Final Accounts of a Sole Trader: ISC Class 11 Accounts Notes

What Final Accounts of a Sole Trader is about

Weightage: Final Accounts of a Sole Trader belongs to the unit Final Accounts, which CISCE weights at 14 of the 80 marks in the ISC Class XI Accountancy Paper I (Theory). Class XI is examined by the school, so your school sets the paper within this weightage.Source: CISCE ISC Accountancy syllabus, examination year 2028, Class XI unit weightage

Key concepts

Trading Account, cost of goods sold and gross profit

The Trading Account finds the gross profit (or loss) from buying and selling goods, for the year ended on the balance sheet date.

Debit side: Opening stock; Purchases less returns outward; direct expenses (wages, carriage/freight inwards, import duty, octroi, power and fuel for production, royalty on production, packing materials used in production).

Credit side: Sales less returns inward; Closing stock.

Cost of goods sold (COGS) = Opening stock + Net purchases + Direct expenses − Closing stock.

Gross profit = Net sales − Cost of goods sold.

Adjusted purchases = Opening stock + Purchases − Closing stock. If the trial balance shows adjusted purchases and closing stock, opening stock is not shown separately and closing stock appears only in the Balance Sheet.

Objectives: find gross profit; compare GP with sales (gross profit ratio); control purchases, direct expenses and stock.

Worked example

Suppose a trader has: opening stock ₹60,000; purchases ₹3,40,000; purchases returns ₹10,000; wages ₹25,000; carriage inwards ₹5,000; sales ₹5,20,000; sales returns ₹20,000; closing stock ₹70,000. Find cost of goods sold, gross profit and the gross profit ratio. [3 marks]

Try it first, then show the solutionSolution

1. COGS = 60,000 + (3,40,000 − 10,000) + 25,000 + 5,000 − 70,000 = ₹3,50,000.
2. Net sales = 5,20,000 − 20,000 = ₹5,00,000; GP = 5,00,000 − 3,50,000 = ₹1,50,000.
3. GP ratio = 1,50,000 ÷ 5,00,000 × 100 = 30%.

Answer: COGS ₹3,50,000; GP ₹1,50,000; GP ratio 30%.

Profit and Loss Account and operating profit

The Profit and Loss Account starts with gross profit and finds net profit (or loss).

Debit side: indirect expenses and losses: office and administration (salaries, rent, office lighting, insurance, printing and stationery, postage, audit fees, legal charges); selling and distribution (carriage outwards, advertisement, salesmen's commission, bad debts, discount allowed, delivery van expenses); financial (interest on loan, bank charges); depreciation; abnormal losses (loss by fire or theft not recovered).

Credit side: gross profit; indirect incomes and gains (commission, rent, interest, discount received, dividends, profit on sale of fixed assets).

Net profit is transferred to the Capital A/c.

Operating profit is the profit from the normal business operations only:

Operating profit = Net profit + Non-operating expenses and losses − Non-operating incomes and gains.

Non-operating items: interest on investments, profit or loss on sale of fixed assets, loss by fire or theft, interest on loans (financing cost, if the question treats it so).

Worked example

Suppose a trader's net profit is ₹2,40,000, after including a profit on sale of machinery of ₹18,000, interest on investments of ₹6,000 and an uninsured loss by fire of ₹10,000. Find the operating profit. [2 marks]

Try it first, then show the solutionSolution

1. Remove non-operating incomes: 2,40,000 − 18,000 − 6,000 = ₹2,16,000.
2. Add back the non-operating loss: 2,16,000 + 10,000 = ₹2,26,000.

Answer: Operating profit ₹2,26,000.

Balance Sheet and marshalling

The Balance Sheet is a statement of assets and liabilities as at a date. In the horizontal format, liabilities and capital are on the left and assets on the right.

Marshalling is the order in which items are arranged.

Order of liquidity (most liquid first):

• Liabilities: current liabilities (bank overdraft, outstanding expenses, bills payable, creditors), long-term loans, capital.
• Assets: cash in hand, cash at bank, prepaid expenses and accrued income, bills receivable, debtors, closing stock, investments, furniture, machinery, building, land, goodwill.

