with their debit and credit balances on a specified period but it is not a distinguished
account of the businessman’s affairs. A trial balance is very important tool of financial
management and it has many objectives. The followings are the basic and most common
objectives of trial balance:
i. To check the totals of the subsidiary books
A trial balance is prepared with a view to see the accuracy of the totals in the
subsidiary books. i.e. the sub-division of journal. For examples, the grand total of all the
creditors (the supplier of the goods) should be equal to the total of the purchase book; the
grand total of all the debtors (credit sales) should be equal to the total of the sales book
of a certain period. Similarly, single journal is prepared for all the business transactions.
Thus, the debit total and credit total must be equal. A trial balance is intended to check all
such numerical totals to find out the numerical accuracy.
ii. To check the Arithmetical Accuracy of Posting
A trial balance is viewed to check the arithmetical accuracy of the posting in the
ledger accounts. If correct posting has been made from journal or sub-division of journal,
the debit and credit totals of the trial balance must tally.
iii. To Facilitate the Preparation of Final Accounts
Trial balance is a statement of all the ledger accounts with their balances on a
specified period. The ledgers are made of assets, capital and liabilities and income, gain,
expenses and losses separately on individual headings. It serves as a source statement for
preparing final accounts. With the help of trial balance, a businessman prepares profit and
loss account by extracting the incomes, gains and expenses and losses (of revenue type) in
order to determine profit or loss of his business. Similarly he/she prepares balance sheet
by extracting the capital, liabilities and assets from the information of the trial balance
upto a certain date.
iv. To Serve as an Aid to the Management
By comparing the trial balance of various periods, specially of the different years,
certain important changes in the different figures can be ascertained and its analysis can
be made. It serves as an aid to the management in taking certain decisions.
v. To Minimize Errors and Frauds
The trial balance helps to minimize errors and frauds. If it does not agree, it helps
to locate and rectify the errors as well as it gives moral presence to the accountant to
maintain the books of accounts with due care and honesty.
vi. To Facilitate Audit
Trial balance collects all the ledger balances at a place and checks arithmetical accuracy
in recording and posting. Ledger balances provide necessary financial information for the
preparation of final accounts. If it is correct, it helps for internal audit and also finally for
external audit.
100 Aakar’s Office Practice and Accountancy - 10 Trial Balance 101
3. Importance/Advantages of Trial Balance
i. It helps to check the accuracy of journal & ledger.
ii. It helps to correct the arithmetical errors.
iii. It helps to find out errors of double posting.
iv. It helps for internal audit.
v. It helps to prepare final account.
vi. It helps the management for taking effective decision at right time.
vii. It helps to find the positions of all account in one place.
4. Specimen and Ruling of a Trial Balance
Simply, a trial balance is a statement of the ledger balances taken for a specified
period. It is prepared on a plain paper, not specific. The debit balances are mentioned in
the debit column and the credit balances in the credit column. The specimen ruling of a
trial balance is as follows.
“Trial Balance of Co.
As on ........................”
S.N. Particulars L.F. Dr. Balance Cr. Balance
(1) (2) (3) (4) (5)
Total
i. Since a trial balance is prepared at any given date, its heading should always be
mentioned as:
“Trial Balance of ................. Co.
As on .........................”
ii. The serial numbers of the ledger heading are respectively mentioned in the first
column.
iii. The ledger accounts in respect of the serial number are mentioned in the 2 column
nd
irrespective of the debit or credit balances on them.
iv. Page numbers of the respective ledger accounts are mentioned in the 3 column, if
rd
any.
v. The amount of the debit or credit balance is respectively mentioned in the 4 and/
th
or 5 , columns. But sometimes the debit and credit totals may be mentioned in the
th
respective 4 and 5 columns when trial balance is prepared on total method.
th
th
vi. Finally, the totals of debit side and credit side are determined to see whether the two
totals are equal.
5. Considerations of a Trial Balance
Even though a trial balance is a simple list or statement of ledger balances on a certain
specified date, one should consider the following important points.
i. Since a trial balance is completely based on the ledger accounts, all the ledgers should
be duly prepared.
102 Aakar’s Office Practice and Accountancy - 10 Trial Balance 103
ii. The heading of a trial balance should be mentioned on the top middle of the page
“Trial balance ...................... Co.
As on ............................”
iii. A trial balance can be prepared on the basis of total figures or balance figures of the
ledger accounts. Thus, the debit and credit totals of the ledgers should be determined
along with the balancing of the accounts.
iv. The ledger accounts should be mentioned along with their serial number so as to
facilitate the counting. It helps to find out whether or not any ledger account is
omitted.
v. The respective ledger page number of the accounts should be mentioned if any in the
L.F. column to facilitate the reference of the required ledger.
vi. All assets, expenses and losses have debit balances and So, they are to be debited in
trial balance. Capital, liabilities, incomes and gains have credit balances and, thus,
are to be credited in it.
Dr. side: Assets, Drawing, Expenses and losses
Cr. side: Capital, Liabilities, income, gain, reserve and surplus
vii. After mentioning all the ledger accounts in the trial balance, its debit and credit sides
should be separately totalled to see whether or not they are equal.
viii. When the two totals of a trial balance are equal, it is supposed that the books of
account are arithmetically accurate; otherwise the books of accounts should be
thoroughly revised as far as possible to locate the arithmetic errors.
ix. When the errors cannot be detected, and there it becomes a problem to proceed
onward for the preparation of final accounts. In such a case, an account called a
‘suspense account’ is opened for the adjustment of the trial balance. The suspense
account is opened for that side where there’s a shortage of amount and totals are
made equal and proceeded onward to prepare final accounts. After finding the errors,
errors are to be detected and corrected by passing journal and suspense account is
removed from the trial balance. It means that, when the debit side of the trial balance
is less than the credit side, suspense account is mentioned in the debit side with the
amount shorting to meet the credit total and vice versa. Later on, when the errors
are found by internally checking or auditing the account, the suspense account is
replaced by the detected ledger account or heading. But one should be familiar with
the fact that, trial balance is not the conclusive measure to check all types of errors in
the books of accounts of a businessman’s transactions.
6. Methods of Preparing Trial Balance
Simply, a trial balance is a statement of ledger balances on a specified period and
prepared in vertical way in the form of a table. There are three methods of preparing a
trial balance which are explained with the following examples.
Methods of Trial Balance
Total Method Balance Method Combined/Mixed Method
102 Aakar’s Office Practice and Accountancy - 10 Trial Balance 103
Illustration - 1
Prepare journal vouchers from the following transactions, post them into the ledger
and prepare the trial balance to check their accuracy of ABC Co., Chitwan.
075, Baishakh:
1, Commenced business with Cash Rs. 20,000.
2, Deposited into bank Rs. 15,000.
3, Bought goods for cash Rs. 1,000.
4, Furniture purchased from ABC Furnitures Rs. 1,500.
6, Purchased goods from Kailash & Co. Rs. 2,000.
8, Goods sold for cash Rs. 1700.
Solution:
Journal Entries of ABC Co., Chitwan
Date Particulars L.F. Dr. Amount Cr. Amount
075-1-1 Cash A/c .............. Dr. 20,000
To Capital A/c 20,000
(Being business commenced)
075-1-2 Bank A/c .................. Dr. 15,000
To Cash A/c 15,000
(Being deposited into bank)
075-1-3 Purchase A/c .................. Dr. 1,000
To Cash A/c 1,000
(Being goods purchased)
075-1-4 Furniture A/c .................. Dr. 1,500
To ABC Furniture’s A/c 1,500
(Being furniture purchased on credit)
075-1-6 Purchase A/c .................. Dr. 2,000
To Kailash & Co’s A/c 2,000
(Being purchased on credit)
075-1-8 Cash A/c .................. Dr. 17,00
To Sales A/c 1,700
(Being goods sold in cash)
Total Rs. 41,200 41,200
Preparation of Ledgers:
Dr. Cash A/c Cr.
Date Particulars J.F Amount Date Particulars J.F. Amount
075-1-1 To Capital A/c 20,000 075-1-2 By Bank A/c 15,000
075-1-8 To Sales A/c 1,700 075-1-3 By Purchase A/c 1,000
075-1-31 By Balance c/d 5,700
21,700 21,700
2-1 To Balance b/d 5,700
104 Aakar’s Office Practice and Accountancy - 10 Trial Balance 105
Dr. Capital A/c Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
075-1-31 To Balance c/d 20,000 075-1-1 By Cash A/c 20,000
20,000 20,000
075-2-1 To Balance b/d 20,000
Dr. Bank A/c Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
075-1-2 To Cash A/c 15,000 075-1-31 By Balance c/d 15,000
15,000 15,000
075-2-1 To Balance b/d 15,000
Dr. Purchase A/c Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
075-1-3 To Cash A/c 1,000 075-1-31 By Balance c/d 3,000
075-1-6 To Kailash & Co. A/c 2,000
3,000 3,000
075-2-1 To Balance b/d 3,000
Dr. Furniture A/c Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
075-1-4 To ABC Furniture 15,000 075-1-31 By Balance c/d 15,000
15,000 15,000
075-2-1 To Balance b/d 15,000
Dr. ABC Furniture’s A/c Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
075-1-31 To Balance c/d 15,000 075-1-31 By Furniture A/c 15,000
15,000 15,000
By Balance c/d 15,000
Dr. Kailash & Co.’s A/c Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
075-1-31 To Balance c/d 2,000 075-1-6 By Purchase A/c 2,000
2,000 2,000
2075-2-1 By Balance c/d 2,000
Dr. Sales A/c Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
075-1-31 To Balance c/d 1,700 075-1-8 By Cash A/c 1,700
1,700 1,700
2075-2-1 By Balance c/d 1,700
104 Aakar’s Office Practice and Accountancy - 10 Trial Balance 105
i. Total Method
In this method, both the debit and credit totals (before balancing the accounts) of the
ledger accounts are put in the respective debit and credit column. When both the totals
in the trial balance are equal at the last, it proves the arithmetical accuracy of the books of
account.
The following is common specimen of a trial balance, prepared under total method.
Trial Balance
As on 31 Baishakh, 075
st
S N. Particulars L.F. Dr. Amount Cr. Amount
1. Cash A/c 21,700 16,000
2. Capital A/c - 20,000
3. Bank A/c 15,000
4. Purchase A/c 3.000
5. Furniture A/c 1,500
6 ABC Furniture A/c 1,500
7. Kailash & Co. A/c 2,000
8. Sales A/c 1,700
Total 41,200 41,200
ii. Balance Method
It is the most common and generally adopted method. Under this method, the debit
and credit balances of the ledgers are mentioned in the respective columns in the trial
balance to see whether the both totals of its balance are equal or not. The balance of a
ledger is the difference of its debit total and credit total of a certain specified period. The
specimen of a trial balance under balance method is given below:
Trial Balance
As on 31 Baishakh, 075
st
S N. Particulars L.F. Dr. Amount Cr. Amount
1. Cash A/c 5,700
2. Capital A/c 20,000
3. Bank A/c 15,000
4. Purchase A/c 3,000
5. Furniture A/c 1,500
6 ABC Furniture A/c 1,500
7. Kailash & Co’s A/c 2,000
8. Sales A/c 1,700
Total 25,200 25,200
iii. Combined/Mixed Method
This method is the combination of the first and second methods i.e. the total and the
balance methods. Hence, this method presents both the total and balance figures in the
same trial balance in separate columns. There are two main amount columns for total and
106 Aakar’s Office Practice and Accountancy - 10 Trial Balance 107
balance figures and each column has further two columns for debit and credit figures. In
the same trial balance, the debit and credit balances can be compared with the differences
of debit and credit totals of the respective account. The debit and credit totals of the total
column should be equal and similarly the debit and credit totals of the balance column
should also be equal to each other. But the totals of the total columns are always more than
the totals of the balance columns. The following is the specimen of the mixed method.
Trial Balance
As on 31 Baishakh, 075
st
Total Balance
S.N. Particulars L.F.
