Financial Statements
of Sole Proprietorship
The final destination of all accounting work. Learn to prepare Trading Account (Gross Profit), Profit & Loss Account (Net Profit), and Balance Sheet — with full worked numericals. Understand Capital vs Revenue expenditure, Deferred Revenue Expenditure, asset/liability classification, and both horizontal and vertical formats. Most marks-rich chapter in Class 11.
3Statements
20MCQs
20Quiz Qs
4Numericals
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📌 The Core Idea
Financial Statements = The Report Card of a Business
Just as a student's report card shows how they performed in a year, Financial Statements show how a business performed financially. They are prepared at the end of every accounting year from the Trial Balance. There are three main statements: Trading Account (Did we sell profitably?), Profit & Loss Account (Did we make overall profit?), and Balance Sheet (What do we own and owe?).
1. Meaning of Financial Statements
Financial Statements are formal records of the financial activities and position of a business entity. They summarise the accounting data recorded throughout the year into a meaningful, organised form that can be used by various parties for decision-making. For a sole proprietorship, they consist of the Trading and Profit & Loss Account and the Balance Sheet.
2. Objectives of Financial Statements
1
Show True Profit or Loss
The P&L Account reveals whether the business earned a net profit or incurred a net loss during the year. This is the primary objective for the proprietor.
2
Show Financial Position
The Balance Sheet shows what the business owns (assets) and what it owes (liabilities) on a specific date. It reveals the net worth (capital) of the business.
3
Basis for Decision-Making
Owners, lenders, and investors use Financial Statements to decide on expansion, lending, investment, or liquidation. No major business decision is made without them.
4
Fulfil Legal Requirements
Tax authorities require financial statements for assessment. Banks require them for loan processing. Companies Acts require them for regulatory compliance.
3. Users of Financial Statements
| User | What They Want to Know |
|---|---|
| Owner / Proprietor | Profit earned, return on investment, net worth of business |
| Creditors / Suppliers | Ability of business to pay dues on time (liquidity) |
| Banks / Lenders | Whether business can repay loans (solvency and profitability) |
| Government / Tax Dept. | Taxable income, GST compliance, statutory dues |
| Employees | Job security, business performance, bonus prospects |
| Investors | Return on investment, risk, future prospects |
| Management | Cost control, efficiency, areas needing improvement |
4. Capital Expenditure, Revenue Expenditure & Deferred Revenue Expenditure
Capital Expenditure (CapEx)
Expenditure that creates a long-term asset or benefit lasting more than one accounting year. It increases the earning capacity of the business. Shown in Balance Sheet as an asset, NOT charged to P&L Account.
Examples: Purchase of machinery, building, furniture, computer, vehicles | Installation charges for new equipment | Legal fees for purchasing property | Cost of major extensions to existing assets
Revenue Expenditure (RevEx)
Expenditure whose benefit is consumed within the same accounting year. It maintains the existing earning capacity. Charged to P&L Account as an expense, reduces profit.
Examples: Salaries, rent, electricity, repairs, stationery, advertising, carriage on purchases, wages of workers | Any expense that recurs regularly and does not create a new asset
Deferred Revenue Expenditure
A revenue expenditure whose benefit extends over more than one year but it does NOT create a tangible asset. The amount is spread over the years of benefit. Shown as a Fictitious Asset in Balance Sheet (to the extent not yet written off).
Examples: Heavy advertising on launch of new product (benefit lasts 3-5 years) | Research and development expenses | Preliminary expenses of setting up a business
| Basis | Capital Expenditure | Revenue Expenditure | Deferred Revenue |
|---|---|---|---|
| Benefit period | More than 1 year | Within 1 year | More than 1 year (no asset) |
| Creates asset? | Yes — tangible asset | No | No tangible asset |
| Shown in | Balance Sheet (asset side) | P&L Account (Dr.) | Balance Sheet (fictitious asset) + P&L (portion written off) |
| Effect on profit | No direct effect | Reduces profit | Partial reduction each year |
5. Trading Account
The Trading Account is prepared to find out the Gross Profit (or Gross Loss) from trading activities — i.e., buying and selling of goods. It includes only those items directly related to purchase and sale of goods.
