Final accounts of a sole proprietor, solved

A year of entries comes down to two questions. How much did the business earn? What does it own and owe today? The final accounts answer both.

The three statements

Trading Account: shows gross profit or gross loss, the result of buying (or making) and selling goods.
Profit and Loss Account: starts with gross profit, deducts all other expenses and adds other incomes, to show net profit or net loss.
Balance Sheet: a statement of assets, liabilities and capital on the last day of the year. It shows the financial position.

The first two are accounts (with "To" and "By") and cover a period: "for the year ended 31 March 2026". The balance sheet is a statement on a date: "as at 31 March 2026".

Which item goes where

Statement	Debit side / Liabilities	Credit side / Assets
Trading Account	Opening stock; purchases less returns; direct expenses: wages, carriage inwards, freight, octroi, power and fuel, factory rent and lighting	Sales less returns; closing stock
Profit and Loss Account	Indirect expenses: salaries, office rent, insurance, printing, advertising, carriage outwards, discount allowed, bad debts, interest paid, depreciation, repairs	Gross profit; commission, interest, rent and discount received; other gains
Balance Sheet	Capital (plus net profit, less drawings); long-term loans; creditors; bills payable; outstanding expenses; bank overdraft	Fixed assets; investments; stock; debtors; bills receivable; prepaid expenses; cash at bank and in hand

The test for a direct expense: is it spent to buy the goods, bring them to the place of business or make them ready for sale? If yes, Trading Account. Everything spent on administration, selling and finance goes to the Profit and Loss Account. Carriage inwards is direct; carriage outwards is indirect.

Solved example: Kaveri Traders

From the following trial balance prepare the Trading and Profit and Loss Account for the year ended 31 March 2026 and the Balance Sheet as at that date. Closing stock was valued at ₹1,00,000.

Trial Balance of Kaveri Traders as at 31 March 2026
Name of account	Dr. (₹)	Cr. (₹)
Opening stock	80,000
Purchases	4,20,000
Sales return	10,000
Wages	36,000
Carriage inwards	9,000
Salaries	60,000
Rent	24,000
Insurance	6,000
Bad debts	2,000
Discount allowed	3,000
Furniture	50,000
Machinery	1,50,000
Debtors	90,000
Cash in hand	12,000
Cash at bank	48,000
Drawings	30,000
Sales		6,50,000
Purchases return		15,000
Commission received		5,000
Creditors		70,000
Bank loan		40,000
Capital		2,50,000
Total	10,30,000	10,30,000

Step 1: Trading Account

Dr. Trading Account for the year ended 31 March 2026 Cr.
Particulars	₹	Particulars	₹
To Opening stock	80,000	By Sales 6,50,000 less returns 10,000	6,40,000
To Purchases 4,20,000 less returns 15,000	4,05,000	By Closing stock	1,00,000
To Wages	36,000
To Carriage inwards	9,000
To Gross profit c/d	2,10,000
	7,40,000		7,40,000

Step 2: Profit and Loss Account

Dr. Profit and Loss Account for the year ended 31 March 2026 Cr.
Particulars	₹	Particulars	₹
To Salaries	60,000	By Gross profit b/d	2,10,000
To Rent	24,000	By Commission received	5,000
To Insurance	6,000
To Bad debts	2,000
To Discount allowed	3,000
To Net profit transferred to Capital A/c	1,20,000
	2,15,000		2,15,000

Step 3: Balance Sheet

Balance Sheet of Kaveri Traders as at 31 March 2026
Liabilities	₹	Assets	₹
Capital 2,50,000 + net profit 1,20,000 − drawings 30,000	3,40,000	Machinery	1,50,000
Bank loan	40,000	Furniture	50,000
Creditors	70,000	Closing stock	1,00,000
		Debtors	90,000
		Cash at bank	48,000
		Cash in hand	12,000
	4,50,000		4,50,000

Gross profit is ₹2,10,000, net profit is ₹1,20,000 and the balance sheet totals ₹4,50,000 on each side.

Check your work

Every item of the trial balance is used once: either in the Trading Account, or the Profit and Loss Account, or the Balance Sheet. Tick each as you use it.
Closing stock, given outside the trial balance, appears twice: credit side of the Trading Account and assets side of the Balance Sheet.
Net profit is added to capital; drawings are deducted.
If the balance sheet does not agree, look first for an unticked item, then for an item on the wrong side.

Order of the balance sheet

Assets and liabilities are arranged ("marshalled") in one of two orders. In order of permanence, the most lasting items come first: fixed assets at the top, cash at the bottom; capital first, creditors last. In order of liquidity it is the reverse: cash first, goodwill last. The example uses the order of permanence.

Useful terms from the statements

Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock. Here: 80,000 + 4,05,000 + 45,000 − 1,00,000 = ₹4,30,000.
Gross profit = Net sales − Cost of goods sold = 6,40,000 − 4,30,000 = ₹2,10,000.
Operating profit = Gross profit − operating expenses, leaving out non-operating items such as interest on loans and profit on sale of assets.
Working capital = Current assets − Current liabilities = (1,00,000 + 90,000 + 48,000 + 12,000) − 70,000 = ₹1,80,000.

Closing entries

The nominal accounts are closed by transfer. All Trading Account debits are transferred by debiting Trading A/c; sales by crediting it. Gross profit is carried to Profit and Loss A/c, and net profit to Capital A/c:

Journal
Date	Particulars	Dr. (₹)	Cr. (₹)
Mar 31	Trading A/c Dr.	2,10,000
	To Profit and Loss A/c		2,10,000
	(Gross profit transferred)
Mar 31	Profit and Loss A/c Dr.	1,20,000
	To Capital A/c		1,20,000
	(Net profit transferred to capital)
Mar 31	Capital A/c Dr.	30,000
	To Drawings A/c		30,000
	(Drawings transferred to capital)
	Total	3,60,000	3,60,000

Real questions come with adjustments. The same trial balance is solved again with seven adjustments on the adjustments in final accounts page.

Questions students ask

What is the difference between gross profit and net profit?

Gross profit is net sales minus the cost of goods sold, found in the Trading Account. Net profit is gross profit plus other incomes minus all indirect expenses, found in the Profit and Loss Account.

Is carriage inwards a direct expense?

Yes. It is the cost of bringing purchased goods to the business, so it goes to the Trading Account. Carriage outwards, the cost of delivering goods sold, goes to the Profit and Loss Account.

Why is the balance sheet not an account?

It is a statement of balances remaining after the nominal accounts are closed. It has no debit and credit sides and uses no "To" and "By".