Dr. Amount Cr. Amount Dr. Amount Cr. Amount
1 Cash A/c 21,700 16,000 5,700 -
2 Capital A/c - 20,000 - 20,000
3 Bank A/c 15,000 - 15,000 -
4 Purchase A/c 3,000 - 3,000 -
5 Furniture A/c 1,500 - 1,500 -
6 ABC Furniture A/c - 1,500 - 1,500
7 Kailash & Co. A/c - 2,000 - 2,000
8 Sales A/c - 1,700 - 1,700
Total: 41,200 41,200 25,200 25,200
7. List of possible items shown in trial balance.
Debit Credit
S.N. Particulars L.F. Reasons
amount amount
1. Opening stock ×××× Assets
2. Purchase ×××× Expenses
3. Sales return ×××× Decrease in sales
4. Travelling expenses ×××× Expenses
5. Cash ×××× Assets
6. Bank ×××× Assets
7. Commission expenses ×××× Expenses
8. Loan given ×××× Assets
9. Bad debt ×××× Loss/ Expenses
10. Wages ×××× Expenses
11. Rent ×××× Expenses
12. Salary ×××× Expenses
13. Allowance ×××× Expenses
14. Land & building ×××× Assets
15. Machinery and plant ×××× Assets
16. Furniture ×××× Assets
17. Motor ×××× Assets
106 Aakar’s Office Practice and Accountancy - 10 Trial Balance 107
18. Establishment Expenses ×××× Assets
19. Adm. & office expenses ×××× Expenses
20. Patent ×××× Assets
21. Bills receivable ×××× Assets
22. Investment ×××× Assets
23. Depreciation ×××× Expenses
24. Custom, tax &fees ×××× Expenses
25. Debtor ×××× Assets
26. Interest expenses ×××× Expenses
27. Insurance & Advertisement ×××× Expenses
28. Phone & post expenses/electricity ×××× Expenses
29. Printing, transportation & fuel ×××× Expenses
30. Capital ×××× Capital
31. Purchase return ×××× Decrease in purchase
32. Accrued expenses ×××× Liabilities
33. Sales ×××× Revenue
34. Unearned commission ×××× Liabilities
35. Interest received ×××× Income
36. Bank overdraft ×××× Liabilities
37. Bankers ×××× Liabilities
38. Commission received ×××× Income
39. Appreciation on building ×××× Income
40. Rent received ×××× Income
41. Customers’ deposits ×××× Income/ Liabilities
42. Discount received ×××× Income
43. Unpaid expenses ×××× Liabilities
44. Creditor ×××× Liabilities
45. Provision for taxation ×××× Liabilities
46. Loan and bills payable ×××× Liabilities
47. Sinking fund ×××× Capital
48. Reserves ×××× Capital
49. Advance income/commission ×××× Liabilities
50. Carriage inward ×××× Expenses
51. Import/excise duty ×××× Expenses
52. Royalties ×××× Expenses
53. Cartage ×××× Expenses
54. Motive power ×××× Expenses
55. Audit fees ×××× Expenses
108 Aakar’s Office Practice and Accountancy - 10 Trial Balance 109
56. Legal charges ×××× Expenses
57. Sampling expenses ×××× Expenses
58. Discount ×××× Expenses
59. Commission ×××× Expenses
60. Export duty ×××× Expenses
61. Repair & maintenance ×××× Expenses
62. Charity donation ×××× Expenses
63. Bank charge ×××× Expenses
64. Sales tax ×××× Expenses
66. Brokerage ×××× Expenses
66. Loss on sale of assets ×××× Loss
67. Loss by incident ×××× Loss
68. Drawings ×××× Decrease in capital
69. Prepaid expenses ×××× Assets
70. Goodwill ×××× Assets
71. Accrued income ×××× Assets
72. Copy Right ×××× Assets
73. Bad debt recovered ×××× Income
74. Provision for bad debts ×××× Expenses
75. Apprenticeship premium ×××× Income
76. Income from investment ×××× Income
77. Gain of sale of assets ×××× Gain
78. Dividend received ×××× Income
79. Deposit from customers ×××× Income
80. Miscellaneous receipts ×××× Income
81. Interest on investment ×××× Income
82. Outstanding expenses ×××× Liabilities
83. Sale of scrap ×××× Income
Total ×××× ××××
Note: 1. Rent, interest, commission, discount, etc. are considered as expenses and are
to be recorded on debit sides but rent received, interest received, commission
received, discount received, etc. are income and are to be recorded on credit side
of trial balance.
2. Interest on loan, interest on bank overdraft are the expenses and recorded on
debit side but interest on investment, interest on given loans, interest on bank
deposit/balance are incomes and recorded on credit side of trial balance.
3. If closing stock is given, it should be recorded an debt side of trial balance as it
is an asset business on closing date.
108 Aakar’s Office Practice and Accountancy - 10 Trial Balance 109
8. Accounting Errors and Trial Balance
There may be some intentional or unintentional i.e. knowing or unknowing mistakes
committed by the accountant or other accounting staff in the process of maintaining books
of account. The mistakes, which may take place in the process of maintaining books of
account, are known as book-keeping errors or accounting errors.
When the two sides of a trial balance agree (become equal), it indicates the arithmetical
accuracy of the books of account of a business concerned. But, the agreement of trial
balance doesn’t necessarily mean the accounting records are free from every error because
there might be still some errors, which cannot be revealed/disclosed by a trial balance.
Therefore, a trial balance should not be regarded as a conclusive proof of the accuracy of
the books of account. In this way, there are two types of errors which are given below.
A. Errors Disclosed by a Trial Balance
When the two sides of a trial balance fail to agree i.e. are not equal, the books of
account are not regarded as arithmetically accurate. The debit and credit totals of a trial
balance do not agree because of some errors and the disagreement of the two totals of a
trial balance locates the arithmetical errors. Thus, the following errors can be disclosed by
a trial balance by means of the disagreement of the two totals.
i. Wrong totalling of Subsidiary Books
ii. Errors of posting on the wrong side of a ledger
iii. Over/under casting an amount while posting into ledger
iv. Errors of double posting on one side of a ledger
v. Errors of omission of posting on one side of a ledger
vi. Errors of totalling and balancing of accounts in the ledger
vii. Omission of any ledger A/c in the trial balance
viii. Errors of mentioning the balance of any ledger in the wrong side of trial balance
ix. Errors in the totalling of the trial balance itself
B. Errors Not Disclosed by a Trial Balance
The objective of preparing a trial balance is to check the arithmetical accuracy of the
books of account. When both sides of a trial balance are equal, we assume that there are
no mistakes in the books of account. The agreement of a trial balance proves the accuracy
of the books of account. However, it should not be taken as the conclusive proof of the
entire accuracy because there are still some certain errors, which remain unaffected by
the agreement in trial balance. These errors are known as errors, not revealed by the trial
balance. They are given below:
i. Errors of Omission
If a transaction is not recorded in the book of original entry, both the debit and credit
aspects of the transaction will be omitted. This error will not affect the trial balance. For
example, if goods sold to Dahal Bros, of Rs. 1,000 is not recorded in the books at all i.e.
neither debited in Dahal Bros. A/c nor credited in sales A/c, it will not affect the totals of
the trial balance. It is because there’s omission of Rs. 1,000 on both sides. Thus, this type
of error cannot be disclosed by a trial balance.
Key Point The error which occurs due to not recording of transaction in primary
books i.e. journal or subsidiary book is called error of complete omission.
110 Aakar’s Office Practice and Accountancy - 10 Trial Balance 111
ii. Errors of Commission
It is the committed error. This type of error takes place when an imaginary transaction
is entered in the original book of account or when a posting is made on the right side but
in wrong account. It will not make any difference in the totalling of trial balance. For
example, when an unreal transaction of any value is entered in the original book, it will
increase both sides of the trial balance with the same amount and will not create the
disagreement. The mentioning of wrong amount of a transaction in the original book is
also an error of commission e.g. payment of salary Rs. 2,300 may be entered in the original
book in extent of Rs. 3,200 in both sides. Similarly, the under-casting of any expense or
over/under casting of any income etc. cannot be revealed by the trial balance.
Key Point The error which occurs due to wrong recording of the transaction either
by wrong amount or in wrong account is called error of commission.
iii. Compensating Errors
When the effect of one error is neutralised by the effect of another error, such errors
are called compensating errors. For example, forgetting to post Rs. 500 on the debit side of
certain account may be compensated/neutralised by under-casting Rs. 500 on the credit
same of another account. Since the first error is neutralised by second error, it will not
affect the trial balance in numerical total and thus, such errors cannot be revealed by a
trial balance.
Key Point The errors on which one effect is cancelled or neutralised by another
effect is called compensating error.
iv. Errors of Principle
When the fundamental principle of accountancy is not followed while recording
a business transaction, it is to be an error of principle. Such an error occurs when an
expense is treated as asset or an asset as expenses or an income as liability or a liability
as an income etc. Similarly, it occurs, when an account to be debited is credited and vice
versa. For example, when salary A/c is credited and cash A/c is debited for the payment
of salary, it is said to be an error of principle. This will not affect the totals of trial balance
because the entry opposes the principle of book keeping. But the amount is allocated to
both sides in the same extent. Thus, the trial balance cannot disclose such type of errors.
Key Point The error which occurs due to violation of accounting principles for
recording the transaction is called error of principle.
v. Errors of Posting in the Wrong Account
If posting of any transactions is made in the wrong account but on the correct side, the
errors will not affect the total balance of trial balance. For example, machinery purchased
from Suman for Rs. 15,000 is credited to Raman account in the ledger. In this case, trial
balance will agree but it is error.
Key Point The error which occurs due to record in the wrong account by on the
correct side is called errors of posting in the wrong account.
110 Aakar’s Office Practice and Accountancy - 10 Trial Balance 111
Points to Remember
i. Errors of omission ii. Errors of commission iii. Compensating errors
vi. Errors of principle vi. Errors of posting in the wrong account
9. Illustrative Problems and Solutions
Illustration 2
From the following balances taken from the books of Sanokaji & Co. as on 31 Ashwin,
th
075, prepare a trial balance.
Heads of account Amount (Rs) Heads of account Amount (Rs)
Cash 10,000 Commission paid 150
Sundry debtors 21,600 Purchases 20,000
Salaries & wages 2,700 Carriage inward 3,000
Capital 50,000 Sundry creditors 5,000
Sales 48,500 Drawings 6,000
Freight 4,000 Return outwards 2,000
Discount earned 450 Bank 9,000
Furniture 2,500 Machinery 27,000
Solution:
Trial Balance of Sanokaji & Co,
As on 31 Ashwin, 075
st
S.No Particulars L.F. Dr. Balance Cr. Balance
1. Cash (Assets) 10,000 -
2. Sundry debtors (Assets) 21,600 -
3. Salaries & wages (Expenses) 2,700 -
4. Capital (Capital) - 50,000
5. Sales (Income) - 48,500
6. Freight (Expenses) 4,000 -
7. Discount earned (Income) - 450
8. Furniture (Assets) 2,500 -
9. Commission paid (Expenses) 150 -
10. Purchases (Expenses) 20,000 -
11. Carriage inward (Expenses) 3,000 -
12. Sundry creditors (Liabilities) - 5,000
13. Drawings (Less from capital) 6,000 -
14. Return outwards (Less from purchase) - 2,000
15. Bank (Assets) 9,000 -
16. Machinery (Assets) 27,000 -
Total: 1,05 950 1,05,950
112 Aakar’s Office Practice and Accountancy - 10 Trial Balance 113
Illustration - 3
The following balances were extracted from the books of Bharatmani Bros. as on 31
st
Kartik, 075, prepare a trial balance:
Heads of account Balance (Rs) Heads of account Balance (Rs)
Capital 60,000 Discount allowed 600
Business premises 35,000 Wages 17,000
Furniture & fixtures 13,500 Insurance & rates 1,200
Plant and machinery 46,000 Sundry creditors 22,000
Purchases 78,000 Sundry debtors 34,000
Sales 1,30,000 Drawings 3,000
Return inwards 1,500 Bills payable 4,000
Return outwards 2,000 Cash in hand 1,500
Carriage inward 1,400 Bank overdraft 15,300
Carriage outward 1,100 Commission received 500
Solution:
Trial Balance of Bharatmani Bros,
as on 31st Ashwin, 075
S.N. Particulars L.F. Dr. Balance Cr. Balance
1. Capital (Capital) - 60,000
2. Business premises (Assets) 35,000 -
3. Furniture & fixtures (Assets) 13,500 -
4. Plant and machinery (Assets) 46,000 -
5. Purchases (Expenses) 78,000 -
6. Sales (Income) - 1,30,000
7. Return inwards (Less from sales/income) 1,500 -
8. Return outwards (Less from purchase/expenses) - 2,000
9. Carriage inward (Expenses) 1,400 -
10. Carriage outward (Expenses) 1,100 -
11. Commission received (Income) - 500
12. Discount allowed (Expenses) 600 -
13. Wages (Expenses) 17,000 -
14. Insurance & rates (Expenses) 1,200 -
15. Sundry creditors (Liabilities) 22,000
16. Sundry debtors (Assets) 34,000 -
17. Drawings (Less from capital) 3,000 -
18. Bills payable (Liabilities) - 4,000
19. Cash in hand (Assets) 1,500 -
20. Bank overdraft (Liabilities) - 15,300
Total 2,33,800 2,33,800
112 Aakar’s Office Practice and Accountancy - 10 Trial Balance 113
Illustration - 4
From the following balances, prepare a trial balance as on 30 Bhadra, 075, in the books
th
of LNS Co. Pvt. Ltd.
