Preparing Trading and Profit and Loss and Balance Sheet

Preparing a trading account is the first stage in of final accounts of a trading concern. It determines the gross profit or gross loss of the concern for that accounting year. For determining the true result or the net result of the business, preparing the Trading and Profit and Loss account is necessary. We prepare these accounts on the last day of the accounting year. We consider only direct revenue and direct expenses in this account.

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Preparing Trading and Profit and Loss and Balance Sheet

Preparation of Trading Account

For preparing a Trading and Profit and Loss Account we need complete information regarding expenses, incomes, assets and liabilities of the concern. In incomplete records, some details are given and some are missing. Thus, we need to ascertain the missing details in an indirect manner by using the logic of double-entry.

How to Calculate Gross Profit in Trading Account?

In order to calculate the gross profit, it is necessary to know the cost of goods which are sold and its sales figures.

Gross Profit = Sales – COGS (Sales + Closing Stock) – (Stock in the beginning + Purchases + Direct Expenses)

Items that are included on the debit side and on the credit side give the resultant figure which is either gross profit or the gross loss.

Trading and Profit and Loss Account

A trading account is one that holds both stocks and cash. The main account of a trader is referred to as a trading account. Because investors’ accounts are subject to particular regulation because they often purchase and sell assets, their accounts are subject to special regulation. A trading account’s assets are segregated from those held in a long-term buy-and-hold strategy.

The profit and loss statement, abbreviated as P&L, is a financial statement that summarises revenues, expenditures, and expenses incurred during a specific time period, generally a fiscal year. The P&L statement corresponds to the income statement, which documents a company’s capacity (or inability) to create profit through growing sales revenue, lowering costs, or both. The P&L statement is also known as a profit and loss statement, income statement, statement of operations, and so on.

Missing Items:

The most common items that are missing and we have to find out for preparing Trading and Profit and Loss Account are:

• Opening capital
• Credit Purchases
• Credit sales
• Bills payable accepted
• Bills receivable received
• Payments to creditors
• Payments to debtors
• Any other cash/bank related items.

As we know that opening capital can be obtained by preparing the statement of affairs at the beginning of the year. For other items that are missing, we can easily obtain them by preparing accounts such as total debtors and total creditors, total bills receivable and total bills payable accounts and summary of cash.

Ascertainment of Credit Purchases

Generally, the credit purchase figure is not available from the incomplete records. It is possible that some other information related to creditors may also be missing. So, we will prepare the total creditors to account so that, credit purchases or any other missing figure related to creditors, as the case may be, can be ascertained as the balancing figure.

Ascertainment of Credit Sales

Generally, the figure of credit sales is also not available from incomplete records. Some other information which is related to debtors may also be missing. Therefore, we will prepare the total debtors to account so that the number of credit sales or any other missing figure, as the case may be, can be traced out as the balancing figure.

Ascertainment of Bills Receivable and Bills Payable

To find out the figure of the bills received during the year, we prepare Bill’s Receivable account. Also, to find out the figure of the bills accepted during the year, we prepare the Bills Payable account.

Ascertainment of Missing Information through Summary of Cash

Sometimes, it is possible that the amount paid to creditors or the amount received from debtors may be missing. Also, the opening or closing cash or bank balance may be missing. So to ascertain any missing item of receipt of payment, we prepare a cash book summary. It shows all receipts and payments during the year and the balancing figure is the amount of missing items.

In case both amounts paid to creditors and that received from debtors are missing. In that case, we will obtain the amount of any one of these first through the total creditors or total debtors account. And the other missing information we will ascertain from the cash book summary. After the missing figures are obtained, we can prepare the final accounts straight away or after the preparation of the trial balance.

Format of P&L Account for Companies

	Note no	Current reporting period (Figures)	Figures for the previous reporting period (Figures)
Income
a)revenues from operations
b) other income
Total income
expenses
a)      Cost of materials consumed
Purchase of stock in trade
Change in inventories of finished goods
Employee benefits expense
Finance costs
Depreciation and amortization expenses
Other expenses
Total expense
Profit/loss before exceptional items and tax
Exceptional items
Profit /loss before tax
Tax expense
Current tax
Deferred tax
Profit/loss for the period from continuing operations
Profit/loss for the period from discontinued operations
Profit/loss for the period
Other comprehensive income
1) Items that will not be reclassified to profit or loss
2) Income tax relating to items that will not be reclassified to profit or loss
3) Items that will not be reclassified to profit or loss
4) Income tax relating to items that will be reclassified to profit or loss
Total comprehensive income for the period Comprising profit/loss and other income for the period
Earnings per equity share(for discontinued operation)
1)      Basic
2)      Diluted
Earnings per equity share(for discontinued & continuing operation)
1)      Basic
2)      Diluted

Statement Of Profit & Loss

Horizontal Format

Company name
Balance sheet
For the period ended
Liabilities	Amount	Amount	Assets	Amount	Amount
Capitals and reserves			Fixed assets
Opening capital balance			Land
Reserves and surplus			Less: Depreciation
Less: Drawings
Capital balance			Building
			Less: Depreciation
Secured loans
Long term debt			Investments
Other long term liabilities			Long term investments
Unsecured loans			Current assets loans and advancements
Cash credit payable			Inventory
			Cash and cash equivalents
Current liabilities			Other current assets
Trade payables
Accrued interest			Prepaid expense
Other current liabilities			Miscellaneous expenditure
Total liabilities			Total assets