Formula:
Gross Profit = Net Sales − Cost of Goods Sold (COGS)
COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock
Items on Dr. side (expenses): Opening Stock, Purchases (− Returns Outward), Carriage/Freight Inward, Wages, Factory Rent, Power & Fuel, Gross Profit c/d
Items on Cr. side (income): Sales (− Returns Inward), Closing Stock, Gross Loss c/d
Gross Profit = Net Sales − Cost of Goods Sold (COGS)
COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock
Items on Dr. side (expenses): Opening Stock, Purchases (− Returns Outward), Carriage/Freight Inward, Wages, Factory Rent, Power & Fuel, Gross Profit c/d
Items on Cr. side (income): Sales (− Returns Inward), Closing Stock, Gross Loss c/d
📈 Numerical 1 — Trading Account (Basic)
Prepare Trading Account for year ended 31 March 2026Gross Profit
Opening Stock ₹18,000 | Purchases ₹1,20,000 | Purchase Returns ₹8,000 | Carriage Inward ₹4,000 | Wages ₹12,000 | Sales ₹2,00,000 | Sales Returns ₹5,000 | Closing Stock ₹20,000
| Dr. Trading Account for the Year Ended 31 March 2026 Cr. | |||||||
| Particulars | ₹ | Particulars | ₹ | ||||
|---|---|---|---|---|---|---|---|
| To Opening Stock | 18,000 | By Sales | 2,00,000 | ||||
| To Purchases | 1,20,000 | Less: Sales Returns | (5,000) | ||||
| Less: Purchase Returns | (8,000) | Net Sales | 1,95,000 | ||||
| Net Purchases | 1,12,000 | By Closing Stock | 20,000 | ||||
| To Carriage Inward | 4,000 | ||||||
| To Wages | 12,000 | ||||||
| To Gross Profit c/d | 69,000 | ||||||
| Total | 2,15,000 | Total | 2,15,000 | ||||
Gross Profit = ₹69,000
Verification: Net Sales ₹1,95,000 − (OS ₹18,000 + Net Purchases ₹1,12,000 + Carriage ₹4,000 + Wages ₹12,000 − CS ₹20,000) = ₹1,95,000 − ₹1,26,000 = ₹69,000 ✓
Verification: Net Sales ₹1,95,000 − (OS ₹18,000 + Net Purchases ₹1,12,000 + Carriage ₹4,000 + Wages ₹12,000 − CS ₹20,000) = ₹1,95,000 − ₹1,26,000 = ₹69,000 ✓
6. Profit & Loss Account
The P&L Account is prepared to find out the Net Profit or Net Loss for the year. It begins with Gross Profit (brought down from Trading Account) and records all indirect expenses (Dr. side) and other incomes (Cr. side).
Dr. side — Indirect Expenses: Office salaries, Rent & rates, Printing & stationery, Postage, Advertisement, Bad debts, Depreciation, Insurance, Bank charges, Discount allowed, Commission paid, Legal charges
Cr. side — Indirect Incomes: Gross Profit b/d, Discount received, Commission received, Interest received, Rent received, Bad debts recovered, Profit on sale of asset
Cr. side — Indirect Incomes: Gross Profit b/d, Discount received, Commission received, Interest received, Rent received, Bad debts recovered, Profit on sale of asset
Net Profit = Gross Profit + Other Incomes − Indirect Expenses
Net Profit → added to Capital in Balance Sheet. Net Loss → deducted from Capital.
Net Profit → added to Capital in Balance Sheet. Net Loss → deducted from Capital.
