Commercial StudiesICSE Class 10 · Final Accounts of Sole Proprietorship

Preparing Final Accounts from a Trial Balance (ICSE Class 10 Commercial Studies)

Updated 17 October 2026 · Fact-checked

From a trial balance a sole proprietor prepares, in order, the Trading Account (finds gross profit), the Profit and Loss Account (finds net profit) and the Balance Sheet (shows assets and liabilities). Closing stock is the only adjustment in the syllabus: it goes to the credit side of the Trading Account and to the assets side of the Balance Sheet.

Understand Preparing the Trading Account, Profit and Loss Account and Balance Sheet

1. Order of work

Trial balance, then Trading Account, then Profit and Loss Account, then Balance Sheet. Each trial balance item is used once, except closing stock (given outside the trial balance), which is used twice.

2. Where each item goes

Trading Account debit: opening stock, purchases (less purchases returns), direct expenses such as wages, carriage inwards, freight, fuel and power.
Trading Account credit: sales (less sales returns), closing stock.
Profit and Loss Account debit: indirect expenses such as salaries, office rent, carriage outwards, advertisement, discount allowed, bad debts, commission paid, interest paid, depreciation, general expenses.
Profit and Loss Account credit: gross profit and other incomes: commission received, discount received, rent received, interest received.
Balance Sheet: capital, drawings, loans, creditors on the liabilities side; fixed assets, closing stock, debtors, bank, cash on the assets side.

3. Trading Account

It finds the gross profit or gross loss on buying and selling goods.

Gross profit = (Net sales + Closing stock) - (Opening stock + Net purchases + Direct expenses)

If the credit side is bigger, the balancing figure is gross profit, entered on the debit side; if the debit side is bigger it is gross loss.

4. Profit and Loss Account

It finds the net profit or net loss.

Net profit = Gross profit + Other incomes - Indirect expenses

Net profit is transferred to the capital account; net loss reduces it.

5. Balance Sheet

A statement of assets and liabilities on the last day of the year, not an account. Both sides total the same.

Closing capital = Opening capital + Net profit - Drawings (or - Net loss)

Assets are listed in order of permanence (land, machinery, furniture, then stock, debtors, bank, cash) and liabilities in order of urgency or permanence as the question requires.

6. Closing stock, the only adjustment

The unsold goods at the end of the year are valued after the books are closed, so they appear below the trial balance. Show them (i) on the credit side of the Trading Account and (ii) on the assets side of the Balance Sheet. Showing it in only one place makes the Balance Sheet fail to tally by exactly the closing stock. If closing stock appears inside the trial balance itself, it goes only to the Balance Sheet.

7. Not in the syllabus

Manufacturing account, profit or loss on sale of assets, intangible and fictitious assets, prepaid and accrued (outstanding) expenses and incomes are excluded. Do not use them.

8. Presentation

Use the proper headings, "To" on the debit side and "By" on the credit side of the accounts, write the date line ("for the year ended 31st March"), and total both sides.

Preparing the Trading Account, Profit and Loss Account and Balance Sheet: key facts

Gross profit: Net sales + Closing stock - Opening stock - Net purchases - Direct expenses | Found in Trading Account; Balancing figure of the Trading Account.
Net profit: Gross profit + Other incomes - Indirect expenses | Found in Profit and Loss Account; Transferred to capital.
Closing capital: Opening capital + Net profit - Drawings | Shown in Balance Sheet; Add net loss with a minus sign.
Closing stock: Credit side of Trading Account | Assets side of Balance Sheet; Shown twice.

How to answer Preparing the Trading Account, Profit and Loss Account and Balance Sheet questions

Expect a trial balance and closing stock, with the three statements to prepare, or only gross profit and net profit.

1Tick each trial balance item once as you place it in the Trading, Profit and Loss or Balance Sheet.
2Net the returns: purchases less returns outwards, sales less returns inwards.
3Find gross profit, carry it to the Profit and Loss Account, then find net profit.
4Adjust capital for net profit and drawings, then total both sides of the Balance Sheet; if they differ, recheck closing stock.

