Financial Statements
Financial statements are the final products of the accounting cycle — they summarise the financial position and performance of a business. They are prepared at the end of each accounting period (typically annually in Nepal, ending on Ashad/Shrawan).
Trading Account
The trading account shows gross profit or loss. Debit side: opening stock, purchases (less returns), direct expenses (carriage inwards, wages, customs duty, freight). Credit side: sales (less returns), closing stock. GP = Sales − COGS. COGS = Opening Stock + Purchases + Direct Expenses − Closing Stock. GP ratio = GP/Sales × 100.
Profit and Loss Account
Shows net profit or loss. Debit: gross loss, operating expenses (salaries, rent, insurance, depreciation, advertising, stationery, bad debts), non-operating expenses (interest paid). Credit: gross profit, non-operating income (interest received, rent received, commission). Net Profit = GP + Other Income − All Expenses.
Balance Sheet
Financial position at a specific date. Assets: fixed (land, building, machinery, furniture) and current (cash, bank, debtors, stock, prepaid). Liabilities: long-term (loans, mortgage) and current (creditors, outstanding expenses, overdraft). Capital = opening capital + net profit − drawings + additional capital. Assets = Liabilities + Capital always.
Adjustments
Closing stock: credit Trading, asset in BS. Outstanding expenses: add to expense (P&L), current liability (BS). Prepaid expenses: deduct from expense (P&L), current asset (BS). Accrued income: add to income, current asset. Unearned income: deduct from income, current liability. Depreciation: P&L debit, deduct from asset. Bad debts: P&L debit, deduct from debtors. Provision for doubtful debts: P&L debit, deduct from debtors after bad debts.
Preparation Steps
1. Trial balance. 2. Read ALL adjustments. 3. Trading Account (direct items). 4. P&L (indirect items). 5. Balance Sheet (remaining + adjustments). 6. Verify BS balances. Each adjustment appears in TWO places.
Summary
Financial statements — Trading (GP), P&L (NP), Balance Sheet (position) — summarise business performance. Mastering adjustments is the key — each affects two places.
Worked Example: Trading and P&L Account
From the trial balance of Himalaya Traders as on 31 Ashad 2081, prepare Trading and P&L Account:
| Trading Account for the year ended 31 Ashad 2081 | |
|---|---|
| Dr (Expenses) | Cr (Income) |
| To Opening Stock: 80,000 To Purchases: 300,000 Less Returns: (5,000) = 295,000 To Carriage Inwards: 8,000 To Wages: 12,000 To Gross Profit c/d: 155,000 | By Sales: 500,000 Less Returns: (10,000) = 490,000 By Closing Stock: 60,000 |
| Total: 550,000 | Total: 550,000 |
| Profit & Loss Account for the year ended 31 Ashad 2081 | |
|---|---|
| Dr (Expenses) | Cr (Income) |
| To Salaries: 40,000 Add Outstanding: 5,000 = 45,000 To Rent: 24,000 Less Prepaid: (4,000) = 20,000 To Depreciation on Furniture: 5,000 To Bad Debts: 3,000 To Provision for Doubtful Debts: 2,000 To Insurance: 6,000 To Net Profit: 79,000 | By Gross Profit b/d: 155,000 By Commission Received: 5,000 |
| Total: 160,000 | Total: 160,000 |
Adjustment Effects Summary
| Adjustment | Effect in Trading/P&L | Effect in Balance Sheet |
|---|---|---|
| Closing Stock Rs 60,000 | Credit Trading A/c | Current Asset |
| Outstanding Salary Rs 5,000 | Add to Salary (P&L Dr) | Current Liability |
| Prepaid Rent Rs 4,000 | Deduct from Rent (P&L Dr) | Current Asset |
| Depreciation on Furniture Rs 5,000 | P&L Debit | Deduct from Furniture |
| Bad Debts Rs 3,000 | P&L Debit | Deduct from Debtors |
| Provision 5% on remaining Debtors | P&L Debit | Deduct from Debtors after bad debts |
Remember: Each adjustment appears in TWO places. If Balance Sheet doesn’t balance, count adjustment entries — you’ve likely missed one side.
Exam Tips
Tip 1: This topic carries 20-25 marks in exams — practise at least 15 full problems. Tip 2: Read ALL adjustments before starting — some adjustments affect the same item (bad debts + provision for doubtful debts both reduce debtors). Tip 3: Direct expenses go to Trading A/c; indirect expenses go to P&L. Common confusion: factory wages = Trading, office salaries = P&L. Tip 4: Balance Sheet must balance — if it doesn’t, the error is almost always a missed adjustment. Tip 5: Show workings for adjusted figures (e.g., Salary 40,000 + Outstanding 5,000 = 45,000) — partial marks are given.