How to Use This Page
Solve each Samacheer Kalvi exercise question on your own first, then compare your P&L Account and Balance Sheet. Final Accounts II covers the P&L Account and Balance Sheet — the key skill is handling adjustments with their double effect.
Key Concepts (Quick Recap)
Three Parts of Final Accounts
| Part | Shows | Key Formula |
|---|
| Trading Account | Gross Profit / Gross Loss | GP = Net Sales − COGS |
| P&L Account | Net Profit / Net Loss | NP = GP + Other Incomes − Indirect Expenses |
| Balance Sheet | Financial Position | Assets = Liabilities + Capital |
Profit & Loss Account
The P&L Account starts with Gross Profit (brought from Trading Account) and shows all indirect incomes and expenses.
P&L Account Format:
Profit & Loss Account for the year ended [Date]
Dr. Cr.
Particulars | Amount | Particulars | Amount
--------------------------------------|---------|----------------------|--------
To Gross Loss b/d (if applicable) | XXXX | By Gross Profit b/d | XXXX
To Salaries | XXXX | By Discount Received | XXXX
To Rent & Rates | XXXX | By Commission Recd | XXXX
To Office Expenses | XXXX | By Interest Received | XXXX
To Carriage Outward | XXXX | By Rent Received | XXXX
To Advertisement | XXXX | By Apprenticeship Premium | XXXX
To Discount Allowed | XXXX | By Net Loss (if any) | XXXX
To Bad Debts | XXXX | |
To Provision for Doubtful Debts | XXXX | |
To Depreciation | XXXX | |
To Interest on Capital | XXXX | |
To Net Profit (transferred to Capital)| XXXX | |
--------------------------------------|---------|----------------------|--------
|XXXXXXX | |XXXXXXX
Balance Sheet Format
Balance Sheet as on [Date]
Liabilities | Amount | Assets | Amount
----------------------------------------|---------|---------------------------|--------
Capital | XXXX | Fixed Assets | XXXX
Add: Net Profit | XXXX | Less: Depreciation | (XXXX)
Add: Interest on Capital | XXXX | Goodwill | XXXX
Less: Drawings | (XXXX) | Investments | XXXX
Less: Interest on Drawings | (XXXX) | Current Assets |
Long-term Liabilities | XXXX | Closing Stock | XXXX
Bank Loan | XXXX | Debtors | XXXX
Current Liabilities | | Less: Prov. for DD | (XXXX)
Creditors | XXXX | Bills Receivable | XXXX
Outstanding Expenses | XXXX | Prepaid Expenses | XXXX
Provision for Doubtful Debts | XXXX | Cash at Bank | XXXX
| | Cash in Hand | XXXX
----------------------------------------|---------|---------------------------|--------
|XXXXXXX | |XXXXXXX
Adjustments — Double Effect Table
| Adjustment | Effect 1 | Effect 2 |
|---|
| Outstanding Expense | Add to expense (P&L) | Show as Current Liability (BS) |
| Prepaid Expense | Deduct from expense (P&L) | Show as Current Asset (BS) |
| Accrued Income | Add to income (P&L) | Show as Current Asset (BS) |
| Unearned Income | Deduct from income (P&L) | Show as Current Liability (BS) |
| Depreciation | Add to expense (P&L) | Deduct from asset (BS) |
| Bad Debts | Add to expense (P&L) | Deduct from Debtors (BS) |
| Provision for Doubtful Debts | Add to expense (P&L) | Deduct from Debtors (BS) |
| Closing Stock | Credit to Trading A/c | Show as Current Asset (BS) |
| Interest on Capital | Add to expense (P&L) | Add to Capital (BS) |
| Interest on Drawings | Add to income (P&L) | Deduct from Capital (BS) |
I. Choose the Best Answer (MCQs)
Q1. The Profit & Loss Account shows (a) Gross Profit (b) Net Profit (c) Cost of Goods Sold (d) Financial Position
Answer(b) Net Profit — The P&L Account shows Net Profit (or Net Loss) by deducting all indirect expenses from Gross Profit and adding all indirect incomes.
Q2. Salary paid is shown in the (a) Trading Account (b) Profit & Loss Account (c) Balance Sheet (d) None of these
Answer(b) Profit & Loss Account — Salary is an indirect expense (administrative expense). It is shown on the debit side of the P&L Account.
Q3. In the Balance Sheet, assets are arranged in the order of (a) Liquidity (b) Permanence (c) Either (a) or (b) (d) Alphabetical
Answer(c) Either (a) or (b) — Assets can be arranged either in order of liquidity (most liquid first) or in order of permanence (most permanent first). Both methods are acceptable.
Q4. Outstanding rent is shown in the (a) Debit side of Trading Account (b) Debit side of P&L Account and Liabilities side of Balance Sheet (c) Assets side of Balance Sheet (d) Credit side of P&L Account only
Answer(b) Debit side of P&L Account and Liabilities side of Balance Sheet — Outstanding rent is added to rent in the P&L Account (as an expense) and shown as a current liability in the Balance Sheet.
