Financial Statements I Class 11: Trading, Profit and Loss Account and Balance Sheet

What Financial Statements - I is about

Weightage: This chapter is part of Unit 3, Financial Statements of Sole Proprietorship (Part B: Financial Accounting-II), which carries 24 of the 80 theory marks in the school annual exam together with Financial Statements - II and Accounts from Incomplete Records.Source: CBSE Accountancy (055) syllabus 2026-27, Class XI course structure, Unit 3 Financial Statements of Sole Proprietorship

Key concepts

Financial statements: meaning, objectives and importance; stakeholders

NCERT section 8.1 and 8.3

Financial statements are the end products of the accounting process: the Trading and Profit and Loss Account for the period and the Balance Sheet at its end. They are prepared from the trial balance.

Objectives:

• to find the profit or loss of the period (Trading and P&L Account);
• to show the financial position (Balance Sheet);
• to give information to stakeholders for decisions.

Stakeholders and their needs: owners (profit and growth), management (performance and control), lenders and banks (ability to repay), suppliers (payment of dues), employees (stability, bonus), government and tax authorities (tax, compliance), investors (return and risk), customers (continuity).

Importance: they show results in a standard form; help compare with past years and other firms; are needed for tax returns and loans; and give the starting point for next year.

Worked example

Name the two main financial statements of a sole proprietor and the question each answers.

Try it first, then show the solutionSolution

1. Trading and Profit and Loss Account: what was the profit or loss for the year?
2. Balance Sheet: what are the assets, liabilities and capital on the last day?

Answer: Trading and P&L Account (results for the year) and Balance Sheet (position on a date).

Capital and revenue expenditure; deferred revenue expenditure

NCERT section 8.2.1

Capital expenditure: spending that gives benefit for more than one year, by acquiring a fixed asset, adding to it, or increasing its earning capacity. It appears in the Balance Sheet as an asset (and is depreciated over time). Examples: buying machinery, building a new floor, freight and installation of a new machine, legal charges on buying land.

Revenue expenditure: spending whose benefit is used up within the year, incurred to run the business or keep assets in working order. It is charged to the Trading or Profit and Loss Account. Examples: wages, salaries, rent, repairs, electricity, carriage, depreciation.

Deferred revenue expenditure: revenue expenditure that is unusually large and whose benefit lasts a few years (but not for ever). It is written off over those years, and the unwritten part may be shown in the Balance Sheet. Example: a huge advertisement campaign to launch a new product, expected to benefit three years.

Importance of the distinction: wrong classification gives the wrong profit and the wrong Balance Sheet. Charging capital expenditure to P&L understates profit and assets; capitalising revenue expenditure overstates them.

Worked example

Suppose a firm spends ₹3,00,000 on a launch campaign whose benefit is expected for 3 years. How is it treated in the first year?

Try it first, then show the solutionSolution

1. Write off ₹3,00,000 ÷ 3 = ₹1,00,000 in this year's P&L Account
2. The remaining ₹2,00,000 is carried forward (shown on the assets side until written off)

Answer: Deferred revenue expenditure: ₹1,00,000 charged this year; ₹2,00,000 carried forward.

Capital and revenue receipts

NCERT section 8.2.2 and 8.2.3

Capital receipts do not arise from normal operations and usually either create a liability or reduce an asset: capital brought in by the owner, loans taken, sale proceeds of fixed assets, sale of long-term investments. They are not shown as income in the P&L Account (only a profit or loss on sale of an asset is).

Revenue receipts arise from normal business operations and are recurring: sale of goods, commission, interest, rent and dividend received, discount received. They are credited to the Trading or P&L Account.

Basis	Capital receipt	Revenue receipt
Source	Owners, lenders, sale of fixed assets	Normal operations
Effect	Creates a liability or reduces an asset	Increases profit
Recurring	No	Yes
Shown in	Balance Sheet	Trading or P&L Account

Worked example

Classify: (a) ₹2,00,000 loan from a bank; (b) ₹5,000 interest received on investments; (c) ₹60,000 from sale of an old car; (d) ₹4,80,000 sale of goods.

Try it first, then show the solutionSolution

1. (a) Creates a liability: capital receipt
2. (b) Normal recurring income: revenue receipt
3. (c) Reduces an asset: capital receipt (only any profit or loss on it goes to P&L)
4. (d) Normal operations: revenue receipt

Answer: (a) and (c) capital; (b) and (d) revenue.

