ICAI Notes- Unit 1: Final Accounts of Non-Manufacturing Entities | Accounting for CA Foundation PDF Download

 Page 1


 
LEARNING OUTCOMES 
PREPARATION OF FINAL  
ACCOUNTS OF SOLE 
 PROPRIETORS  
UNIT – 1 FINAL ACCOUNTS OF NON-
MANUFACTURING ENTITIES 
 
 
 
After studying this unit, you would be able to:  
? Draw final Accounts of Non- manufacturing entities.  
? Learn the relationship between Profit and Loss Account and Balance Sheet. 
? Understand the Trading Account items. This will help you to learn which of the 
transactions and events should be shown in the Trading Account. 
? Understand the items shown in the Profit and Loss Account. By that you will 
learn the technique of preparing Profit and Loss Account and deriving the Profit 
and Loss balance. 
? Learn how to adjust outstanding and pre-paid expenses, accrued income and 
income received in advance. 
? Understand the items to be shown in the balance sheet. Also learn the 
classification of assets and liabilities and the order by which they are presented 
in the Balance Sheet. 
7
CHAPTER 
   
© The Institute of Chartered Accountants of India
Page 2


 
LEARNING OUTCOMES 
PREPARATION OF FINAL  
ACCOUNTS OF SOLE 
 PROPRIETORS  
UNIT – 1 FINAL ACCOUNTS OF NON-
MANUFACTURING ENTITIES 
 
 
 
After studying this unit, you would be able to:  
? Draw final Accounts of Non- manufacturing entities.  
? Learn the relationship between Profit and Loss Account and Balance Sheet. 
? Understand the Trading Account items. This will help you to learn which of the 
transactions and events should be shown in the Trading Account. 
? Understand the items shown in the Profit and Loss Account. By that you will 
learn the technique of preparing Profit and Loss Account and deriving the Profit 
and Loss balance. 
? Learn how to adjust outstanding and pre-paid expenses, accrued income and 
income received in advance. 
? Understand the items to be shown in the balance sheet. Also learn the 
classification of assets and liabilities and the order by which they are presented 
in the Balance Sheet. 
7
CHAPTER 
   
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.2 
7.2 
 
 1.1 INTRODUCTION  
Non-manufacturing entities are the trading entities, which are engaged in the purchase and 
sale of goods for profit without changing the form/ underlying use of such goods. In other 
words, non-manufacturing entities do not process the goods purchased rather sell them in 
their original form. Meanwhile the entity indulges in some liabilities, makes some assets and 
also incurs some expenses like salaries, stationery expenses, advertisement, rent etc. to run 
the business. At the end of the accounting year, the entity must be interested in knowing the 
results of the business. To ascertain the final outcome of the business i.e., the income and 
financial position, they prepare financial statements at the end of the accounting year. 
 
Financial Statements are the systematically organized summary of all the ledger account heads 
and presented in such a manner that it gives detailed information about the financial position 
and the performance of the entity. As seen above, through categorization of Financial 
Statements into Income & Position Statement, the profit or loss is measured at two levels: 
(a)  Gross Profit or Gross Loss 
(b)  Net Profit or Net Loss 
NON-MANUFACTURING BUSINESS ENTITIES
Final  Accounts
Trading Account Profit & Loss Account Balance Sheet
Financial Statements
Income Statement
Trading Account
Gross Profit or Gross Loss
Profit & Loss Account
Net Profit or Net Loss
Position Statement
Balance Sheet
Position of Assets & Liabilities
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
Page 3


 
LEARNING OUTCOMES 
PREPARATION OF FINAL  
ACCOUNTS OF SOLE 
 PROPRIETORS  
UNIT – 1 FINAL ACCOUNTS OF NON-
MANUFACTURING ENTITIES 
 
 
 
After studying this unit, you would be able to:  
? Draw final Accounts of Non- manufacturing entities.  
? Learn the relationship between Profit and Loss Account and Balance Sheet. 
? Understand the Trading Account items. This will help you to learn which of the 
transactions and events should be shown in the Trading Account. 
? Understand the items shown in the Profit and Loss Account. By that you will 
learn the technique of preparing Profit and Loss Account and deriving the Profit 
and Loss balance. 
? Learn how to adjust outstanding and pre-paid expenses, accrued income and 
income received in advance. 
? Understand the items to be shown in the balance sheet. Also learn the 
classification of assets and liabilities and the order by which they are presented 
in the Balance Sheet. 
7
CHAPTER 
   
