This document provides information about final accounts or financial statements prepared at the end of an accounting period. It includes an income statement (also called a profit and loss account) and a position statement (also called a balance sheet). The document discusses the trading account, which is the first part of the income statement and is used to calculate gross profit or loss from trading activities. It provides the format of a trading account and explains the items shown on the debit and credit sides, including opening and closing stock, purchases, sales, expenses, and gross profit or loss. Examples are provided to illustrate the calculation of cost of goods sold and gross profit from the trading account information.

1. M. C. Sharma
Associate Professor
Department of Commerce
Shaheed Bhagat Singh Evening College
(University of Delhi)
Delhi
1

2. Final Accounts or Financial Statements
Financial statements are organised summaries of detailed
information about operating results and financial position of
the concern. These are prepared at the end of the accounting
period. Financial statements includes:
(1) Income Statement or Profit and Loss Account:
 Manufacturing Account
 Trading Account, and
 Profit and Loss Account
(2) Position Statement or Balance Sheet
2

3. Trading Account
 Trading account is first part of income statement. It is
prepared for calculating the gross profit earned or
gross loss incurred on account of trading activities of
an enterprise.
3

4. Need and Importance of Trading Account
1) Finding trading results
2) Finding details of direct expenses
3) Calculation of cost of goods sold
4) Calculation of important ratios for financial analysis
4

5. M/s………………………..
Trading Account
For the year ended 31.03.20X1
Dr. Cr.
Particulars
Amt.
Rs.
Particulars
Amt.
Rs.
To Opening Stock x x x By Sales x x x
To Purchases x x x Less: Sales Returns (x x) x x x
Less: Purchase Returns (x x) By Closing Stock x x x
To Expenses on Purchase of
Goods
By Gross Loss
(Tfd. to P & L A/c)
x x x
To Manufacturing Expenses
To Other Direct Expenses
To Gross Profit
(Tfd. to P & L A/c)
Total x x x Total x x x
5

6. Items Shown on the Debit Side of Trading A/c
(1) Opening stock.
(i) Raw materials
(ii) Work-in-progress or Semi-finished goods.
(iii) Finished goods
(2) Net Purchases: Purchases less purchases return
Following points are important regarding purchases:
(i) Cash and credit purchase
(ii) Purchase of assets
(iii) Drawings of goods
(iv) Goods in transit
(vi) Goods received on consignment basis
6

7. Items Shown on the Debit Side of Trading A/c
(3) Expenses on purchase of goods :
(i) Freight, carriage and cartage
(ii) Customs duty and octroi, etc.
(iii) Landing and clearing charges
(iv) Dock dues/charges.
(4) Manufacturing expenses.:
(i) Wages or labour or productive wages or factory wages.
(ii) Coal, gas and water.
(iii) Fuel and power.
7

8. Items Shown on the Debit Side of Trading A/c
(5) Factory expenses:
 Factory rent, rates and taxes.
 Insurance premium of factory building, plant and machinery.
 Factory lighting or electricity.
 Consumable stores, like, engine oil, lubricants, cotton waste.
 Packing charges to pack the goods manufactured to make it saleable.
(6) Royalty. Royalty is an amount paid to a person or firm for using their
assets (like mines, oil wells, tea garden etc.).
 When royalty is paid on the basis of goods manufactured, it is
considered direct expenses and debited to trading account.
 When royalty is paid on the basis of sales, then it should be debited to
profit and loss account.
8

9. Items Shown on the Credit Side of Trading A/c
Net Sales (Sales and sales return):
Following points are important regarding sales:
 Cash and credit sales
 Sale of old assets, not to be included in sales.
 Consignment sales, not be included in sales, show
separately.
 Goods sold on approval basis pending confirmation
 Goods sold on hire purchase basis. Goods sold on hire-
purchase basis should be recorded separately.
9

10. Items Shown on the Credit Side of Trading A/c
Closing stock. In trading concerns, it includes only finished
goods. In manufacturing concerns it may include raw
materials, semi-finished goods and finished goods.
 It is shown on the credit side of trading account. Usually it is
given as adjustments.
 When it is given in trial balance, it should not be shown in
the trading account.
 Valuation of stock. According to prudence concept, stock
is valued at cost or market price, whichever is less. Here,
cost includes purchase price and direct expenses incurred
on purchase of goods or on its manufacturing.
10