Preparing the Trading Account, Profit and Loss Account and Balance Sheet in real life

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

Gross profit

Suppose a shopkeeper began the year with goods worth ₹40,000, bought goods for ₹3,00,000 (net of returns), sold goods for ₹5,00,000 (net of returns) and ended with unsold goods of ₹60,000. Wages and carriage inwards were ₹38,000.

Find the gross profit.

Try it first, then show the solutionSolution

Debit side: 40,000 + 3,00,000 + 38,000 = 3,78,000.
Credit side: 5,00,000 + 60,000 = 5,60,000.
Gross profit = 5,60,000 - 3,78,000 = 1,82,000.

Answer: Gross profit ₹1,82,000.

Memory hook: What he sold plus what is left, less what he had and bought.

Closing stock shown twice

Imagine that a student prepared a Balance Sheet in which the two sides differ by exactly the value of the unsold goods.

What omission is the likely cause?

Try it first, then show the solutionSolution

The difference equals the closing stock.
It was shown in the Trading Account but not on the assets side.

Answer: Closing stock was left out of the assets side of the Balance Sheet.

Memory hook: Closing stock knocks twice.

Tricks to remember Preparing the Trading Account, Profit and Loss Account and Balance Sheet

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

GOODS, BILLS, OWNS-OWES
Items about goods go to Trading; the bills of running and selling go to Profit and Loss; what the firm owns or owes goes to the Balance Sheet.
Use it when: Placing items.
IN and OUT
Carriage INwards is a Trading item; carriage OUTwards is a Profit and Loss item.
Use it when: A common slip.

Preparing the Trading Account, Profit and Loss Account and Balance Sheet: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Where does it go? · 1 mark · MCQBoard level

Carriage outwards is shown in the:
(a) Trading Account
(b) Profit and Loss Account
(c) Balance Sheet
(d) Capital Account

Try it first, then show the solutionSolution

Carriage outwards is a selling and distribution expense, an indirect expense.

Answer: (b)

Example 2: Closing stock · 2 marks · Very short answerBoard level

Where is closing stock, given outside the trial balance, shown in the final accounts? Why?

Try it first, then show the solutionSolution

It is shown on the credit side of the Trading Account, because it reduces the cost of goods sold.
It is also shown on the assets side of the Balance Sheet as a current asset.

Answer: On the credit side of the Trading Account and on the assets side of the Balance Sheet.

Example 3: Gross profit and net profit · 4 marks · Short answerHarder board level

Suppose a trader has: opening stock ₹25,000; purchases ₹2,00,000; sales ₹3,00,000; wages ₹20,000; carriage inwards ₹5,000; salaries ₹30,000; rent ₹12,000; commission received ₹8,000. Closing stock is ₹35,000. Find the gross profit and the net profit.

Try it first, then show the solutionSolution

Trading Account debit: 25,000 + 2,00,000 + 20,000 + 5,000 = 2,50,000.
Credit: 3,00,000 + 35,000 = 3,35,000. Gross profit = 3,35,000 - 2,50,000 = ₹85,000.
Profit and Loss: expenses 30,000 + 12,000 = 42,000; income 8,000.
Net profit = 85,000 + 8,000 - 42,000 = ₹51,000.

Answer: Gross profit ₹85,000; net profit ₹51,000.

Example 4: Full set of final accounts · 8 marks · Long answerHarder board level

Trial balance of a sole trader on 31st March (Rs): Debit: opening stock 40,000; purchases 3,10,000; sales returns 20,000; wages 30,000; carriage inwards 8,000; salaries 50,000; rent 24,000; carriage outwards 6,000; advertisement 10,000; bad debts 4,000; drawings 30,000; machinery 3,00,000; furniture 1,00,000; debtors 1,50,000; cash at bank 40,000; cash in hand 13,000. Credit: capital 4,00,000; sales 5,20,000; purchases returns 10,000; commission received 12,000; discount received 3,000; creditors 90,000; bank loan 1,00,000. Closing stock is ₹60,000. Prepare the Trading Account, Profit and Loss Account and Balance Sheet.