Q5. Depreciation is shown in the (a) Trading Account only (b) P&L Account only (c) P&L Account and Balance Sheet (d) Balance Sheet only
Answer(c) P&L Account and Balance Sheet — Depreciation is an expense shown on the debit side of P&L Account. It is also deducted from the relevant asset in the Balance Sheet.
II. Fill in the Blanks
1. The P&L Account shows net profit or net loss. 2. Net Profit = Gross Profit + Other Incomes − Indirect Expenses. 3. The Balance Sheet shows the financial position of a business on a particular date. 4. Outstanding expenses are shown as current liabilities in the Balance Sheet. 5. Prepaid expenses are shown as current assets in the Balance Sheet. 6. Depreciation is shown on the debit side of the P&L Account. 7. Depreciation is deducted from the asset in the Balance Sheet. 8. Closing stock is shown on the assets side of the Balance Sheet. 9. Net Profit is added to capital in the Balance Sheet. 10. Drawings are deducted from capital in the Balance Sheet.
III. True or False (with corrections for false statements)
Q1. The Balance Sheet shows the profit or loss of the business.
AnswerFalse — Correction: The Balance Sheet shows the FINANCIAL POSITION (assets, liabilities, and capital) on a particular date. Profit or loss is shown in the P&L Account.
Q2. Outstanding salary is added to salary in the P&L Account and shown as a liability in the Balance Sheet.
AnswerTrue — Outstanding salary is an expense incurred but not yet paid. It is added to salary in the P&L Account (to show the true expense) and shown as a current liability in the Balance Sheet.
Q3. Prepaid rent is shown on the liabilities side of the Balance Sheet.
AnswerFalse — Correction: Prepaid rent is an ASSET — it is an expense paid in advance that will benefit future periods. It is shown on the ASSETS side of the Balance Sheet.
Q4. Net Profit is transferred to the Capital Account.
AnswerTrue — Net Profit is added to the Capital Account in the Balance Sheet. This increases the owner's equity.
Q5. Depreciation reduces the value of an asset in the Balance Sheet.
AnswerTrue — Depreciation is deducted from the original cost of the asset in the Balance Sheet, showing the asset at its written-down value (book value).
IV. Match the Following
| Column A | Column B | Answer |
|---|
| 1. Outstanding Expense | (a) Asset in Balance Sheet | (b) Liability in Balance Sheet + Add to expense |
| 2. Prepaid Expense | (b) Liability in Balance Sheet | (a) Asset in Balance Sheet + Deduct from expense |
| 3. Depreciation | (c) P&L only | (d) P&L expense + Deduct from asset in BS |
| 4. Closing Stock | (d) P&L expense + Deduct from asset | (e) Trading A/c credit + Asset in BS |
| 5. Net Profit | (e) Trading A/c credit + Asset in BS | (f) Added to Capital in BS |
V. Answer Briefly (2-mark questions)
Q1. What is the P&L Account? What does it show?
Answer
The Profit & Loss Account is the second part of the final accounts. It starts with Gross Profit (from the Trading Account) and shows all indirect incomes and indirect expenses. The result is Net Profit or Net Loss. Net Profit = Gross Profit + Other Incomes − Indirect Expenses
Q2. What is a Balance Sheet? What does it show?
Answer
A Balance Sheet is a statement showing the financial position of a business on a particular date. It lists all assets (what the business owns) on one side and all liabilities and capital (what the business owes) on the other side. Assets = Liabilities + Capital (must always balance)
Q3. Give four examples of indirect expenses.
Answer
1. Salaries (administrative expense) 2. Rent and Rates (office rent, not factory rent) 3. Advertisement (selling expense) 4. Discount Allowed (financial expense) Other examples: office lighting, postage, telephone, audit fees, bank charges, repairs (not factory).
Q4. How is net profit treated in the Balance Sheet?
Answer
Net Profit is added to the Capital Account on the liabilities side of the Balance Sheet. This increases the owner's equity. Capital (in Balance Sheet) = Opening Capital + Net Profit + Interest on Capital − Drawings − Interest on Drawings
VI. Answer in Detail (5-mark questions)
Q1. From the following balances and adjustments, prepare the P&L Account and Balance Sheet:
Answer
Trial Balance as on 31st March 2024:
- Capital: ₹3,00,000; Drawings: ₹20,000; Gross Profit: ₹1,50,000
- Salaries: ₹40,000; Rent: ₹24,000; Office Expenses: ₹15,000
- Advertisement: ₹10,000; Discount Allowed: ₹3,000; Discount Received: ₹5,000
- Commission Received: ₹8,000; Bad Debts: ₹2,000; Depreciation: ₹12,000
- Machinery: ₹2,00,000; Furniture: ₹50,000; Debtors: ₹80,000
- Creditors: ₹60,000; Cash at Bank: ₹25,000; Cash in Hand: ₹10,000
- Closing Stock: ₹40,000
Adjustments: 1. Outstanding salary ₹5,000 2. Prepaid rent ₹3,000 3. Create provision for doubtful debts at 5% on debtors 4. Interest on capital at 5%
Profit & Loss Account for the year ended 31st March 2024
Dr. Cr.
