Account:
Gross Profit = Sales – Cost of goods sold
Cost of goods sold = Opening Stock + Purchases
+ Direct Expenses – Closing Stock
Therefore, Gross Profit = Sales – (Opening Stock
+Purchases + Direct Expenses – Closing Stock)
or Gross Profit = (Sales + Closing Stock ) – (Opening
Stock + Purchases + Direct Expense)
The term “Direct Expenses” include those expenses which have been incurred in purchasing the goods, bringing them to
the business premises and making them fit for sale. Examples of such expenses are carriage charges, octroi, import duty, expenses
for seasoning the goods, etc.
The Trading Account can be prepared in the following form on the basis of equation given above.
TRADING ACCOUNT
Dr. for the period ending ... Cr.
Particulars Amount Rs Particulars Amount Rs
To Opening Stock ...... By Sales ......
To Purchases Less: Returns ......
Less: Returns ...... By Closing Stock
To Direct Expenses ...... ......

Illustration 6.6. Prepare the Trading Account of Mr. Ramesh for the year ending 31st December, 1998 from the date as
follows:
Rs Rs
Purchases 10,000 Wages 4,000
Purchases Returns 2,000 Carriage Charges 2,000
Sales 20,000 Stock on 1.1.1998 4,000
Sales Returns 5,000 Stock on 31.12.1998 6,000
TRADING ACCOUNT
for the year ending 31.12.1998
Particulars Rs Particulars Rs
To Opening Stock 4,000 By Sales 20,000
To Purchases 10,000 Less: Sales
Less: Returns 2,000 8,000 Returns 5,000 15,000
To Wages 4,000 By Closing Stock
To Carriage Charges 2,000 6,000
To Gross Profit 3,000
21,000 21,000

Important Points Regarding Trading Account

1. Stock. The term ‘Stock’ includes goods lying unsold on a particular date. The Stock may be of two types:
(i) Opening Stock
(ii) Closing Stock
The term ‘Opening Stock’ means goods lying unsold with the businessman at the beginning of the accounting year.
This is shown on the debit side of the Trading Account.
The term ‘Closing Stock’ includes goods lying unsold with the businessman at the end of the accounting year. It should be
noted that stock at the end of the accounting year is taken after the books of accounts have been closed. The following journal
entry is passed in the Journal Proper to record the amount of closing stock:
Closing Stock Account Dr.
To Trading Account
The amount of closing stock is shown on the credit side of the Trading Account and as an asset in the Balance Sheet. This
has been explained later. The Closing Stock at the end of the accounting period will become the Opening Stock for the next year.
The Opening Stock is, therefore, shown on the debit side of the Trial Balance.

78 Final Accounts: Determination of Business Income & Financial Portion

 Valuation of closing stock. The closing stock is valued on the basis of “cost or market price whichever is less” principle.
It is, therefore, very necessary that the cost of the goods lying unsold should be carefully determined. The market value of such
goods will also be found out on the Balance Sheet date. The closing stock will be valued at the lower of the two values. For
example, if the goods lying unsold at the end of the accounting period is Rs 11,000, while their market price on the Balance Sheet
date amounts to Rs 10,000, the closing stock will be valued at Rs 10,000. This valuation is done because of the accounting
convention of conservatism, according to which expected losses are to be taken into account but not expected profits.
2. Purchases. The term “Purchases” includes both cash and credit purchases of goods. The term “goods”, as already
explained in an earlier chapter, means items purchased for resale. Assets purchased for permanent use in the business such as
purchase of plant, furniture, etc., are not included in the purchase of goods. Similarly, purchase of articles such as stationery
meant for using in the business will also not be included in the item of purchases. In case, a proprietor has himself used certain
goods for his personal purposes, the value of such goods at cost will be deducted from the purchases and included in the
drawings of the proprietor. The journal entry in such a case would be as follows:
Drawings Account Dr.
To Purchases Account
Similarly, in case certain goods are given by way of free samples, etc., the value of such goods should be charged to the
advertisement account and deducted from purchases. The journal entry in such a case would be as follows:
Advertisement Account Dr.
To Purchases Account
The amount of purchases will be the net purchases made by the proprietor. The term ‘net purchases’ means total purchases
of goods made by the businessman less the goods that he has returned to the suppliers. In other words, purchases will be taken
to the Trading Account after deducting purchase returns from the gross purchases made during the accounting period.
3. Sales. The term ‘Sales’ includes both cash and credit sales. Gross sales will be shown in the inner column of the Trading
Account out of which “sales returns” will be deducted. The net sales will then be shown in the outer column of the Trading
Account. Proper care should be taken in recording sale of those goods which have been sold at the end of the financial year but
have not yet been delivered. The sales value of such goods should be included in the sales, but care should be taken that they
are not included in the closing stock at the end of the accounting period.
Sales of assets like plant and machinery, land and building or such other assets which were purchased for using in the
business, and not for sale, should not be included in the figure of ‘sales’ to be taken to the Trading Account.
4. Wages. The amount of wages is taken as a direct expense and, therefore, is debited to the Trading Account. Difficulty
arises in those cases when the Trial Balance includes a single amount for “wages and salaries”. In such a case, the amount is taken
to the Trading Account. However, if the Trial Balance shows “salaries and wages” the amount is taken to the Profit and Loss
Account. In actual practice such difficulties do not arise because the businessman knows for which purpose he has incurred the
expenditure by way of wages or salaries. However, in an examination problem, it will be useful for the students to follow the
principle given above i.e., “wages and salaries” to be charged to Trading Account while “wages and salaries” to be charged to the
Profit and Loss Account. Wages paid for purchase of an asset for long-term use in the business i.e., wages paid for plant and
machinery or wages paid for construction of a building should not be charged to the Wages Account. They should be charged
to the concerned Asset Account.
5. Customs and import duty. In case the goods have been imported from outside the country, customs and import duty may
have to be paid. The amount of such duty should be charged to the Trading Account.
6. Freight, carriage and cartage. Freight, Carriage and Cartage are taken as direct expenses incurred on purchasing of the
goods. They are therefore, taken to the debit side of the Trading Account. The terms “Freight In”, “Cartage In” and “Carriage In”
have also the same meaning. However, “Cartage Out”, “Freight Out” and “Carriage Out” are taken to be the expenses incurred on
selling the goods. They are, therefore, charged to the Profit and Loss Account. The term “Inward” is also used for the term “IN”.
Similarly, the term “Outward” is also used for the term “Out”. In other words, “Carriage” or “Carriage Inward” or “Carriage Inward’’
or ‘‘Carriage In’’ are used as synonymous terms. Similarly ‘‘Carriage Out’’ or ‘‘Carriage Outward’’ are also synonymous terms. The
same is true for other expenses like Freight or Cartage.
7. Royalty. Royalty is the amount paid to the owner for using his rights. For example, the royalty is paid by a “Lessee” of a
coalmine to its owner for taking out the coal from the coalmine. Similarly, royalty is paid to the owner of a patent for using his right.
It is generally taken as a direct expense and, therefore, is charged to the Trading Account. However, where royalty is based on
sales, for example in case of the book publishing trade, it may be charged to the Profit and Loss Account.
8. Gas, electricity, water, fuel, etc. All these expenses are direct expenses and, therefore, they are charged to the Trading
Account.