11. Equation for Trading Account
 Gross Profit = Net Sales - Cost of Goods Sold
 Gross Profit = (Net Sales + Closing stock) - (Opening
stock + Net Purchases + Direct expenses)
 Sales = Cost of Goods Sold + Gross Profit
 Cost of Goods Sold = Sales - Gross Profit
 Cost of goods sold can also be expressed as:
= Opening Stock + Net Purchases + Direct Expenses -
Closing Stock
11

12. Illustration 1
The following information was taken from an income
statement:
Rs.
Opening Stock 25,000
Sales 75,000
Freight incurred 5,000
Sales Return 5,000
Gross Profit on Sales 30,000
Net Loss for the year 5,000
Purchases 50,000
Purchases Return 4,500
You are required to determine: (a) Cost of goods sold,
and (b) Closing stock.
12

13. Solution
(a) Cost of Goods Sold
= (Sales - Return Inwards) - Gross Profit
= (75,000 - 5,000) - 30,000
= 70,000 - 30,000
= Rs. 40,000.
(b) Closing Stock
= Opening Stock + Net Purchases + Direct
Expenses - Cost of Goods Sold
= 25,000 + (50,000 - 4,500) + 5,000 - 40,000
= 25,000 + 45,500 + 5,000 - 40,000
= 75,500 - 40,000
= Rs. 35,500.
13

14. Illustration 2
(a) Calculate closing stock from the following:
Rs. Rs.
Sales 10,000 Opening Stock500
Purchases 6,150 Returns Inward 250
Gross Profit 4,000 Return Outward 500
Carriage Inward 200
(b) Calculate gross profit from the following:
Rs.
Purchases (200 units) 8,000
Freight and Carriage 800
Sales (150 units) 12,000
14

15. Solution (a)
(a) Calculation of closing stock:
Cost of goods sold = Net Sales - Gross Profit
= (10,000 - 250) - 4,000 = Rs. 5,750
Alternatively,
Cost of Goods sold = Opening Stock + Net Purchases + Direct
Expenses - Closing Stock
5,750 = 500 + (6,150 - 500) + 200 - Closing Stock
5,750 = 500 + 5,650 + 200 - Closing Stock
5,750 = 6,350 - Closing Stock
or Closing Stock = 6,350 - 5,750 = Rs. 600
15

16. Solution (b)
(b) Calculation of gross profit Rs.
Sales (150 Units) 12,000
Less: Cost of Goods Sold:
Purchases (200 Unit) 8,000
Freight & Carriage 800
8,800
Less: Closing Stock (8,800/200 × 50) (-) 2,200
6,600
Gross Profit 5,400
16

17. Test Your Knowledge - 1
(a) Ascertain cost of goods sold from the following:
Rs. Rs.
Opening stock 17,400 Purchase 42,300
Direct expenses 14,600 Indirect expenses 7,800
Closing stock 12,500
(b) From the following figures ascertain the gross profit:
Rs.
Opening stock (1-1-06) 30,000
Goods purchased during 1998 1,50,000
Freight and packing on above 15,000
Sales 2,10,000
Packing expenses on sales 8,400
Closing stock (31-12-06) 36,000
17

18. Test Your Knowledge - 2
Problem 2 : Calculate cost of goods sold and gross profit for the
year 2015-16:
On April 1, 2005 a firm had stock of goods valued at Rs. 5,000.
During the year, following transactions took place:
Rs. Rs.
Opening Stock 5,000 Sales 1,25,000
Purchases 75,000 Carriage Inwards 750
Freight Inwards 1,250 Sales Return 2,500
Clearing Charges 5,500 Purchases Return 1,250
The closing stock of goods on March 31, 2016 is Rs. 10,000.
Answer 1
(a) Cost of Goods Sold = Rs. 61,800.
(b) Gross Profit = Rs. 51,000.
Answer 2: Gross Profit - Rs. 46,250
18