Heads of account Balance (Rs) Heads of account Balance (Rs)
Bills receivables 13,000 Capital 60,000
Rent 7,000 Debtors 22,000
Opening stock 5,500 Creditors 20,000
Building 25,000 Bank overdraft 12,000
Loan 20,000 Sales 58,000
Purchases 35,000 Wages 13,000
Interest 3,000 Cash 5,000
Bills payable 10,500 Machinery 50,000
Sales return 5,000 Purchase returns 3,500
Tax and insurance 1,500 Dividend (Cr.) 1,000
Solution:
Trial Balance of LNS Co. Pvt. Ltd,
as on 31 Bhadra, 075
st
S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.)
1. Bills receivables 13,000 -
2. Capital - 60,000
3. Rent 7,000 -
4. Debtors 22,000 -
5. Opening stock 5,500 -
6. Creditors - 20,000
7. Building 25,000 -
8. Bank overdraft - 12,000
9. Loan - 20,000
10. Sales - 58,000
11. Purchases 35,000 -
12. Wages 13,000 -
13. Interest 3,000 -
14. Cash 5,000 -
15. Bills payable - 10,500
16. Machinery 50,000 -
17. Sales returns 5,000 -
18. Purchase returns - 3,500
19. Tax and insurance 1,500 -
20. Dividend (Cr.) - 1,000
Total 1,85,000 1,85,000
114 Aakar’s Office Practice and Accountancy - 10 Trial Balance 115
Illustration - 5
From the under mentioned ledger balances of Hiralala & Co., prepare a trial balance as
on 31 Ashwin, 075.
st
Heads of account Balance (Rs) Heads of account Balance (Rs)
Capital 30,000 Stock (1-6-075) 10,000
Business premises 20,000 Sundry debtors 12,000
Furniture and fittings 8,500 Sales 1,50,000
Discount allowed 1,600 Insurance premium 1,500
General expenses 4,000 Salaries 10,000
Carriage outwards 500 Bad debt written off 800
Bank deposit 5,000 Sundry creditors 11,500
Reserve fund 4,500 Purchases 1,10,000
Sales returns 2,000 income tax paid 1,500
Rent received from tenants 2,000 Wages 5,000
Carriage inwards 2,200 Legal expenses 1,800
Cash in hand 1,600
Solution:
Trial Balance of Hiralal & Co.
As on 31 Ashwin, 075
st
S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.)
1. Capital - 30,000
2. Stock (1-6-075) 10,000 -
3. Business premises 20,000 -
4. Sundry debtors 12,000 -
5. Furniture and fittings 8,500 -
6 Sales - 1,50,000
7. Discount allowed 1,600 -
8. Insurance premium 1,500 -
9. General expenses 4,000 -
10. Salaries 10,000 -
11. Carriage outwards 500 -
12. Bad debt written off 800 -
13. Bank deposit 5,000 -
14. Sundry creditors - 11,500
15. Reserve fund - 4,500
16. Purchases 1,10,000 -
17. Sales returns 2,000 -
18. Income tax paid 1,500 -
19. Rent received from tenants - 2,000
20. Wages 5,000 -
21. Carriage inwards 2,200 -
22. Legal expenses 1,800 -
23. Cash in hand 1,600 -
Total 1,98,000 1,98,000
114 Aakar’s Office Practice and Accountancy - 10 Trial Balance 115
Illustration - 6
Prepare a trial balance from the following ledger balances of ABC Co. Kathmandu, for
Ashad, 2075.
Heads of account Balance (Rs) Heads of account Balance (Rs)
Equity Capital 80,000 Motor car 50,000
Business premises 60,000 Stock at commencement 10,000
Purchase 55,000 Sales 1,10,000
Heating and lighting 7,000 Wages 15,000
Salaries 20,000 Trade creditors 13,000
Return inwards 2,500 Creditors 1,500
Bad debt recovered 6,500 Equipment 30,000
Book debts 25,000 Selling expenses 4,500
Borrowed loan 70,000 Travelling expenses 3,500
Account payable 13,500 Account receivables 12,000
Solution:
Trial Balance of ABC Co., Kathmandu,
as on Ashad, 2075
S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.)
1. Equity Capital - 80,000
2. Motor car 50,000 -
3. Business premises 60,000 -
4. Stock at commencement 10,000 -
5. Purchase 55,000 -
6. Sales - 1,10,000
7. Heating and lighting 7,000 -
8. Wages 15,000 -
9. Salaries 20,000 -
10. Trade creditors - 13,000
11. Return inwards 2,500 -
12. Creditors - 1,500
13. Bad debt recovered - 6,500
14. Equipment 30,000 -
15. Book debts 25,000 -
16. Selling expenses 4,500 -
17. Borrowed loan - 70,000
18. Travelling expenses 3,500 -
19. Account payables - 13,500
20. Account receivables 12,000 -
Total 9,550 9,550
116 Aakar’s Office Practice and Accountancy - 10 Trial Balance 117
Illustration - 7
The following is a trial balance prepared by an inexperienced book-keeper. Redraft it
in a correct form.
Trial Balance, As on .........................
S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.)
1. Opening stock 400 -
2. Capital - 3,500
3. Cash in hand 500 -
4. Cash at bank - 1,000
5. Interest paid 300 -
6. Bills payable 600 -
7. Wages 700 -
8. Purchase returns 300 -
9. Sales returns - 200
10. Sales 2,150 -
11. Purchases - 800
12. Rent paid 100 -
13. Commission paid - 50
14. Bills receivables - 700
15. Furniture 500 -
16. Debtors and Creditors 3,000 2,000
17. Loan on debenture - 1,000
18. Vehicles 1,300 -
Total 9,850 9,850
Solution:
Trial Balance, As on ........................
S.N. Particulars L.F. Dr. Balance (Rs.) Cr. Balance (Rs.)
1. Opening stock 400 -
2. Capital - 3,500
3. Cash in hand 500 -
4. Cash at bank 1,000 -
5. Interest paid 300 -
6. Bills payable - 600
7. Wages 700 -
8. Purchase returns - 300
9. Sales returns 200 -
10. Sales - 2,150
11. Purchases 800 -
12. Rent paid 100 -
13. Commission paid 50 -
14. Bills receivables 700 -
15. Furnitures 500 -
16. Debtors and Creditors 3,000 2,000
17. Loan on debenture - 1,000
18. Vehicles 1,300 -
Total 9,850 9,850
116 Aakar’s Office Practice and Accountancy - 10 Trial Balance 117
Glossary
Disagreement : Not to agree
Errors : mistakes committed unknowingly
Fraud : to cheat, mistakes committed knowingly
Subsidiary book : additional book where the record of credit purchase,
credit sales, return and cash transaction are recorded.
Omitted : to neglect, to leave out
Omission : lapse
Accuracy : exactness/equal
Rectified : corrected
Revealed : found
Suspense account : doubtful account
Exercise
A. Answer the following questions in one sentence.
1. What is trial balance?
2. What is suspense account?
3. What are the methods of preparing trial balance?
4. What do you mean by errors of principle?
5. Write the major debit items of trial balance.
B. Give short answers to the following question.
6. Define a trial balance and mention its importance.
7. Mention the specimen rulings of a trial balance.
8. Write the objectives of trial balance.
9. Mention the important considerations of a trial balance.
10. What is accounting error? What are its types from trial balance point of view?
Mention.
11. Mention the errors that can be revealed by a trial balance.
12. Describe about the errors that cannot be revealed by a trial balance, with suitable
examples.
NUMERICAL PROBLEMS
13. Pass journal entries, prepare necessary ledger accounts and draw out a trial
balance from the following information of ABC Co., Chitwan.
Jestha 1 Commenced business with cash of Rs. 20,000 and goods worth
Rs. 10,000.
118 Aakar’s Office Practice and Accountancy - 10 Trial Balance 119
Jestha 5 Withdrawn Rs. 2,000 on a permanent basis out of capital.
Jestha 6 Brought in additional capital of Rs. 5,000.
Jestha 9 Sale of goods Rs. 9,500.
Jestha 10 Drawings made during the year Rs. 2,500.
Jestha 12 Furniture purchased from Pooja Rs.10,000.
Jestha 15 Goods purchased from Manish Rs. 5,000.
Jestha 22 Goods purchased Rs. 3,000.
Jestha 30 Paid salaries Rs. 3,000.
14. From the following ledger balances, prepare a Trial Balance as on 30 Chaitra,
th
2075.
Ledger Balances Amount Ledger Balances Amount
Capital 20,000 Stock (1-12-2075) 6.000
Drawing 1,000 Purchase 11,000
Purchase returns 500 Insurance 200
Sales 21,000 Salaries 1,500
Sales returns 1,000 Commission 1,200
Wages 3,000 Interest 500
Carriage inward 500 Trading expenses 300
Carriage outward 800 Rent & taxes 400
Printing and stationery 600 Cash in hand 1,000
Plants & machinery 4,000 Cash at bank 2,000
Land and building 5,000 Creditors 1,300
Debtors 1,900 Bills payables 700
Bills receivables 1,600
Ans: Total Rs. 43,500
15. Prepare a Trial Balance from the following information.
Ledger Balances Amount Ledger Balances Amount
Suresh’s capital 1,556 Suresh’s drawing 564
Leasehold premises 741 Sales 2,756
Due form customers 530 Purchases 1,268
Purchase returns 264 Loan from bank 250
Creditors 528 Trading and office expenses 784
Cash in hand 142 Bills payables 100
Salaries & Wages 598 Opening stock 264
Rent rates and taxes 465 Sales returns 98
Ans: Total: 5454
118 Aakar’s Office Practice and Accountancy - 10 Trial Balance 119
16. From the following ledger balances extracted from the books of Baburam,
prepare a Trial Balance as on 31 Baisakh, 076.
st
Ledger Balances Amount Ledger Balances Amount
Baburam’s capital 1,00,000 Vehicle 30,000
Baburam’s drawing 7,500 Clearing charges 2,500
Loan on mortgage 60,000 Carriage & cartage 3,500
Business premises 62,000 Trade expenses 5,000
Dock charges 2,000 Carriage insurance 1,500
Purchase 80,000 Wages 17,000
Stock at commencement 10,000 Suppliers 26,000
Shipping and railway freight 6,000 Patent 18,000
Bad debt recovered 3,000 Trade marks 22,000
Miscellaneous receipts 5,800 Bank overdraft 30,000
Customers 30,000 Cash in hand 13,000
Account receivables 7,000 Sales 1,35,000
Account payables 8,000 Commission (Cr) 2,200
Plant & Machinery 34,000 Interest on loan 3,000
Equipments 16,000
Ans: Total: 3,70,000
17. The following balances were extracted from the books of Niraj Bros. as on 31
st
Bhadra, 075. Prepare Trial Balance.