Final Accounts: Determination of Business Income & Financial Portion 79

 9. Packing materials. Packing Materials used for packing the goods purchased for bringing them to the Shop or convert
them into a saleable state are direct expenses and, therefore, they are charged to the Trading Account. However, packing
expenses incurred for making the product look attractive or packing expenses incurred after the product has been sold away are
charged to the Profit and Loss Account.

Closing Entries
Closing Entries are entries passed at the end of the accounting year to close different accounts. These entries are passed to close
the accounts relating to incomes, expenses, gains and losses. In other words, these entries are passed to close the different
accounts which pertain to Trading and Profit and Loss Account. The accounts relating to assets and liabilities are not closed but
they are carried forward to the next year. Hence, no closing entries are to be passed regarding those accounts which relate to the
Balance Sheet.
The principle of passing closing entry is very simple. In case an account shows a debit balance, it has to be credited in order
to close it. For example, if the Purchases Account is to be closed, the Purchases Account will have to be credited so that it may be
closed because it has a debit balance. The Trading Account will have to be debited.
The closing entries are passed in the Journal Proper. The difference closing entries to be passed by the accountant for
preparing a Trading Account are being explained below:
(i) Trading Account Dr.
To Stock Account (Opening)
To Purchases Account
To Sales Returns Account
To Carriage Account
To Customs Duty Account
(ii) Sales Account Dr.
Purchases Returns Account Dr.
Stock Account (Closing) Dr.
To Trading Account
In case the total of the credit side of the Trading Account is greater than the total of the debit side of the Trading Account,
the difference is known as Gross Profit. In a reverse case it will be a Gross Loss. Gross Profit or Gross Loss disclosed by the
Trading Account is transferred to the Profit and Loss Account.

Importance of the Trading Account

Trading Account provides the following information to a businessman regarding his business:
1. Gross Profit disclosed by the Trading Account tells him the upper limit within which he should keep the operating
expenses of the business besides saving something for himself. The cost of purchasing and the price at which he can
sell the goods are governed largely by market factors over which he has no control. He can control only his operating
expenses. For example, if the cost of purchasing an article is Rs 10 and it can be sold in the market at Rs 15 per unit, the
gross margin available on each article is Rs 5. In case a businessman proposes to sell 1,000 units of that article in a year,
his gross profit or gross margin will be Rs 5,000. His other expenses should therefore be less than Rs 5,000 so that he
can also save something for himself.
2. He can calculate his Gross Profit Ratio1 and compare his performance year after year. A fall in the Gross Profit Ratio
means increase in the cost of purchasing the goods or decrease in the selling price of the goods or both. In order to
maintain at least same figure of gross profit in absolute terms, he will have to push up the sales or make all our efforts
to obtain goods at cheaper prices. Thus, he can prevent at least fall in the figure of his gross profit if cannot bring any
increase in it.
3. Comparison of stock figures of one period from another will help him in preventing unnecessary lock-up of funds in
inventories.
4. In case of new products, the businessman can easily fix up the selling price of the products by adding to the cost of
purchases, the percentage gross profit that he would like to maintain. For example, if the trader has been so far
maintaining a rate of gross profit of 20% on sales and he introduces a new product in the market having a cost of Rs 100,
he should fix the selling price at Rs 125 in order to maintain the same rate of gross profit (i.e., 20% on sales).