 

Vertical format

Company name
Balance sheet
Particulars	Note no	Figures (as per end of the current reporting period)	Figures (as per end of the previous reporting period)
Equity and liabilities
1)      Shareholders funds a)      Share capital b)      Reserves and surplus c)       Money received against share warrants
2)      Share application money pending allotment
3) Non-current liabilities a)      Long term borrowings b)      Deferred tax liabilities c)       Other long term liabilities d)      Long term provisions
4)      Current liabilities a)      Short term borrowings b)      Trade payables c)       Other current liabilities d)      Short term provisions
Total
2.       Assets
1) Non-current assets a)      Fixed assets 1)      Tangible assets 2)      Intangible assets 3)      Capital work in progress 4)      Intangible assets under development b) Non-current investments c)       Deferred tax assets d)      Long term loans and advances e)      Other non-current assets
2)      Current assets a)      Current investments b)      Inventories c)       Trade receivables d)      Cash and cash equivalents e)      Short term loans and advances f)       Other current assets
Total

Solved Example for You

Q: Miss Krati started business on 1^st January 2017, with cash of ₹ 25,000, furniture of ₹ 5,000, goods of ₹ 1,000, and machinery worth ₹ 10,000. During the year she further introduces the capital of ₹ 10,000 by opening a bank account. From the following information extracted from her books required for preparing Trading and Profit and Loss Account and Balance Sheet

Receipt from debtors	28,750
Cash sales	22,500
Cash purchases	12,500
Wages	2,500
Salaries	8,750
Trade expenses	3,250
Electricity bill of factory	3,750
Drawings	1,500 p.m.
Cash paid to creditors	21,000
Discount allowed	600
Discount received	1,500
Bad debts written off	650
Closing cash balance	10,000

Miss Krati used goods worth ₹ 1,250 for the private purpose, which is not recorded by her in the book. Charge depreciation on furniture @10% and on machinery @20% p.a. On 31^st March 2018, debtors, creditors, and stock in trade were valued as ₹ 35,000, ₹ 17,500, and ₹ 12,500 respectively.

Ans:

Trading and Profit and Loss Account                                         

Particulars		Amount (₹)	Particulars		Amount (₹)
To opening stock		10,000	By Sales
To Purchases:			Cash sales	22,500
Cash purchase	12,500		Credit sales(WN2)	65,000	87,500
Credit purchase(WN3)	40,000		By Closing stock		12,500
Less: Drawings of goods	(1,250)	51,250
To Wages		2,500
To Electricity bill of factory		3,750
To Gross profit		32,500
		1,00,000			1,00,000
To Salaries		8,750	By Gross profit		32,500
To Trade expenses		3,250	By Discount received		1,500
To Discount allowed		600
To Bad debts		650
To Depreciation:
Furniture @10%                     500
Machinery @20%               2,000		2,500
To Net profit		18,250
		34,000			34,000

Balance Sheet as at 31^st December 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital (WN1)	50,000	Cash in hand	10,000
Add: Net profit	18,250	Cash at the bank(WN4)	6,500
Add: Additional capital	10,000	Stock	12,500
Less: Drawings	(1,250)	Debtors	35,000
Cash	(18,000)	Furniture                    5,000
Goods	59,000	Less: depreciation     (500)	4,500
Creditors	17,500	Machinery               10,000
		Less: depreciation  (2,000)	8,000
	76,500		76,500

 

Working notes:

1] Statement of Affairs as on 31^st December 2017

Liabilities	Amount (₹)	Assets	Amount (₹)
Capital (balancing figure)	50,000	Cash	25,000
		Stock	10,000
		Furniture	5,000
		Machinery	10,000
	50,000		50,000

2] Debtors Account

Date	Particulars	Amount(₹))	Date	Particulars	Amount (₹)
	To Balance b/d	NIL		By Cash	28,750
	To Sales  (credit)	65,000		By Discount allowed	600
	(balancing figure)			By Bad debts	650
				By Balance c/d	35,000
		65,000			65,000

 3] Creditors Account

Date	Particulars	Amount(₹)	Date	Particulars	Amount(₹)
	To Cash	21,000		By Balance b/d	NIL
	To Discount received	1,500		By Purchases credit	40,000
	To Balance c/d	17,500		(balancing figure)
		40,000			40,000

4] Summary of Cash

Receipts	Amount(₹)	Payments	Amount(₹)
To Balance b/d	25,000	By Purchases	12,500
To Capital introduced (bank)	10,000	By Wages	2,500
To Debtors	28,750	By Salaries	8,750
To Sales	22,500	By Trade expenses	3,250
		By Electricity bill for factory	3,750
		By Creditors	21,000
		By Drawings (1,500 p.m.)	18,000
		By Balance c/d – cash	10,000
		By Cash at Bank (Bal. fig.)	6,500
	86,250		86,250