19. Illustration 3
On April 1, 2015 M/s. Ram Chandra had stock of goods valued at Rs. 5,600.
During the year, the following transactions took place:
Rs. Rs.
Sales 2,25,000 Carriage Inwards 750
Purchases 1,75,000 Import Duty 1,250
Freight Inwards 7,500 Sales Returns 2,500
Coal, Gas and Water 1,400 Factory Lighting 1,800
Factory Insurance 600 Purchases Returns 2,250
Excise Duty 5,400 Clearing Charges 5,500
The closing stock of goods on March 31,2016 is Rs. 12,000.
Prepare Trading Account for the year ending 31st March, 2016.
19

20. M/s. Ram Chandra
Trading Account
For the year ending 31st March, 2015
Particulars Rs. Particulars Rs.
To Opening stock 5,600 By Sales 2,25,000
To Purchases 1,75,000 Less: Returns (2,500) 2,22,500
Less: Returns(2,250) 1,72,750 By Closing Stock 12,000
To Carriage Inwards 750
To Freight Inwards 7,500
To Import Duty 1,250
To Coal, Gas, Water 1,400
To Factory Lighting 1,800
To Factory Insurance 600
To Excise Duty 5,400
To Clearing Charges 5,500
To Gross Profit c/d 31,950
2,34,500 2,34,500
20

21. Test Your Knowledge - 3
Prepare a Trading Account of Shri Umesh Chand for the year ending 31st March, 2015
from the following figures:
Rs. Rs.
Purchases 1,53,500 Sales 2,53,750
Stock (April 1, 2014) 23,350 Wages 15,800
Carriage inwards 2,400 Octroi 3,500
Returns outwards 1,500 Returns inwards 1,250
Dock Charges 1,300 Import duty 3,100
Manufacturing Expenses 2,400 Freight 2,500
Additional Information: Stock on 31st March, 2015 Rs. 21,600
Answer: Gross Profit – Rs. 67,750
21

22. Preparing Manufacturing Account
 Manufacturing enterprises are involved in production
of goods. They purchases raw materials and incur
direct labour and other costs in converting raw
materials into finished goods.
 To ascertain the cost of goods produced, such firms
has to prepare a manufacturing account.
 Both direct and indirect expenses relating to factory
and manufacturing process are recorded in this
account.
 Balancing figure of this account – ‘Cost of goods
produced’ is transferred to Trading Account.
22

23. M/s. ………………………….
Manufacturing Account
For the year ending 31st March, 20xx
Particulars Rs. Particulars Rs.
To Opening stock By Sale of scraps
Raw Materials X By Closing Stock:
Work-in-progress X Raw Materials X
To Purchases of RM (Net) Work-in-progress X
To Carriage Inwards By Cost of Goods produced
transferred to Trading A/c
To Direct Labour/Wages
To Factory Expenses
To Manufacturing Expenses
To Depreciation on Factory
Building
To Depreciation on Plant and
machinery
xxx xxx
23

24. Alternate Format
Manufacturing Account
For the year ending 31st March, 20xx
Particulars Rs. Particulars Rs.
To Opening stock By Sale of scraps
Work-in-progress X By Closing Stock:
To Raw Materials consumed: Work-in-progress X
Op. Stock of RM
+ Net Purchases of RM
- Closing Stock of RM
By Cost of Goods produced
transferred to Trading A/c
(B.F.)
To Carriage Inwards
To Direct Labour/Wages
To Factory Expenses
To Manufacturing Expenses
To Depreciation on Factory
Building
To Depreciation on Plant and
machinery
xxx xxx
24

25. Format of Trading Account
When a Manufacturing Account is prepared
Particulars Rs. Particulars Rs.
To Opening stock of finished
goods
By Net Sales (Sales less Slaes
return)
To Cost of goods produced
transferred from Manufacturing
A/c
By Closing Stock of Finished
Goods
To Purchases of FG (Net) By Gross Loss C/d (B.F.)
To Carriage Inwards on purchase
of finished goods
To Gross Profit C/d (B.F.)
xxx xxx
25