Gross Profit
1 ×100
Sales

80 Final Accounts: Determination of Business Income & Financial Portion

 CHECK YOUR PROGRESS
1. State whether each of the following statements is True or False:
(a) The ‘Current Liabilities’ is used to denote those liabilities which are payable after a year.
(b) The term ‘Current Assets’ and ‘Liquid Assets’ have synonymous meanings.
(c) All Intangible Assets are fictitious assets.
(d) Creating reserve for discount on creditors is not strictly according to the principle of conservatism.
(e) Stock at the end, if appears in the Trial Balance, is taken only to the Balance Sheet.
(f) Goods taken out by the proprietor from the business for his personal use are credited to Sales Account.
(g) ‘Salary paid in advance’ is not an expense because it neither reduces assets nor increases liabilities.
(h) The term “Accrued Income” and “Outstanding Income” have synonymous meanings.
(i) Premium paid on the life policy of the proprietor is debited to the Profit and Loss Account.

6.2.2 Profit and Loss Account

The Trading Account simply tells about the gross profit or loss made by a businessman on purchasing and selling of goods. It
does not take into account the other operating expenses incurred by him during the course of running the business. For example,
he has to maintain an office for getting orders and executing them, taking policy decisions and implementing them. All such
expenses are charged to the Profit and Loss Account. Besides this, a businessman may have other sources of income. For
example, he may receive rent from some of his business properties. He may have invested surplus funds of the business in some
securities. He might be getting interest or dividends from such investments. In order to ascertain the true profit or loss which the
business has made during a particular period, it is necessary that all such expenses and incomes should be considered. Profit and
Loss Account considers all such expenses and incomes and gives the net profit made or loss suffered by a business during a
particular period. It is generally prepared in the following form:

PROFIT AND LOSS ACCOUNT

Dr. for the year ending..... Cr.
Particulars Rs Particulars Rs
To Gross Loss b/d ....... By Gross Profit b/d ........
To Salaries ........ By Discount received ........
To Rent ........ By Net Loss transferred
To Commission ........ to Capital A/c ........
To Advertisements ........
To Bad Debts ........
To Discount . ........
To Net Profit Transferred
to Capital Account ........
........ ........

Important Points Regarding Profit and Loss Account

1. Gross Profit or Gross Loss. The figure of gross profit or gross loss is brought down from the Trading Account. Of course,
there will be only one figure, i.e., either of gross profit or gross loss.
2. Salaries. Salaries payable to the employees for the services rendered by them in running the business being of indirect
nature are charged to the Profit and Loss Account. In case of a partnership firm, salaries may be allowed to the partners. Such salaries
will also be charged to the Profit and Loss Account.
3. Salaries less tax. In case of employees earning salaries beyond a certain limit, the employer has to deduct at source income
tax from the salaries of such employees. In such a case, the amount of gross salaries should be charged to the Profit and Loss Account,
while the tax deducted by the employer will be shown as a liability in the Balance Sheet of the business till it is deposited with the
Tax Authorities. For example, if salaries paid are Rs 2,400 after deducting income tax of Rs 600, the amount of salaries to be charged
to the Profit and Loss Account will be a sum of Rs 3,000. The amount of tax-deducted at source by the employer, i.e., Rs 600 will
be shown as a liability in the Balance Sheet.

Final Accounts: Determination of Business Income & Financial Portion 81

 4. Salaries after deducting provident fund contribution etc. In order to provide for old age of the employees, employers
contribute a certain percentage of salaries of the employees to the Provident Fund. The employee is also required generally to
contribute an equivalent amount. The share of the employee’s contribution to Provident Fund is deducted from the salary due to
him and the net amount is paid to him. The amount of salaries to be charged to the Profit and Loss Account will be the gross salary
payable to the employee, i.e., including the employee's contribution to the Provident Fund. The contribution by the employer will
also be charged as an expense to the Profit and Loss Account. Both employer’s and employee’s contributions to the Provident Fund
will also be shown as liability in the Balance Sheet under the heading ‘‘Employees Provident Fund’’.
5. Interest. Interest on loans whether short-term or long-term is an expense of an indirect nature and, therefore, is charged
to the Profit and Loss Account. However, interest on loans advanced by a firm to third-parties is an item of income and, therefore,
will be credited to the Profit and Loss Account.
6. Commission. Commission may be both an item of income as well as an item of expense. Commission on business brought
by agents is an item of expense while commission earned by the business for giving business to others is an item of income.
Commission to agents is, therefore, debited to the Profit and Loss Account while commission received is credited to the Profit and
Loss Account.
7. Trade expenses. Trade expenses are expenses of a miscellaneous nature. Theyare of small amount and varied in nature and,
therefore, it is not considered worthwhile to open separate accounts for each of such types of expenses. The term ‘‘Sundry Expenses’’,
‘‘Miscellaneous Expenses’’ or ‘‘Petty Expenses’’ have also the same meaning. They are charged to the Profit and Loss Account.
8. Printing and stationery. This item of expense includes expenses on printing of bills, invoices, registers, files, letter heads,
ink, pencil, paper and other items of stationery, etc. It is of an indirect nature and, therefore, charged to the Profit and Loss Account.
9. Advertisements. Advertisement expenses are incurred for attracting the customers to the shop and, therefore, they are
taken as selling expenses. They are debited to the Profit and Loss Account. However, advertisement expenses incurred for
purchasing of goods should be charged to the Trading Account, while an advertisement expenses incurred for purchase of a capital
asset (e.g., cost of insertion in a newspaper for purchase of car) should be taken as a capital expenditure and debited to the concerned
asset account. Similarly advertisement expenditure incurred for sale of a capital asset should be deducted out of the sale proceeds
of the asset concerned.
10. Bad debts. Bad Debts denotes, the amount lost from debtors to whom the goods were sold on credit. It is a loss and
therefore, should be debited to the Profit and Loss Account.
11. Depreciation. Depreciation denotes decrease in the value of an asset due to wear and tear, lapse of time, obsolescence,
exhaustion and accident. For example, a motor car purchased gets depreciated on account of its constant use. A property purchased
on lease for Rs 12,000 for 12 years will depreciate at the rate of Rs 1,000 per year. On account of new inventions, old assets become
obsolete and they have to be replaced. Mines etc. get exhausted after the minerals are completely taken out of them. An asset may
meet an accident and may lose its value. It is necessary that depreciation on account of all these factors is charged to the Profit
and Loss Account to ascertain the true profit or loss made by the business.
12. Discount. It is a reduction from a list price, quoted price or invoice price. Discount may be of three types:
(a) Trade Discount. It is a reduction from the list price. It is a reduction granted by a supplier from the list price of goods
or services.
(b) Quantity Discount. It is similar to trade discount with the difference that it is given in case of purchasing of goods in
bulk quantity.
(c) Cash Discount. It is reduction granted by a supplier from the invoice price in consideration of immediate payment or
payment within a stipulated period.
Thus, quantity discount is similar to trade discount. However, cash discount is different from trade discount.
Distinction between trade discount and cash discount can be put as follows:
(a) Meaning. A trade discount is a reduction granted by the supplier from the list price on total amount of sales, while a cash
discount is a reduction for prompt payment or payment within a stipulated time period.
(b) Objective. The objective of trade discount is to promote sales, while the objective of cash discount is quick collection
of payment.
(c) Time. Trade discount is allowed at the time of purchasing of goods, while cash discount is allowed at the time of making
payment.
(d) Disclosure. Trade discount is shown as reduction in the invoice itself, while cash discount is not shown in the invoice.
Moreover, trade discount account is not opened in the ledger, while cash discount account is opened in the ledger.
(e) Variation. Trade discount may vary with the quantity of goods purchased, while cash discount may vary with time period
within which payment is received.