Ledger Balances Amount Ledger Balances Amount
Capital 10,000 Packing and printing 300
Cash in hand 1,700 S/creditors 4,500
Cash at bank 7,000 Trade expenses 1,600
Stock (1-5-075) 1,000 Drawing 1,500
Purchases 11,000 Bills payables 3,500
Bad debt (loss) 500 S/debtors 8,000
Carriage in 800 Repairs and maintenance 700
Return to suppliers 1,000 Reserve fund 2,500
Wages 4,000 Sales 17,000
Rent and rates 600 Return form customers 1,400
Legal charges 400 Carriage out 400
Ans: Trial Balance Total: 40,900,
Suspense A/c (Cr): 2,400,
120 Aakar’s Office Practice and Accountancy - 10 Trial Balance 121
18. From the following ledger balances, prepare a Trial Balance.
Heads Amount Heads Amount
Secured loan 9,000 Provision for bad debts 1,500
Lease hold premises 12,000 Sundry expenses 700
Loose tools 4,000 Miscellaneous income 1,400
Notes receivable 5,000 Plant and machinery 9,500
Notes payable 4,500 Furnitures and fittings 7,500
Interest on loan borrowed 500 Wages 4,300
Commission received in advance 600 Salaries 2,200
Unpaid rent 900 Income tax 800
Equity capital 16,000 Purchases 22,000
Manufacturing expenses 1,700 Returns out 1,000
Office and general expenses 5,500 Sales 43,000
Salesman’s commission 700 Returns in 1,500
Ans : Trial Balance Total: 77,900
19. Prepare a trial balance of Nepal Store for the fiscal year 2075/076 based on the
following particulars.
Description Amount Description Amount
Capital 2,13,000 Salary 25,000
Purchase 75,000 Discount received 2,000
Sales 1,25,000 Stationery 5,000
Goodwill 45,000 Machine 1,90,000
Ans: Total: 3,40,000
20. Prepare Trial Balance from the following ledger balances.
Heads Amount Heads Amount
Land and building 50,000 Postal charges 700
Plant and machinery 30,000 Vehicles 25,000
Capital 63,000 Bad debt recovered 1,600
Loan on debenture 40,000 Cash 13,000
Book debts 24,000 Bank overdraft 10,000
Trade creditors 20,000 General reserve 21,000
Opening stock 7,000 Goodwill 17,000
Purchases 35,000 Sales 65,000
Discount on purchase 2,000 Sales returns 3,500
Interest received 1,100 Office and general expenses 2,300
Investment to XYZ Co. 10,000 Audit fees 800
Dividend received 2,300 Loan to Sharma Bros. 5,000
Telephone charges 1,800 Carriage outward 900
Ans: Trial Balance Total: 2,26,000
120 Aakar’s Office Practice and Accountancy - 10 Trial Balance 121
21. Prepare the Trial Balance of Rabi Furniture Industry for the fiscal year
2075/076 from the following particulars.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Purchase 40,000 Suppliers 35,000
Sales 70,000 Bills payable 15,000
Loan to Mohan 60,000 Land & Building 45,000
Bank Overdraft 40,000 Wages and Salary 15,000
Ans: Total Rs. 1,60,000
22. Prepare the Trial Balance of Himal Iron Industry for the fiscal year 2075/076
from the following particulars.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Capital 50,000 Advance Wages 25,000
Loose tools 65,000 Bills receivable 30,000
Trade Mark 35,000 Loan of Hari 20,000
Sales 60,000 Creditors 25,000
Ans: Trial Balance Total: 1,55,000
23. Prepare the Trial Balance of Krishna Masala Industry for the fiscal year
2075/076 from the following particulars.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Gas and Water 20,000 Commission 25,000
Reserve 25,000 Bills Payable 50,000
Closing Stock 5,000 Preliminary Expenses 45,000
Capital 40,000 Insurance 20,000
Ans: Trial Balance Total: 1,15,000
24. Prepare the Trial Balance of Ram & Sita Co. for the fiscal year 2075/076 from
the following particulars.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Purchase 75,000 Ram’s capital 90,000
Discount on Sale 10,000 Commission to Salesman 25,000
Commission Received 25,000 Profit on Sale of Fixed Assets 10,000
Bills Receivable 25,000 Income from Investment 10,000
Ans: Trial Balance Total: 1,35,000
25. Prepare the Trial Balance of Nepal Feed Industry for the fiscal year 2075/076
from the following particulars.
Particulars Amount Particulars Amount
Advertisement 30,000 Dividend Received 30,000
Short Term Loan 35,000 Outstanding Salary 15,000
Goodwill 33,000 Insurance 22,000
Advance Expenses 15,000 Received Interest on Development Bond 20,000
Ans: Trial Balance Total: 1,00,000
122 Aakar’s Office Practice and Accountancy - 10 Trial Balance 123
26. Prepare the Trial Balance of R & S Co. for the fiscal year 2075/076 from the
following particulars.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Bad debts 15,000 Rent 20,000
Loan from Basu 40,000 Sales 60,000
Bills payable 25,000 Interest from fixed deposit 20,000
Opening stock 85,000 Distribution Expenses 25,000
Ans: Trial Balance Total: 1,45,000
27. Prepare the Trial Balance of Sagar Furniture for the fiscal year 2075/076 from
the following particulars.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Accrued income 10,000 Bills payable 20,000
Bank loan 40,000 Debtors 25,000
Cash 45,000 Discount received 30,000
Sales 70,000 Purchase 80,000
Ans: Trial Balance Total: 1,60,000
28. Prepare the trial balance of Bikash Furniture, Kathmandu for the fiscal year
2075/076 from the following particulars.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Sale of scrap 40,000 Machine 35,000
Investment 20,000 Loan of Prem 30,000
Rent earned 10,000 Advance Income 10,000
Drawing 15,000 Depreciation 20,000
Ans: Trial Balance Total: 90,000
29. Prepare the Trial Balance of Anusha and Anjana Company for the fiscal year
2075/076 from the following particulars.
Particulars Amount (Rs.) Particulars Amount (Rs.)
Capital 160,000 Opening stock 80,000
Purchase 116,000 Furniture 16,000
Debtor 40,000 Sales 80,000
Bills payable 6,000 Interest received 26,000
Ans: Trial Balance Total: 2,72,000, Suspense account Dr. Rs. 20,000
S.L.C/SEE Examination Questions
1. Prepare a Trial Balance of Kashyapi Medical Hall, Chitwan as 2072 Ashad 31
on the basis of followings transactions. 2072 (R)
Particulars Amount (Rs.) Particulars Amount (Rs.)
Opening stock 27,000 Depreciation 35,000
Purchase 2,46,000 Sales 3,32,000
Purchase Return 15,000 Insurance 40,000
Bank Loan 23,000 Wages 22,000
(Ans: Rs. 3,70,000)
122 Aakar’s Office Practice and Accountancy - 10 Trial Balance 123
2. Prepare a trial balance of Limbu & Company, Ilam on 2073 Asadh 31 on the
basis of followings particulars. 2073 (R)
Particulars Amount (Rs.) Particulars Amount (Rs.)
Capital 5,00,000 Purchase 7,00,000
Sales 11,25,000 Advertisement 1,00,000
Depreciation 50,000 Land 8,00,000
Furniture 1,75,000 Bank Loan 2,00,000
(Ans: Rs. 18,25,000)
3. Prepare a Trial Balance of Koshi Centre, Biratnagar on 31 Asadh 2074 on the
basis of followings transactions. 2074 (R)
Particulars Amount (Rs.) Particulars Amount (Rs.)
Capital 1,50,000 Depreciation 50,000
Purchase 6,00,000 Bank Loan 13,00,000
Sales 7,00,000 Business Premises 9,00,000
Rent paid 2,00,000 Machinery 4,00,000
(Ans: Total Rs. 21,50,000)
4. Prepare Trial Balance of Kunal Guest House as on 31 , Asadh, 2062, from the
st
following particulars. (2063)
Particulars Amount (Rs.) Particulars Amount (Rs.)
Capital 3,22,000 Bank Loan 56,000
Purchase 9,70,000 Creditors 1,50,000
Sales 12,00,000 Depreciation 1,65,000
Drawings 83,000 Reserve Fund 91,000
Machinery & Equipment 3,71,000 Bills Receivable 2,30,000
(Ans: Total Rs. 18,19,000)
st
5. Prepare a Trial Balance of Shagun Company of 31 Asadh, 2064 from the,
following transaction. (S.L.C. 2064 `R’)
Particulars Amount (Rs.) Particulars Amount (Rs.)
Purchase 2,50,000 Sales 2,12,000
Furniture 30,000 Bank Loan 80,000
Purchase Return 15,000 Depreciation 12,000
Bills Receivable 8,000 Discount Received 5,000
Debtor 5,000 Sales Return 7,000
(Ans: Total Rs. 3,12,000)
6. Prepare a Trial Balance of Rai Khadya Stores for the fiscal year 2075/076 on
last Asar, 2075 based on following particulars. 2068 (R)
Particulars Amount (Rs.)
Sales 2,00,000/-
Purchases 40,000/-
Sales Return 60,000/-
Creditors 15,000/-
Outstanding Expenses 25,000/-
Advance Income 40,000/-
Furniture 80,000/-
Machinery 1,00,000/-
Ans: Trial balance total = Rs. 280000
124 Aakar’s Office Practice and Accountancy - 10 Trial Balance 125
7. Prepare a trial balance of Shyam and Company for the fiscal year 2075/076
based on the following particulars. 2067 (S)
Description Amount Description Amount
Capital Rs. 2,40,000/- Sales Rs. 1,50,000/-
Salary Rs. 40,000/- Maintenance expenses Rs. 60,000/-
Purchase Rs. 2,45,000/- Furniture Rs. 50,000/-
Interest received Rs. 15,000/- Bad debts Rs. 10,000/-
Ans: 4,05,000
8. From the following particulars, prepare trial balance of Remesh & Sons Store
Pokhara for the fiscal year end of Ashadh 2075/067. 2067(R)
Description Amount Description Amount
Opening stock Rs. 40,000/- Purchase Rs. 1,45,000/-
Capital Rs. 2,10,000/- Sales Rs. 1,89,000/-
Wages Rs. 70,000/- Bank balance Rs. 1,80,000/-
Commission received Rs. 6,000/- Creditors Rs. 30,000/-
Ans: Trial balance total Rs. 43,500
9. Prepare a trial balance of Patan Garment Industry for the fiscal year 2064/2065
upto the end of Asar from the following particulars : 2066(S)
Description Amount Description Amount
Capital Rs. 5,50,000/- Purchase return Rs. 50,000/-
Opening stock Rs. 4,30,000/- Salary Rs. 2,00,000/-
Purchase Rs. 6,90,000/- Advertisement Rs. 30,000/-
Sales Rs. 7,10,000/- Reserve fund Rs. 40,000/-
Ans: Rs. 13,50,000
10. Prepare a Trial Balance of Saman Wood Industry as on 31st Ashad, 2065 from
the following particulars. 2066 (R)
Description Amount Description Amount
Capital Rs. 2,50,000 Purchase Rs. 4,00,000
Sales Rs. 3,30,000 Drawing Rs. 25,000
Bank Loan Rs. 20,000 Creditors Rs. 25,000
Depreciation Rs. 10,000 Machine Rs. 1,90,000
Ans: Trial Balance Total = Rs. 6,25,000
11. Prepare a Trial Balance of Kathmandu Cold Store for the fiscal year end of
Asar, 2064/2065 from the following particulars. 2065(S)
Description Amount Description Amount
Capital Rs. 1,70,000/- Purchase Rs. 2,35,000/-
Sales Rs. 4,95,000/- Opening stock Rs. 80,000/-
Sales Return Rs. 14,000/- Salaries Rs. 3,50,000/-
Stationery Rs. 63,000/- Bank overdraft Rs. 77,000/-
Ans: Total of Trial Balance Rs. 742000
124 Aakar’s Office Practice and Accountancy - 10 Trial Balance 125
12. Prepare a trial balance of S.&S. Trade concern for the fiscal year 2063/64 based
on the following particulars : 2065(R)
Description Amount Description Amount
Capital Rs. 1,25,000 Salary Rs. 70,000
Sales Rs. 3,60,000 Advertisement Rs. 30,000
Purchases Rs. 2,00,000 Advance Income Rs. 15,000
Discount Rs. 2,000 Machine Rs. 1,98,000
Ans: Trial balance total = Rs. 5,00,000
13. Prepare a trial balance of Gauri Shankar Store, Charikot for the fiscal year
end of Asar, 2068/69 from the following particulars. SLC 2069
Particulars Amount Particulars Amount
Opening Stock 5,70,000 Sales 6,80,000
Purchase 3,30,000 Purchase return 1,80,000
Commission received 11,000 Creditors 1,59,000
Depreciation 20,000 Wages 1,10,000
Ans: Rs. 10,30,000
14. Prepare a trial balance of Amrit Sweet Home as an 31st Ashadh from the
following particulars. SLC 2070
Particulars Amount Particulars Amount
Capital 2,50,000 Purchase 3,00,000
Discount 5,000 Sales 4,60,000
Rent 70,000 Stationery 30,000
Furnitures 3,23,000 Loan 18,000
Ans: Rs 7,28,000
15. Prepare a trial balance of ABC Traders for the fiscal year end of Asar, 2070/071
from the following particulars. SLC 2071
Particulars Amount Particulars Amount
Capital 6,00,000 Bill Payable 60,000
Machine 5,80,000 Sales 7,50,000
Bank Overdraft 40,000 Sales return 20,000
Purchase 8,00,000 Office Expenses 50,000
Ans: Rs. 14,50,000
Project Work
a. Make a trial balance after observing and analyzing the journal and ledger
of any social or business organization.