26. Illustration 4
From the following information, prepare a Manufacturing Account
showing raw materials consumed and Trading A/c :
Stock of Raw materials
(1.4.2014) 21,000
Stock of Raw materials
(31.3.2015) 24,000
Stock of Finished Goods
(1.4.2014)
23,000 Stock of Finished Goods
(31.3.2015) 43,000
Work-in-progress
(1.4.2015) 32,000
Work-in-progress
(31.3.2015) 34,000
Purchases - Raw Materials 1,20,000 Sales of scrap 10,000
Manufacturing wages 95,300 Factory rent and rates 12,700
Fuel and Power 10,200 Indirect wages 27,000
Depreciation on Plant 11,400 Carriage inwards 6,000
Sale of Finished goods 2,71,200
26

27. Manufacturing Account
For the year ending 31st March, 2015
Particulars Rs. Particulars Rs.
To Opening stock By Sale of scraps 10,000
Work-in-progress 32,000 By Closing Stock:
To Raw Materials consumed: Work-in-progress 34,000
Op. Stock of RM 21,000
+ Net Purchases of RM 99,000
- Closing Stock of RM (24,000) 96,000
By Cost of Goods produced
transferred to Trading A/c
2,46,000
To Carriage Inwards 6,000
To Manufacturing Wages 95,300
To Fuel and power 10,200
To Factory rent and rates 12,100
To Indirect wages 27,000
To Depreciation on Plant and
machinery
11,400
2,90,000 2,90,000
27

28. Trading Account
For the year ending 31st March, 2015
Particulars Rs. Particulars Rs.
To Opening stock of finished
goods
23,000 By Net Sales (Sales less
Slaes return)
2,71,200
To Cost of goods produced
transferred from Manufacturing
A/c
2,46,000 By Closing Stock of Finished
Goods
43,000
To Gross Profit C/d 45,200
3,14,200 3,14,200
28

29. Test Your Knowledge - 4
From the following information, prepare a Manufacturing Account
showing raw materials consumed and Trading A/c :
Stock of Raw materials
(1.4.2014) 22,000
Stock of Raw materials
(31.3.2015) 26,000
Stock of Finished Goods
(1.4.2014)
24,000 Stock of Finished Goods
(31.3.2015) 45,000
Work-in-progress
(1.4.2015) 33,000
Work-in-progress
(31.3.2015) 36,000
Purchases - Raw Materials 1,21,000 Sales of scrap 12,000
Manufacturing wages 96,300 Factory rent and rates 14,700
Fuel and Power 11,200 Indirect wages 29,000
Depreciation on Plant 12,400 Carriage inwards 8,000
Sale of Finished goods 2,92,200
29

30. Answer
 Raw Materials Consumed – Rs. 1,17,000
 Cost of goods produced – Rs. 2,73,600
 Gross Profit – 39,600
30

31. Profit and Loss Account
 A profit and loss account starts with gross profit or
gross loss brought down from trading account.
 All the indirect expenses are shown on the debit side.
These expenses include office and administrative
expenses, selling and distribution expenses, financial
expenses, depreciation and other miscellaneous
expenses.
 Income other than sales are recorded on the credit
side.
 Net profit or Net Loss - transferred to capital account.
31

32. Need and Importance of Profit and Loss Account
 Finding net profit or net loss.
 Finding details of indirect expenses.
 Helps in preparing balance sheet: Net profit earned (or net
loss incurred) is carried to capital account to find the capital at
the end of the year.
 Maintaining provision and reserves. To meet future
uncertainties and to strengthen financial position of the
firm/company, certain provisions and reserves are to be
maintained out of profits.
 Calculation of important ratios. For the purpose of financial
analysis, several ratios are calculated with the help of
information/data provided in the profit and loss account.
32

33. Format of Profit and Loss Account
M/s. ...................
Profit and Loss Account
For the year ending ............
Dr. Cr.
Particulars Rs. Particulars Rs.
To Gross Loss b/d x x x By Gross Profit b/d x x x
To Office and Administrative
Expenses x x x
By Non-operating Recurring
Incomes x x x
To Selling and Distributing
Expenses x x x
By
By
Other Incomes
Net Loss transferred to
x x x
To
To
Financial Expenses
Depreciation
x x x
x x x
Capital A/c
x x x
To Miscellaneous Expenses or
Losses x x x
To Net Profit transferred to
Capital A/c x x x
Total x x x Total x x x
33