Accounting (Closing) Entries for preparing Profit and Loss Account

Following journal entries will be passed in the Journal Proper for preparing the Profit and Loss Account:
(i) For transfer of items of expenses, losses, etc., appearing on the debit side of the Trial Balance

82 Final Accounts: Determination of Business Income & Financial Portion

 Profit and Loss Account Dr.
To Salaries
To Rent
To Commission
To Advertisements
To Bad Debts
To Discount
To Printing and Stationery
(ii) For transfer of items of incomes, gains, etc., appearing on the credit side of the Trial Balance
Interest Account Dr.
Dividends Account Dr.
Discount Account Dr.
To Profit and Loss Account
(iii) For transfer of net profit or net loss:
In case the total of the credit side of the Profit and Loss Account is greater than the debit side of the Profit and Loss Account,
the difference is termed as Net Profit. In a reverse case, it will be termed as Net Loss. The amount of Net Profit or Net Loss shown
by the Profit and Loss Account will be transferred to Capital Account in case of sole proprietary firm. In case of a partnership firm,
the amount of net profit or net loss will be transferred to the Partners’ Capital Accounts in the agreed ratio. In the absence of any
agreement, the partners will share profits and losses equally.
For transfer of Profit
Profit and Loss Account Dr.
To Capital Account(s)
For transfer of Net Loss
Capital Account(s) Dr.
To Profit and Loss Account
Illustration 6.7. From the following balances, taken from the Trial Balance of Shri Suresh, prepare a Trading and Profit and
Loss Account for the year ending 31st Dec., 1999:
Particulars Dr. Cr.
Rs Rs
Stock on 1.1.1998 2,000
Purchases and Sales 20,000 30,000
Returns 2,000 1,000
Carriage 1,000
Cartage 1,000
Rent 1,000
Interest received 2,000
Salaries 2,000
General Expenses 1,000
Discount 500
Insurance 500

The Closing Stock on 31st December, 1998 is Rs 5,000.

Solution:
TRADING AND PROFIT AND LOSS ACCOUNT
Dr. for the year ending 31st December, 1998 Cr.
Particulars Rs Particulars Rs
To Opening Stock 2,000 By Sales 30,000
To Purchases 20,000 Less: Returns 2,000 28,000
Less: Returns 1,000 19,000 By Closing Stock 5,000
To Carriage 1,000
To Cartage 1,000
To Gross Profit c/d 10,000
33,000 33,000
To Rent 1,000 By Gross Profit b/d 10,000
To Salaries 2,000 By Interest 2,000
To General Expenses 1,000 By Discount 500
To Discount 1,000
To Insurance 500
To Net Profit taken to
Capital Account 8,000
12,500 12,500