Order of permanence (the reverse; most permanent first):

• Liabilities: capital, long-term loans, current liabilities.
• Assets: goodwill, land, building, machinery, furniture, investments, stock, debtors, bills receivable, prepaid and accrued items, bank, cash.

Sole traders and partnerships often use either; banks use liquidity. Whatever order you use, keep it consistent on both sides.

Grouping: show capital with its movements (opening + net profit − drawings); show assets net of depreciation and provisions.

Worked example

Arrange in order of liquidity: Machinery, Cash in hand, Debtors, Closing stock, Prepaid insurance, Goodwill, Cash at bank. [1 mark]

Try it first, then show the solutionSolution

1. Most liquid to least: cash in hand, cash at bank, prepaid insurance, debtors, closing stock, machinery, goodwill.

Answer: Cash in hand, Cash at bank, Prepaid insurance, Debtors, Closing stock, Machinery, Goodwill.

Adjustments: outstanding, prepaid, accrued and received in advance

Each adjustment appears twice:

Adjustment	P&L / Trading Account	Balance Sheet
Closing stock	Credit of Trading A/c	Assets
Outstanding expense	Added to the expense	Liabilities
Prepaid expense	Deducted from the expense	Assets
Accrued income	Added to the income	Assets
Income received in advance	Deducted from the income	Liabilities
Depreciation	Debit of P&L	Deducted from the asset

Hints in the trial balance: 'Rent paid for 11 months' means one month's rent is outstanding. 'Insurance paid for one year from 1st October' means six months are prepaid at 31st March.

If an outstanding or prepaid item already appears in the trial balance, it has been recorded: show it only in the Balance Sheet.

Worked example

Suppose the trial balance shows rent ₹33,000, paid for 11 months, and insurance ₹12,000, of which ₹1,300 relates to next year. Show the treatment. [2 marks]

Try it first, then show the solutionSolution

1. Monthly rent = 33,000 ÷ 11 = ₹3,000; outstanding ₹3,000; P&L rent = ₹36,000; Balance Sheet: outstanding rent ₹3,000 (liability).
2. P&L insurance = 12,000 − 1,300 = ₹10,700; Balance Sheet: prepaid insurance ₹1,300 (asset).

Answer: Rent ₹36,000 and insurance ₹10,700 in P&L; outstanding rent ₹3,000 (liability) and prepaid insurance ₹1,300 (asset).

Bad debts, provision for doubtful debts and provision for discount

Further bad debts (given as an adjustment) are written off from debtors.

Provision for doubtful debts (PDD) = Rate × (Debtors − Further bad debts).

P&L charge = Bad debts in trial balance + Further bad debts + New PDD − Old PDD (shown as one combined item, or bad debts and the increase in provision separately). If the result is negative, the excess is credited to P&L.

Provision for discount on debtors = Rate × (Debtors − Further bad debts − New PDD): a further charge to P&L.

Balance Sheet: Debtors − Further bad debts − New PDD − Provision for discount.

The syllabus note: if the new provision rate is not given, either treat the remaining debtors as good (no new provision) or apply the same percentage as the opening provision, as the question indicates.

Worked example

Suppose debtors ₹1,60,000; bad debts in trial balance ₹3,000; further bad debts ₹4,000; old PDD ₹6,000; new PDD 5%. Find the P&L charge and net debtors. [3 marks]

Try it first, then show the solutionSolution

1. New PDD = 5% × (1,60,000 − 4,000) = ₹7,800.
2. P&L charge = 3,000 + 4,000 + 7,800 − 6,000 = ₹8,800.
3. Net debtors = 1,60,000 − 4,000 − 7,800 = ₹1,48,200.

Answer: P&L charge ₹8,800; debtors in Balance Sheet ₹1,48,200.