Try it first, then show the solutionSolution

The trial balance totals ₹11,35,000 on each side.
Trading Account: Dr: opening stock 40,000; purchases 3,10,000 less returns 10,000 = 3,00,000; wages 30,000; carriage inwards 8,000; total 3,78,000. Cr: sales 5,20,000 less returns 20,000 = 5,00,000; closing stock 60,000; total 5,60,000. Gross profit 1,82,000.
Profit and Loss Account: Dr: salaries 50,000; rent 24,000; carriage outwards 6,000; advertisement 10,000; bad debts 4,000; total expenses 94,000. Cr: gross profit 1,82,000; commission 12,000; discount 3,000; total 1,97,000. Net profit = 1,97,000 - 94,000 = 1,03,000.
Capital: 4,00,000 + 1,03,000 - 30,000 = 4,73,000.
Balance Sheet: Liabilities: capital 4,73,000; bank loan 1,00,000; creditors 90,000; total 6,63,000. Assets: machinery 3,00,000; furniture 1,00,000; closing stock 60,000; debtors 1,50,000; cash at bank 40,000; cash in hand 13,000; total 6,63,000.
Both sides agree at ₹6,63,000.

Answer: Gross profit ₹1,82,000; net profit ₹1,03,000; Balance Sheet total ₹6,63,000.

Example 5: Why does it not tally? · 6 marks · Case-basedHOTS / competency

A student prepares a Balance Sheet for the trader above but leaves closing stock out of the assets side. (a) By how much will the two sides differ and which side will be short? (b) Explain the cause. (c) Would the net profit also be wrong?

Try it first, then show the solutionSolution

(a) Liabilities total 6,63,000 but assets would total 6,03,000: the assets side is short by ₹60,000, the value of closing stock.
(b) Closing stock was credited in the Trading Account (raising profit and capital), but the matching debit, the asset, was omitted, so the double entry is incomplete.
(c) No; the net profit is correct because the Trading Account has the closing stock. The error lies only in the Balance Sheet.

Answer: (a) Assets short by ₹60,000; (b) closing stock omitted from assets; (c) net profit is unaffected.

Where students lose marks in Preparing the Trading Account, Profit and Loss Account and Balance Sheet

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

Mistake: Showing closing stock only once
Students treat it like any other item.
Wrong working
Closing stock only on the Trading Account credit side.
Right working
Closing stock on the Trading Account credit side and on the assets side of the Balance Sheet.
Do this: Ask whether the Balance Sheet tallies.
Usually costs: 2-3 marks.
Mistake: Mixing carriage inwards and outwards
Both contain "carriage".
Wrong working
Carriage outwards in the Trading Account.
Right working
Carriage inwards: Trading Account. Carriage outwards: Profit and Loss Account.
Do this: IN goes into Trading; OUT goes to Profit and Loss.
Usually costs: 1-2 marks.
Mistake: Forgetting to net the returns
Gross figures are used.
Wrong working
Purchases ₹3,10,000 in the Trading Account.
Right working
Purchases 3,10,000 less returns 10,000 = ₹3,00,000.
Do this: Deduct returns before totalling.
Usually costs: 1-2 marks.
Mistake: Forgetting drawings or net profit in capital
Opening capital is shown as given.
Wrong working
Capital: ₹4,00,000.
Right working
Capital: 4,00,000 + 1,03,000 - 30,000 = ₹4,73,000.
Do this: Update capital before totalling.
Usually costs: 2 marks.