Final Accounts: Determination of Business Income & Financial Portion 83

Important Points Regarding Balance Sheet
1. Liabilities. The term ‘‘Liabilities’’ denotes claims against the assets of a firm whether those of owners of the business or
of the creditors. As a matter of fact, the term “Equity” is more appropriate than the term “Liabilities”. This is supported by the definition
given by American Accounting Association. According to this Association, Liabilities are “claims of the creditors against the
enterprise arising out of past activities that area to be satisfied by the disbursement or utilisation of corporate resources”. While
the term “Equity” stands both for owners equity (owners claims) as well as the outsiders equity (outsiders claims). However, for
the sake of convenience, we are using the term “Liabilities” for purposes of this book.
Liabilities can be classified into two categories:
(i) Current Liabilities, and (ii) Long Term of Fixed Liabilities.
Current liabilities. The term “Current Liabilities” is used for such liabilities which are payable within a year from the date
of the Balance Sheet either out of existing current assets or by creation of new current liabilities. The broad categories of current
liabilities are as follows:
(a) Accounts Payable, i.e., bills payable and trade creditors.
(b) Outstanding Expenses, i.e., expenses for which services have been received by the business but for which payments
have not been made.
(c) Bank Overdraft.
(d) Short-term Loans, i.e., loans from Bank which are payable within one year from the date of the Balance Sheet.
(e) Advance payments received by the business for the services to be rendered or goods to be supplied in future.
Fixed liabilities. All liabilities other than Current Liabilities come within this category. In other words, these are liabilities which
do not become due for payment in one year and which do not require current assets for their payment.
2. Assets. The term ‘‘Assets’’ denotes the resources acquired by the business from the funds made available either by the
owners of the business or others. It Thus, includes all rights or properties which a business owns. Cash, investments, bills receivable,
debtors, stock of raw materials, work-in-progress and finished goods, land, buildings, machinery, trade marks, patent rights, etc.,
are some examples of assets.
Assets may be classified into the following categories:
(a) Current assets. Current Assets are those assets which are acquired with the intention of converting them into cash during
the normal business operations of the enterprise. According to Grady, ‘‘the term Current Assets is used to designate cash
and other assets or resources commonly identified as those which are reasonably expected to be realized in cash or sold
during the normal operating cycle of the business.’’1 Thus, the term “Current Assets” includes cash and bank balances,
stocks of raw materials, work-in-progress and finished goods, debtors, bills receivable, short-term investments, prepaid
expenses, etc.
(b) Liquid assets. Liquid Assets are those assets which are immediately convertible into cash without much loss. Liquid
Assets are a part of current asset. In computing liquid assets, stock of raw materials, work-in-progress and finished goods
and prepaid expenses are excluded while all other current assets are taken.
(c) Fixed assets. Fixed assets are those assets which are acquired for relatively long periods for carrying on the business
of the enterprise. They are not meant for resale. Land and building, machinery, furniture are some of the example of Fixed
Assets. Sometimes, the term “Block Capital” is also used for them.
(d) Intangible assets. Intangible Assets are those assets which cannot be seen and touched. Goodwill, patents, trade
marks, etc., are some examples of Intangible Assets.
(e) Fictitious assets. There are assets not represented by tangible possession or property. Examples of such assets are
formation expenses incurred for establishing a business such as registration charge paid to the registrar of joint stock
company for getting a company incorporated, discount on issue of shares, debit balance in the Profit and Loss Account
when shown on the assets side in case of a joint stock company etc.
Difference between a Trial Balance and Balance Sheet
The difference between a trial balance and balance sheet can be put as under:
(a) Meaning. A trial balance is a statement containing various ledger balances on a particular date while a balance sheet is
a statement of various assets and liabilities of the business on a particular date.
(b) Objective. The objective of preparation of a trial balance is to check the arithmetical accuracy of the books of account
of the business. While the objective of preparation of a balance sheet is to ascertain the financial position of the
business.
(c) Item covered. A trial balance contains all items relating to incomes, expenses, assets and liabilities while a balance sheet
incorporates only assets and liabilities.
1
Paul Grady, ‘‘Inventory of Generally Accepted Accounting Principles for Business Enterprises’’, pp. 234–35.

88 Final Accounts: Determination of Business Income & Financial Portion

 (d) Preparation. A trial balance is prepared before preparation of a balance sheet. In other words, the preparation of a trial
balance is independent of preparation of a balance sheet. While a balance sheet is prepared not only on the basis of trial
balance but also of any additional information which may not have been incorporated in the trial balance.
(e) Use. A trial balance is meant only for internal use. While a balance is prepared both for internal as well as external use.
Illustration 6.9. From the following balance extracted from the books of M/s Rajendra Kumar Gupta & Co., pass the necessary
closing entries, prepare a Trading and Profit and Loss Account and a Balance Sheet.
Particulars Rs Particulars Rs
Opening Stock 1,250 Plant and Machinery 6,230
Sales 11,800 Returns Outwards 1,380
Depreciation 667 Cash in hand 895
Commission (Cr.) 211 Salaries 750
Insurance 380 Debtors 1,905
Carriage Inwards 300 Discount (Dr.) 328
Furniture 670 Bills Receivable 2,730
Printing Charges 481 Wages 1,589
Carriage Outwards 200 Returns Inwards 1,659
Capital 9,228 Bank Overdraft 4,000
Creditors 1,780 Purchases 8,679
Bills Payable 541 Petty Cash in Hand 47
Bad Debts 180

The value of stock on 31st December, 1999 was Rs 3,700.

Solution:
JOURNAL
Date Particulars Dr. Amount Cr. Amount
Rs Rs
Trading A/c Dr. 13,477
To Opening Stock A/c 1,250
To Purchases A/c 8,679
To Wages A/c 1,589
To Returns Inward A/c 1,659
To Carriage Inward A/c 300
(For closing all accounts to be debited to Trading A/c)
Sales A/c Dr. 11,800
Returns Outward A/c Dr. 1,380
To Trading A/c 13,180
(For closing all accounts to be credited to the Trading A/c)
Trading A/c Dr. 3,403
To Profit and Loss A/c 3,403
(For transfer of Gross Profit)
Profit and Loss A/c Dr. 2,986
To Depreciation A/c 667
To Insurance A/c 380
To Printing Charges A/c 481
To Carriage Outward A/c 200
To Salaries A/c 750
To Discount A/c 328
To Bad Debts A/c 180
(For closing all indirect and selling expenses accounts)
Commission A/c Dr. 211
To Profit and Loss A/c 211
(For closing commission account)
Profit and Loss A/c Dr. 628
To Capital A/c 628
(For transferring Net Profit to Capital Account)