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.2 
7.2 
 
 1.1 INTRODUCTION  
Non-manufacturing entities are the trading entities, which are engaged in the purchase and 
sale of goods for profit without changing the form/ underlying use of such goods. In other 
words, non-manufacturing entities do not process the goods purchased rather sell them in 
their original form. Meanwhile the entity indulges in some liabilities, makes some assets and 
also incurs some expenses like salaries, stationery expenses, advertisement, rent etc. to run 
the business. At the end of the accounting year, the entity must be interested in knowing the 
results of the business. To ascertain the final outcome of the business i.e., the income and 
financial position, they prepare financial statements at the end of the accounting year. 
 
Financial Statements are the systematically organized summary of all the ledger account heads 
and presented in such a manner that it gives detailed information about the financial position 
and the performance of the entity. As seen above, through categorization of Financial 
Statements into Income & Position Statement, the profit or loss is measured at two levels: 
(a)  Gross Profit or Gross Loss 
(b)  Net Profit or Net Loss 
NON-MANUFACTURING BUSINESS ENTITIES
Final  Accounts
Trading Account Profit & Loss Account Balance Sheet
Financial Statements
Income Statement
Trading Account
Gross Profit or Gross Loss
Profit & Loss Account
Net Profit or Net Loss
Position Statement
Balance Sheet
Position of Assets & Liabilities
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
7.3 
PREPARATIONS OF FINAL ACCOUNTS OF 
SOLE PROPRIETORS 
The profit or loss of the enterprise is obtained through the preparation of Income Statement 
i.e. Trading and Profit & Loss A/c 
The financial position of the business enterprise is assessed by measuring the assets, liabilities 
and capital of the enterprise and the same is communicated to the users of financial 
statements. Financial position of the enterprise can be known through the preparation of the 
Position Statement i.e Balance Sheet. 
Comparison between Income Statement and Position Statement 
Income Statement Position statement 
Profit or loss is presented in the Income 
Statement prepared at the close of the 
financial year 
It exhibits assets and liabilities of the 
business as at the close of the financial year. 
Income Statement is sub-divided into 
following two parts for a non-manufacturing 
concern: 
(i) Trading account; and 
(ii) Profit and Loss account 
Apart from balance sheet, to assess the 
financial position of the business, sometimes 
additional statements are also prepared like 
cash flow statement, statement of changes in 
equity etc. which is not mandatory for non-
corporate entities. These additional 
statements are prepared for the better 
understanding of the financial position of 
the business. 
Income Statement discloses net profit or net 
loss of the business after adjusting from the 
income earned during the year, all the 
expenditures of the business incurred in that 
year. 
Position statement discloses the assets and 
liabilities position as on a particular date. 
 1.2  PREPARATION OF FINAL ACCOUNTS 
The principal function of final accounts (Trading Account, Profit and Loss Account and the 
Balance Sheet) is to exhibit truly and fairly the performance and the financial position of the 
business to which they relate. In order that these may be properly drawn up, it is essential that 
a proper record of transactions entered into by the business during a particular accounting 
period should be maintained. The BASIC PRINCIPLES in regard to accumulation of accounting 
period data are: 
(i) a distinction should be made between capital and revenue receipts and payments. 
(ii) income and expenses relating to a period of account should be separated from those 
of another period.  
© The Institute of Chartered Accountants of India
Page 4


 
LEARNING OUTCOMES 
PREPARATION OF FINAL  
ACCOUNTS OF SOLE 
 PROPRIETORS  
UNIT – 1 FINAL ACCOUNTS OF NON-
MANUFACTURING ENTITIES 
 
 
 
After studying this unit, you would be able to:  
? Draw final Accounts of Non- manufacturing entities.  
? Learn the relationship between Profit and Loss Account and Balance Sheet. 
? Understand the Trading Account items. This will help you to learn which of the 
transactions and events should be shown in the Trading Account. 
? Understand the items shown in the Profit and Loss Account. By that you will 
learn the technique of preparing Profit and Loss Account and deriving the Profit 
and Loss balance. 
? Learn how to adjust outstanding and pre-paid expenses, accrued income and 
income received in advance. 
? Understand the items to be shown in the balance sheet. Also learn the 
classification of assets and liabilities and the order by which they are presented 
in the Balance Sheet. 
7
CHAPTER 
   
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.2 
7.2 
 
 1.1 INTRODUCTION  
Non-manufacturing entities are the trading entities, which are engaged in the purchase and 
sale of goods for profit without changing the form/ underlying use of such goods. In other 
words, non-manufacturing entities do not process the goods purchased rather sell them in 
their original form. Meanwhile the entity indulges in some liabilities, makes some assets and 
also incurs some expenses like salaries, stationery expenses, advertisement, rent etc. to run 
the business. At the end of the accounting year, the entity must be interested in knowing the 
results of the business. To ascertain the final outcome of the business i.e., the income and 
financial position, they prepare financial statements at the end of the accounting year. 
 