34. Items Shown on the Debit Side of
Profit & Loss Account
(1) Gross Loss.
(2) Office and administrative expenses. Following are the
examples of office and administrative expenses:
Salaries or Office Salaries or Salaries & Wages
Indirect Wages Rent, Rates & Taxes
Printing & Stationary Postage & Courier
Insurance Premium Establishment Expenses
General Expenses Lighting or Office Lighting
Audit Fees Newspaper and Magazines
Repairs and Maintenance
Telephone and Mobile Expenses
Sundry or Miscellaneous Expenses
34

35. Items Shown on the Debit Side of
Profit & Loss Account
(3) Selling and distribution
expenses. Following are the
examples of selling and distribution
expenses:
Trading Expenses
Advertisement Expenses
Packing Expenses
Rent of Showroom or
Godown
Entertainment Expenses
Sales Promotion Expenses
Freight Outwards or
Freight on Sales
Carriage Outwards or
Carriage on Sales
Travelling Expenses
Commission (Dr.)
Export Duty
Free Samples
Bad Debts or Provision for
Bad Debts
Salesman’s Salaries
Travellers’ Commission
Delivery Charges
Delivery Van Expenses
35

36. Financial expenses
Financial expenses are related to arranging long-term
and short-term funds. Following are the important
examples of financial expenses:
1) Interest on Loan/Bank Overdraft/Cash Credit
2) Interest on Capital
3) Bank Interest or Interest on overdraft
4) Bank Charges
5) Discount (Dr.) or Discount allowed
36

37. Depreciation and Maintenance
In this category we include the depreciation on account
of wear and tear of fixed assets and expenses incurred to
maintain the fixed assets. Following are the examples of
such expenses:
 Depreciation on tangible and intangible fixed assets,
like building, plant and machinery, furniture and
fixtures, motor vehicles, patents, trade marks, etc.
 Repairs & Maintenance, like white wash charges of
building, repairs and maintenance of machinery,
equipments, etc.
37

38. Miscellaneous Expenses or Losses
All other indirect expenses or loss on account of non-
operating transactions are included in this category.
Following are such important expenses:
(i) Charity or Donation,
(ii) Legal Expenses,
(iii) Loss on Sale of Assets,
(iv) Loss by Theft or Fire, etc.
38

39. Items shown on the
Credit side of Profit and Loss Account
(1) Gross profit
(2) Other incomes:
(a) Non-operating Recurring Incomes:
(i) Interest (Cr.) or Interest received on investments
(ii) Rent (Cr.) or Rent received
(iii) Discount (Cr.) or Discount received
(iv) Commission (Cr.) or Commission received
(v) Dividend Received
(vi) Sundry receipts
(b) Non-operating and Non-recurring Incomes:
(i) Bad debts recovered
(ii) Profit on sale of fixed assets
39

40. Prepare the Profit and Loss Account of M/s. Jorawar
Singh Babu Lal for the year ending March 31, 2015 from
the following balances:
Rs.
Salaries 1,600
General Expenses 1,200
Rent, Rates and Taxes 2,500
Carriage Outward 200
Interest received 460
Advertising 900
Discount 750
Printing and Stationary 650
Gross Profit 22,250
40

41. M/s. Jorawar Singh Babu Lal
Trading and Profit & Loss Account
For the year ending 31st March, 2015
DR. CR.
Particulars Rs. Particulars Rs.
To Salaries 1,600 By Gross Profit b/d 22,250
To General Expense 1,200 By Interest Received 460
To Rent, Rates and Taxes 2,500
To Advertising 900
To Discount 750
To Carriage Outward 200
To Printing & Stationery
650
To Net Profit 14,910
22,710 22,710
41

42. Closing Entries
 Closing entries are the journal entries which are
passed at the end of the year to close the nominal
accounts.
 All the nominal accounts having debit balance are
closed by transferring to the debit side of trading
account or profit and loss account, as the case may be.
 All the nominal accounts having credit balance are
closed by transferring to the credit side of trading
account or profit and loss account.
42

