Chapter 2

Trial Balance to Profit & loss

A/c and Balance Sheet for
Corporate & Non-Corporate
Entities

Key Points of the Chapter

Difference between Corporate and

Non Corporate entities
Accounting Cycle
Profit & Loss A/c In a Nut Shell
Balance Sheet In a Nut Shell
Examples

Difference between Corporate &

Non-Corporate Entities
Non-Corporate Entities
Types

Sole
Proprietorship

Partnership

Owner

Proprietor

Partners

Examples

Krishna
S.R.Shah &
provision store Co.
Delhi Traders

Corporate Entities
Public Ltd Co.

Private Ltd Co

Share holders
IDBI Bank Ltd
Dabur India
Ltd

Haldiram
Marketing
Pvt.Ltd

Identification
of
transaction
Accounting
Cycle

Recording
Transaction

Posting to
Ledger

Preparation
of Trial
Balance

Preparation
of final A/cs

Accounting Cycle
Trial Balance

Construction of
Financial
statement

Analysis of results

Profit & Loss A/c

Balance Sheet

Profit & Loss A/c In a Nut Shell

The Profit and loss account enables the users to ascertain

whether the business operations have been profitable or not
during an accounting period. i.e. whether the co. is making
profit or loss.

When, Revenues > Expenses = Profit / Net Income

When , Expenses > Revenue = Loss / Net loss

Conti.
The Accounting cycle seeks to bifurcate the trial balance into
Balance Sheet & Profit & Loss Account.
The profit & loss A/c is again divided into two parts

Trading A/c

Showing Gross Profit

Profit & Loss A/c

Showing Net Profit

But, both the parts are constructed in one statement and put
together known as Trading & Profit & loss A/c.

Particulars

Amount
( Rs)

To Opening Stock
To Purchases
-Less: Purchase returns -To Direct Expenses
To Wages
To Freight inward
To Carriage inward
To Gross Profit c/d

-------_________________
_________________

To Gross loss b/d

To Salary
To Rent, Rates
To Fire Insurance Premium
To Repairs & Maintenance
To Depreciation
To Audit fees
To Bank Charges
To Legal Charges
To Commission on Sales
To Traveling Expenses
To Entertainment Expenses
To Sales & promotion Expenses
To Advertising Expenses
To Bad Debts
To Packing Charges
To Interest on loan
To loss by theft
To loss by fire
To Carriage outward
To Discount allowed
To Discount on issue of shares
To Preliminary expenses w/off
To Net Profit c/d
(transfer to capital A/c)

------------------------_________________
_________________

Particulars
By Sales
Less: Sales return
By Closing Stock
By Gross loss c/d

By
By
By
By
By

---

Gross profit b/d

Interest received/ earned
Commission received
Rent earned
profit on sale of fixed
Assets
By Income from Investments
By Miscellaneous income
By Sale of scrap
By Net loss
(Transfer to Capital A/c)

Amount

( Rs)

----

___________________
__________________
-----------

___________________
___________________

Gross Profit :

Gross Profit is the difference between the sales revenue and

cost of goods sold.
(Gross Profit = Sales revenue- COGS)

Where,
COGS = Ope.stock +Purchase +Direct Expenses Cl.stock

Net Profit

Net Profit = Gross Profit

+ All the incomes
-All the Operating expenses
Where,
All operating expenses=Admini. exps + selling & distribution exps

Balance Sheet In a Nut Shell

It is called Balance sheet because it is a sheet of balances of

those ledger accounts which have not been closed till the
preparation of Trading & profit &loss account.
A balance sheet describes the financial position of an entity.

Liabilities
Capital:
Opening Bal.
-Add: Net Profit
-(Less: Net loss)
Less: Drawings
-Long-term Liabilities :
Loan
Current Liabilities:
Sundry Creditors
Bills payable
Bank Overdraft
Income received in advance
Outstanding Expenses

Amount
( Rs)

----------------

_____________
_____________

Assets
Fixed Assets:
Goodwill
Land
Building
Plant & Machinery
Furniture& fixtures
Investments
Current Assets:
Closing stock
Sundry Debtors
Bills Receivable
Cash at Bank
Cash on hand
Prepaid expenses
Accrued Income

Amount
(Rs)
---------------_____________
_____________

Classification of Capital and Revenue

1.

Capital Expenditure : Capital expenditure refers to an

expenditure which has been incurred for the purpose of
obtaining long-term advantage for an entity. i.e.
- For acquiring or bringing into existence an asset
- For extending or improving a fixed asset
- For replacement of an existing fixed asset.

2.

Revenue Expenditure : Revenue expenditure refers to an

expenditure which yields benefits in the current accounting
period.
- For e.g. Salary, rent, telephone expenses, electricity charges.

3.

Deferred Revenue Expenditure : Deferred revenue expenditure is

that expenditure which yields benefits which extend beyond a
current expenses should be written off over a period of 3-5
years. accounting period, but relatively short period as compare
to the period for which a capital expenditure is expected to give
benefits. Such expenses should be written off over a period of 35 years.
- For e.g. Advertising campaign, Research & Development
expenses.

Conti

Capital Receipts : Capital receipts consist of payments made to

the entity by shareholders, proprietors or owners of the business.
An entity can generate receipts by selling fixed assets or by
raising loans.

Revenue Receipts : This receipts arise in the course of an entity's

regular operating transactions.
- For e.g. Sale of goods, interest and commission received.