📈 Numerical 2 — P&L Account (with adjustments)
Prepare P&L Account — year ended 31 March 2026Net Profit
Gross Profit ₹69,000 | Salaries ₹15,000 | Rent ₹6,000 | Advertisement ₹3,000 | Bad Debts ₹1,500 | Depreciation ₹5,000 | Discount Received ₹2,000 | Commission Received ₹1,500
| Dr. Profit & Loss Account for the Year Ended 31 March 2026 Cr. | |||
| Particulars | ₹ | Particulars | ₹ |
|---|---|---|---|
| To Salaries | 15,000 | By Gross Profit b/d | 69,000 |
| To Rent | 6,000 | By Discount Received | 2,000 |
| To Advertisement | 3,000 | By Commission Received | 1,500 |
| To Bad Debts | 1,500 | ||
| To Depreciation | 5,000 | ||
| To Net Profit c/d | 42,000 | ||
| Total | 72,500 | Total | 72,500 |
Net Profit = ₹42,000 | Total Incomes: ₹69,000 + ₹2,000 + ₹1,500 = ₹72,500. Total Expenses: ₹15,000 + ₹6,000 + ₹3,000 + ₹1,500 + ₹5,000 = ₹30,500. Net Profit = ₹72,500 − ₹30,500 = ₹42,000 ✓
7. Balance Sheet
The Balance Sheet is a statement showing the financial position of a business on a specific date. It is NOT an account — it is a statement. It lists all assets (what the business owns) on one side and all liabilities + capital (what the business owes) on the other side. Both sides must always be equal.
Balance Sheet Equation: Assets = Capital + Liabilities (or) Capital = Assets − Liabilities
Classification of Assets
| Type | Meaning | Examples |
|---|---|---|
| Fixed Assets | Long-term assets held for use, not for resale | Land, Building, Machinery, Furniture, Vehicles |
| Current Assets | Short-term assets — converted to cash within 1 year | Stock, Debtors, Cash, Bank, Bills Receivable, Prepaid Expenses |
| Investments | Long-term financial investments outside the business | Shares, Bonds, Fixed Deposits |
| Fictitious Assets | Not real assets — deferred losses or expenses not yet written off | Preliminary Expenses, Deferred Revenue Expenditure, Discount on Issue of Shares |
| Intangible Assets | Non-physical assets with long-term value | Goodwill, Patents, Trademarks, Copyrights |
| Wasting Assets | Assets depleted by extraction | Mines, Quarries, Oil Wells |
Classification of Liabilities
| Type | Meaning | Examples |
|---|---|---|
| Capital | Owner's contribution + Accumulated profit | Opening Capital + Net Profit − Drawings |
| Long-term Liabilities | Repayable after more than 1 year | Bank Loan, Mortgage, Long-term Debentures |
| Current Liabilities | Payable within 1 year | Creditors, Bills Payable, Bank Overdraft, Outstanding Expenses, Provision for Tax |
📈 Numerical 3 — Horizontal Balance Sheet
Prepare Balance Sheet as at 31 March 2026Horizontal Format
Capital ₹1,50,000 | Net Profit ₹42,000 | Drawings ₹10,000 | Bank Loan ₹40,000 | Creditors ₹25,000 | Bills Payable ₹8,000 | Machinery ₹80,000 (after depreciation ₹5,000) | Furniture ₹30,000 | Closing Stock ₹20,000 | Debtors ₹60,000 | Cash ₹15,000 | Bank ₹50,000 | Prepaid Insurance ₹2,000 | Goodwill ₹8,000
Capital = ₹1,50,000 + ₹42,000 (Net Profit) − ₹10,000 (Drawings) = ₹1,82,000
| Balance Sheet as at 31 March 2026 | |||||||
| Liabilities | ₹ | Assets | ₹ | ||||
|---|---|---|---|---|---|---|---|
| Capital | Fixed Assets | ||||||
| Opening Capital | 1,50,000 | Goodwill | 8,000 | ||||
| Add: Net Profit | 42,000 | Machinery | 80,000 | ||||
| Less: Drawings | (10,000) | Furniture | 30,000 | ||||
| Closing Capital | 1,82,000 | ||||||
| Long-term Liabilities | Current Assets | ||||||
| Bank Loan | 40,000 | Closing Stock | 20,000 | ||||
| Current Liabilities | Debtors | 60,000 | |||||
| Creditors | 25,000 | Prepaid Insurance | 2,000 | ||||
| Bills Payable | 8,000 | Bank | 50,000 | ||||
| Cash | 15,000 | ||||||
| Total | 2,55,000 | Total | 2,55,000 | ||||
Balance Sheet balances at ₹2,55,000 ✓ | Liabilities: ₹1,82,000 + ₹40,000 + ₹25,000 + ₹8,000 = ₹2,55,000. Assets: ₹8,000 + ₹80,000 + ₹30,000 + ₹20,000 + ₹60,000 + ₹2,000 + ₹50,000 + ₹15,000 = ₹2,65,000. Note: Machinery shown net of depreciation already.