Financial Statements are the systematically organized summary of all the ledger account heads 
and presented in such a manner that it gives detailed information about the financial position 
and the performance of the entity. As seen above, through categorization of Financial 
Statements into Income & Position Statement, the profit or loss is measured at two levels: 
(a)  Gross Profit or Gross Loss 
(b)  Net Profit or Net Loss 
NON-MANUFACTURING BUSINESS ENTITIES
Final  Accounts
Trading Account Profit & Loss Account Balance Sheet
Financial Statements
Income Statement
Trading Account
Gross Profit or Gross Loss
Profit & Loss Account
Net Profit or Net Loss
Position Statement
Balance Sheet
Position of Assets & Liabilities
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
7.3 
PREPARATIONS OF FINAL ACCOUNTS OF 
SOLE PROPRIETORS 
The profit or loss of the enterprise is obtained through the preparation of Income Statement 
i.e. Trading and Profit & Loss A/c 
The financial position of the business enterprise is assessed by measuring the assets, liabilities 
and capital of the enterprise and the same is communicated to the users of financial 
statements. Financial position of the enterprise can be known through the preparation of the 
Position Statement i.e Balance Sheet. 
Comparison between Income Statement and Position Statement 
Income Statement Position statement 
Profit or loss is presented in the Income 
Statement prepared at the close of the 
financial year 
It exhibits assets and liabilities of the 
business as at the close of the financial year. 
Income Statement is sub-divided into 
following two parts for a non-manufacturing 
concern: 
(i) Trading account; and 
(ii) Profit and Loss account 
Apart from balance sheet, to assess the 
financial position of the business, sometimes 
additional statements are also prepared like 
cash flow statement, statement of changes in 
equity etc. which is not mandatory for non-
corporate entities. These additional 
statements are prepared for the better 
understanding of the financial position of 
the business. 
Income Statement discloses net profit or net 
loss of the business after adjusting from the 
income earned during the year, all the 
expenditures of the business incurred in that 
year. 
Position statement discloses the assets and 
liabilities position as on a particular date. 
 1.2  PREPARATION OF FINAL ACCOUNTS 
The principal function of final accounts (Trading Account, Profit and Loss Account and the 
Balance Sheet) is to exhibit truly and fairly the performance and the financial position of the 
business to which they relate. In order that these may be properly drawn up, it is essential that 
a proper record of transactions entered into by the business during a particular accounting 
period should be maintained. The BASIC PRINCIPLES in regard to accumulation of accounting 
period data are: 
(i) a distinction should be made between capital and revenue receipts and payments. 
(ii) income and expenses relating to a period of account should be separated from those 
of another period.  
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.4 
7.4 
(iii)   different items of income and expenditure should be accumulated under significant 
heads so as to disclose the sources from which capital has been procured and the 
nature of liabilities, which are outstanding for payment. 
Having regard to these basic principles, the various matters to which attention should be paid 
for determining the different aspects of transactions, a record of which should be kept, and 
the different heads of account under which various items of income and expenditure should 
be accumulated, are stated below: 
(a) Distinction between personal and business income:- Since the final statements of 
account are intended to show the profitability of the business and not that of its 
proprietors, it is essential that all personal income and expenditure should be 
separated from business income and expenditure. 
(b)  Distinction between capital and revenue expenditure:- A distinction should be 
made between capital and revenue, both receipts and expenditure. Different types of 
income and expenditure should be classified under separate heads. Assets should be 
included in the Balance Sheet by following accounting principles and accounting 
standards. Likewise, a provision for expenses which have accrued but not paid, should 
be made by estimation or otherwise on the same basis as in the previous year. 
(c) All material information to be disclosed:- Every information, considered material for 
evaluating the performance of the business or its financial position, should be 
disclosed. For example, when the labour charges have increased substantially on 
account of bonus having been paid to workmen, the amount of bonus paid should be 
disclosed. Similarly, If there are substantial write-offs in inventory due to any reason, it 
should be shown separately. 
(d) Record only current period transactions:- Though the record of transactions should 
be maintained continuously, at the end of each accounting period, the transactions of 
the closing accounting period should be cut off from those of the succeeding period. 
(e) Only transactions completed before close of accounts should be given effect:- It 
should be seen that only the effect of transactions, which were concluded before the 
close of period of account, has been adjusted in the accounts of the year. For example, 
when a sale of goods is to take place only after the goods have been inspected by the 
purchaser and the inspection had not been made before the close of the year, it would 
be incorrect to treat the goods as a sale in the accounts of the year. 
 