Final Accounts: Determination of Business Income & Financial Portion 89

 TRADING AND PROFIT & LOSS ACCOUNT
for the year ending 31st December, 1999
Particulars Amount Rs Particulars Amount Rs
To Opening Stock 1,250 By Sales 11,800
To Purchases 8,679 Less: Returns
Less: Returns Outward 1,380 7,299 Inwards 1,659 10,141
To Wages 1,589 Closing Stock 3,700
To Carriage Inward 300
To Gross Profit c/d 3,403
13,841 13,841
To Depreciation 667 By Gross Profit b/d 3,403
To Insurance 380 By Commission 211
To Printing Charges 481
To Carriage Outwards 200
To Salaries 750
To Discount 328
To Bad Debts 180
To Net Profit 628
3,614 3,614

BALANCE SHEET
as on 31st December, 1999
Liabilities Amount Rs Assets Amount Rs
Bills Payable 541 Cash 895
Creditors 1,780 Petty Cash 47
Bank Overdraft 4,000 Bills Receivable 2,730
Capital 9,228 Debtors 1,905
Add: Net Profit 628 9,856 Closing Stock 3,700
Plant and Machinery 6,230
Furniture 670
16,177 16,177

Illustration 6.10. From the following Trial Balance prepare the Manufacturing Account, Trading and Profit and Loss
Account for the year ending 31st March, 1999 and the Balance Sheet as on that date:
Particulars Debit Rs Credit Rs
Shri Banker’s Capital Account 41,000
Shri Banker’s Drawing Account 6,100
Mrs. Banker’s Loan Account 4,000
Sundry Creditors 45,000
Cash in Hand 250
Cash at Bank 4,000
Sundry Debtors 40,500
Patents 2,000
Plant and Machinery 20,000
Land and Buildings 26,000
Purchases of Raw Materials 35,000
Raw Material as on 1.4.1998 3,500
Work-in-process as on 1.4.1998 2,000
Finished Stock as on 1.4.1998 18,000
Carriage Inwards 1,100
Wages 27,000
Salary of Works Manager 5,600
Factory Expenses 3,400
Factory Rent and Taxes 2,500
Royalties (paid on sales) 1,200

90 Final Accounts: Determination of Business Income & Financial Portion

 BALANCE SHEET
as on 31st December, 1999
Liabilities Amount Rs Assets Amount Rs
Outstanding Rent 100 Cash at Bank 3,000
Creditors 2,800 Debtors 5,400
Capital 20,000 Closing Stock 1,200
Less: Net Loss 4,800 Prepaid Wages 400
15,200 Machinery 6,300
Less: Drawings 1,800 13,400
16,300 16,300

Illustration 6.26. From the following figures extracted from the books of Shri Govind, you are required to prepare a Trading
and Profit & Loss Account for the year ended 31st March, 1999 and a Balance Sheet as on that date after making the necessary
adjustments:
Particulars Amount Rs Particulars Amount Rs
Shri Govind’s Capital 2,28,800 Stock 1.4.1999 38,500
Shri Govind’s Drawings 13,200 Wages 35,200
Plant and Machinery 99,000 Sundry Creditors 44,000
Freehold Property 66,000 Postage and Telegrams 1,540
Purchases 1,10,000 Insurance 1,760
Returns Outwards 1,100 Gas and Fuel 2,970
Salaries 13,200 Bad Debts 660
Office Expenses 2,750 Office Rent 2,860
Office Furniture 5,500 Freight 9,900
Discounts A/c (Dr.) 1,320 Loose Tools 2,200
Sundry Debtors 29,260 Factory Lighting 1,100
Loan to Shri Krishan @ Provision for D/D 880
10% p.a.-balance on 1.4.1999 44,000 Interest on loan to Shri Krishna 1,100
Cash at Bank 29,260 Cash in Hand 2,640
Bills Payable 5,500 Sales 2,31,440

Adjustments
1. Stock on 31st March, 1999 was valued at Rs 72,600.
2. A new machine was installed during the year costing Rs 15,400, but it was not recorded in the books as no payment was
made for it. Wages Rs 1,100 paid for its erection have been debited to wages account.
3. Depreciate:
1
Plant and Machinery by 33 %.
3
Furniture by 10%
Freehold Property by 5%
4. Loose tools were valued at Rs 1,760 on 31.3.1999.
5. Of the Sundry Debtors Rs 600 are bad and should be written off.
6. Maintain a provision of 5% on Sundry Debtors for doubtful debts.
7. The manager is entitled to a commission of 10% of the net profits after charging such commission.
Solution:
Shri Govind
TRADING AND PROFIT & LOSS ACCOUNT
for the year ended 31.3.1999
Particulars Amount Particulars Amount
To Stock (1.4.99) 38,500 By Sales 2,31,440
To Purchases 1,10,000 By Closing Stock 72,600
Less: Returns 1,100 1,08,900
To Wages 35,200
Less: Erection
of machinery 1,100 34,100
To Gas and Fuel 2,970
To Freight 9,900
To Factory Lighting 1,100

