Final Accounts of Sole Proprietors for CA Foundation
Preparing the Trading Account, Profit and Loss Account and Balance Sheet of a sole proprietor, with the common adjustments and the capital–revenue distinction.
AccountingPaper 112 MCQs2 lessons2 flashcards3 memory tricks
Practise Final Accounts of Sole Proprietors free
What you'll learn
- Trading Account, P&L and Balance Sheet
Prepare the three statements from a trial balance. - Adjustments and capital vs revenue
Apply the common adjustments and classify expenditure.
Key formulas
| Cost of goods sold | Opening stock + purchases + direct expenses − closing stock |
|---|---|
| Gross profit | Net sales − cost of goods sold |
| Net profit | Gross profit + other income − indirect expenses |
| Capital (closing) | Opening capital + net profit + interest on capital − drawings − interest on drawings |
Concepts explained
Trading Account, P&L and Balance Sheet
The Trading Account finds gross profit, the Profit and Loss Account finds net profit, and the Balance Sheet shows assets, liabilities and capital on the closing date.
What it means
- COGS = opening stock + purchases + direct expenses − closing stock.
- Direct expenses (carriage inwards, wages) go to Trading; indirect ones (salaries, carriage outwards) to P&L.
- Closing stock outside the trial balance: Trading credit and Balance Sheet asset.
- Net profit is added to capital; drawings are deducted.
- Opening 10,000; purchases 50,000; closing 15,000; sales 70,000
Answer: ₹25,000
- Opening 1,00,000; profit 30,000; drawings 12,000
Answer: ₹1,18,000
Related terms
- Trial balance: starting point for final accounts
- Marshalling: order of assets and liabilities in the Balance Sheet
Exam tip: Inside the trial balance: once. Adjustment outside it: twice.
Adjustments in final accounts
Adjustments make the accounts follow accrual: record income earned and expenses incurred in the year, whether or not cash has moved.
What it means
- Outstanding expense: add to expense, current liability.
- Prepaid expense: deduct, current asset.
- Accrued income: add to income, current asset; income received in advance: deduct, current liability.
- Provision for doubtful debts on debtors after further bad debts; interest on capital is an expense added to capital.
- Debtors 50,000; further bad debts 2,000; 5% provision
Answer: ₹2,400
- Insurance 12,000 paid for 12 months from 1 Oct; year ends 31 Mar
Answer: Prepaid ₹6,000
Related terms
- Accrual concept: record when earned or incurred
- Matching concept: match expenses with the revenue they help earn
Exam tip: Ask: does this belong to this year? If yes but unpaid, add; if paid but not this year's, deduct.
Capital vs revenue expenditure
Capital expenditure buys or improves long-term assets and benefits several years; revenue expenditure keeps the business running within the year.
What it means
- Capital: purchase of machinery, building, installation, major improvements.
- Revenue: repairs, wages, rent, salaries, power.
- Deferred revenue: heavy advertising for a new product, written off over a few years.
- Capital receipts (sale of assets, loans) vs revenue receipts (sales, commission).
- New engine increases a truck's life by 5 years
Answer: Capital expenditure
- Routine replacement
Answer: Revenue expenditure
Related terms
- Error of principle: treating capital as revenue or vice versa
- Depreciation: spreads capital expenditure over its life
Exam tip: Does it create or improve something that lasts? Capital. Just maintains it? Revenue.
Memory tricks
Outstanding: add + liability; prepaid: deduct + asset; same logic for incomes reversed.
Carriage inwards → Trading A/c; carriage outwards → P&L A/c.
Balance Sheet: position on a date; P&L: result for a period.
Try 3 CA Foundation-style questions
Q1. Opening stock ₹10,000; purchases ₹50,000; closing stock ₹15,000; sales ₹70,000. Gross profit is
- ₹20,000
- ₹35,000
- ₹25,000
- ₹15,000
Show answer
Answer: (3) ₹25,000
Cost of goods sold = 10,000 + 50,000 − 15,000 = 45,000. Gross profit = 70,000 − 45,000 = ₹25,000.
Q2. Income received in advance is
- added to the income and shown as an asset
- credited to the Trading Account
- deducted from the income and shown as a liability
- ignored
Show answer
Answer: (3) deducted from the income and shown as a liability
Income for future periods isn't earned yet, so deduct it from income and show it as a current liability.
Q3. Prepaid insurance is
- deducted from insurance in the Profit and Loss Account and shown as an asset
- added to insurance and shown as a liability
- credited to the Trading Account
- shown as income
Show answer
Answer: (1) deducted from insurance in the Profit and Loss Account and shown as an asset
The part paid for next year isn't this year's expense, so deduct it and show it as a current asset.
Practise all 12 questions Free · explanations for every option · see where you go wrong