© The Institute of Chartered Accountants of India
Page 5


 
LEARNING OUTCOMES 
PREPARATION OF FINAL  
ACCOUNTS OF SOLE 
 PROPRIETORS  
UNIT – 1 FINAL ACCOUNTS OF NON-
MANUFACTURING ENTITIES 
 
 
 
After studying this unit, you would be able to:  
? Draw final Accounts of Non- manufacturing entities.  
? Learn the relationship between Profit and Loss Account and Balance Sheet. 
? Understand the Trading Account items. This will help you to learn which of the 
transactions and events should be shown in the Trading Account. 
? Understand the items shown in the Profit and Loss Account. By that you will 
learn the technique of preparing Profit and Loss Account and deriving the Profit 
and Loss balance. 
? Learn how to adjust outstanding and pre-paid expenses, accrued income and 
income received in advance. 
? Understand the items to be shown in the balance sheet. Also learn the 
classification of assets and liabilities and the order by which they are presented 
in the Balance Sheet. 
7
CHAPTER 
   
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.2 
7.2 
 
 1.1 INTRODUCTION  
Non-manufacturing entities are the trading entities, which are engaged in the purchase and 
sale of goods for profit without changing the form/ underlying use of such goods. In other 
words, non-manufacturing entities do not process the goods purchased rather sell them in 
their original form. Meanwhile the entity indulges in some liabilities, makes some assets and 
also incurs some expenses like salaries, stationery expenses, advertisement, rent etc. to run 
the business. At the end of the accounting year, the entity must be interested in knowing the 
results of the business. To ascertain the final outcome of the business i.e., the income and 
financial position, they prepare financial statements at the end of the accounting year. 
 