43. 1. For closing accounts to be shown on
debit side of trading account:
Trading A/c Dr.
To Opening Stock
To Purchases
To Sales Return
To Wages
To Freight, etc.
(Being transfer of debit balance to trading account)
Note: Sales return account has a debit balance and therefore
it is included in this entry. In trading account it is shown by
deducting from sales on the credit side.
43

44. 2. For closing accounts to be shown on
the credit side of trading account:
Sales A/c Dr.
Purchase Returns Dr.
To Trading A/c
(Being transfer of Sales and Purchase Returns to Trading
A/c)
Note: (i) Purchases return account has a credit balance and
therefore it is included in this entry. In trading account it is shown
by deducting from purchases on the debit side.
(ii) Closing stock is also shown in the trading account, but
its balance is not given in the trial balance. Entry passed for closing
stock is called adjustment entry. It is passed as:
Closing Stock A/c Dr.
To Trading A/c
44

45. 3. For gross profit or gross loss:
(a) For gross profit:
Trading A/c Dr.
To Profit & Loss A/c
(Being gross profit transferred to profit & loss a/c)
(b) For gross loss:
Profit & Loss A/c Dr.
To Trading A/c
(Being gross loss transferred to profit & loss account)
45

46. 4. For closing accounts to be shown on the debit
side of profit & loss account:
Profit & Loss A/c Dr.
To Indirect Expenses A/c (Individually)
(Being transfer of debit balances to profit and loss a/c)
5. For closing accounts to be shown on the credit
side of profit and loss account:
Other Incomes & Gains A/c Dr.
(Individually)
To Profit & Loss A/c
(Being transfer of credit balances to profit and loss a/c)
46

47. 6. For net profit or net loss:
(a) For net profit
Profit and Loss A/c Dr.
To Capital A/c
(Being net profit transferred to capital account)
(b) For net loss
Capital A/c Dr.
To Profit and Loss A/c
(Being net loss transferred to capital account)
47

48. Balance Sheet
Balance sheet or Position statement is also a part of final
accounts. It is a statement which shows the assets
owned by the business and liabilities owed on a certain
date, usually last date of the accounting year.
48

49. Characteristics of Balance Sheet
 It is prepared after preparing trading and profit and loss
account.
 It is prepared on a particular day, usually on the closing of
last day of the accounting year. It is not prepared for a
period.
 It shows financial position of a business as a going concern.
 It is a statement and not an account. The word ‘To’ or ‘By’
are not used with items. The words ‘Dr.’ and ‘Cr.’ are also
not used.
 Capital and liabilities are shown on the left hand side,
while assets are shown on the right hand side.
 Various assets and liabilities are presented in a order based
on either liquidity or permanence.
 The balance sheet is always tallied.
49

50. Grouping or Classification of Liabilities
 Owners’ Funds : Capital + Reserves and Surplus
 Long-term or Non-current liabilities. These
liabilities are payable after a long period, normally
more than one year. For example, long- term loans,
mortgage loan, debentures, etc.
 Current liabilities. These are obligations to be met in
near future (generally within one year). For example,
creditors for goods, outstanding expenses, bank
overdraft, bills payable, short-term loans, etc.
 Contingent liabilities
50

51. Contingent Liabilities
There are some possible liabilities which are not actual
liabilities on the date of balance sheet, but which may
become real liabilities after some time on happening of
certain contingency. Such possible liabilities are termed
as ‘Contingent Liabilities’.
The contingent liabilities are mentioned only by way of
foot notes in Balance Sheet, but their amount are not
shown in the amount column.
51

52. Examples of Contingent Liabilities:
 Claims against the company not acknowledged as debts;
 Uncalled liability on partly paid shares;
 Arrears of fixed cumulative dividends;
 Estimated amounts of contracts remaining to be executed
but not provided for;
 Liabilities under a guarantee.
 Liability on Bills Receivable discounted but not matured.
 Other money for which the company is contingently liable.
52