Trading Account and gross profit

NCERT section 8.4

The Trading Account shows the result of buying and selling goods: gross profit or gross loss.

Debit side: opening stock; purchases less purchases return; direct expenses (expenses to buy goods and bring them to a saleable condition): carriage or freight inwards, wages, octroi, import duty, fuel and power for a factory, manufacturing expenses, royalty on production.
Credit side: sales less sales return; closing stock.

Gross profit = Net sales − Cost of goods sold, where
Cost of goods sold = Opening stock + Net purchases + Direct expenses − Closing stock.

If the credit side is larger, the difference is gross profit (written on the debit side as "Gross profit c/d"); otherwise gross loss. Closing stock is valued at cost or net realisable value, whichever is lower. It is recorded by the closing entry Closing Stock A/c Dr, To Trading A/c, and also appears in the Balance Sheet.

Closing entries transfer all these balances to the Trading Account (Trading A/c Dr, To Opening Stock, Purchases, Wages...; Sales A/c Dr, To Trading A/c), so the nominal accounts close.

Worked example

Opening stock ₹60,000; net purchases ₹4,08,000; carriage inwards ₹8,000; wages ₹30,000; net sales ₹7,10,000; closing stock ₹75,000. Find the cost of goods sold and gross profit.

Try it first, then show the solutionSolution

1. COGS = 60,000 + 4,08,000 + 8,000 + 30,000 − 75,000 = ₹4,31,000
2. GP = 7,10,000 − 4,31,000 = ₹2,79,000

Answer: COGS ₹4,31,000; gross profit ₹2,79,000.

Profit and Loss Account, net profit and operating profit

NCERT section 8.4 and 8.5

The Profit and Loss Account starts with gross profit and records all indirect expenses and losses (debit) and other incomes and gains (credit).

Debit side:

• office and administration: salaries, rent of office, insurance, printing and stationery, telephone, audit fees, legal charges, repairs, depreciation;
• selling and distribution: advertisement, carriage outwards, commission on sales, bad debts, discount allowed, delivery van expenses;
• financial: interest on loans, bank charges;
• abnormal losses: loss by fire or theft (not covered by insurance), loss on sale of fixed assets.

Credit side: gross profit; commission, rent, interest or dividend received; discount received; profit on sale of assets.

Net profit = Gross profit + Other incomes − Indirect expenses and losses. It is added to capital (net loss deducted).

Operating profit (EBIT) is the profit from normal operations, before interest and tax:

Operating profit = Net profit + Non-operating expenses − Non-operating incomes

Non-operating expenses: interest on loans, loss on sale of assets, loss by fire. Non-operating incomes: interest and dividend on investments, profit on sale of assets. So the order in which profit is found is gross profit, then operating profit, then net profit.

Worked example

Tanya Fashions has net profit ₹1,41,000, interest on bank loan ₹6,000, loss on sale of furniture ₹4,000 and interest on investments ₹4,000. Find the operating profit.

Try it first, then show the solutionSolution

1. Operating profit = 1,41,000 + 6,000 + 4,000 − 4,000
2. = ₹1,47,000

Answer: ₹1,47,000

Balance Sheet: need, grouping and marshalling

NCERT section 8.6

The Balance Sheet is a statement of assets, liabilities and capital on a particular date. It is a statement, not an account (no "To" and "By"). Its totals agree because of the accounting equation.

Need: shows the financial position; the nature and value of assets; the amount owed to outsiders and to the owner; the liquidity (ability to pay current liabilities); and it carries balances into the next year.

Grouping: putting similar items together under headings: non-current (fixed) assets, long-term investments, current assets; capital, long-term liabilities, current liabilities.

Marshalling: arranging the groups in a definite order.

• Order of liquidity: assets from most liquid (cash in hand, cash at bank, bills receivable, debtors, stock...) to least liquid (furniture, machinery, buildings, land, goodwill); liabilities from those payable soonest (bills payable, creditors) to capital.
• Order of permanence: the reverse: assets from most permanent (goodwill, land, building, machinery) to most liquid (cash); liabilities from capital and long-term loans to current liabilities.

Sole proprietors may use either order but must use it consistently. Capital is shown as opening capital + net profit (or − net loss) + additional capital − drawings.

Worked example

Arrange in the order of liquidity: machinery, debtors, cash in hand, stock, goodwill, bills receivable, cash at bank.

Try it first, then show the solutionSolution

1. Most liquid first: cash, then items close to cash, then fixed assets

Answer: Cash in hand, cash at bank, bills receivable, debtors, stock, machinery, goodwill.