Goods taken by the owner, free samples and abnormal loss

Goods that leave without a sale are deducted from purchases at cost (or shown on the credit side of the Trading Account) and then:

Item	Trading A/c	P&L A/c	Balance Sheet
Goods taken by owner	Less from purchases	—	Added to drawings (less from capital)
Free samples	Less from purchases	Debit: advertisement	—
Abnormal loss (fire, theft), insurance claim admitted	Less from purchases (full cost of goods lost)	Debit: loss less claim	Asset: insurance claim receivable

An abnormal loss is removed from the Trading Account so that gross profit reflects normal trading only. Normal losses (evaporation, leakage) are not separately shown; they are absorbed in cost of goods sold.

Worked example

Suppose purchases are ₹4,60,000 and purchases returns ₹12,000. Goods costing ₹5,000 were taken by the owner, ₹2,000 given as free samples, and ₹8,000 destroyed by fire (claim admitted ₹5,000). Find net purchases and show the other effects. [3 marks]

Try it first, then show the solutionSolution

1. Net purchases = 4,60,000 − 12,000 − 5,000 − 2,000 − 8,000 = ₹4,33,000.
2. Drawings + ₹5,000; advertisement + ₹2,000 (P&L).
3. Loss by fire in P&L = 8,000 − 5,000 = ₹3,000; insurance claim ₹5,000 shown as an asset.

Answer: Net purchases ₹4,33,000; drawings +₹5,000; advertisement +₹2,000; P&L loss ₹3,000; claim receivable ₹5,000.

Manager's commission: before and after charging

A manager may be paid a commission as a percentage of net profit:

• On net profit before charging such commission: Commission = Net profit (before commission) × Rate ÷ 100.
• On net profit after charging such commission: Commission = Net profit (before commission) × Rate ÷ (100 + Rate).

In both cases, net profit before commission is found after all other adjustments. The commission is debited to P&L and, if unpaid, shown as an outstanding liability.

Check for 'after': commission = rate × (profit − commission). E.g. 5,000 = 5% × (1,05,000 − 5,000) ✔.

Worked example

Suppose net profit before manager's commission is ₹2,52,000. Find the commission at 5% (a) on profit before charging it and (b) on profit after charging it. [2 marks]

Try it first, then show the solutionSolution

1. (a) 2,52,000 × 5/100 = ₹12,600.
2. (b) 2,52,000 × 5/105 = ₹12,000. Check: 5% × (2,52,000 − 12,000) = ₹12,000.

Answer: (a) ₹12,600; (b) ₹12,000.

Adjusting, closing and transfer entries

Adjusting entries (before final accounts): Closing Stock A/c Dr To Trading A/c; Expense A/c Dr To Outstanding Expense A/c; Prepaid Expense A/c Dr To Expense A/c; Accrued Income A/c Dr To Income A/c; Income A/c Dr To Income Received in Advance A/c; Depreciation A/c Dr To Asset A/c; Bad Debts A/c Dr To Debtors; Profit and Loss A/c Dr To Provision for Doubtful Debts A/c; Drawings A/c Dr To Purchases A/c; Advertisement A/c Dr To Purchases A/c; Loss by Fire A/c and Insurance Claim A/c Dr To Purchases A/c; Manager's Commission A/c Dr To Outstanding Manager's Commission A/c.

Closing entries: Trading A/c Dr To opening stock, purchases, direct expenses; Sales A/c Dr To Trading A/c; Profit and Loss A/c Dr To indirect expenses and losses; indirect incomes Dr To Profit and Loss A/c.

Transfer entries: Trading A/c Dr To Profit and Loss A/c (gross profit); Profit and Loss A/c Dr To Capital A/c (net profit); Capital A/c Dr To Drawings A/c.

Worked example

Pass the adjusting entries for: outstanding salaries ₹6,000; accrued commission ₹1,500; manager's commission ₹5,000 (unpaid). [3 marks]

Try it first, then show the solutionSolution

1. Salaries A/c Dr 6,000 To Outstanding Salaries A/c 6,000.
2. Accrued Commission A/c Dr 1,500 To Commission A/c 1,500.
3. Manager's Commission A/c Dr 5,000 To Outstanding Manager's Commission A/c 5,000.

Answer: Three adjusting entries as shown.