Exam tips

Use "To" and "By" in the accounts and a heading with the date; a Balance Sheet is not an account, so use no "To" or "By".
Write the gross profit and net profit as the balancing figures in the correct side before totalling.
Do not bring in outstanding or prepaid items: they are outside the syllabus.
Check that the Balance Sheet tallies; if not, look at closing stock, capital and drawings first.

Practice questions on Preparing the Trading Account, Profit and Loss Account and Balance Sheet

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

Q1 · 3 marks · Very short answerBoard level
Name the account in which each of the following is shown: (i) purchases returns, (ii) discount received, (iii) debtors.
Hint
Goods, income, owns.
Answer
(i) Purchases returns: deducted from purchases in the Trading Account. (ii) Discount received: credit side of the Profit and Loss Account. (iii) Debtors: assets side of the Balance Sheet.
Q2 · 4 marks · Short answerHarder board level
Suppose the opening stock is ₹30,000, purchases ₹1,80,000, purchases returns ₹5,000, sales ₹2,70,000, sales returns ₹10,000, carriage inwards ₹7,000 and closing stock ₹50,000. Prepare the Trading Account and find the gross profit.
Hint
Net the returns first.
Answer
Debit: opening stock 30,000; net purchases 1,80,000 - 5,000 = 1,75,000; carriage inwards 7,000; total 2,12,000. Credit: net sales 2,70,000 - 10,000 = 2,60,000; closing stock 50,000; total 3,10,000. Gross profit = 3,10,000 - 2,12,000 = ₹98,000.
Q3 · 4 marks · Short answerHarder board level
Suppose a trader's opening capital is ₹3,00,000, his net profit ₹80,000 and his drawings ₹35,000. Find the closing capital and show the capital in the Balance Sheet. If instead he had a net loss of ₹20,000, what would the closing capital be?
Hint
Add profit, deduct drawings.
Answer
Closing capital = 3,00,000 + 80,000 - 35,000 = ₹3,45,000, shown as the first item on the liabilities side. With a net loss: 3,00,000 - 20,000 - 35,000 = ₹2,45,000.
Q4 · 4 marks · Short answerHarder board level
Explain what the Trading Account and the Profit and Loss Account each find, and why the first is prepared before the second.
Hint
Purpose, items, result, order.
Answer
Purpose: the Trading Account finds gross profit; the Profit and Loss Account finds net profit. Items: Trading contains stock, purchases, sales and direct expenses; Profit and Loss contains indirect expenses and other incomes. Result: Trading ends with gross profit or loss; Profit and Loss ends with net profit or loss. Order: Trading is prepared first and its result is carried to the Profit and Loss Account.
Q5 · 4 marks · Case-basedHOTS / competency
Suppose a student places carriage inwards and wages in the Profit and Loss Account instead of the Trading Account. Explain the effect on gross profit and on net profit.
Hint
Direct expenses reduce gross profit.
Answer
Carriage inwards and wages are direct expenses and belong in the Trading Account. If moved, gross profit becomes higher than the correct figure by the total of these two items, and the Profit and Loss Account has extra expenses of the same amount. The net profit is unchanged, because the same expenses are deducted somewhere, but the gross profit and the gross profit ratio are wrongly stated.

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.Which account finds gross profit?Show answer
The Trading Account.
2.Which side of the Trading Account carries closing stock?Show answer
The credit side.
3.How is net profit used in the Balance Sheet?Show answer
It is added to the opening capital.
4.Where are drawings shown?Show answer
They are deducted from capital in the Balance Sheet.
5.Where is a bank loan shown?Show answer
On the liabilities side of the Balance Sheet.

Preparing the Trading Account, Profit and Loss Account and Balance Sheet: frequently asked questions

Is the Balance Sheet an account?

No, it is a statement of assets and liabilities on a date, so it has no "To" or "By".

Why is closing stock not in the trial balance?

It is valued after the books are balanced, so it is given as additional information.

What if opening stock is not given?

Take it as nil only if the question says so; otherwise it is an item of the trial balance.