Opening journal entry

NCERT section 8.7

At the start of a new year, the balances of assets, liabilities and capital from the previous year's Balance Sheet are brought into the new books by an opening entry in the journal proper. All assets are debited; all liabilities and capital are credited. If capital is not given, it is the difference (assets − liabilities).

Revenue and expense accounts are not included, because they were closed to the Trading and Profit and Loss Account.

Date	Particulars	Dr (₹)	Cr (₹)
1 Apr 2026	Machinery A/c ... Dr	2,00,000
	Furniture A/c ... Dr	40,000
	Stock A/c ... Dr	85,000
	Debtors A/c ... Dr	60,000
	Cash A/c ... Dr	15,000
	To Creditors A/c		50,000
	To Bank Loan A/c		1,00,000
	To Rahul's Capital A/c		2,50,000
	(Balances brought forward from the previous year)

Worked example

Find Rahul's capital from these opening balances: machinery ₹2,00,000; furniture ₹40,000; stock ₹85,000; debtors ₹60,000; cash ₹15,000; creditors ₹50,000; bank loan ₹1,00,000.

Try it first, then show the solutionSolution

1. Assets = ₹4,00,000
2. Liabilities = ₹1,50,000
3. Capital = ₹2,50,000

Answer: Capital ₹2,50,000, credited in the opening entry.

Financial Statements - I in real life

Each concept, met in an everyday situation. Read the situation, answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Topics in this chapter

• Capital and Revenue Expenditure, Deferred Revenue Expenditure and Receipts
• Trading and Profit and Loss Account: Gross Profit, Operating Profit and Net Profit

Financial Statements - I: key facts

Cost of goods sold

COGS = Opening stock + Net purchases + Direct expenses − Closing stock

Net purchases = Purchases − Purchases return.

Gross profit

Gross profit = Net sales − Cost of goods sold

Net sales = Sales − Sales return.

Net profit

Net profit = Gross profit + Other incomes − Indirect expenses and losses

Added to capital.

Operating profit (EBIT)

Operating profit = Net profit + Non-operating expenses − Non-operating incomes

Order of finding profit: gross, operating, net.

Gross profit on cost and on sales

If GP is x% on cost, GP = Sales × x ÷ (100 + x); if x% on sales, GP = Sales × x ÷ 100

25% on cost = 20% on sales.

Closing capital

Closing capital = Opening capital + Additional capital + Net profit − Drawings

Shown on the liabilities side.

Balance Sheet equation

Assets = Capital + Liabilities

Totals must agree.

How the school exam asks Financial Statements - I

The question patterns to expect, and the method that works for each.

Tricks to remember Financial Statements - I

Short memory aids. Say each one aloud once, then use it on a question the same day.

• Direct expenses in the Trading Account

  "Carry Wages For Power": Carriage inwards, Wages, Freight inwards, fuel and Power (also import duty, octroi, royalty on production).

  Use it when: Trading Account debit side.

• Order of profits

  G-O-N: Gross, Operating, Net.

  Use it when: MCQs on profit order.

• Liquidity order

  "Cash Comes Before Debtors and Stock, Machines Later": cash, cash at bank, bills receivable, debtors, stock, machinery, land, goodwill.

  Use it when: Marshalling.

• Closing stock twice

  Closing stock: credit in Trading, asset in Balance Sheet.

  Use it when: Final accounts.

Financial Statements - I: exam-level solved questions

Ordered from exam level to HOTS. Cover the solution, write your own, then compare step by step.

Case-study practice (Section E style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 4-mark question split into 1 + 1 + 2 marks.

Where the marks are

How a typical answer is split into step marks. Show every step: a right final answer alone rarely earns full marks.

Where students lose marks in Financial Statements - I

The slips examiners see most often, and what to write instead.

• ✗Mistake: Putting carriage outwards in the Trading Account

  Both are "carriage".

  Wrong working

  Trading A/c Dr: Carriage outwards 5,000

  Right working

  P&L A/c Dr: Carriage outwards 5,000 (selling expense)

  ✓Do this: Inwards (bringing goods in) is direct; outwards (sending goods to customers) is indirect.

  Usually costs: GP and the P&L both wrong; 1 mark.

• ✗Mistake: Showing drawings as an expense in the P&L Account

  It is a debit balance like expenses.

  ✓Do this: Deduct drawings from capital in the Balance Sheet.

  Usually costs: 1-2 marks; net profit understated.