53. Grouping or Classification of Assets
 Fixed Assets or Non-current Assets: These assets are
purchased for the purpose of operating the business
and not for resale as these are required in the business
permanently.
 Tangible Assets: Main examples of these are land,
building, plant and machinery, furniture, motor car, etc.
 Intangible assets. These are the assets which has no
physical existence, but can be sold and purchased.
Goodwill, patent right, copyright and trade marks are
some of the examples.
53

54. Grouping or Classification of Assets
 Current assets. Current assets are kept for short term and
are required for day-to-day business activity. Stock of raw
material, semi-finished goods and finished goods, debtors,
bills receivables, bank balance, etc., are some of the
examples of current assets.
 Liquid assets. Liquid assets may be defined as the assets
which can be converted into cash easily or at short notice.
Cash in hand, bank balance, debtors, bills receivables are
the examples of liquid assets. Stock and prepaid expenses
are not considered liquid assets.
 Fictitious assets. Items shown as asset in the balance
sheet, having no market value, are called fictitious assets.
For example, preliminary expenses, accumulated losses,
etc.
54

55. Marshalling of Balance Sheet
A balance sheet shows assets and liabilities as on a
particular date. Assets are future economic benefit, the
right which are owned or controlled by an organisation
or individual. Assets may be fixed or current. Liabilities
are claims of creditors against the enterprise arising out
of past activities that are to be satisfied by the
disbursement of utilisation of corporate resources. The
arrangement of assets and liabilities in balance sheet in a
systematic way is known as marshalling of balance sheet.
There are two way of marshalling:
(1) Liquidity order, and
(2) Permanence order
55

56. Liquidity Order
 Liquidity means the convertibility of the assets into
cash.
 According to liquidity preference, the most liquid asset
is shown first. The asset which is most difficult for
conversion into cash is written last. In between these,
the same order is followed.
 When liabilities are recorded in liquidity order, first
short term or current liabilities, then long term
liabilities and then capital is shown.
56

57. The format of a Balance Sheet
(based on liquidity order)
Liabilities Rs. Assest Rs.
Current Liabilities: Current Assets:
Creditors x x x Cash in hand x x x
Bills Payable x x x Cash at bank x x x
Bank overdraft x x x Debtors x x x
Outstanding expenses x x x Bills Receivable x x x
Income received in advance x x x Stock-in-trade x x x
N0n-current Liabilities: Prepaid expenses x x x
Loan x x x Investments (give details) x x x
Mortgage x x x Non-current Assets:
Capital x x Furniture and Fixtures x x x
Add: Net Profitxx x x Plant and Machinery x x x
x x x Building x x x
Less: Drawings (x x x) (x x x) x x x Land x x x
Goodwill x x x
x x x x x x
57

58. Permanence Order
 While arranging the items of assets and liabilities in
the order of permanence, the period for which the firm
desire to keep them in use considered as basis.
 Assets which are to be used permanently in the
business are shown first. Assets having maximum
liquidity such as cash in hand, are shown in the last.
 When liabilities are shown, capital is shown first, as it
is most permanent. Then long term liabilities and the
current liabilities. Thus, the arrangement of assets and
liabilities will be just reverse of that shown in the
balance sheet prepared on liquidity preference.
58

59. The format of a Balance Sheet
(based on permanence order)
59
Liabilities Rs. Assest Rs.
Capital x x Fixed Assets:
Add: Net Profit x x Goodwill x x x
x x x Plant and Machinery x x x
Less: Drawings (x x x) x x x Building x x x
Long Term Liabilities: Land x x x
Loan x x x Furniture and Fixtures x x x
Mortgage x x x Investments (give details) x x x
Current Liabilities: Current Assets:
Creditors x x x Stock-in-trade x x x
Bills Payable x x x Prepaid Expenses x x x
Outstanding expenses x x x Debtors x x x
Income received in advance x x x Bills Receivable x x x
Bank overdraft x x x Cash in hand x x x
Cash at bank x x x
x x x x x x

