How to Use This Page
Solve each Samacheer Kalvi exercise question on your own first, then compare your Trading Account and calculations. Final Accounts I covers the Trading Account — master the COGS formula and the adjustment entries before moving to Final Accounts II (P&L and Balance Sheet).
Key Concepts (Quick Recap)
Final Accounts: Three Components
| Account | Shows | Prepared From |
|---|
| Trading Account | Gross Profit / Gross Loss | Direct expenses and direct incomes |
| Profit & Loss Account | Net Profit / Net Loss | Indirect expenses and indirect incomes |
| Balance Sheet | Financial Position | Assets, Liabilities, and Capital |
Trading Account
The Trading Account shows the result of trading operations — buying and selling goods.
Trading Account Format:
Trading Account for the year ended [Date]
Dr. Cr.
Particulars | Amount | Particulars | Amount
-----------------------------------|--------|--------------------------|--------
To Opening Stock | XXXX | By Sales | XXXX
To Purchases | XXXX | Less: Returns | (XXXX)
Less: Returns | (XXXX) | By Closing Stock | XXXX
To Wages | XXXX | By Gross Loss c/d | XXXX
To Carriage Inward | XXXX | (if applicable) |
To Freight Inward | XXXX | |
To Factory Rent / Fuel / Power | XXXX | |
To Gross Profit c/d | XXXX | |
-----------------------------------|--------|--------------------------|--------
|XXXXXX | |XXXXXX
Key Formulas
Net Sales = Total Sales − Sales Returns
Net Purchases = Total Purchases − Purchases Returns
COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock
Gross Profit = Net Sales − COGS
Gross Loss = COGS − Net Sales (when COGS > Net Sales)
Direct Expenses (Go in Trading Account)
- Wages
- Carriage Inward / Freight Inward
- Factory Rent
- Fuel and Power
- Factory Lighting
- Royalty
- Import Duty / Octroi
- Gas and Water (factory)
Direct Incomes (Go in Trading Account)
- Sales (less Sales Returns)
- Closing Stock
Adjustments — How to Handle
| Adjustment | Trading A/c | P&L A/c | Balance Sheet |
|---|
| Closing Stock | Credit side | — | Assets side |
| Outstanding Expenses | Add to relevant expense (if direct) | Add to relevant expense (if indirect) | Liabilities side |
| Prepaid Expenses | Deduct from relevant expense (if direct) | Deduct from relevant expense (if indirect) | Assets side |
| Depreciation | — | Debit side | Deduct from asset |
| Provision for Doubtful Debts | — | Debit side | Deduct from Debtors |
| Interest on Capital | — | Debit side | Add to Capital |
| Interest on Drawings | — | Credit side | Deduct from Capital |
I. Choose the Best Answer (MCQs)
Q1. The Trading Account shows (a) Net Profit (b) Gross Profit (c) Both (a) and (b) (d) Neither
Answer(b) Gross Profit — The Trading Account shows Gross Profit (or Gross Loss) by comparing Net Sales with Cost of Goods Sold. Net Profit is shown in the Profit & Loss Account.
Q2. Cost of Goods Sold is calculated as (a) Opening Stock + Purchases − Closing Stock (b) Opening Stock + Net Purchases + Direct Expenses − Closing Stock (c) Sales − Gross Profit (d) Net Sales − Purchases
Answer(b) Opening Stock + Net Purchases + Direct Expenses − Closing Stock — COGS includes opening stock, net purchases, and all direct expenses (wages, carriage inward, etc.), minus closing stock.
Q3. Carriage inward is shown in the (a) Profit & Loss Account (b) Trading Account (c) Balance Sheet (d) None of these
Answer(b) Trading Account — Carriage inward is a direct expense (cost of bringing goods to the godown). It is shown on the debit side of the Trading Account.
Q4. Closing stock is shown in the (a) Debit side of Trading Account only (b) Credit side of Trading Account and Assets side of Balance Sheet (c) P&L Account (d) Liabilities side of Balance Sheet
Answer(b) Credit side of Trading Account and Assets side of Balance Sheet — Closing stock is credited to the Trading Account (to reduce COGS) and shown as a current asset on the assets side of the Balance Sheet.