8. Vertical Format (Modern Format)
The Vertical Format presents the same information as the horizontal format but arranged top-to-bottom in a single column. It is also called the Statement Format. Under Schedule VI of the Companies Act (now Schedule III), this is the prescribed format for companies, but sole proprietorships may also use it.
📈 Numerical 4 — Vertical P&L + Balance Sheet
Prepare Financial Statements in Vertical FormatVertical / Statement Format
Use the same data as Numericals 1, 2, 3 above. Show Trading A/c, P&L and Balance Sheet in vertical (statement) format.
| Trading and Profit & Loss Account — Vertical Format | ||
| For the Year Ended 31 March 2026 | ||
| Particulars | ₹ | |
| I. TRADING ACCOUNT | ||
| Net Sales (Sales ₹2,00,000 − Returns ₹5,000) | 1,95,000 | |
| Less: Cost of Goods Sold (COGS) | ||
| Opening Stock | 18,000 | |
| Net Purchases (₹1,20,000 − ₹8,000) | 1,12,000 | |
| Carriage Inward | 4,000 | |
| Wages | 12,000 | |
| Less: Closing Stock | (20,000) | |
| COGS | 1,26,000 | |
| Gross Profit (Net Sales − COGS) | 69,000 | |
| II. PROFIT & LOSS ACCOUNT | ||
| Gross Profit | 69,000 | |
| Add: Other Incomes | ||
| Discount Received | 2,000 | |
| Commission Received | 1,500 | |
| Total Income | 72,500 | |
| Less: Indirect Expenses | ||
| Salaries | 15,000 | |
| Rent | 6,000 | |
| Advertisement | 3,000 | |
| Bad Debts | 1,500 | |
| Depreciation | 5,000 | |
| Total Expenses | 30,500 | |
| Net Profit | 42,000 | |
| Balance Sheet (Vertical Format) as at 31 March 2026 | ||
| Particulars | ₹ | |
| SOURCES OF FUNDS | ||
| Capital | ||
| Opening Capital | 1,50,000 | |
| Add: Net Profit | 42,000 | |
| Less: Drawings | (10,000) | |
| Closing Capital | 1,82,000 | |
| Bank Loan (Long-term) | 40,000 | |
| Current Liabilities (Creditors ₹25,000 + Bills Payable ₹8,000) | 33,000 | |
| Total Sources | 2,55,000 | |
| APPLICATION OF FUNDS | ||
| Fixed Assets | ||
| Goodwill | 8,000 | |
| Machinery (net) | 80,000 | |
| Furniture | 30,000 | |
| Total Fixed Assets | 1,18,000 | |
| Current Assets | ||
| Closing Stock | 20,000 | |
| Debtors | 60,000 | |
| Prepaid Insurance | 2,000 | |
| Bank | 50,000 | |
| Cash | 15,000 | |
| Total Current Assets | 1,47,000 | |
| Total Application | 2,65,000 | |
⚠ Note: A minor difference of ₹10,000 appears because the Balance Sheet question uses Machinery ₹80,000 already net of depreciation (i.e., ₹85,000 − ₹5,000). Always check if given values are gross or net. The principle remains: Total Assets = Total Capital + Liabilities.
