Final accounts from a trial balance

Most exam questions give you a trial balance and ask for the trading and profit and loss account and the balance sheet. A steady method:

• First check that the trial balance agrees.
• Mark each item: T (trading), P&L (profit and loss), A (asset), L (liability), C (capital, drawings).
• Every item in the trial balance is used exactly once.
• Items given below the trial balance, like closing stock, are used twice: closing stock goes to the credit of the trading account and to the assets in the balance sheet.

The trading account gets opening stock, purchases and their returns, sales and their returns, wages, carriage inwards, fuel and power, factory rent, and closing stock. Everything else that is an income or an expense goes to the profit and loss account.

Read the nature of each item carefully, not just its name.

• Apprenticeship premium received (a fee paid by a trainee) and bad debts recovered are incomes: credit side of the profit and loss account.
• The owner's own income tax, paid by a sole trader from the business, is not a business expense; it is treated as drawings.
• Sales tax (or GST) collected from customers and not yet paid to the government is a liability.

If the trading account's debit side is bigger than its credit side, the result is a gross loss. Royal Traders' trading debits total ₹2,66,500, but sales of ₹2,45,000 and closing stock of ₹8,000 make only ₹2,53,000: a gross loss of ₹13,500, carried to the debit side of the profit and loss account.

In the book's Illustration 9, working through every item this way gives a gross profit of ₹98,690, a net profit of ₹76,860 and a balance sheet total of ₹3,17,860.