T
rial Balance
Aakar’s Office Practice and Accountancy - 10
127
126 Aakar’s Office Practice and Accountancy - 10 Final Accounts 127
126
6 Final Accounts
Unit
CDC Syllabus 15 Periods
6.1 Profit and loss account- Introduction
and advantages
Methods of calculating gross
profit- gross loss and net profit
and net loss
6.2 Balance sheet- Introduction,
advantage and use adjustments:
Closing stock
Advance payment Learning
Outstanding Objectives
Depreciation- in amount After studying this unit, students will
be able to :
define final account and its types,
state the objectives and importance
of trading, profit and loss account and
balance sheet,
prepare trading, profit and loss a/c
and balance sheet,
differentiate between trial balance
and balance sheet,
define some adjustment items and
show their impact of final account,
solve some of the practical problems.
Trading, Profit and Loss Account of Ramesh & Bros.
As on 30-12-075
Balance Sheet of Ramesh & Bros.
As on 30-12-075
Aakar’s Office Practice and Accountancy - 10
rial Balance
T
127
126
126 Aakar’s Office Practice and Accountancy - 10 Final Accounts 127
1. Introduction
Every business is motivated by profit. Thus, a businessman wants to determine the
profit or loss of his business after a certain period and its financial position on that date.
He/ she needs the complete monetary figures of the incomes, gains and expenses and
losses of his business concern of a certain period, say a year, in order to determine the
profit or loss for the period. Similarly, she/he needs the actual monetary values of the
capital, liabilities and assets of her/his concern on that date to find out its true financial
position.
These all pieces of information are obtained from the ledger balances of certain specified
period, usually of a year, because ledger accounts are prepared on separate heads of
incomes, gains, expenses, losses, capital, liabilities and assets. After preparing the ledgers
and getting their balances (Dr. or Cr. balances), they are to be tested by preparing a
trial balance to check their arithmetical accuracy. Then, when the ledger accounts are
found accurate, the final accounts are prepared from the information of trial balance. The
final accounts, comprised of trading and profit and loss and balance sheet, are basically
intended to ascertain the profit or loss at the end of a fiscal year and the true financial
position on that date.
Thus, final accounts may be defined as the books of account of a business concern,
prepared at the end of a fiscal year to ascertain the result of its operation i.e. profit/loss
for the period and its true financial position on that date.
According to S. Mukharjee, “Final account is the account which is prepared at the end of a
given year period to see the profit and loss position as well as the financial position of a going
concern for the period given.”
In conclusion, it is the final process of accounting for preparing financial statements,
i.e. trading A/c, profit and loss A/c and balance sheet to show the operating result and
financial position of the firm.
Key Point Final accounts are the accounts prepared at the end of a given period of
time to ascertain profit or loss and financial position of the business.
2. Objectives/Importance of Final Accounts
i. To know the profit/loss of the business.
ii. To know the position of capital, liabilities and assets.
in. To find out the liquidity and solvency position of business.
iv. To control over the unnecessary financial transactions which are essential for
the business.
v. To predict the future performance of the business.
vi. To communicate the financial transactions in summary.
128 Aakar’s Office Practice and Accountancy - 10 Final Accounts 129
Trading Account
3. Introduction
The account, which is prepared by a business concern, at the end of an accounting
year, in order to ascertain the gross profit or gross loss resulting from the sales and the
cost of goods sold, is known as trading A/c. It includes all the direct and factory expenses
on the debit side and sales, closing stock and abnormal loss of stock, if any, on the credit
side to compare the sales revenue and the cost of goods sold. Thus, the difference between
the totals of its debit side and credit side is either gross profit or gross loss. When the total
of credit side i.e. the total of incomes is heavier than the total of debit side i.e. the total
of expenses, gross profit occurs. Otherwise, when the debit total exceeds the credit total,
it results the gross loss. In this way, it tries to ascertain the gross profit or gross loss of
business concern during a certain period, say a year, in its normal production or trading
operation.
This account is mainly prepared to find out the profitability of the goods bought or
manufactured and sold by a business concern. It is the first step of final accounts.
Key Point Trading account is the first step of final accounts prepared to ascertain
profit or loss from its production and trading operation i.e. gross profit or
gross loss of the business.
4. Objectives of Trading Account
There’s a notable importance of trading A/c to the business organizations. Its
importance may be highlighted in terms of the following objectives:
i. To find out the gross profit or gross loss during a year in order to measure the
profitability of the goods bought or manufactured and sold by a business concern.
ii. To find out the gross profit ratio or the gross loss ratio by comparing the gross profit
and sales figures and measure the efficiency by comparing with that of the last years
and taking necessary corrective measures, if required.
iii. To determine the net purchase and sales during the year.
iv. To find out the opening and closing stock for the year.
v. To acquire the knowledge about the direct expenses and factory and manufacturing
overheads and the abnormal losses of stock in trade, if any, and control over them in
an appropriate way.
vi. To provide suggestions to the business authority to determine the price of the
products by providing information about the cost of goods sold. A certain percentage
of projected profit is added in the cost of the products to determine the selling price.
5. Importance and Advantages of Trading Account
A trading A/c is important for a business undertaking. The importance of a trading
A/c can be described in respect to the following advantages:
128 Aakar’s Office Practice and Accountancy - 10 Final Accounts 129
i. Finding Out Gross Profit or Loss
A trading A/c ascertains the gross profit/loss resulting from the sales and cost of
goods sold of a business concern during each accounting period. This helps to measure
the profitability of the goods bought or manufactured and sold. If gross loss has accrued,
then it will suggest the entrepreneur to close down the business line temporarily till the
improvement of the conditions.
ii. Helpful in Fixation of Selling Price
Generally, a businessman determines the selling price of his products by adding a
certain percentage of profit on their cost. Since a trading A/c enters all the direct costs and
factory/manufacturing indirect expenses of the products, a certain percentage of profit
can be calculated on such a cost and selling price can be easily determined.
iii. Maintaining Efficiency
Trading A/c helps to compare the projected profit and the actual profit and helps
to analyse the reason for the differences, if any. Then the necessary improvements can be
done if the actual profit is less than the projected one. Similarly, when the actual profit is
more than the projected one, efforts can be made to maintain it in the future. In this way
efficiency can be maintained.
iv. Comparison of Figures
It provides the important figures like net purchases, net sales, gross profit, opening
stock and closing stock etc. Thus, a businessman can see a ratio of gross profit to sales,
compare the purchase and sales and make an appropriate valuation of stocks, which can
be compared with that of the previous years.
v. Control Over the Expenses and Losses
It provides the information about all direct expenses and factory/manufacturing
indirect expenses under separate headings. Thus, necessary control can be made over
them by eliminating wastage and leakage and minimizing overheads. It also helps to
ascertain the percentage of direct expenses over sales.
Points to Remember
i. Finding out gross profit or loss ii. Helpful in fixation of selling price iii. Maintaining efficiency
vi. Comparison of figures v. Control over the expenses and losses
Debit Side Items of Trading A/c
i. Opening Stock
The term ‘stock’ refers to the stock of goods. Generally goods may be found in three
forms - raw materials, semi raw materials i.e. work in progress and finished goods. Thus,
there may be stock of raw materials, semi-raw materials or finished goods. The opening
stock is the stock of unused materials or unsold goods remained at the end of the previous
accounting year and brought forward to the beginning of the current accounting year.
130 Aakar’s Office Practice and Accountancy - 10 Final Accounts 131
Since this stock is brought forward to the beginning of the current year with its value
(stock is generally valued on the basis of cost price or present market price whichever is
less), it is assumed as an expense to the current year and thus, charged on the debit side
of trading A/c.
ii. Purchase and Purchase Return
Purchases refer to all the cash as well as credit purchases of goods (but not of capital
assets) during a year. It is a revenue nature expense on materials or goods purchased for
the regular dealing of a business concern. Sometimes materials/goods of some value may
be returned to the supplier, specially out of the credit purchases, such a return is termed
as purchase return, return outward or return to suppliers. In such a case, net purchase of
the year should be found by deducting the total purchase return from the total purchases
of the year. The purchase is always charged on the debit side of the trading A/c by
deducting the returns, if any.
iii. Purchasing Expenses
The expenses made on the carriage of goods from the supplier’s place up to the
godown of the buyer are known as purchasing expenses or in other words the expenses
made during the transit for the goods bought are known as purchasing or buying expenses.
There are a number of such expenses. So, examples of such expenses are as given below:
Clearing charges Loading and unloading expenses
Shipping and railway freight Import duty
Carriage on purchase Octroi charges/local taxes
Carriage and cartage etc.
iv. Factory Expenses
All the expenses (both of direct and indirect nature) incurred inside the factory for
production or manufacturing of the goods is called factory expense. These expenses are
debited in trading A/c. The following are some of the examples of factory expenses:
Wages, Productive expenses, Manufacturing expenses, Factory expenses like factory
rent, factory insurance, factory heating and lighting, etc., Motive power like; coal,
water and electricity, fuel, gas, oil etc. Consumable store like; engine oil, cotton,
wastage or rags, soap paper, royalty, etc.
Note: Royalty refers to the payment in the form of rent, payable to the owner of an
asset such as patentee, author or landlord for acquiring the right to use his patent,
copyright or land. If royalty is paid on the basis of production, it is regarded as
production expense and thus, debited to trading A/c, if it is paid on the basis of
sales, it is regarded as selling expense and thus debited to profit and loss A/c and if
it is paid in lump sum, it is regarded as a capital expenditure and thus, mentioned in
the assets side of balance sheet.