Final Accounts: Determination of Business Income & Financial Portion 113

To Gross Profit c/d 1,08,570
3,04,040 3,04,040
To Salaries 13,200 By Gross Profit b/d 1,08,570
To Office Expenses 2,750 By Interest 1,100
To Postage & Telegram 1,540 Add: Outstanding 3,300 4,400
To Insurance 1,760
To Office Rent 2,860
To Discounts 1,320
To Bad Debts 660
Add: Addl. Bad Debts 600
Add: New Provision 1,430
2,690
Less: Old Provision 880 1,870
To Depreciation:
Machinery 38,500
Furniture 550
Freehold Property 3,300
Loose Tools 440 42,790
To Commission to Manager 4,080
To Net Profit taken to
Balance Sheet 40,800
1,12,970 1,12,970
Shri Govind
BALANCE SHEET
as at 31.3.1999
Liabilities Amount Rs Assets Amount Rs
Capital 2,28,800 Plant & Machinery 99,000
Add: Net Profit 40,800 Add : New Machinery
2,69,600 (15,400 + 1,100) 16,500
Less: Drawings 13,200 2,56,400 1,15,500
Bills Payable 5,500 Less: Depreciation 38,500 77,000
Sundry Creditors 59,400 Freehold Property 66,000
Manager’s Commission Less: Depreciation 3,300 62,700
Outstanding 4,080 Office Furniture 5,500
Less: Depreciation 550 4,950
Loose Tools 2,200
Less: Depreciation 440 1,760
Closing Stock 72,600
Sundry Debtors: 29,260
Less: Addl. bad debts 600
28,600
Less: Provision for
doubtful debts 1,430 27,170
Load to Sh. Krishna 44,000
Add: Interest accrued
and outstanding 3,300 47,300
Cash at Bank 29,260
Cash in Hand 2,640
3,25,380 3,25,380

Illustration 6.27. The following is the Trial Balance of Shri Om, as on 31st March, 1999. You are requested to prepare the
Trading and Profit and Loss Account for the year ended 31st March, 1999 and Balance Sheet as on that date after making the
necessary adjustments:
Particulars Debit Rs Credit Rs
Sundry Debtors 5,00,000 ......
Sundry Creditors ...... 2,00,000
Outstanding Liability for Expenses 55,000 ......
Wages 1,00,000 .....
Carriage Outwards 1,10,000 ......
Carriage Inwards 50,000 ......
General Expenses 70,000 ......

114 Final Accounts: Determination of Business Income & Financial Portion

Cash Discounts 20,000 ......
Bad Debts 10,000 ......
Motor Car 2,40,000 ......
Printing and Stationery 15,000 ......
Furniture and Fittings 1,10,000 ......
Advertisement 85,000 ......
Insurance 45,000 ......
Salesmen’s Commission 87,500 .......
Postage and Telephone 57,500 .......
Salaries 1,60,000 .......
Rates and Taxes 25,000 ......
Drawings 20,000 ......
Capital Account ........ 14,43,000
Purchases 15,50,000 ......
Sales ....... 19,87,500
Stock on 1.4.99 2,50,000 ......
Cash at Bank 60,000 ......
Cash in Hand 10,500 ......
36,30,500 36,30,500

The following adjustments are to be made:

(1) Stock on 31st March, 1999 was valued at Rs 7,25,000.
(2) A Provision for Bad and Doubtful Debts is to be created to the extent of 5 per cent on Sundry Debtors.
(3) Depreciate:
Furniture and Fittings by 10%
Motor Car by 20%
(4) Shri Om had withdrawn goods worth Rs 25,000 during the year.
(5) Sales include goods worth Rs 75,000 sent out to Shanti & Company on approval and remaining unsold on 31st March,
1999. The cost of the goods was Rs 50,000.
(6) The Salesmen are entitled to a Commission of 5% on total sales.
(7) Debtors include Rs 25,000 bad debts.
(8) Printing and Stationery expenses of Rs 55,000 relating to 1997-98 had not been provided in that year but was paid in this
year by debiting outstanding liabilities.
(9) Purchases include purchase of Furniture worth Rs 50,000.
Solution:
Shri Om
TRADING AND PROFIT AND LOSS ACCOUNT
for the year ended 31st March, 1999
Particulars Amount Rs Particulars Amount Rs
To Opening Stock 2,50,000 By Sales 19,87,500
To Purchases 15,50,000 Less: Goods sent on
Less: Drawings 25,000 Approval 75,000 19,12,500
15,25,000 By Closing Stock 7,25,000
Less: Furniture 50,000 14,75,000 Add: Stock on
To Wages 1,00,000 approval (at cost) 50,000 7,75,000
To Carriage Inwards 50,000
To Gross Profit c/d 8,12,500
26,87,500 26,87,500
To Salaries 1,60,000 By Gross Profit b/d 8,12,500
To Rates and Taxes 25,000
To Postage and Telephone 57,500
To Insurance 45,000
To Printing and Stationery 15,000
To General Expenses 70,000
To Depreciation:
Furniture (11,000 + 5,000) 16,000
Motor Car 48,000
To Salesmen’s Commission 95,625
(5% on Rs 19,12,500)

Final Accounts: Determination of Business Income & Financial Portion 115

To Advertisement 85,000
To Carriage Outwards 1,10,000
To Bad Debts 10,000
Add: Addl. Bad Debts 25,000
Add: Prov. for Bad Debts
(5% on Rs 4,00,000: 20,000 55,000
See W.N. 3)
To Cash Discount 20,000
To Net Profit 10,375
8,12,500 8,12,500