Financial Statements are the systematically organized summary of all the ledger account heads 
and presented in such a manner that it gives detailed information about the financial position 
and the performance of the entity. As seen above, through categorization of Financial 
Statements into Income & Position Statement, the profit or loss is measured at two levels: 
(a)  Gross Profit or Gross Loss 
(b)  Net Profit or Net Loss 
NON-MANUFACTURING BUSINESS ENTITIES
Final  Accounts
Trading Account Profit & Loss Account Balance Sheet
Financial Statements
Income Statement
Trading Account
Gross Profit or Gross Loss
Profit & Loss Account
Net Profit or Net Loss
Position Statement
Balance Sheet
Position of Assets & Liabilities
UNIT OVERVIEW 
© The Institute of Chartered Accountants of India
7.3 
PREPARATIONS OF FINAL ACCOUNTS OF 
SOLE PROPRIETORS 
The profit or loss of the enterprise is obtained through the preparation of Income Statement 
i.e. Trading and Profit & Loss A/c 
The financial position of the business enterprise is assessed by measuring the assets, liabilities 
and capital of the enterprise and the same is communicated to the users of financial 
statements. Financial position of the enterprise can be known through the preparation of the 
Position Statement i.e Balance Sheet. 
Comparison between Income Statement and Position Statement 
Income Statement Position statement 
Profit or loss is presented in the Income 
Statement prepared at the close of the 
financial year 
It exhibits assets and liabilities of the 
business as at the close of the financial year. 
Income Statement is sub-divided into 
following two parts for a non-manufacturing 
concern: 
(i) Trading account; and 
(ii) Profit and Loss account 
Apart from balance sheet, to assess the 
financial position of the business, sometimes 
additional statements are also prepared like 
cash flow statement, statement of changes in 
equity etc. which is not mandatory for non-
corporate entities. These additional 
statements are prepared for the better 
understanding of the financial position of 
the business. 
Income Statement discloses net profit or net 
loss of the business after adjusting from the 
income earned during the year, all the 
expenditures of the business incurred in that 
year. 
Position statement discloses the assets and 
liabilities position as on a particular date. 
 1.2  PREPARATION OF FINAL ACCOUNTS 
The principal function of final accounts (Trading Account, Profit and Loss Account and the 
Balance Sheet) is to exhibit truly and fairly the performance and the financial position of the 
business to which they relate. In order that these may be properly drawn up, it is essential that 
a proper record of transactions entered into by the business during a particular accounting 
period should be maintained. The BASIC PRINCIPLES in regard to accumulation of accounting 
period data are: 
(i) a distinction should be made between capital and revenue receipts and payments. 
(ii) income and expenses relating to a period of account should be separated from those 
of another period.  
© The Institute of Chartered Accountants of India
  ACCOUNTING
1.4 
7.4 
(iii)   different items of income and expenditure should be accumulated under significant 
heads so as to disclose the sources from which capital has been procured and the 
nature of liabilities, which are outstanding for payment. 
Having regard to these basic principles, the various matters to which attention should be paid 
for determining the different aspects of transactions, a record of which should be kept, and 
the different heads of account under which various items of income and expenditure should 
be accumulated, are stated below: 
(a) Distinction between personal and business income:- Since the final statements of 
account are intended to show the profitability of the business and not that of its 
proprietors, it is essential that all personal income and expenditure should be 
separated from business income and expenditure. 
(b)  Distinction between capital and revenue expenditure:- A distinction should be 
made between capital and revenue, both receipts and expenditure. Different types of 
income and expenditure should be classified under separate heads. Assets should be 
included in the Balance Sheet by following accounting principles and accounting 
standards. Likewise, a provision for expenses which have accrued but not paid, should 
be made by estimation or otherwise on the same basis as in the previous year. 
(c) All material information to be disclosed:- Every information, considered material for 
evaluating the performance of the business or its financial position, should be 
disclosed. For example, when the labour charges have increased substantially on 
account of bonus having been paid to workmen, the amount of bonus paid should be 
disclosed. Similarly, If there are substantial write-offs in inventory due to any reason, it 
should be shown separately. 
(d) Record only current period transactions:- Though the record of transactions should 
be maintained continuously, at the end of each accounting period, the transactions of 
the closing accounting period should be cut off from those of the succeeding period. 
(e) Only transactions completed before close of accounts should be given effect:- It 
should be seen that only the effect of transactions, which were concluded before the 
close of period of account, has been adjusted in the accounts of the year. For example, 
when a sale of goods is to take place only after the goods have been inspected by the 
purchaser and the inspection had not been made before the close of the year, it would 
be incorrect to treat the goods as a sale in the accounts of the year. 
 
© The Institute of Chartered Accountants of India
7.5 
PREPARATIONS OF FINAL ACCOUNTS OF 
SOLE PROPRIETORS 
Inter-relationship of the two statements 
One of the points to be remembered is that of total expenditure incurred some type of 
expenditure appears in the Profit and Loss Account and some in the Balance Sheet. Consider 
few examples,  
1. Salaries paid for current year is shown on the Dr. side of Profit and Loss Account but 
outstanding salaries is shown on liabilities side of Balance Sheet and is added to 
Salaries paid and shown under Profit and Loss Account. 
Profit & Loss A/c 
Particulars Amount
`
 
Particulars Amount 
` 
To Salaries paid                   25,000 
   
Add: Outstanding             1,500 26,500 
  
         Salaries 
   
Balance Sheet 
Liabilities Amount 
` 
Assets Amount 
` 
Outstanding Salaries 1,500 
  
2. When a machine is purchased, that part of it which is attributable to the year 
considered as depreciation is debited to the Profit and Loss Account and the balance 
amount after reducing the amount of depreciation is shown in the Balance Sheet as an 
asset. 
Profit & Loss A/c 
Particulars Amount
` 
Particulars Amount 
` 
To Depreciation     50,000
  
Balance Sheet 
Liabilities Amount 
` 
Assets Amount 
` 
  
Fixed Assets               5,00,000 
 
  
Less:- Depreciation     (50,000) 4,50,000 
These illustrations show that the two statements, the Profit and Loss Account and the Balance 
Sheet, are thoroughly inter-related. The assets shown in the Balance Sheet are mostly only the 
remainder of the expenditure incurred after a suitable amount has been charged to the Profit 
© The Institute of Chartered Accountants of India