130 Aakar’s Office Practice and Accountancy - 10 Final Accounts 131
Credit Side Items of Trading A/c
i. Sales and Sales Returns
Sales refer to the cash as well as the credit sales of goods (not of the capital assets)
during a year. It is a revenue nature income of a business concern for the year. It includes
the sales of goods, which have been purchased for resale or manufacturing purpose. It
also includes the goods already sold but remained undeliverable. Sometimes, goods of
some value may be returned by the customers, specially from out of the credit sales and
it is termed as sales returns, return inward or returns from customers. Such a return is
deducted from the total sales in order to find out the net sales for the year. Sales are
always credited in trading A/c by deducting sales returns, if any.
ii. Closing Stock
There may be a stock of raw materials, work-in-progress or finished goods in a firm
or company at the end of an accounting year in course of its business dealing, which
is known as closing stock. Thus, closing stock refers to the stock of unused material or
unsold goods remained at the end of the current accounting year. It is the unused material
or unsold good and thus, deductible from purchase. So, it is credited in trading A/c (it
must be carried forward to the beginning of the coming accounting year and thus, it is
credited in trading A/c by creating it as A/c rather than deducting from purchase), on
one hand and it is a property to the concern until it is used or sold thus, regarded as an
asset and is mentioned in the balance sheet on the other.
Normally, it is given outside the trial balance because its valuation is made after the
accounts have been closed and the trial balance is prepared. Thus, as a new finding or
transaction, it is recorded twice in the final accounts once on the credit side of trading,
A/c and then in the assets side of balance sheet according to the principle of double entry
book-keeping.
iii. Abnormal Loss of Goods
Sometimes, there may be an abnormal loss of goods due to fire, theft or other natural
disasters. The full value of such a loss (whether recovered from insurance co. or not)
should be credited to trading A/c to ascertain the gross result of the normal business
operation of a concern.
It should be noted, however, that if the total value of such an abnormal loss of the goods
is assured to compensate by the insurance company, it should be mentioned further once
in the assets side of the balance sheet as ‘insurance claim receivables; if not assured to
compensate, then the total of this loss should be charged on the debit side of profit and
loss A/c as ‘To goods lost, and by again if it is assured to compensate a certain portion of
the loss, that portion mentioned in the balance sheet assets side and the portion of loss,
which is not assured to be compensated should be charged on the debit side of profit and
loss A/c as a business loss.
132 Aakar’s Office Practice and Accountancy - 10 Final Accounts 133
Specimen and Preparation of Trading A/c
Trading A/c of .................. Co.
Dr. For the year ended................... Cr.
Particulars Amount Particulars Amount
To Opening stock .......... By Sales ..........
To Stock at commencement .......... Less: Returns .......... ..........
To Stock (1-1-075) .......... By Return from Customers ..........
To Purchases .......... By Return from debtors ..........
Less: Returns .......... .......... By Return in ..........
To Purchasing expenses .......... By Return (Dr.) ..........
To Carriages .......... By Closing stock ..........
To Carriages on purchase .......... By Goods lost by fire, theft etc. ..........
To Carriage in .......... By Gross loss c/d ..........
To Freight inwards .......... By Stock at end ..........
To Dock charges .......... By Unsold stock ..........
To Clearing charges .......... By Gross loss c/d ..........
To Loading and unloading .......... (Balancing figure)
To Shipping and railway freight ..........
To Import duty/excise duty ..........
To Octroi charges ..........
To Local charges ..........
To Carriage insurance ..........
To Coolie & cartage ..........
To Factory expenses ..........
To Factory rent ..........
To Factory insurance ..........
To Factory heating & Lightning ..........
To Wages ..........
To Productive wages ..........
To Manufacturing wages ..........
To Wages to foremen ..........
To Wages and salaries ..........
To Motive power ..........
To Coal, coke, wood, steam, etc. ..........
To Fuel, gas, oil, water, etc. ..........
To Stores consumed ..........
To Consumable stores ..........
To Royalty on production ..........
To Gross profit c/d .........
(Balancing figure)
Total: .......... Total: ..........
132 Aakar’s Office Practice and Accountancy - 10 Final Accounts 133
Procedures of Preparing Trading Account
There are the procedures which are followed while preparing trading account.
1. A proper format should be drawn and name of company and the date should be
maintained at the top.
2. It is prepared in the form of ledger account and thus, it contains two sides; debit
and credit.
3. It is treated as nominal account and all the losses and expenses are debited and
all gains and incomes are credited.
4. The word ‘To’ is used in debit side and ‘By’ in credit side.
5. Opening stock and direct expenses are entered in debit side sales and closing
stock are entered in credit side.
6. The gross profit or gross loss should be determined by comparing the debit total
and credit total.
7. The balancing figure appearing in debit side is termed as gross profit under the
word “To gross profit c/d” and the balancing figure appearing in credit side is
termed as gross loss under the word “By gross loss c/d”.
8. After the determination of gross profit and gross loss, it should be closed by
drawing two parallel lines.
Illustration - 1
From the following information, prepare a Trading A/c of Suman Enterprises for the
year ended 30 Chaitra, 2075.
th
Particulars Amount Particulars Amount
Purchases 35,000 Carriage inward 2,000
Wages 5,000 Opening stock 12,000
Sales 65,000 Factory expenses 10,000
Purchase returns 2,500 Carriage insurance 500
Octroi charges 1,500 Coal & coke 700
Clearing charges 1,300 Sales returns 3,000
Power & fuel 1,800 Import duty 1,200
Closing stock was valued at Rs. 20,000
134 Aakar’s Office Practice and Accountancy - 10 Final Accounts 135
Solution:
Trading A/c of Suman Enterprises
Dr. For the year ended 30th Chaitra, 2075 Cr.
Particulars Amount Particulars Amount
To Opening stock 12,000 By Sales 65,000
To Purchases 35,000 Less: Returns 3,000 62,000
Less: Returns 2 500 32,500 By closing stock 20,000
To Carriage inward 2,000
To Wages 5,000
To Factory expenses 10,000
To Carriage insurance 500
To Octroi charges 1,500
To Coal & coke 700
To Clearing charges 1,300
To Power & fuel 1,800
To Import duty 1,200
To Gross profit c/d 13,500
Total: 82,000 Total: 82,000
Illustration -2
From the following balances, prepare a Trading A/c for the year ended 32
nd
Ashadh, 2075.
Particulars Amount Particulars Amount
Purchases 25,000 Stock (1-4-075) 5,000
Sales 50,000 Purchase returns 2,500
Sales returns 3,500 Carriage inward 1,000
Factory rent 4,000 Coal, gas & water 300
Factory heating and lighting 700 Stores consumed 3,000
Wages 7,000
Closing stock: 20,000
134 Aakar’s Office Practice and Accountancy - 10 Final Accounts 135
Solution:
Trading A/c of ........
Dr. For the year ended 32 Ashadh, 2075 Cr.
nd
Particulars Amount Particulars Amount
To Opening stock 5,000 By Sales 50,000
To Purchases 25,000 Less: Returns 3,500
Less: Returns 2,500 22,500 46,500
To Carriage inward 1,000 By closing stock 20,000
To Factory rent 4,000
To Factory heating and lighting 700
To Coal, gas and water 300
To Wages 7,000
To Store consumed 3,000
To Gross profit c/d 23,000
Total: 66,500 Total: 66,500
Exercise
A. Answer the following questions in one sentence.
1. What is final account?
2. What is trading account?
3. How is the gross profit determined?
4 How is gross loss determined?
5. What is closing stock?
6. What is direct income?
7. What is direct expense?
8. Write a difference between direct expenses and indirect expenses.
9. Why is trading account prepared?
10. What is opening stock?
11. What will be the result if total of debit side is heavier than total of credit side in
trading account?
B. Give short answers to the following questions.
12. What is meant by final accounts? Explain any four objectives of final account.
13. What is trading account? Explain its any four objectives.
14. Describe any five point of importance of a trading A/c.
15. Draw-up a common specimen of a trading A/c with their respective debit and
credit items.
136 Aakar’s Office Practice and Accountancy - 10 Final Accounts 137
NUMERICAL PROBLEMS
16. Prepare the Trading Account of R & R Distributors on the basis of the
following particulars as on 31 st Ashad, 2075.
Particulars Amount Particulars Amount
Opening Stock 2,30,000 Octori 3,000
Wages 14,000 Return inward 15,000
Sales 4,45,000 Purchase 1,10,000
Custom Duty 15,000 Other Manufacturing Expenses 35,000
Ans: Gross profit Rs. 23,000
17. Prepare the Trading Account of Sani & Dasha Company for the fiscal year
2075/076 from the following particulars.
Particulars Amount Particulars Amount
Opening Stock 8,00,000 Return outward 43,000
Sales 12,50,000 Sales return 54,000
Freight on Purchase 55,000 Closing Stock 60,000
Purchase 6,50,000 Duty on Import 35,000
Ans: Gross loss Rs. 2,41,000
18. Prepare the Trading Account of Meri Gold Pvt. Ltd., Chitwan on the basis of
the following particulars as on 31 Ashadh, 2075.
st
Particulars Amount Particulars Amount
Opening Stock 125,000 Closing Stock 20,000
Wages and salary 50,000 Return inward 14,000
Sales 320,000 Purchase 60,000
Factory Expenses 14,000 Royalties 25,000
Ans: Gross profit Rs. 52,000
19. Prepare the Trading Account of Hari Pvt. Ltd., Kathmandu on the basis of the
following particulars as on 31 Ashadh, 2075.
st
Particulars Amount Particulars Amount
Opening stock 40,000 Purchase 36,000
Sales 80,000 Carriage on purchase 15,000
Royalties 5,000 Closing stock 15,000
Manufacturing wages 5,000 Factory insurance 10,000
Coolie and cartage 1,000 Custom duty 1,200
Excise duty 4,000 Store consumed 1,000
Coal and coke 1,500 Return outward 1,200
Productive expenses 5,000 Lighting & heating 1,500
Return inward 6,000
Ans: Gross loss Rs. 36,000
136 Aakar’s Office Practice and Accountancy - 10 Final Accounts 137
S.L.C/SEE Examination Questions
1. Why is trading account prepared? Mention its four objectives.
2+ 4=6 (2060S, 2062R)
2. Prepare trading account of Shiv Company, Itahari on last of Ashadh, 2074
from the following items. (2057S)
Particulars Amount Particulars Amount
Opening stock 50,000 Wages 10,000
Sales 2,50,000 Closing stock 60,000
Purchase 1,50,000 Fuel expenses 5,000
Sales return 10,000
(Ans: G.P. Rs 85,000)
3. Prepare trading account of Samjhana Company for the year ended Ashadh,
2057 according to the following particulars. (2058S)
Particulars Amount Particulars Amount
Opening stock 50,000 Purchase return 7,000
Sales return 10,000 Fuel Expenses 5,000
Closing stock 10,000 Sales 5,00,000
Purchases 1,50,000 Wages 10,000
(Ans: GP Rs 2,92,000)
4. Prepare a trading account of Laxmi Brick Industry Pvt. Ltd. Bhaktapur for the
year ended Ashad, 2060 from the following particulars. (2060R)
Particulars Amount Particulars Amount
Opening stock 356,000 Purchase 14,80,000
Coal 2,48,000 Sales 25,25,000
Sales return 50,000 Factory rent 3,00,000
Wages 2,00,000 Stock (32 Ashadh) 6,75,000
nd
Purchase return 90,000 Production expenses 3,56,000
(Ans: GP Rs 3,00,000)
5. Prepare the trading account of Steel Wood Company for the year ended 31
st
Ashadh, 2062 from the following particulars. (Send-up Board)
Particulars Amount Particulars Amount
Opening stock 20,000 Closing stock 35,000
Purchase 75,000 Sales 1,75,000
Carriage inward 3,000 Wages 8,000
Packing expenses 5,000 Manufacturing expenses 8,000
Purchase return 4,000 Sales return 2,000
Factory insurance 2,000 Factory expenses 5,000
(Ans: GP Rs 86,000)
138 Aakar’s Office Practice and Accountancy - 10 Final Accounts 139
6. Prepare a trading account of Avash Company at the end of Ashadh, 2061
according to the following transactions. (Board)
Particulars Amount Particulars Amount
Opening Stock 12,000 Purchase return 2,500
Factory rent 5,000 Sales return 2,200
Carriage 2,000 Sales 82,500
Wages 22,500 Purchase 35,000
Closing stock 20,000 Clearing charges 2,000
(Ans: GP Rs 24,300)
7. Prepare a Trading Account of Baba Biscuit Industry Pvt. Ltd. for the fiscal
year 2061/062 of Ashadh, from the following transactions. (2062R)
Particulars Amount Particulars Amount
Stock on 1 Shrawan 2,25,000 Sales Return 16,000
st
Purchase 7,80,000 Wages 1,40,000
Sales 9,50,000 Octroi 23,000
Fuel 1,32,000 Closing stock 3,00,000
Carriage Inward 90,000
(Ans: G.L. Rs. 1,56,000)
Profit and Loss A/c
6. Introduction
Profit and Loss A/c is the second step of final accounts. It is prepared after preparing
the trading A/c by transferring gross profit from the trading A/c on its credit side or
gross loss on its debit side. After the result of the trading A/c is entered, it enters all the
office and administrative and selling and distribution expenses and losses on the debit
side and indirect incomes, gains and profits on the credit side in order to determine the
net profit/loss for the year. Thus, a profit and loss A/c may be defined as the second step
of final accounts which is prepared to ascertain the net profit/loss of a business concern
for each accounting year, resulting from indirect incomes plus gains and expenses plus
losses of the year. It enters all such expenses and losses on the debit side and the incomes
and gains on the credit side. Thus, the difference between the total of its debit side and
credit side is either net profit or net loss. It means when the totals of its credit side i.e. the
total of incomes, gains and profits is heavier than the total of its debit side i.e. the total
of expenses and losses, it results net profit. Otherwise, when the debit total exceeds the
credit total, it results net loss.
