Sole Proprietorship Final Accounts

Final Accounts for Sole Proprietors

• Covers sole proprietorships
• Manufacturing entities prepare Manufacturing A/c, Trading A/c, P&L A/c, and Balance Sheet
• Non-manufacturing entities prepare Trading A/c, P&L A/c, and Balance Sheet
• Trading, Profit & Loss A/c helps understand the Financial Performance
• Balance Sheet sheds light on the Financial Position

Trading Account

• Prepared by merchandising concerns that buy and sell goods within a period
• Determines gross profit or gross loss, a key indicator of business efficiency
• Covers direct expenses and operational revenue

Profit and Loss Account

• Relates to a complete accounting period
• Displays business activities' outcome in a summarized form
• Covers indirect expenses, losses, and other revenues

Balance Sheet

• Lists resources and their funding, detailing assets and liabilities
• Shows sources of funds like liabilities & capital, and their application like assets

Expenses and Revenue Notes

• Direct expenses are those to make goods available for sale, like purchases, wages, carriage inward, and other factory expenses
• Indirect expenses include salary, advertisements and discount
• Revenue from operations includes sales of goods, interest, and commission

Manufacturing Account

• Calculates the cost of goods manufactured

Trading Account Details

• Opening stock, purchases, and direct expenses are debited
• Sales, sales returns, goods sent on consignment, goods withdrawn by owner, goods distributed as sample/charity, goods lost and closing stock are credited
• Gross profit is entered as credit
• The difference between the debit and credit sides is the gross profit or loss

Profit & Loss statement

• Gross loss, administrative, depreciation, and indirect expenses are debited
• Gross profit, interest, commission & profit on asset sales are credited
• The difference between the debit and credit sides is the net profit or loss

Trial Balance Items Note

• All Trial Balance items should be posted on one side only (debit or credit)

Adjustment Entries Note

• Adjustment effects should be posted on both the debit and credit sides

Notable Adjustment Entries

• Purchase Return A/c is debited; To Purchase
• Sales A/c is debited; To Sales Return
• Expense A/c is debited; To Outstanding Expenses
• Prepaid Expense A/c is debited; To Expense A/c
• Outstanding Incomes A/c is debited; To Income

Closing Entries for Trading Account

• Trading A/c is debited to close Opening Stock, Purchases, and Direct Expenses
• Sales A/c and Closing Stock A/c are debited; To Trading A/c
• Trading A/c is debited with the gross profit balance; To Profit & Loss A/c
• Profit & Loss A/c is debited to close gross loss; To Trading A/c

Closing Entries for Profit & Loss Account

• Profit & Loss A/c is debited; To Indirect Expenses
• Indirect Incomes A/c is debited; To Profit & Loss A/c
• Profit & Loss A/c is debited with net profit; To Capital A/c
• Capital A/c is debited with net loss; To Profit & Loss A/c

Closing Stock Adjustments

• If Closing Stock appears in the Trial Balance, it's already adjusted against purchases, with one effect on the Balance Sheet's Asset side
• If Closing Stock is not in the Trial Balance, it's shown on the Trading Account's credit side and as an asset on the Balance Sheet

LAAL Chart

• Outstanding Expenses: Add to respective expense, shown as a Liability
• Prepaid Expenses: Deduct from respective expense, shown as an Asset
• Outstanding Income: Add to respective income, shown as an Asset
• Pre-Received Income: Deduct from respective income, shown as a Liability

Depreciation

• Debited to P&L A/c
• Deducted from Asset

Bad Debts & Provision for Bad Debts

• Debtors are reduced by new bad debts, discounts, and provisions for debts/discount

Provision Creation

• Recorded with a debit to P&L A/c
• Credited to Provision for bad Debts A/c

Bad Debts & Further bad debts

• Bad debts are debited
• Credited to Debtors A/c

Trial Balance Treatment Note

• Bad debts included in the Trial Balance reported as a loss in P&L

Abnormal Loss/Loss Due to Fire

• Loss by fire is debited; to purchase A/c for the full amount of the loss
• Insurance claim accepted is debited to Insurance Co. A/c and credited to P&L A/c for the uncovered portion

Drawings

• Drawings are deducted from Capital in the Balance Sheet
• Reduce Cash/Bank or Purchase A/C if cash is withdrawn or goods are taken

Drawings Account Note

• If a Drawings A/C appears in the Trial Balance, show it as a deduction from capital in the Balance Sheet

Advertisements

• Record advertisements as an expense in P/L
• Reduce from Purchase A/C

Sale of Goods on Approval

• Reduce from Sales and Debtors
• Show in credit side of Trading A/C (Closing stock) and Balance sheet

Opening Entries

• Opening entries are only recorded for Real & Personal Accounts by debiting individual assets and crediting individual liabilities and capital
• The entry is based on the previous year's closing Balance Sheet

Marshaling of Balance Sheet Approach

• Permanence Approach: Long-term (non-current) assets and liabilities. Short-term (current) assets and liabilities
• Liquidity Approach: Short-term (current) assets and liabilities, then long-term (non-current) assets and liabilities