• ✗Mistake: Leaving closing stock out of the Balance Sheet

  It was already used in the Trading Account.

  ✓Do this: Closing stock appears twice: Trading Account (Cr) and Balance Sheet (current asset).

  Usually costs: Balance Sheet does not agree; 1-2 marks.

• ✗Mistake: Mixing GP on cost and GP on sales

  Both are given as percentages.

  Wrong working

  25% on cost, sales 5,00,000: GP = 1,25,000

  Right working

  GP = 5,00,000 × 25 ÷ 125 = ₹1,00,000

  ✓Do this: On cost: divide by (100 + rate); on sales: take rate of sales.

  Usually costs: 1-2 marks.

• ✗Mistake: Treating the sale price of an old asset as income

  Money is received.

  ✓Do this: The sale proceeds are a capital receipt; only the profit or loss on sale goes to the P&L Account.

  Usually costs: 1 mark.

NCERT exercise guide: Financial Statements - I

What each exercise in the NCERT chapter tests, how to approach it, and a question of the same kind solved step by step. Questions here are written in our own words.

Practice questions on Financial Statements - I

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

1. Q1 · 1 mark · MCQExam level

   Wages paid for the installation of a new machine are:
   (a) revenue expenditure
   (b) capital expenditure
   (c) deferred revenue expenditure
   (d) a capital receipt

   Hint

   Part of the cost of the asset.

   Answer

   (b) capital expenditure

2. Q2 · 1 mark · MCQExam level

   Closing stock appears in:
   (a) the Trading Account only
   (b) the Balance Sheet only
   (c) both the Trading Account and the Balance Sheet
   (d) the Profit and Loss Account

   Hint

   It is outside the trial balance.

   Answer

   (c)

3. Q3 · 1 mark · Very short answerExam level

   Give two examples of non-operating expenses.

   Hint

   Financial or abnormal.

   Answer

   Interest on loans; loss on sale of fixed assets (also loss by fire).

4. Q4 · 3 marks · Short answerExam level

   Distinguish between capital receipts and revenue receipts on three bases with an example of each.

   Hint

   Source, effect, recurrence.

   Answer

   Source: owners, lenders or sale of fixed assets vs normal operations. Effect: create a liability or reduce an asset vs increase profit. Recurrence: non-recurring vs recurring. Examples: loan received; sale of goods.

5. Q5 · 3 marks · Short answerHarder exam level

   Find the cost of goods sold and gross profit: opening stock ₹45,000; purchases ₹3,20,000; purchases return ₹8,000; wages ₹22,000; carriage inwards ₹5,000; sales ₹4,60,000; sales return ₹12,000; closing stock ₹52,000.

   Hint

   Net purchases and net sales first.

   Answer

   COGS = 45,000 + 3,12,000 + 22,000 + 5,000 − 52,000 = ₹3,32,000. Net sales ₹4,48,000. GP = ₹1,16,000.

6. Q6 · 3 marks · Short answerHarder exam level

   Suppose net profit is ₹92,000. The P&L Account includes interest on loan ₹8,000, loss by fire ₹5,000, dividend received ₹3,000 and profit on sale of a machine ₹2,000. Find the operating profit.

   Hint

   Add back non-operating expenses, deduct non-operating incomes.

   Answer

   92,000 + 8,000 + 5,000 − 3,000 − 2,000 = ₹1,00,000.

7. Q7 · 3 marks · Short answerHarder exam level

   Pass the opening entry: cash ₹20,000; stock ₹70,000; debtors ₹55,000; building ₹3,00,000; creditors ₹45,000; outstanding salary ₹5,000; capital to be found.

   Hint

   Capital is the difference.

   Answer

   Cash Dr 20,000; Stock Dr 70,000; Debtors Dr 55,000; Building Dr 3,00,000; To Creditors 45,000; To Outstanding Salary 5,000; To Capital 3,95,000.

8. Q8 · 6 marks · Long answerHarder exam level

   Prepare the Trading Account, P&L Account and Balance Sheet of Kiran (see the case study figures) given: capital ₹2,00,000; drawings ₹30,000; creditors ₹48,000; furniture ₹60,000; debtors ₹62,000; cash ₹75,000 (ignore the loan and photocopier).

   Hint

   Find COGS first; then GP and NP.