Outstanding Expenses/ Accrued Expenses:

- Outstanding expenses refer to those expenses which have been
incurred but not paid during the current accounting period.

Prepaid Expenses/ Unexpired Expenses/ Expenses paid in advance:

- Prepaid expenses refer to those expenses which have been paid
during the current accounting period but the benefit of which will
accrue in the subsequent accounting period.

Difference between outstanding expense and Prepaid

expense
Basis of Distinction
1. Meaning

2. Payment
3. Incurrence
4. Item related with
5. Treatment in Income
Statement
6. Treatment in Balance
Sheet

Outstanding expenses
It refers to an expense
incurred but not paid during
the current accounting
period.
It is yet to be paid
It has already been incurred
It is an item of current year
It is shown by way of
addition to the relevant
item.
It is shown on the liabilities
side as a current liability.

Prepaid Expenses
It refers to an expense paid
but not incurred during the
current accounting period.
It has already been paid
It is yet to be incurred
It is an item of subsequent
year
It is shown by way of
deduction from the relevant
item
It is shown on the asset side
as a current asset.

Outstanding Income/ Accrued Income:

Accrued income refers to that income which has been earned but
not received during the current accounting period.
- For e.g. interest earned on deposits.

Unaccrued Income/ Unearned income/ Revenue received in

advance :
Unaccrued income refers to that income which has been received
but not earned during the current accounting period.

Difference between Accrued income and

Unaccrued Income
Basis of Distinction
1. Meaning

2. Receipt
3. Earned
4. Item related with
5. Treatment in Income
Statement
6. Treatment in Balance
Sheet

Accrued Income
It refers to an income
earned but not received
during the current
accounting period.
It is yet to be received
It has already been earned
It is an item of current year
It is shown by way of
addition to the relevant
item.
It is shown on the asset side
as a current asset.

Unaccrued Income
It refers to an income
received but not earned
during the current
accounting period.
It has already been received
It is yet to be earned
It is an item of subsequent
year
It is shown by way of
deduction from the relevant
item
It is shown on the liability
side as a current liability.

Summary of adjusting entries

Adjustments

If Given In The Trial Balance

If Given In The Adjustment Below The

Trial Balance

1 Closing Stock

Balance Sheet - Asset Side

Trading A/C - Credit Side

Balance Sheet - Asset Side

Outstanding
2
Expenses

Balance Sheet - Liability Side

Trading A/C - Profit And Loss A/C - Debit Side,

Add To The Concern Expense

Balance Sheet - Liability Side

3 Prepaid Expense

Balance Sheet - Asset Side

Trading A/C - Profit And Loss A/C - Debit Side,

Deduct From The Concern Expense

Balance Sheet - Liability Side

Outstanding Income

Balance Sheet - Asset Side

P&L A/C - Credit Side, Add To The Concern Income

Balance Sheet - Asset Side

Income Received In
Advance

Balance Sheet - Liability Side

P&L A/C - Credit Side, Deduct From The Concern

Income

Balance Sheet - Liability Side

Bad Debts

P&L A/C - Debit Side

P&L A/C - Debit Side Add To The Bed Debts If Given

In Trial Balance

Balance Sheet - Asset Side , Deduct From Debtors

Provision For Bad Of

Doubtful Debts

P&L A/C - Debit Side

P&L A/C - Debit Side

Balance Sheet - Asset Side , Deduct From Debtors,

After Additional Bad Debts

Provision For
Discount On
Debtors

Balance Sheet - Asset Side, Deduct

From Debtors

P&L A/C - Debit Side

Balance Sheet - Asset Side, Deduct From Debtors

After Additional Bad Debts,If Any

Depreciation

P&L A/C - Debit Side

P&L A/C - Debit Side

Balance Sheet - Asset Side, Deduct From Asset

1
0

Interest On Capital

P&L A/C - Debit Side

P&L A/C - Debit Side

Balance Sheet - Liability Side Add To Capital

1
1

Interest On
Drawings

P&L A/C - Credit Side

P&L A/C - Credit Side

Balance Sheet - Liability Side Deduct From Capital

12

13

14

15

Loss By Fire

P&L A/C - Debit Side

Trading A/C - Credit Side , (Full Amt Of Loss)

P&L A/C - Debit Side(Actual Loss If Any)

Balance Sheet - Asset Side,(With Insurance

Claim Admited By Ins Co)

Drawings In
Kind(Goods For
Personal Use)

trading a/c - credit side

Trading A/C - Credit Side Or Deduct From

Purchase

Balance Sheet - Liability Side Deduct From

Capital

Goods
Distributed As
Free Samples

P&L A/C - Debit Side

Trading A/C - Credit Side Or Deduct From

Purchase

P&L A/C - Debit Side

Sale Off Goods

On Approval
Basis, Approval
Not Yet Received

Usually It Is Not Given In Trial

Balance

Trading A/C - Credit Side Or Deduct From

Sales , The Selling Price Of Goods Sold

Trading A/C - Credit Side Add To Stock At

Cost Price

Balance Sheet - Asset Side , Deduct From

Debtors, The Selling Price Of Such Sale And
Show The Cost Price Of Such Sale Along
With Closing Stock

Purchase Invoice
Entered By
Goods Not
Received

Usually It Is Not Given In Trial

Balance

trading a/c - credit side add to closing stock

or debit side deduct from purchases

16

Balance Sheet - Asset Side, Add To Closing