Final Accounts Of Sole Proprietor

A sole trader is the sole owner of the business. At the end of a accounting year the sole trader would like to know the financial results and the financial position of his business. For this, he prepares income statements i.e. trading A/c and P/L A/c and balance sheet. These statements collectively are known as Final Accounts. 

TRADING ACCOUNT
Trading Account is that part of income statement which is prepared before any other financial statement. It is created to calculate the gross profit or gross loss of a given accounting period.

CHARACTERISTICS OF TRADING ACCOUNT
Trading Account is prepared before preparing profit & loss account to calculate Gross profit. This gross profit is transferred to Profit and Loss Account. 
Trading Account shows the result of trading activities relating to purchases & sales of goods & services and all the direct expenses.

Gross Profit = Net Sales – Cost of the Goods Sold.

Net Sales = Total Sales – Sales Returns (Return Inwards)

Net Purchases = Total Purchase – Purchases Returns (Return Inwards)

MANUFACTURING ACCOUNT
As a Trading Account is not able of show the cost of goods manufactured because trading account deals with stock of finished goods and a manufacturing concern would like to calculate the cost of goods manufactured during the accounting period. Due to this reason a manufacturing account is prepared. 
Manufacturing Account is debited with all Direct expenses incurred in the factory for production of goods. It includes depreciation and repairs to plant and machinery and factory building, salary to works manager, etc

PROFIT AND LOSS ACCOUNT
Profit and Loss Account is prepared to ascertain the net profit or net loss of the business for a given accounting period. The balance of Trading Account i.e. gross profit/gross loss is transferred to the Profit and Loss. The balance of Profit account which may be Net Profit or Net loss is transferred to 
Capital Account in case of Sole proprietorship
Profit and Loss Appropriation Account in case of Partnership Firm.

BALANCE SHEET
Balance sheet is a position statement which shows the financial position i.e. the balances of assets, liabilities and capital, of a business entity at a specific  date. 
It is prepared from the real accounts and personal accounts of trial balance. 

FEATURES OF BALANCE SHEET
The primary objective of the preparation of balance sheet is to ascertain the financial position of a concern.
 It shows 
(a) the nature and value of assets, 
(b) the nature and value of liabilities and 
(c) the position of capital.
 
Balance sheet is always prepared on a specific date and not for a particular period. Balance sheet is not an account, it is a statement which contains information related to assets, liabilities and capital.

MARSHALLING OF BALANCE SHEET
Arranging assets and liabilities in a specific order is known as marshalling.

There Are Two Methods Of Marshalling
Liquidity order or according to time: In this method liquid assets are shown first and non liquid assets are shown at the end of the statement. 
Permanence order or according to purpose:  In these method non current are shown first and the current or liquid assets are shown last in order.

These online MCQ Mock tests and MCQ questions includes all main concepts of the chapter (Final Account of Sole Proprietor) in CS foundation Financial Accounting and Auditing.

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