60. Format of Vertical Income Statement
M/s. ....... (Name of the Firm)
Income Statement
For the year ended ..................
Particulars Rs. Rs.
Gross Sales xxx
Less: Cost of Goods Sold:
Opening stock xxx
Net Purchases xxx
Direct Expenses (Carriage and Freight, Wages,
etc.)
xxx
xxx
Less: Closing Stock (xxx) (xxx)
Gross Profit or Gross Income xxx
Less: Operating Expenses:
(a) Office and Administrative Expenses xxx
(b) Selling and Distribution Expenses xxx
(c) Financial Expenses xxx (xxx)
Operating Profit before Depreciation xxx60

61. Format of Vertical Income Statement
M/s. ....... (Name of the Firm)
Income Statement (Contd.)
For the year ended ..................
Particulars Rs. Rs.
Operating Profit before Depreciation xxx
Less: Depreciation (xxx)
Operating Profit after Depreciation xxx
Add: Non-operating Incomes
(Rent received, Interest received, etc.)
xxx
xxx
Less: Non-operating Expenses/Losses (xxx)
Profit before Interest xxx
Less: Interest on Loan (xxx)
Net Profit xxx
61

62. Format of Vertical Balance Sheet
M/s. ....... (Name of the Firm)
Balance Sheet as on …………
62
Particulars Rs. Rs.
Fixed Assets:
Land and Building x x x
Plant & Machinery x x x
Furniture & Fittings x x x
Investments x x x
Other Fixed Assets x x x x x x
Working Capital:
Current Assets:
Cash in Hand x x x
Cash at Bank x x x
Debtors x x x
Bills Receivable x x x
Closing Stock x x x x x x
Less: Current Liabilities:
Creditors x x x
Bills Payable x x x (x x x) x x x
Capital Employed x x x

63. Format of Vertical Balance Sheet (Contd.)
M/s. ....... (Name of the Firm)
Balance Sheet as on …………
63
Particulars Rs. Rs.
Capital Employed x x x
Less: Long-term Loans (x x x)
Net Worth or Proprietor’s Funds: x x x
Represented by:
Capital x x x
Add: Net Profits x x x
Less: Drawings (x x x) x x x

64. Draw up the Balance Sheet of Raymond Paper Works as at 31st
March, 2015 from the following information:
Cash in hand Rs. 11,200; Sundry Creditors Rs. 28,800;
Bills Payable Rs. 3,500; Bills Receivable Rs. 5,300; Sundry
Debtors Rs. 18,000.
Machinery as on April 1, 2014 Rs. 85,000 and
Depreciation provided for the year Rs. 8,500; Furniture and
Fixtures as on April 1, 2004 Rs. 21,000 and Depreciation
provided for the year Rs. 2,100; Closing stock Rs. 15,40.
Proprietor’s Capital Account Rs. 90,000;.
His drawings during the year Rs. 8,000.
Net profit as per Profit and Loss Account Rs. 31,000.
64

65. (a) In the order of liquidity.
M/s Raymond Paper Workers
Balance Sheet As on 31st March, 2015
Liabilities Rs. Assets Rs.
Current Liabilities: Current Assets:
Sundry Creditors 28,800 Cash in hand 11,200
Bills Payable 3,500 Sundry Debtors 18,000
Capital 90,000 Bills Receivable 5,300
Add: Net Profit 31,000 Stock 15,400
1,21,000 Fixed Assets:
Less: Drawings (8,000) 1,13,000 Machinery 85,000
Less: Depreciation (8,500) 76,500
Furniture &
Fixtures
21,000
Less: Depreciation (2,100) 18,900
1,45,300 1,45,300
65

66. (b) In the order of permanence
M/s Raymond Paper Workers
Balance Sheet As on 31st March, 2015
66
Liabilities Rs. Assets Rs.
Capital 90,000 Fixed Assets:
Add: Net Profit 31,000 Machinery 85,000
1,21,000 Less: Depreciation (8,500) 76,500
Less: Drawings (8,000) 1,13,000 Furniture &
Fixtures
21,000
Current Liabilities: Less: Depreciation (2,100) 18,900
Sundry Creditors 28,800 Current Assets:
Bills Payable 3,500 Stock 15,400
Bills Receivable 5,300
Sundry Debtors 18,000
Cash in hand 11,200
1,45,300 1,45,300