Q5. Gross Profit is calculated as (a) Net Sales − COGS (b) Net Sales − Indirect Expenses (c) Total Sales − Purchases (d) Net Sales − Net Purchases
Answer(a) Net Sales − COGS — Gross Profit = Net Sales − Cost of Goods Sold. This gives the profit from trading operations before deducting indirect expenses.
II. Fill in the Blanks
1. The Trading Account shows gross profit or gross loss. 2. Net Sales = Total Sales − Sales Returns. 3. Net Purchases = Total Purchases − Purchases Returns. 4. COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock. 5. Carriage inward is a direct expense and is shown in the Trading Account. 6. Carriage outward is an indirect expense and is shown in the Profit & Loss Account. 7. Closing stock is shown on the credit side of the Trading Account. 8. Closing stock is shown on the assets side of the Balance Sheet. 9. Wages is a direct expense shown in the Trading Account. 10. Rent paid is an indirect expense shown in the Profit & Loss Account.
III. True or False (with corrections for false statements)
Q1. The Trading Account shows the net profit of the business.
AnswerFalse — Correction: The Trading Account shows the GROSS profit of the business. Net profit is shown in the Profit & Loss Account.
Q2. Carriage inward is a direct expense.
AnswerTrue — Carriage inward (or freight inward) is the cost of transporting goods to the godown. It is a direct expense and is shown in the Trading Account.
Q3. Closing stock is shown on the debit side of the Trading Account.
AnswerFalse — Correction: Closing stock is shown on the CREDIT side of the Trading Account (it reduces the cost of goods sold).
Q4. Gross Profit = Net Sales − Indirect Expenses.
AnswerFalse — Correction: Gross Profit = Net Sales − Cost of Goods Sold. Net Profit = Gross Profit + Other Incomes − Indirect Expenses.
Q5. Factory rent is a direct expense shown in the Trading Account.
AnswerTrue — Factory rent is incurred for the production facility and is a direct expense shown on the debit side of the Trading Account.
IV. Match the Following
| Column A | Column B | Answer |
|---|
| 1. Trading Account | (a) Net Profit | (b) Gross Profit |
| 2. Profit & Loss Account | (b) Gross Profit | (a) Net Profit |
| 3. Carriage Inward | (c) Indirect expense | (d) Direct expense |
| 4. Carriage Outward | (d) Direct expense | (c) Indirect expense |
| 5. Closing Stock | (e) Shown in P&L | (f) Shown in Trading A/c and Balance Sheet |
V. Answer Briefly (2-mark questions)
Q1. What is the Trading Account? What does it show?
Answer
The Trading Account is the first part of the final accounts that shows the gross profit or gross loss of a business from buying and selling goods. It compares the cost of goods sold (opening stock + net purchases + direct expenses − closing stock) with net sales.
Q2. Distinguish between direct and indirect expenses with examples.
Answer
| Feature | Direct Expenses | Indirect Expenses | |---|---|---| | Shown in | Trading Account | P&L Account | | Nature | Connected with purchase/production | Connected with administration/selling | | Examples | Wages, carriage inward, factory rent | Office rent, salary, advertisement | | Affects | Gross Profit | Net Profit |
Q3. What is COGS? How is it calculated?
Answer
COGS (Cost of Goods Sold) is the total cost of goods that were sold during the year. COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock Components: - Opening Stock: Value of goods at the beginning of the year - Net Purchases: Total Purchases − Purchases Returns - Direct Expenses: Wages, carriage inward, factory rent, fuel, etc. - Closing Stock: Value of goods remaining unsold at the end of the year
Q4. What is the treatment of closing stock in final accounts?
Answer
Closing stock appears in TWO places: 1. Trading Account: Shown on the credit side (reduces COGS, increases gross profit) 2. Balance Sheet: Shown as a current asset on the assets side at cost or market price, whichever is lower
VI. Answer in Detail (5-mark questions)
Q1. From the following balances, prepare a Trading Account for the year ended 31st March 2024:
Answer
Opening Stock: ₹30,000; Purchases: ₹2,00,000; Purchases Returns: ₹5,000; Sales: ₹3,50,000; Sales Returns: ₹10,000; Wages: ₹25,000; Carriage Inward: ₹3,000; Factory Rent: ₹12,000; Fuel and Power: ₹8,000; Closing Stock: ₹35,000
Trading Account for the year ended 31st March 2024
Dr. Cr.
