Final accounts of sole traders: manufacturing, trading, profit and loss account and balance sheet

Financial Accounting · Unit III · Topic 9 of 14 · 5 min read

What final accounts are, the manufacturing account with a worked cost of production, the trading account and gross profit, the profit and loss account and net profit, the balance sheet with marshalling and classification of assets and liabilities, and Rajan's trial balance (January 2026) taken to final accounts.

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1. Final accounts
2. Manufacturing account
3. Trading account
4. Profit and loss account
5. Balance sheet
6. Worked problem: Rajan (January 2026)
How this is examined

Cases checked to exist. Read the judgment before quoting a holding.

Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.

The examinable core. A 10-mark “From the following trial balance prepare Trading and Profit and Loss Account and Balance Sheet” is the first choice in Unit III of every 80-mark paper (Rajan, January 2026). The 6-mark notes are “Trading account”, “Difference between P&L account and balance sheet” (June 2025) and “Prepare a balance sheet with at least six imaginary items” (January 2026). Adjustments are treated in the next note.

1. Final accounts

At the end of the accounting year a sole trader prepares, from the trial balance, (1) a Manufacturing Account if he makes the goods he sells, (2) a Trading Account to find gross profit, (3) a Profit and Loss Account to find net profit, and (4) a Balance Sheet to show the financial position. The first three are accounts (part of the double entry, closing the nominal accounts); the balance sheet is a statement. Every item in the trial balance is used once; every adjustment is used twice.

2. Manufacturing account

It finds the cost of production of goods completed. It contains raw materials consumed, direct wages, direct expenses (prime cost) and factory overheads, adjusted for work-in-progress. Imaginary figures:

Dr	Rs.	Cr	Rs.
To Opening work-in-progress	6,000	By Closing work-in-progress	8,000
To Raw materials consumed (opening 10,000 + purchases 60,000 − closing 12,000)	58,000	By Cost of production c/d to Trading A/c	90,000
To Direct wages	20,000
To Direct expenses	4,000
To Factory overheads (rent 3,000, power 5,000, depreciation on plant 2,000)	10,000
	98,000		98,000

Prime cost is 58,000 + 20,000 + 4,000 = Rs. 82,000; with overheads and the WIP adjustment, cost of production is Rs. 90,000. If opening finished goods were Rs. 15,000, closing Rs. 20,000 and sales Rs. 1,30,000, the trading account would show gross profit of 1,30,000 + 20,000 − 15,000 − 90,000 = Rs. 45,000.

3. Trading account

The Trading Account compares the net sales with the cost of goods sold. Debit: opening stock, purchases less returns outward, and direct expenses — wages, carriage inward, freight, octroi, import duty, fuel and power, factory rent. Credit: sales less returns inward, and closing stock. The excess of credit is gross profit, carried to the P&L Account. Its uses: it shows the gross profit ratio, lets the trader compare the margin year to year, and controls direct costs and stock.

4. Profit and loss account

Starting from gross profit, it is debited with all indirect expenses — office and administration (salaries, rent, insurance, printing), selling and distribution (advertisement, carriage outward, bad debts, commission), financial (interest on loans, discount allowed) and depreciation — and credited with other incomes (interest, commission, discount received, rent received). The balance is net profit (credit excess) or net loss, transferred to Capital Account.

5. Balance sheet

A statement of assets and liabilities on a date. Marshalling is the order of arranging them: in order of permanence (fixed assets first, cash last; capital first, current liabilities last), usual for sole traders, or in order of liquidity (the reverse). Classification: fixed assets (land, building, machinery, furniture); investments; current assets (stock, debtors, bills receivable, prepaid expenses, cash); fictitious assets (preliminary expenses, debit balance of P&L). Liabilities: capital (plus net profit, less drawings); long-term liabilities (loans); current liabilities (creditors, bills payable, outstanding expenses, bank overdraft).

Six imaginary items (January 2026): Liabilities — Capital 1,00,000 + net profit 20,000 − drawings 10,000 = 1,10,000; Creditors 30,000; Bills payable 10,000; total Rs. 1,50,000. Assets — Building 80,000; Furniture 15,000; Stock 25,000; Debtors 20,000; Cash at bank 8,000; Cash in hand 2,000; total Rs. 1,50,000.

P&L account and balance sheet distinguished: the P&L is an account, the balance sheet a statement; the P&L covers a period, the balance sheet speaks on a date; the P&L holds nominal accounts, the balance sheet personal and real accounts; the P&L shows the result, the balance sheet the position; P&L sides are headed Dr and Cr, balance sheet sides Liabilities and Assets.

6. Worked problem: Rajan (January 2026)

Trial balance total Rs. 46,700. Adjustments: closing stock Rs. 1,500; insurance prepaid Rs. 40; outstanding salaries Rs. 200 and taxes Rs. 130; depreciation on building 2% (Rs. 440).

Trading and Profit and Loss Account for the year ended 31-3-2024

Dr	Rs.	Cr	Rs.
To Opening stock	1,200	By Sales 15,000 less returns 280	14,720
To Purchases 8,900 less returns 450	8,450	By Closing stock	1,500
To Wages	800
To Freight and carriage	2,000
To Gross profit c/d	3,770
	16,220		16,220
To Trade expenses	200	By Gross profit b/d	3,770
To Advertisement	240	By Interest	350
To Taxes and insurance 130 + 130 − 40	220
To Salaries 800 + 200	1,000
To Depreciation on building	440
To Net profit to capital	2,020
	4,120		4,120

Balance Sheet as on 31-3-2024

Liabilities	Rs.	Assets	Rs.
Capital 29,000 + NP 2,020 − drawings 760	30,260	Building 22,000 − 440	21,560
Creditors	1,200	Closing stock	1,500
Bills payable	700	Debtors	6,500
Outstanding salaries 200, taxes 130	330	Bills receivable	1,500
		Prepaid insurance	40
		Cash at bank 1,200, in hand 190	1,390
	32,490		32,490

Freight and carriage is taken as inward (direct) because the question does not say outward. Interest in the credit column of the trial balance is income.

How this is examined

Unit III is a 10-mark trial-balance problem with an alternative of the same kind, and a 6-mark theory note. Write the Trading and P&L Account as one account in two parts, show each adjustment in the particulars column so the examiner can follow it, and finish with a balance sheet whose sides agree. In the 100-mark paper the same problem is 16 marks.

Now try the real questions: Financial Accounting past question papers.