According to S. Mukherjee, “Profit and loss account is a statement which summarises all
indirect revenue expenses in one side which is compared with gross profit revenue incomes in
another side and trading income of an accounting period is assessed.”
The net profit ascertained by profit and loss A/c is the taxable income of that concern
for the year. It is prepared, on one hand to facilitate the tax determination and on
the other, for finding out the general efficiency of a business concern in its normal
business operation.
138 Aakar’s Office Practice and Accountancy - 10 Final Accounts 139
Trading A/c and Profit and Loss A/c are also, termed as an income statement if it is
prepared in the form of a statement i.e. the add and less schedule.
Key Point Profit and loss account is the second step of final account prepared to
ascertain net profit or net loss of the business.
7. Objectives of Profit and Loss Account
There are various objectives of preparing profit and loss A/c. The main objectives
are mentioned below:
i. To find out the net profit/loss during a year in order to measure the general efficiency
of a business conduct.
ii. To facilitate the assessment of tax liability by ascertaining the net profit i.e. the taxable
income. by comparing the total of all permissible incomes, gains and profits on one
side i.e. credit side and expenses and losses on the other i.e. debit side.
iii. To identify each head of indirect expenses and losses and make the necessary control
over them by eliminating wastage, leakage, mishandling etc.
iv. To compare the different relevant figures like net profit and gross profit or losses,
net profit and sales, net profit to the total of non-production expenses, gross profit
to such non-production expenses, etc. Similarly, the current year’s gross profit, net
profit and expenses can also be compared with those of the previous years.
v. To facilitate the preparation of balance sheet by transferring the profit or loss to the
capital A/c. The net profit increases the capital and is thus, added to it and the net
loss decreases the capital and thus, deducted from it.
8. Importance and Advantages
A Profit and Loss A/c is very important financial document of a business concern.
It ascertains the net profit/loss of a concern for each accounting period by means of all
the revenue incomes plus gains and revenue expenses plus losses. Thus, it measures the
general efficiency of the concern. The importance of a profit and loss A/c can be studied
in terms of the following advantages:
i. Finding Out Net Profit/Loss
Profit and Loss A/c of a concern ascertains the net profit or loss at the end of each
accounting year by comparing the totals of incomes, gains and profits on one side and the
expenses and losses on the other. It helps to measure the success or failure of a business
organization in terms of its profit or loss.
ii. Facilitating Tax Assessment
Profit and Loss A/c is prepared in order to ascertain the taxable income. The audited
income statement or profit and loss A/c is recognized by the tax authority. The tax amount
is determined on the basis of the net profit shown by profit and loss A/c. Otherwise, it
becomes difficult to assess the tax, thus, the authority may charge the tax for more than
the actual one. In addition to this, the profit and loss A/c or income statement is legally a
must, for joint stock companies.
140 Aakar’s Office Practice and Accountancy - 10 Final Accounts 141
iii. Control Over Expenses and Losses
Profit and Loss A/c enters all the administrative and office expenses, and selling
and distribution expenses under separate heads and thus the expenses can be studied in
order of heads and thus, a proper control over the expenses and elimination of wastage,
leakage etc. can be done in time. Furthermore, the net profit and gross profit can be
studied separately, with the indirect expenses to have a general evaluation of expenses.
iv. Comparison of Figures
A profit and Loss A/c begins with gross profit on credit side or gross loss on debit side.
It ascertains the net profit/loss finally, as the balancing figure. Thus, with the help of a profit
and loss A/c, the gross profit/loss and the net profit/loss can be compared for the same
year. Similarly, it helps to compare the net profit with the sales of the year. Furthermore, the
net profit of the current year can be compared with that of the previous years and deviations
in such profits may be analysed and improvements can be made if necessary.
v. Helpful in the Preparation of Balance Sheet
A balance sheet is prepared at the last step of final accounts. The net profit or loss, as
the case may be, resulted from profit and loss A/c, is transferred to the capital A/c in the
balance sheet. The net profit is added to the capital and net loss is deducted. There will be
either a net profit or sometimes a net loss in a business concern. The profit and loss A/c
helps to prepare balance sheet by transferring the profit or loss to the capital account.
Points to Remember
i. Finding out net profit/loss ii. Facilitating tax assessment iii. Control over expenses and losses
vi. Comparison of figures v. Helpful in the preparation of balance sheet
Debit Side Items of Profit and Loss A/c
i. Gross Loss
Gross loss is a debit balance of a trading A/c i.e. the balancing figure on the credit
side and, thus, it is always debited in the profit and loss A/c “To Gross loss b/d”. But in
most of the firms, generally gross profit takes place, which is transferred to the credit side
of the profit and loss A/c.
ii. Office and Administrative Expenses
All the expenses of revenue nature i.e. the annual expenses, which are incurred in
course of the general office and administrative performance fall under this head. These
expenses are of indirect nature. These are also, termed as management expenses and are
debited in profit and loss A/c. The examples of such expenses are:
Salary Bank charges Rent, rates and taxes
Audit fees Lighting and heating Printing and stationery
Telephone charges General expenses Postage and telegrams
Trade expenses Office expenses Legal charges
Administrative expenses
140 Aakar’s Office Practice and Accountancy - 10 Final Accounts 141
iii. Selling and Distribution Expenses
These are also indirect expenses. The expenses, which are incurred for the promotion
of sales and distribution of goods and services, are known as selling and distribution
expenses. These expenses are also debited in the profit and loss A/c. The following are
some examples of such expenses:
Packing expenses Warehouse rent/expenses
Godown rent/ insurance etc. Advertising expenses
Publicity expenses Carriage out
Freight out Showroom expenses
Sales agent’s salary and commission Traveller’s salary and commission
Export duty Bad debts Selling expenses
Distribution expenses Brokerage Sampling expenses
iv. Financial and other expenses
All the non-productive but indirect expenses other than the office and selling and
distribution expenses fall under this category. Discount, commission, interest, depreciation
etc. are of this type and also debited in profit & loss A/c.
Credit Side Items of Profit and Loss A/c
i. Gross profit
Gross profit is a credit balance of trading A/c i.e. the balancing figure on the debit
side and thus it is always credited in profit and loss A/c as “By Gross profit b/d”.
ii. Indirect income and profit
All the indirect incomes, gains and profits are mentioned on the credit side of profit
and loss A/c. Such incomes are:
Discount received Commission received
Rent from sublet Rent from tenants
Miscellaneous receipts Interest received from bank
Interest received from investment Dividend received
Income earned Profit on sale of old asset normal profit
Bad debt recovered Apprentice premium etc.
Specimen and Preparation of Profit and Loss A/c
Profit and Loss A/c of .................Co.
Dr. For the year ended ..................... Cr.
Particulars Amount Particulars Amount
To Gross loss b/d ............ By Gross profit b/d ............
To Salaries ............ By Discount received ............
To Salaries and wages ............ By Discount on purchase ............
142 Aakar’s Office Practice and Accountancy - 10 Final Accounts 143
To Rent rates & taxes ............ By Commission received ............
To Printing & stationery ............ By Rent from sublet ............
To Postage and telegram ............ By Rent received ............
To Telephone charges ............ By Rent from tenant ............
To Audit fees ............ By Miscellaneous receipts ............
To Legal charges ............ By Interest earned/received ............
To Insurance ............ By Income earned ............
To General expenses ............ By Dividend received ............
To Office expenses ............ By Bad debt recovered ............
To Administrative expense ............ By Interest from bank ............
To Lighting and heating ............ By Interest from investment ............
To Trade expenses ............ By Profit on sale of old asset ............
To Bank charges ............ By Other indirect profit /gains/incomes ............
To Establishment expenses ............ By Provision for doubtful debt ............
To Repairs and maintenance ............ By Apprenticeship premium ............
To Licence fees ............ By Appreciation of fixed assets ............
To Conveyance ............ By Interest on drawing ............
To Depreciation ............ By compensation received ............
To Packing expenses ............ By Discount on Creditors ............
To Warehousing expenses ............ By Gain on revaluation of fixed assets ............
To Advertising & publicity ............ By Income tax returned ............
To Carriage out ............ By Transfer fee received ............
To Freight out ............ By Interest on loan to others ............
To loss of goods by Accident/Fire/Theft ............ By Provision for depreciation ............
To Entertainment/Refreshment Expenses ............ By Provision for taxation ............
To Charity ............ By Sale of scrap ............
To Sampling ............ By Net loss c/d ............
To Export duty ............ (Balancing Figure)
To Sales tax ............
To Free sample distribution ............
To Brokerage ............
To Bad debt/Bad debt written off ............
To Collection expenses ............
To Traveller’s expenses ............
To Selling expenses ............
To Unproductive wages ............
To Distribution expenses ............
To Sample distribution ............
To Show room expenses ............
To Salesman’s expenses ............
By Goodwill written off ............
To Loss on sale of old asset ............
142 Aakar’s Office Practice and Accountancy - 10 Final Accounts 143
By Amortization of goodwill ............
To Discount ............
To Preliminary expenses written off ............
To Commission ............
To Interest on loan/interest allowed ............
To Interest on bank overdraft ............
To Interest on capital ............
To Net profit c/d ............
(Balancing Figure)
Total ............ Total ............
Procedures of Preparing Profit and Loss Account
Following are the procedures of preparing profit and loss account.
1. It is prepared in the form of ledger account and thus, it contains two sides i.e. debit
and credit.
2. The gross profit should be entered in credit side and the gross loss in debit side.
3. The word ‘To’ and ‘By’ should be used in debit and credit side respectively.
4. All the indirect expenses, losses and nominal account are entered in debit side and
the indirect incomes and gains are entered in credit side of profit and loss A/c.
5. The net profit and net loss of the business firm should be determined by comparing
the total of debit side and the total of credit side.
6. The balancing figure appearing in debit side is termed as net profit under the word
“To net profit c/d” and the balancing figure appearing in credit side is termed as net
loss under the word, “By net loss c/d”.
7. After determination of net profit or net loss, it should be closed by drawing two
parallel lines.
Note: Nowadays for convenience, Trading and Profit and Loss Account are combined
together and it is known as ‘Trading and profit and Loss Account’. First part is
prepared to ascertain the gross profit or gross loss and the second part is prepared
for net profit or net loss.
Illustration - 3
From the following information, prepare Profit and Loss A/c of ABC Co., Kathmandu
for the fiscal year 2075/076.
Particulars Amount Particulars Amount
Office rent 2,000 General expenses 1,500
Gross profit 18,000 Salaries 4,500
Commission paid 700 Discount allowed 500
Interest received 600 Insurance 1,300
Carriage on sales 1,200 Distribution expenses 800
Sundry receipts 400 Lighting and heating 300
Audit fees 1,700
144 Aakar’s Office Practice and Accountancy - 10 Final Accounts 145
Solution:
Profit and Loss A/c of ABC Co., Kathmandu
Dr. For the year ended 2075/076 Cr.