Particulars | Amount | Particulars | Amount
-----------------------------------|---------|-------------------------|--------
To Opening Stock | 30,000 | By Sales | 3,50,000
To Purchases | 2,00,000 | Less: Returns | (10,000)
Less: Returns | ( 5,000) | Net Sales | 3,40,000
Net Purchases | 1,95,000 | By Closing Stock | 35,000
To Wages | 25,000 | |
To Carriage Inward | 3,000 | |
To Factory Rent | 12,000 | |
To Fuel and Power | 8,000 | |
To Gross Profit c/d | 1,02,000 | |
-----------------------------------|---------|-------------------------|--------
| 3,75,000 | | 3,75,000
-----------------------------------|---------|-------------------------|--------
Verification:
- Net Sales = ₹3,50,000 − ₹10,000 = ₹3,40,000
- COGS = ₹30,000 + ₹1,95,000 + ₹25,000 + ₹3,000 + ₹12,000 + ₹8,000 − ₹35,000 = ₹2,38,000
- Gross Profit = ₹3,40,000 − ₹2,38,000 = ₹1,02,000 ✓
Q2. Explain the treatment of adjustments in final accounts.
Answer
Adjustments are entries that need to be recorded in the books but are not yet recorded. Each adjustment affects TWO places in the final accounts. 1. Outstanding Expenses (expenses incurred but not yet paid): - Add to the relevant expense in Trading/P&L Account - Show as a liability in the Balance Sheet 2. Prepaid Expenses (expenses paid in advance): - Deduct from the relevant expense in Trading/P&L Account - Show as a current asset in the Balance Sheet 3. Depreciation: - Show as an expense in P&L Account (debit side) - Deduct from the relevant asset in the Balance Sheet 4. Closing Stock: - Credit side of Trading Account - Assets side of Balance Sheet 5. Provision for Doubtful Debts: - Debit side of P&L Account - Deduct from Debtors in the Balance Sheet 6. Interest on Capital: - Debit side of P&L Account - Add to Capital in the Balance Sheet 7. Interest on Drawings: - Credit side of P&L Account - Deduct from Capital in the Balance Sheet
Common Mistakes to Avoid
- Showing indirect expenses in the Trading Account: Only DIRECT expenses (wages, carriage inward, factory rent, fuel) go in the Trading Account. Office rent, salaries, advertisement go in P&L.
- Forgetting to deduct returns: Net Sales = Total Sales − Sales Returns. Net Purchases = Total Purchases − Purchases Returns.
- Treating closing stock as a debit: Closing stock goes on the CREDIT side of the Trading Account (it reduces COGS).
- Confusing carriage inward and carriage outward: Carriage INWARD = direct expense (Trading Account). Carriage OUTWARD = indirect expense (P&L Account).
- Not showing closing stock in the Balance Sheet: Closing stock must appear in BOTH the Trading Account (credit side) AND the Balance Sheet (assets side).
- Forgetting the double effect of adjustments: Every adjustment affects TWO places. If you add outstanding wages to Trading Account, you MUST also show it as a liability in the Balance Sheet.
Exam Checklist
- [ ] Can you define and format a Trading Account?
- [ ] Can you calculate Net Sales and Net Purchases?
- [ ] Can you calculate COGS correctly?
- [ ] Can you calculate Gross Profit or Gross Loss?
- [ ] Can you classify expenses as direct or indirect?
- [ ] Can you handle adjustments: outstanding, prepaid, depreciation, closing stock?
- [ ] Can you show closing stock in both Trading Account and Balance Sheet?
- [ ] Can you distinguish between gross profit and net profit?
- [ ] Can you verify your Trading Account by ensuring both sides balance?
- [ ] Can you handle factory-related expenses vs office-related expenses?