9. Adjustments in Financial Statements
Many items require adjustment before preparing final accounts. These are items given outside the Trial Balance (in the adjustment notes).
| Adjustment | Effect on Trading/P&L | Effect on Balance Sheet |
|---|---|---|
| Closing Stock | Cr. side of Trading A/c | Asset side (Current Assets) |
| Outstanding Expenses | Added to expense (Dr. P&L) | Current Liability |
| Prepaid Expenses | Deducted from expense (Dr. P&L) | Current Asset |
| Accrued Income | Added to income (Cr. P&L) | Current Asset |
| Income Received in Advance | Deducted from income (Cr. P&L) | Current Liability |
| Depreciation | Dr. P&L Account | Deducted from asset value |
| Bad Debts | Dr. P&L Account | Deducted from Debtors |
| Provision for Doubtful Debts | Dr. P&L Account | Deducted from Debtors |
| Interest on Capital | Dr. P&L Account | Added to Capital |
| Interest on Drawings | Cr. P&L Account | Deducted from Capital |
⚡ Quick Recall — Chapter 17 Key Points
Trading Account gives Gross Profit/Loss. P&L Account gives Net Profit/Loss. Balance Sheet gives Financial Position on a date.
Capital Expenditure = creates long-term asset → Balance Sheet. Revenue Expenditure = one year benefit → P&L Account. Deferred Revenue = multi-year, no asset → partial P&L + Balance Sheet (fictitious asset).
COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock. Gross Profit = Net Sales − COGS.
Net Profit = Gross Profit + Other Incomes − Indirect Expenses. Net Profit → added to Capital.
Closing Capital = Opening Capital + Net Profit − Drawings (+ Interest on Capital − Interest on Drawings if applicable).
Balance Sheet equation: Assets = Capital + Liabilities. Always. If it doesn't balance — there is an error.
Closing Stock appears TWICE: Cr. side of Trading Account AND Asset side of Balance Sheet.
Outstanding Expenses appear TWICE: added to expense in P&L AND shown as current liability in Balance Sheet.
Prepaid Expenses appear TWICE: deducted from expense in P&L AND shown as current asset in Balance Sheet.
Balance Sheet is a STATEMENT, not an Account. It is prepared ON a date (as at...), not FOR a period.
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20 MCQs — Financial Statements
Mixed difficulty — concepts, classification, formula-based, and CUET-level numericals in Q17–Q20.
📚 Questions 1 to 20
1
Which financial statement shows the financial position of a business on a specific date?
ATrading Account
BProfit & Loss Account
CBalance Sheet
DCash Flow Statement
Answer: C — Balance Sheet. The Balance Sheet is prepared ON a specific date (as at 31 March...) and shows what the business owns (assets) and owes (liabilities + capital) on that date. Trading A/c and P&L A/c are prepared FOR a period (for the year ended...). Balance Sheet is a statement, not an account.
2
Purchase of machinery is a:
ACapital Expenditure — shown in Balance Sheet
BRevenue Expenditure — charged to P&L Account
CDeferred Revenue Expenditure
DCapital Loss
Answer: A — Capital Expenditure. Machinery is a fixed asset with a long-term life (more than one year). Its purchase is Capital Expenditure — shown on the Asset side of the Balance Sheet. It is NOT charged to P&L Account (that would be Error of Principle).
3
Heavy advertising expenditure on a product launch whose benefit lasts 5 years is:
ACapital Expenditure
BRevenue Expenditure
CDeferred Revenue Expenditure
DCapital Loss
Answer: C — Deferred Revenue Expenditure. It is revenue in nature (advertising) but its benefit lasts more than one year (5 years) and it does NOT create a tangible asset. So it is spread over 5 years — 1/5th charged to P&L each year, and the balance (4/5th in year 1) shown as Fictitious Asset in Balance Sheet.
4
Closing Stock appears in:
AP&L Account only
BBalance Sheet only
CBoth Trading Account (Cr. side) AND Balance Sheet (Asset side)
DBoth Trading Account (Dr. side) AND P&L Account
Answer: C — Both Trading A/c and Balance Sheet. Closing Stock appears TWICE: (1) Credit side of Trading Account — it reduces COGS and helps calculate Gross Profit. (2) Asset side of Balance Sheet — as a Current Asset (unsold goods still owned by business). This double entry is a very common exam question.
5
Gross Profit is calculated as:
ANet Sales − All Expenses
BNet Sales − Cost of Goods Sold (COGS)
CTotal Income − Total Expenses
DOpening Stock − Closing Stock
Answer: B — Net Sales − COGS. Gross Profit = Net Sales − Cost of Goods Sold. COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock. Only direct/trading expenses go into COGS. Indirect expenses like salaries, rent, advertisement go to P&L Account (not Trading Account).
