# 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.

## Preparing Trading and Profit and Loss and Balance Sheet

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 â€“ COGS (Sales + Closing Stock) â€“ (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 forÂ preparing Trading and Profit and Loss Account are:

• Opening capital
• Credit Purchases
• Credit sales
• Bills payable accepted
• 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)Â Â Â Â Â  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 Â 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)Â  Â  Â  Basic 2)Â  Â  Â  Diluted Earnings per equity share(for discontinued & continuing operation) 1)Â  Â  Â  Basic 2)Â  Â  Â  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)Â  Â  Â  Shareholders funds a)Â  Â  Â  Share capital b)Â  Â  Â  Reserves and surplus c)Â  Â  Â  Â Money received against share warrants 2)Â  Â  Â  Share application money pending allotment 3) Non-current liabilities a)Â  Â  Â  Long term borrowings b)Â  Â  Â  Deferred tax liabilities c)Â  Â  Â  Â Other long term liabilities d)Â  Â  Â  Long term provisions 4)Â  Â  Â  Current liabilities a)Â  Â  Â  Short term borrowings b)Â  Â  Â  Trade payables c)Â  Â  Â  Â Other current liabilities d)Â  Â  Â  Short term provisions Total 2.Â  Â  Â  Â Assets 1) Non-current assets a)Â  Â  Â  Fixed assets 1)Â  Â  Â  Tangible assets 2)Â  Â  Â  Intangible assets 3)Â  Â  Â  Capital work in progress 4)Â  Â  Â  Intangible assets under development b) Non-current investments c)Â  Â  Â  Â Deferred tax assets d)Â  Â  Â  Long term loans and advances e)Â  Â  Â  Other non-current assets 2)Â  Â  Â  Current assets a)Â  Â  Â  Current investments b)Â  Â  Â  Inventories c)Â  Â  Â  Â Trade receivables d)Â  Â  Â  Cash and cash equivalents e)Â  Â  Â  Short term loans and advances f)Â  Â  Â  Â Other current assets Total

## Solved Example for You

Q: Miss Krati started business on 1st January 2017, with cash of â‚¹ 25,000, furniture of â‚¹ 5,000, goods of â‚¹ 1,000, and machinery worth â‚¹ 10,000. During the year she further introduces the capital of â‚¹ 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 â‚¹ 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 31st March 2018, debtors, creditors, and stock in trade were valued as â‚¹ 35,000, â‚¹ 17,500, and â‚¹ 12,500 respectively.

Ans:

#### Trading and Profit and Loss AccountÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  Â Â Â Â Â Â Â Â Â Â

 Particulars Amount (â‚¹) Particulars Amount (â‚¹) 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 Â 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%Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â  500 Machinery @20%Â Â Â Â Â Â Â Â Â Â Â Â Â Â  2,000 2,500 To Net profit 18,250 34,000 34,000

#### BalanceÂ Sheet as at 31st December 2017

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

Working notes:

1] Statement of Affairs as on 31st December 2017

 Liabilities Amount (â‚¹) Â Assets Amount (â‚¹) Capital (balancing figure) 50,000 Cash 25,000 Stock 10,000 Furniture 5,000 Machinery 10,000 50,000 Â 50,000

2] Debtors Account

 Date Particulars Amount(â‚¹)) Date Particulars Amount (â‚¹) Â To Balance b/d NIL By Cash 28,750 To SalesÂ  (credit) 65,000 By Discount allowed 600 (balancing figure) By Bad debts 650 By Balance c/d 35,000 Â Â 65,000 Â Â 65,000

Â 3] Creditors Account

 Date Particulars Amount(â‚¹) Date Particulars Amount(â‚¹) Â 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 Â Â 40,000

4] Summary of Cash

 Receipts Amount(â‚¹) Â Payments Amount(â‚¹) Â 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 â€“ cash 10,000 By Cash at Bank (Bal. fig.) 6,500 86,250 Â 86,250

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### 3 responses to “Meaning of Incomplete Records, Reasons for Incompleteness and Its Limitations”

1. jude says:

The Relevance of the Extraction of Financial Statements to a set of incomplete records

2. SABONA says:

requirements for incomplete records

• victor says:

it is used for each transoction