Particulars Amount Particulars Amount
To Office rent 2,000 By Gross profit b/d 18,000
To General expenses 1,500 By Interest received 600
To Salaries 4,500 By Sundry receipt 400
To Commission 700
To Discount 500
To Insurance 1,300
To Carriage on sales 1,200
To Distribution expenses 800
To Lighting and heating 300
To Audit fees 1,700
To Net profit c/d 4,500
Total: 19,000 Total: 19,000
Illustration - 4
From the following information taken from the books of Jagat Bros, for the year ended
30 Chaitra, 075, prepare Profit and Loss A/c.
th
Particulars Amount Particulars Amount
Staff salaries 8,000 Stationers 1,000
Office rent 2,500 General expenses 1,500
Bank charges 700 Administrative expenses 2,500
Advertisement & publicity 1,300 Legal charges 600
Traveller’s salary & commission 1,900 Discount allowed 450
Gross profit 22,000 Carriage out 1,550
Interest from bank 1,100 Sampling expenses 1,200
Dividend received 2,900
Profit and Loss A/c of Jagat Bros.
Dr. For the year ended 30 Chaitra, 075 Cr.
th
Particulars Amount Particulars Amount
To Staff salaries 8,000 By Gross profit b/d 22,000
To Stationers 1,000 By Interest from bank 1,100
To Office rent 2,500 By Dividend received 2,900
To General expenses 1,500
To Bank charges 700
To Administrative expenses 2,500
To Advertisement & publicity 1,300
To Legal charges 600
To Traveller’s salary and commission 1,900
To Discount allowed 450
To Carriage out 1,550
To Sampling expenses 1,200
To Net profit c/d 2,800
Total: 26,000 Total: 26,000
144 Aakar’s Office Practice and Accountancy - 10 Final Accounts 145
Illustration - 5
Prepare Trading A/c and Profit and Loss A/c from the following balances.
Particulars Amount Particulars Amount
Stock at commencement 1,800 Purchase 8,000
Sales 15,000 Purchase returns 200
Sales return 100 Carriage in 150
Carriage out 50 Freight and duty etc. 120
Manufacturing wages 2,200 Coal & fuel 80
Factory expenses 450 Salary 1,700
Rent rates and insurance 600 Commission 650
Interest (Cr.) 300 Discount (Cr.) 600
Stationery 50 Trading expenses 180
Closing stock was valued at Rs. 2,000
Solution:
Trading A/c of .........
Dr. For the year ended .......... Cr.
Particulars Amount Particulars Amount
To Opening stock 1,800 By Sales 15,000
To Purchase 8,000 Less: Returns - 100 14,900
Less: Returns - 200 7,800 By Closing stock 2,000
To Carriage in 150
To Freight and duty etc. 120
To Manufacturing wages 2,200
To Coal & fuel 80
To Factory expenses 450
To Gross profit c/d 4,300
Total: 16,900 Total: 16,900
Profit and Loss A/c ..............
Dr. For the year ended .......... Cr.
Particulars Amount Particulars Amount
To Carriage out 50 By Gross profit b/d 4,300
To Salary 1,700 By Interest received 300
To Rent, rates and insurance 600 By Discount received 600
To Commission paid 650
To Stationery 50
To Trading expenses 180
To Net profit c/d 1,970
Total: 5,200 Total: 5,200
146 Aakar’s Office Practice and Accountancy - 10 Final Accounts 147
Exercise
A. Answer the following questions in one sentence.
1. What is profit and loss account?
2. How is the net profit determined?
3. How is net loss determined?
4. What is depreciation?
5. What is indirect income?
6. What are indirect expenses?
7. What is loss on sale of old asset?
8. What are selling and distribution expenses?
9. What will be the result if total of credit is excess than total of debit of P & L A/c?
10. What is adjustment?
B. Give short answers to the following questions.
11. What is profit and loss account? Explain any four objectives.
12. Describe any five points of importance of profit and loss account.
13. Draw-up a common specimen of profit and loss account with their respective
debit and credit items.
NUMERICAL PROBLEMS
1. From the following particulars, prepare profit & loss account to find out net
profit or net less of Roj & company.
Particulars Amount Particulars Amount
Gross profit 90,000/- Interest 2,000/-
Salary 15,000/- Depreciation 6,000/-
Discount received 1,000/- Dividend received 5,000/-
Carriage out 9,000/- Advertisement 10,000/-
Ans: Net profit Rs. 54,000
2. Prepare the Profit and Loss A/c of Santosh & Co., Bardiya on the basis of the
following particulars as on 31 Ashad, 2075.
st
Particulars Amount Particulars Amount
Gross Profit 50,000 Rent Received 15,000
Loss by Accident 15,000 Export Duty 10,000
Dividend Received 25,000 Bad debts Recovered 10,000
Audit Fee 5,000 Legal Charge 5,000
Ans: Net profit Rs. 65,000
146 Aakar’s Office Practice and Accountancy - 10 Final Accounts 147
3. Prepare the Profit and Loss A/c of Bhabilal & Company, Baglung on the basis
of the following particulars as on 31 Ashad, 2075.
st
Particulars Amount Particulars Amount
Profit on sales of assets 22,000 Income from Investment 7,000
Depreciation 5,000 Bad debts 5,000
Rent Received 12,000 Gross Loss 12,000
Interest on Loan 9,000 Repairs 7,000
Ans: Net profit Rs. 3,000
4. Prepare the Profit and Loss A/c of S & J Stores, Chitwan for the fiscal year 075/076.
Particulars Amount Particulars Amount
Gross Loss 210,000 Trade Expenses 25,000
Sale of Scrap 25,000 Interest on Loan 10,000
Income from Investment 65,000 Profit on Sale of Fixed Assets 95,500
Discount on Purchase 55,000 Commission to Salesman 12,000
Ans: Net loss Rs. 16,500
5. Prepare the Profit and Loss A/c of X to Z Stores, Chitwan for the fiscal year 075/076.
Particulars Amount Particulars Amount
Gross Profit 30,000 Rent Earned 22,000
Loss on Sale of Fixed Assets 25,000 Repairs and Maintenance 15,000
Sale of Scrap 10,000 Interest on Loan 8,000
Discount on Sales 25,000 Commission Received 10,000
Ans: Net loss Rs. 1,000
6. On the basis of following stocks of Super Company, prepare Trading and P/L
account at the end Ashadh, 2075.
Particulars Amount Particulars Amount
Purchase 4,00,000 Carriage 30,000
Wages 35,000 House rent and taxes 3,000
Purchase return 5,000 Opening stock 2,00,000
Sales 1,42,000 Sales return 6,000
Advertisement 50,000 Salary 1,10,000
Stationery and printing 25,000 Legal fees 3,00
Ans: Gross Loss Rs. 4,96,000, Net Loss Rs. 7,14,300
7. On the basis of following transactions of Harati Enterprises, prepare Trading
and P & L account for the end of fiscal year 31 Ashadh, 2075.
st
Particulars Amount Particulars Amount
Opening stock 55,000 Closing stock 45,000
Sales 60,000 Purchase return 9,000
Coal and water 1,500 Audit fee 11,000
Rent received 35,000 Carriage outwards 12,000
Carriage inwards 2,000 Interest on investment 18,000
Purchase 40,000 Labour and worker 25,000
Salary 35,000 Commission and discount 3,000
Legal fee 4,000 received 25,000
Sales return 6,000 Income from investment 20,000
Expenses for factory
Ans: Gross loss Rs. 35,500, Net loss Rs. 16,500
148 Aakar’s Office Practice and Accountancy - 10 Final Accounts 149
S.L.C/SEE Examination Questions
8. Prepare a profit and loss account of Kamal Industry Ltd. for the year end of
Ashad, 2058 from the following particulars. (2058R)
Particulars Amount Particulars Amount
Gross profit 1,00,000/- Salaries 40,000/-
Trade expenses 5,000/- Bank charges 500/-
Commission received 10,000/- Discount on sales 3,000/-
Interest received 2,000/- Interest expenses 11,000/-
House rent received 25,000/- Travelling expenses 15,000/-
(Ans: Net Profit Rs. 62,500)
9. Prepare a Profit and Loss Account of Bhaktapur Shoes Factory of 31 Ashadh,
st
2061 from the following transactions. (SLC 2061 ‘R’).
Particulars Amount Particulars Amount
Gross profit 3,56,000 Discount on purchase 5,000
Advertising 25,000 Interest received 21,000
Rent received 50,000 Insurance 33,000
Stationary 18,000 Carriage outward 40,000
(Ans: Net Profit Rs. 3,16,000)
10. Prepare a Profit and Loss Account of Daliyan Limited for the year ended
2001. (Board)
Particulars Amount Particulars Amount
Gross profit 3,000 Depreciation 2,200
Trade expenses 1,100 Postage and telegram 2,500
Salaries 1,200 Insurance 500
Discount 2,000 Advertisement 1800
Rent earned 8,000 Miscellaneous 800
Interest on investment 1,000 Bad debt 1,000
(Ans: Net loss Rs. 1,100)
11. Prepare a Profit and Loss Account of Bibek and Co. for the end of Ashadh,
2060 from the following particulars. (Board 060)
Particulars Amount Particulars Amount
Salaries 80,000 Gross profit 1,25,000
Advertisement 2,000 Interest received 20,000
Printing and stationery 4,500 Legal charges 5,000
Insurance 2,000 Audit fee 2,000
Bad debt 3,000 Commission received 10,000
Bank charges 1,500 Depreciation 5,000
(Ans: Net Profit Rs. 50,000)
148 Aakar’s Office Practice and Accountancy - 10 Final Accounts 149
12. Prepare a Profit and Loss Account of Sherpa Carpet Industry Pvt. Ltd. of 32
nd
Asar, 2063 according to the following transactions: (2063R)
Particulars Amount Particulars Amount
Gross profit 5,22,000 Salary 1,36,000
Stationery 25,000 Interest received 18,000
Commission received 50,000 Telephone charge 24,000
Carriage received 41,000 Entertainment expenses 20,000
Advertisement 60,000
(Ans: Net Profit Rs. 3,66,000)
13. Prepare profit and loss account of Hetauda Company Pvt. Ltd. for the fiscal
year end of Ashadh 2067/68 according to the following transactions. 2068 (R)
Particulars Amount Particulars Amount
Gross Profit 1,85,000/- Salary 81,000/-
Profit in Investment 11,000/- Tax 7,000/-
Commission Received 4,000/- Interest Paid 20,000/-
Advertisement 15,000/- Audit Fees 10,000/-
Ans: Net profit = Rs. 67,000
14. Prepare a profit and loss account of Pathibhara General Store for the year
2068/69 Ashadh. SLC 2069
Particulars Amount Particulars Amount
Salary 95,000 Insurance premium 15,000
Stationary 13,000 Dividend received 18,000
Carriage award 4,000 Discount received 11,000
Doubtful debt 19,000 Gross Profit 1,49,000
Ans: Net Profit Rs. 32,000
15. Prepare the profit and loss account of Pashupati Grill Industry as an 31
st
Ashadh, 2070 from the following particulars. SLC 2070
Particulars Amount Particulars Amount
Gross loss 2,00,000 Advertisement 15,000
Purchase discount 16,000 Rent received 50,000
House rent 60,000 Salary 90,000
Received bonus 34,000
Ans: Net loss Rs 2,65,000
16. Prepare profit and loss account of D and D store as on 30 Asar, 2071 from the
th
following particulars. 2072
Particulars Amount Particulars Amount
Gross loss 4,00,000 Interest received 20,000
Depreciation 24,000 Doubtful debt 15,000
Dividend received 30,000 Salary 90,000
Selling expenses 50,000 Stationery 16,000
Ans: Net profit Rs. 2,55,000/-
150 Aakar’s Office Practice and Accountancy - 10 Final Accounts 151
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