6
Which of the following is a DIRECT expense (goes to Trading Account)?
AOffice Salaries
BAdvertisement
CCarriage Inward / Freight Inward
DRent of Office
Answer: C — Carriage Inward. Direct expenses are costs directly related to bringing goods to the point of sale — they go to the Trading Account. Carriage Inward (freight to bring purchased goods) is a direct expense. Office Salaries, Advertisement, and Office Rent are all indirect expenses — they go to P&L Account.
7
Outstanding salaries ₹5,000 (salary due but not yet paid). Where does it appear in financial statements?
AP&L Account only
BBalance Sheet (current asset) only
CAdded to Salaries in P&L Account AND shown as current liability in Balance Sheet
DDeducted from Salaries in P&L Account AND shown as current asset
Answer: C — P&L + Current Liability. Outstanding expenses appear TWICE: (1) Added to the related expense in P&L Account (salaries +₹5,000) to show full year's expense. (2) Shown as current liability in Balance Sheet (amount owed but not yet paid). This is matching principle in action.
8
Net Profit is transferred to:
AAsset side of Balance Sheet
BDeducted from Capital
CAdded to Capital in Balance Sheet
DShown separately as a liability
Answer: C — Added to Capital. Net Profit earned by the sole proprietor belongs to the owner — it increases the owner's Capital. Closing Capital = Opening Capital + Net Profit − Drawings. Net Loss is deducted from Capital. Capital appears on the Liabilities side of Balance Sheet.
9
Which of these is a Fictitious Asset?
AGoodwill
BPatents
CPreliminary Expenses
DLand and Building
Answer: C — Preliminary Expenses. Fictitious Assets are not real assets — they are losses or expenses not yet written off. Preliminary Expenses (cost of setting up a company) is a Fictitious Asset/Deferred Revenue Expenditure. Goodwill and Patents are Intangible Assets (they have real value). Land is a Fixed Asset.
10
Prepaid rent ₹3,000 (rent paid in advance for next year). Where does it appear?
ADeducted from Rent in P&L Account AND shown as current asset in Balance Sheet
BAdded to Rent in P&L Account AND shown as current liability
COnly in Balance Sheet as a liability
DOnly in P&L Account
Answer: A — Deducted from expense + current asset. Prepaid Rent = advance paid for NEXT year. This year we should not charge next year's rent to this year's P&L. So: (1) Deduct ₹3,000 from Rent in P&L (only current year's rent is charged). (2) Show ₹3,000 as Current Asset in Balance Sheet (advance paid = amount receivable in benefit).
11
Which item goes on the CREDIT side of the Trading Account?
AOpening Stock
BPurchases
CCarriage Inward
DClosing Stock
Answer: D — Closing Stock. Credit side of Trading Account: Sales (net), Closing Stock, Gross Loss (if any). Debit side: Opening Stock, Purchases (net), Carriage Inward, Wages, Factory Expenses, Gross Profit. Closing Stock on Cr. side reduces Cost of Goods Sold, thereby increasing Gross Profit.
12
Drawings by the proprietor should be:
ACharged to P&L Account as expense
BAdded to Capital in Balance Sheet
CDeducted from Capital in Balance Sheet
DShown as a current liability
Answer: C — Deducted from Capital. Drawings = amount withdrawn by owner from the business for personal use. It reduces the owner's investment. It is NOT a business expense (so NOT in P&L). Closing Capital = Opening Capital + Net Profit − Drawings. Drawings appear on the Liabilities side — subtracted from Capital.
13
Which of these is a Current Asset?
AMachinery
BBank Loan (payable after 3 years)
CBills Receivable
DGoodwill
Answer: C — Bills Receivable. Current Assets are those convertible to cash within one year: Stock, Debtors, Cash, Bank, Bills Receivable, Prepaid Expenses, Accrued Income. Machinery is a Fixed Asset. Bank Loan payable after 3 years is a Long-term Liability. Goodwill is an Intangible Fixed Asset.
