CUET UG Business Studies: Accounting - Final Accounts, Trading Account, P&L Account, Balance Sheet

Must-Know

• A Trading Account determines gross profit or gross loss by deducting the cost of goods sold from net sales; for example, if sales are ?5,00,000 and cost of goods sold is ?3,50,000, gross profit is ?1,50,000.
• Cost of goods sold = Opening stock + Net purchases + Direct expenses – Closing stock; e.g., opening stock ?50,000 + net purchases ?3,00,000 + wages ?20,000 – closing stock ?40,000 = ?3,30,000.
• Direct expenses include wages, freight on purchases, carriage inwards, and import duty; indirect expenses like rent or salaries are excluded.
• Gross profit is transferred to the Profit and Loss Account; it is not shown in the Balance Sheet.
• The Profit and Loss Account records all indirect expenses and incomes to determine net profit or net loss.
• Indirect expenses include rent, salaries, insurance, depreciation, and advertising; e.g., rent paid ?12,000 appears on the debit side of P&L Account.
• Indirect incomes include commission received, interest received, and discount received; e.g., commission ?5,000 appears on the credit side of P&L Account.
• Net profit is calculated as total credit side minus total debit side of the Profit and Loss Account; if credit total is ?2,00,000 and debit total ?1,60,000, net profit is ?40,000.
• Net profit is added to capital in the Balance Sheet under owner’s equity.
• The Balance Sheet is prepared on a particular date, not for a period; e.g., "as at 31st March 2024".
• Assets in the Balance Sheet are classified as non-current (fixed) and current (liquid); e.g., machinery is non-current, debtors are current.
• Liabilities are classified as non-current (long-term) and current (short-term); e.g., bank loan (due after 1 year) is non-current, creditors are current.
• Closing stock is shown on the credit side of Trading Account and as an asset in the Balance Sheet.
• Outstanding expenses are added to respective expenses in P&L Account and shown as liabilities in Balance Sheet; e.g., outstanding salary ?5,000.
• Prepaid expenses are subtracted from respective expenses in P&L Account and shown as assets in Balance Sheet; e.g., prepaid insurance ?3,000.
• Accrued income is added to respective income in P&L Account and shown as asset in Balance Sheet; e.g., accrued interest ?2,000.
• Depreciation is charged on fixed assets and shown as an expense in P&L Account and reduces asset value in Balance Sheet.
• Provision for doubtful debts is a charge against profit, shown in P&L Account, and reduces debtors in Balance Sheet.
• Capital = Assets – Liabilities; if total assets are ?5,00,000 and liabilities ?2,00,000, capital is ?3,00,000.
• The fundamental accounting equation is: Assets = Capital + Liabilities; it must balance in the Balance Sheet.

Difficulty Level

Intermediate — requires understanding of account classification, adjustments, and interlinking of three statements, but no complex calculations beyond NCERT examples.

Common CUET Traps

• Trap: Students include closing stock in the Trial Balance without adjusting it in Trading Account. Avoid: Closing stock does not appear in Trial Balance; it is adjusted outside and shown only in Trading Account (credit side) and Balance Sheet (asset).
• Trap: Treating prepaid expenses as liabilities or outstanding incomes as expenses. Avoid: Prepaid expenses are assets; outstanding incomes are assets, not liabilities or expenses.
• Trap: Including direct expenses like wages in Profit and Loss Account. Avoid: Wages are direct expenses and belong only in Trading Account, not in P&L Account.

Practice MCQs

1. Which of the following is a direct expense?
   A) Rent
   B) Salaries
   C) Wages
   D) Advertising
   Answer: C
   Explanation: Wages are directly related to production and are recorded in the Trading Account.
   Why others fail: Rent, salaries, and advertising are indirect expenses recorded in P&L Account.

2. Where is gross profit transferred?
   A) Trading Account
   B) Profit and Loss Account
   C) Balance Sheet
   D) Cash Account
   Answer: B
   Explanation: Gross profit is transferred to the credit side of the Profit and Loss Account.
   Why others fail: Some confuse it with Balance Sheet, but gross profit is not directly shown there.

3. Closing stock worth ?30,000 is not recorded in the books. What is the correct adjustment?
   A) Add to purchases, show in liabilities
   B) Add to sales, show in assets
   C) Credit Trading Account, show in assets
   D) Debit Trading Account, show in liabilities
   Answer: C
   Explanation: Closing stock is credited to Trading Account and shown as an asset in Balance Sheet.
   Why others fail: Students often debit it or misplace it in liabilities due to confusion with adjustments.

4. Outstanding salary of ?5,000 will:
   A) Increase net profit and appear as asset
   B) Decrease net profit and appear as liability
   C) Increase gross profit and appear as expense
   D) Decrease capital and appear as asset
   Answer: B
   Explanation: Outstanding salary increases total expenses, reducing net profit, and is a liability.
   Why others fail: Some think it reduces capital directly or treat it as asset due to misreading "outstanding".

5. If opening stock is ?40,000, net purchases ?2,60,000, wages ?30,000, and closing stock ?50,000, what is cost of goods sold?
   A) ?2,80,000
   B) ?3,30,000
   C) ?2,70,000
   D) ?3,80,000
   Answer: A
   Explanation: COGS = 40,000 + 2,60,000 + 30,000 – 50,000 = ?2,80,000.
   Why others fail: Students forget to subtract closing stock or incorrectly add it, leading to ?3,80,000 (option D).

Last?Minute Revision

• Trading Account-Gross profit; P&L Account-Net profit.
• Direct expenses: wages, freight inwards, carriage on purchases, fuel, power, factory rent.
• Indirect expenses: rent (office), salaries, printing, postage, insurance (office), depreciation.
• Closing stock: credit Trading Account, asset in Balance Sheet.
• Outstanding expense: add to expense, show as liability.
• Prepaid expense: subtract from expense, show as asset.
• Accrued income: add to income, show as asset.
• Depreciation: charge in P&L, reduce asset in Balance Sheet.
• Provision for doubtful debts: debit P&L, deduct from debtors in Balance Sheet.
• Net profit increases capital; net loss decreases capital.
• Balance Sheet date format: “as at 31st March 2024” — not “for the year”.
• Assets = Capital + Liabilities — must always balance.
• Cost of goods sold = Opening stock + Net purchases + Direct expenses – Closing stock.
• Gross profit = Net sales – Cost of goods sold.
• Net profit = Total incomes – Total expenses (after adjustments).
• Carriage outward is indirect expense (P&L); carriage inward is direct (Trading).
• Discount allowed-P&L debit; discount received-P&L credit.
• Capital = Opening capital + Net profit – Drawings + Additional capital.
• No account of depreciation, outstanding, or prepaid appears in Trial Balance — only in final accounts.
• Verify from NCERT: exact format of Balance Sheet (vertical form preferred in NCERT Class 11).