Particulars | Amount | Particulars | Amount
--------------------------------------|---------|-----------------------|--------
To Salaries 40,000 | | By Gross Profit b/d |1,50,000
Add: Outstanding 5,000 45,000| | By Discount Received | 5,000
To Rent 24,000 | | By Commission Received| 8,000
Less: Prepaid 3,000 21,000| | |
To Office Expenses | 15,000 | |
To Advertisement | 10,000 | |
To Discount Allowed | 3,000 | |
To Bad Debts | 2,000 | |
To Provision for Doubtful Debts (5% of 80,000)| 4,000 |
To Depreciation | 12,000 | |
To Interest on Capital (5% of 3,00,000)| 15,000 | |
To Net Profit transferred to Capital | 38,000 | |
--------------------------------------|---------|-----------------------|--------
|1,63,000 | |1,63,000
Balance Sheet as on 31st March 2024
Liabilities | Amount | Assets | Amount
----------------------------------------|---------|-----------------------------|--------
Capital 3,00,000 | | Machinery 2,00,000 |
Add: Net Profit 38,000 | | Less: Depreciation (12,000) | 1,88,000
Add: Interest on Capital 15,000 | | Furniture 50,000 |
Less: Drawings (20,000)3,33,000| | Closing Stock | 40,000
Creditors | 60,000 | Debtors 80,000 |
Outstanding Salary | 5,000 | Less: Prov. for DD (4,000) | 76,000
| | Cash at Bank | 25,000
| | Cash in Hand | 10,000
| | Prepaid Rent | 3,000
----------------------------------------|---------|-----------------------------|--------
|3,98,000 | |3,98,000
Verification: Total Liabilities = Total Assets = ₹3,98,000 ✓
Q2. Explain all the adjustments and their double effect in final accounts.
Answer
1. Outstanding Expenses (e.g., outstanding salary ₹5,000): - Effect 1: Add to the expense in P&L (Salary ₹40,000 + ₹5,000 = ₹45,000) - Effect 2: Show as Current Liability in Balance Sheet 2. Prepaid Expenses (e.g., prepaid rent ₹3,000): - Effect 1: Deduct from the expense in P&L (Rent ₹24,000 − ₹3,000 = ₹21,000) - Effect 2: Show as Current Asset in Balance Sheet 3. Depreciation (e.g., ₹12,000 on machinery): - Effect 1: Show as expense in P&L (debit side) - Effect 2: Deduct from the asset in Balance Sheet 4. Provision for Doubtful Debts (e.g., 5% on debtors ₹80,000 = ₹4,000): - Effect 1: Show as expense in P&L (debit side) - Effect 2: Deduct from Debtors in Balance Sheet 5. Interest on Capital (e.g., 5% on ₹3,00,000 = ₹15,000): - Effect 1: Show as expense in P&L (debit side) - Effect 2: Add to Capital in Balance Sheet 6. Interest on Drawings (e.g., ₹1,000): - Effect 1: Show as income in P&L (credit side) - Effect 2: Deduct from Capital in Balance Sheet
Common Mistakes to Avoid
- Forgetting the double effect of adjustments: EVERY adjustment affects TWO places. Outstanding salary → P&L (add to expense) + Balance Sheet (liability). Don't do one and forget the other.
- Showing direct expenses in P&L: Wages, carriage inward, factory rent go in the TRADING Account, not P&L.
- Not adding net profit to capital: Net profit MUST be added to capital in the Balance Sheet.
- Not deducting drawings from capital: Drawings MUST be deducted from capital in the Balance Sheet.
- Prepaid expense on the wrong side: Prepaid expense is a CURRENT ASSET (assets side), not a liability.
- Outstanding expense on the wrong side: Outstanding expense is a CURRENT LIABILITY (liabilities side), not an asset.
- Wrong calculation of provision for doubtful debts: Calculate it on DEBTORS (after deducting bad debts), not on total sales.
- Balance Sheet not balancing: If Assets ≠ Liabilities + Capital, there is an error. Re-check all adjustments and their double effects.
Exam Checklist
- [ ] Can you prepare a P&L Account starting from Gross Profit?
- [ ] Can you classify expenses as direct (Trading) or indirect (P&L)?
- [ ] Can you handle adjustments: outstanding, prepaid, depreciation, provision?
- [ ] Can you prepare a Balance Sheet with all adjustments?
- [ ] Can you correctly add net profit to capital and deduct drawings?
- [ ] Can you calculate provision for doubtful debts on debtors?
- [ ] Can you show prepaid expenses as assets and outstanding expenses as liabilities?
- [ ] Can you verify that Assets = Liabilities + Capital?
- [ ] Can you handle interest on capital and interest on drawings?
- [ ] Can you prepare complete final accounts (Trading + P&L + Balance Sheet) from a trial balance with adjustments?