Shri Om
BALANCE SHEET
as on 31.3.1991
Liabilities Amount Rs Assets Amount Rs
Capital as on Rs Furniture & Rs
1.4.98 14,43,000 Fittings 1,10,000
Add: Net Profit 10,375 Additions during the yr. 50,000
14,53,375 1,60,000
Less: Drawings Less: Depn. 16,000 1,44,000
(20,000 + 25,000) 45,000 Motor Car 2,40,000
14,08,375 Less: Depn. 48,000 1,92,000
Less: Printing & Stationery Closing Stock 7,75,000
of last year 55,000 13,53,375 (7,25,000 + 50,000)
Sundry Creditors 2,00,000 Sundry Debtors 5,00,000
Salesmen’s Commission Less: Goods sent on
Outstanding 8,125 approval 75,000
(Rs 95,625 – Rs 87,530) 4,25,000
Less: Addl. Bad debts 25,000
4,00,000
Less: Provision for
doubtful debts
5% on 4,00,000 20,000 3,80,000
Cash at Bank 60,000
Cash in Hand 10,500
15,61,500 15,61,500

Working Notes
1. Both Sales and Sundry Debtors have been reduced by Rs 75,000 representing invoice value of goods sent on approval.
Rs 50,000 have been added to the closing stock being the cost of goods sent on approval.
2. Last year’s short provision for Printing and Stationery has not been charged to the current year’s Profit & Loss
Account. It is preferable to charge it directly to in Capital Account.
3. Sundry Debtors = Rs 5,00,000 – (Rs 75,000 Goods on Approval + Rs 25,000 Bad Debt) = Rs 4,00,000.
Illustration 6.28. The Trial Balance of Jagfay Corporation, New Delhi, as on 30.9.1999 is as below:
Particulars Amount Rs
Capital Account (including Rs 5,000)
(Introduced on 1.4.1999) 22,500
Stock as on 1.10.1998
Finished Goods 3,500
Work-in-progress 7,000
Raw Materials 3,000 13,500
Purchase of Raw Material 70,500
Machinery 22,500
Sales 1,26,225
Carriage Inwards 750
Carriage Outwards 450
Rent (including Rs 450 for the factory premises) 1,350
Rebates and Discounts allowed 105
Fire Insurance (for machinery) 210
Sundry Debtors 18,900
Sundry Creditors 5,100

116 Final Accounts: Determination of Business Income & Financial Portion

termed as ‘‘Balance Sheet’’. Thus, Balance Sheet is not an account but only a statement containing the assets and liabilities of a
business on a particular date. It is as a matter of fact a classified summary of the various remaining accounts after accounts relating
to Incomes and Expenses have been closed by transfer to Manufacturing, Trading and Profit and Loss Account.
Balance Sheet has two sides. On the left hand side, the ‘‘liabilities’’ of the business are shown while on the right hand side
the assets of the business appear. These two terms have been explained later in the chapter.
It will be useful here to quote definitions of the Balance Sheet given by some prominent writers. According to Palmer, ‘‘The
Balance Sheet is a statement at a given date showing on one side the trader’s property and possessions and on the other side his
liabilities.’’According to Freeman, ‘‘A Balance Sheet is an itemised list of the assets, liabilities and proprietorship of the business
of an individual at a certain date.’’The definition given by the American Institute of Certified Public Accountants makes the meaning
of Balance Sheet more clear. According to it, Balance Sheet is ‘‘a list of balances of the asset and liability accounts. This list depicts
the position of assets and liabilities of a specific business at a specific point of time.’’

Pro Forma of Balance Sheet

There is no prescribed form of Balance Sheet for a sole proprietary and partnership concern. However, the assets and liabilities
may be shown in any of the following order:
1. Liquidity Order.
2. Permanency Order.
1. Liquidity order. In case a concern adopts liquidity order, the assets which are more readily convertible into cash come first
and those which cannot be so readily converted come next and so on. Similarly, those liabilities which are payable first come first,
and those payable later, come next and so on. A pro forma of Balance Sheet according to liquidity order is given below:
BALANCE SHEET
as on.......
Liabilities Rs Assets Rs
Bank Overdraft ....... Cash in hand .......
Outstanding Expenses ....... Cash at Bank .......
Bills Payable ....... Prepaid Expenses .......
Sundry Creditors ....... Bills Receivable .......
Long-term Loans ....... Sundry Debtors .......
Capital ....... Closing Stock:
Raw Materials .......
Work-in-progress .......
Finished Goods ....... .......
Plant and Machinery .......
Furniture ....... .......
Building ....... .......
Land ....... .......
Goodwill ....... .......
....... .......

2. Permanency order. In case of permanency order, assets which are more permanent come first, less permanent come next
and so on. Similarly liabilities which are more permanent come first, less permanent come next and so on. In other words, an asset
which will be sold in the last or a liability which will be paid in the last come first and that order is followed both for all assets and
liabilities. In case a balance sheet is to be prepared according to permanency order, arrangement of assets and liabilities will be
reversed than what has been shown above in case of liquidity order.
Arrangement of assets according to any of these orders is also termed as “Marshalling of Assets and Liabilities”.
Distinction between Profit and Loss Account and Balance Sheet
The point of distinction between Profit and Loss Account and Balance Sheet are as under:
(i) A profit and loss account shows the profit or loss made by the business during a particular period. While a balance sheet
shows the financial position of the business on a particular date.
(ii) A profit and loss account incorporates those items which are of a revenue nature while a balance sheet incorporates those
items which are of a capital nature.
(iii) Of course, both profit and loss account and the balance sheet are prepared from the Trial Balance. However, the accounts
transferred to the profit and loss account are finally closed while the accounts transferred to the balance sheet represent
those accounts whose balance are to be carried forward to the next year.

Final Accounts: Determination of Business Income & Financial Portion 87