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Example -3 On 31^st December, 2012 following Trial Balance was extracted from the books of a trader.

Debit balance	Amount	Credit Balance….	Amount
Cash at Bank	12,000	Capital	200,000
Advertisement	4,000	Sales	254,000
Rent , Rates and Taxes	20,000	Sundry creditors	50,000
Carriage outwards	4,200	Bad debt provisions	1,200
Carriage inwards	1,500	Purchases Return	1,500
Wages	20,000
Salaries	12,000
Sundry Debtors	90,000
General expenses	300
Bad Debts	700
Opening stock	60,000
Sales Return	2,000
Purchases	1,20,000
Plant and Machinery	1,60,000
Total	506,700		506,700

You are required to prepare the Trading, Profit and Loss Account for the year ended 31^st December 2012 and a Balance sheet as on the date. The following adjustments are to be made.

i.            Closing stock was valued at Rs.72,000(market value Rs.70,000) ii.            Further bad debts to be written off Rs.1, 000 and provision for doubtful debts is to be maintained at 2% on sundry debtors.
  iii.            Depreciate machinery at 10%
iv.            Outstanding wages amount to Rs. 4,000.
v.            Create a provision for discount of debtors at 1%
vi.            A provision for discount is to be created at 1% on sundry creditors.

Step -1 Trading Account Presents Gross Profit or loss

Debit Total (Expenses) = Opening Stock+ (Purchase – Purchase return- Goods Lost) + Carriage on purchase +freight + (Wages + Outstanding - Prepaid) + Duty (Custom+ Excise+ Import) + Factory/Manufacturing Expenses + Royalty + Power+ Fuel + lighting + Heating + Octroi

Credit Total (Incomes) = (Sales – Sales return) + Closing Stock

Note: Add: Outstanding (due/payable) Expenses

Less: Prepaid (advance) Expenses

Add: Outstanding (Receivable/Accrued) Income

Less: Pre-receipt (advance) Incomes

Gross Profit = Credit Total - Debit total of Trading account

Gross Loss = Debit Total – Credit Total of Trading Account

Step -2 Profit and Loss Account Presents Net profit or Loss

Net Profit = Credit Total - Debit total of Profit & Loss account

Net Loss = Debit Total – Credit Total of Profit & Loss Account

Debit Total (Expenses/Losses) = Gross Loss+ Office Operating and Selling Expenses ( Salary + due/outstanding - Prepaid) + Office rent +Depreciation+ Interest on loan + advertisement + General expenses + Bad debt+ bad debt write off + Travelling expenses + printing and stationery expenses + Charges ( telephone + electricity + bank + legal)+ Discount and commission allowed + audit fees + insurance+ selling and distribution expenses)

Credit Total (Incomes/Gains) = Gross Profit + Office operating Income/gains (appreciation + Discount and commission received + Receivable (accrued) – Advance Received+ provision for bad debt + interest and rent received + other incomes/gains)

Note: Add: Outstanding (due/payable) Expenses

  Less: Prepaid (advance) Expenses
  Add: Outstanding (Receivable/Accrued) Income
  Less: Pre-receipt (advance) Incomes