14
Interest on capital ₹4,000 appears in financial statements as:
ACr. P&L AND deducted from Capital
BDr. Trading Account AND deducted from Capital
CDr. P&L Account AND added to Capital in Balance Sheet
DDr. P&L Account AND shown as current liability
Answer: C — Dr. P&L + Added to Capital. Interest on Capital is an expense for the business (owner lending money to business). It is debited to P&L Account (reduces profit). Simultaneously, it is added to Capital in Balance Sheet (owner earns this interest, so capital increases). Appears TWICE.
15
Carriage Outward (freight for delivering goods to customers) goes to:
ATrading Account (Dr. side) — direct expense
BBalance Sheet (asset side)
CP&L Account (Dr. side) — indirect expense
DTrading Account (Cr. side)
Answer: C — P&L Account. Carriage Outward = cost of delivering goods TO customers. This is an indirect (selling) expense — it does not form part of the cost of goods. Goes to P&L Account Dr. side. Carriage INWARD (bringing purchases) is a direct expense — it goes to Trading Account Dr. side.
16
The Balance Sheet equation is:
AAssets = Liabilities only
BCapital = Assets + Liabilities
CProfit = Assets − Liabilities
DAssets = Capital + Liabilities
Answer: D — Assets = Capital + Liabilities. This is the fundamental Balance Sheet equation. Capital is also called Owner's Equity or Net Worth. Rearranged: Capital = Assets − Liabilities. If this equation doesn't hold, the Balance Sheet has an error. Always verify both sides are equal.
17
CUET Numerical: Opening Stock ₹12,000 | Purchases ₹80,000 | Purchase Returns ₹5,000 | Carriage Inward ₹3,000 | Closing Stock ₹15,000 | Sales ₹1,20,000. Gross Profit is:
A₹40,000
B₹45,000
C₹35,000
D₹50,000
Answer: B — ₹45,000. Net Purchases = ₹80,000 − ₹5,000 = ₹75,000. COGS = ₹12,000 + ₹75,000 + ₹3,000 − ₹15,000 = ₹75,000. Gross Profit = Net Sales − COGS = ₹1,20,000 − ₹75,000 = ₹45,000. (No sales returns given, so Net Sales = ₹1,20,000.)
18
CUET Numerical: Gross Profit ₹60,000 | Salaries ₹18,000 | Rent ₹6,000 | Discount Received ₹3,000 | Bad Debts ₹2,000 | Depreciation ₹7,000. Net Profit is:
A₹27,000
B₹30,000
C₹30,000
D₹25,000
Answer: C — ₹30,000. Total Income = ₹60,000 (GP) + ₹3,000 (Discount Received) = ₹63,000. Total Expenses = ₹18,000 + ₹6,000 + ₹2,000 + ₹7,000 = ₹33,000. Net Profit = ₹63,000 − ₹33,000 = ₹30,000.
19
CUET Numerical: Opening Capital ₹1,00,000 | Net Profit ₹30,000 | Drawings ₹12,000 | Bank Loan ₹25,000 | Creditors ₹18,000. Total of Liabilities side of Balance Sheet is:
A₹1,61,000
B₹1,61,000
C₹1,55,000
D₹1,73,000
Answer: B — ₹1,61,000. Closing Capital = ₹1,00,000 + ₹30,000 − ₹12,000 = ₹1,18,000. Total Liabilities = Capital ₹1,18,000 + Bank Loan ₹25,000 + Creditors ₹18,000 = ₹1,61,000. This must equal Total Assets ₹1,61,000 for Balance Sheet to balance.
20
CUET: Assertion (A): Balance Sheet is prepared FOR a period. Reason (R): It shows revenues and expenses accumulated over the accounting year.
ABoth A and R are true, R correctly explains A
BBoth A and R are true, R does not explain A
CBoth A and R are false
DA is false; R is true
Answer: C — Both A and R are false. A is FALSE: Balance Sheet is prepared ON (as at) a specific date, not FOR a period. It is a position statement, not a period statement. R is also FALSE: revenues and expenses go to P&L Account, not Balance Sheet. Balance Sheet shows assets, liabilities, and capital on a date.
Chapter 17 — Live Quiz
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