   Answer

   Trading Account of Kiran's Stationery Shop for the year ended 31st March 2026

   Dr: Particulars	₹	Cr: Particulars	₹
   Opening stock	40,000	Net sales	3,80,000
   Net purchases	2,54,000	Closing stock	50,000
   Freight inwards	6,000
   Wages	20,000
   Gross profit c/d (to P&L)	1,10,000
   Total	4,30,000	Total	4,30,000

   Profit and Loss Account of Kiran's Stationery Shop for the year ended 31st March 2026

   Dr: Particulars	₹	Cr: Particulars	₹
   Salaries	45,000	Gross profit b/d	1,10,000
   Rent	24,000	Discount received	2,000
   Electricity	9,000
   Carriage outwards	5,000
   Net profit (transferred to capital)	29,000
   Total	1,12,000	Total	1,12,000

   Balance Sheet of Kiran's Stationery Shop as at 31st March 2026

   Liabilities	₹	Assets	₹
   Capital 2,00,000 + net profit 29,000 − drawings 30,000	1,99,000	Furniture	60,000
   Creditors	48,000	Closing stock	50,000
   		Debtors	62,000
   		Cash	75,000
   Total	2,47,000	Total	2,47,000

9. Q9 · 4 marks · Short answerHarder exam level

   Explain grouping and marshalling, and arrange these liabilities in the order of permanence: creditors, capital, bank overdraft, long-term loan, bills payable.

   Hint

   Capital first.

   Answer

   Grouping: putting similar items under one head (current liabilities, long-term liabilities). Marshalling: arranging the groups in an order. Permanence: capital, long-term loan, creditors, bills payable, bank overdraft.

10. Q10 · 4 marks · Long answerHarder exam level

    Explain the importance of distinguishing between capital and revenue items, with two examples of what goes wrong if they are mixed.

    Hint

    Profit and Balance Sheet both.

    Answer

    Correct profit and a true Balance Sheet depend on it. (1) Charging a new machine to P&L understates profit and omits an asset. (2) Treating a loan received as income overstates profit and hides a liability. It also affects tax and decisions of users.

11. Q11 · 3 marks · Short answerHarder exam level

    Suppose a firm reports gross profit at 20% on sales. Sales ₹6,00,000; opening stock ₹80,000; purchases ₹4,90,000; carriage inwards ₹10,000. Find the closing stock.

    Hint

    GP = 20% of sales.

    Answer

    GP = ₹1,20,000; COGS = ₹4,80,000; closing stock = 80,000 + 4,90,000 + 10,000 − 4,80,000 = ₹1,00,000.

12. Q12 · 4 marks · Long answerHOTS / competency

    Suppose two shops have the same net profit of ₹1,00,000. Shop A has interest on a large loan of ₹30,000; Shop B has a one-time profit of ₹25,000 on selling its old van. Which runs its normal business better? Use operating profit to justify.

    Hint

    Compute EBIT for each.

    Answer

    A: operating profit = 1,00,000 + 30,000 = ₹1,30,000. B: 1,00,000 − 25,000 = ₹75,000. A's normal operations earn much more; its lower net profit is due to how it is financed, while B's net profit is propped up by a one-time gain.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1. 1.Name the two financial statements of a sole proprietor.Show answer

   Trading and Profit and Loss Account; Balance Sheet.

2. 2.Give an example of deferred revenue expenditure.Show answer

   A heavy advertisement campaign benefiting a few years.

3. 3.Formula for cost of goods sold?Show answer

   Opening stock + Net purchases + Direct expenses − Closing stock.

4. 4.Is loan taken a capital or revenue receipt?Show answer

   Capital receipt.

5. 5.Formula for operating profit?Show answer

   Net profit + Non-operating expenses − Non-operating incomes.

6. 6.What is marshalling?Show answer

   Arranging assets and liabilities in a definite order in the Balance Sheet.

7. 7.Which accounts are included in the opening entry?Show answer

   Assets, liabilities and capital.

8. 8.Where does carriage outwards go?Show answer

   Profit and Loss Account (debit).

Quick revision checklist

The night before the exam: can you do each of these without looking?

• ☐Can you name the stakeholders and what each needs?
• ☐Can you classify ten items as capital or revenue?
• ☐Can you explain deferred revenue expenditure with an example?
• ☐Can you compute COGS and gross profit?
• ☐Can you list five direct and five indirect expenses?
• ☐Can you compute operating profit from net profit?
• ☐Can you convert GP on cost to GP on sales?
• ☐Can you arrange a Balance Sheet in both orders?
• ☐Can you pass an opening entry with capital as the balancing figure?
• ☐Can you prepare full final accounts from a trial balance?

Financial Statements - I: frequently asked questions