Final Accounts of a Sole Trader 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

• Balance Sheet, Bad Debts, Provisions and Goods Taken by the Owner
• Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments

Final Accounts of a Sole Trader: key facts

Cost of goods sold

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

Adjusted purchases

Adjusted purchases = Opening stock + Purchases − Closing stock

Gross profit

Gross profit = Net sales − Cost of goods sold

Operating profit

Operating profit = Net profit + Non-operating expenses/losses − Non-operating incomes/gains

Manager's commission (before charging)

Commission = Net profit before commission × Rate ÷ 100

Manager's commission (after charging)

Commission = Net profit before commission × Rate ÷ (100 + Rate)

Closing capital

Closing capital = Opening capital + Additional capital + Net profit − Drawings (cash and goods)

Final Accounts of a Sole Trader: diagrams to practise

Practise each one on paper: draw it from the checklist, then tick off every label.

How the school exam asks Final Accounts of a Sole Trader

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

Tricks to remember Final Accounts of a Sole Trader

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

• Twice-rule

  Every adjustment appears twice: once in Trading/P&L, once in the Balance Sheet.

  Use it when: All adjustments.

• Goods out without sale leave through Purchases

  Drawings, samples and abnormal loss: minus from purchases at cost; then follow each to its home (capital, advertisement, P&L).

  Use it when: Goods adjustments.

• Commission 'after' = rate over (100 + rate)

  5% after → × 5/105; 10% after → × 10/110.

  Use it when: Manager's commission.

Final Accounts of a Sole Trader: 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 A style)

Read the situation, then answer every part. In a school exam set on the board pattern this is a 6-mark question split into 2 + 2 + 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 Final Accounts of a Sole Trader

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

• ✗Mistake: Showing an adjustment only once

  Every adjustment has a profit effect and a balance sheet effect; missing either leaves the Balance Sheet out of balance.

  ✓Do this: Make the adjustment grid before starting; tick two cells per adjustment.

  Usually costs: 1 mark per adjustment and a Balance Sheet that does not agree.

• ✗Mistake: Deducting goods taken by the owner from sales

  No sale took place; the goods are removed at cost from purchases and added to drawings.

  Wrong working

  Sales 7,50,000 − 5,000.

  Right working

  Purchases 4,60,000 − 5,000; Drawings 36,000 + 5,000.

  ✓Do this: Goods out without a sale: purchases, at cost.

  Usually costs: 1-2 marks.

• ✗Mistake: Charging the whole fire loss to P&L and forgetting the claim

  The admitted claim is an asset (insurance claim receivable); only the unrecovered part is a loss.

  ✓Do this: Trading: full cost out of purchases; P&L: loss − claim; Balance Sheet: claim.

  Usually costs: 1-2 marks.

• ✗Mistake: Using rate/100 for commission 'after charging'

  The commission is part of the deduction itself, so the base excludes it.

  ✓Do this: After → rate/(100 + rate); check that commission = rate × (profit − commission).

  Usually costs: 1 mark and the net profit.

• ✗Mistake: Mixing orders of marshalling

  Liquidity on one side and permanence on the other makes the Balance Sheet hard to read and loses presentation marks.

  ✓Do this: Choose one order and use it on both sides.

  Usually costs: ½-1 mark.

Practice questions on Final Accounts of a Sole Trader

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

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

   Hint

   Twice-rule.

   Answer

   (c) the Trading Account and the Balance Sheet.

2. Q2 · 2 marks · Short answerExam level

   State two objectives each of the Trading Account and the Balance Sheet.

   Hint

   Gross profit; financial position.

   Answer

   Trading: find gross profit; control the cost of goods sold (and find GP ratio). Balance Sheet: show the financial position on a date; show the nature and value of assets and liabilities (and capital invested).

3. Q3 · 3 marks · Short answerExam level

   What is marshalling? Distinguish between order of liquidity and order of permanence.

   Hint

   Arrangement.

   Answer

   Marshalling is arranging assets and liabilities in a particular order in the Balance Sheet. Liquidity: most easily convertible assets (cash) and most urgent liabilities first. Permanence: most permanent assets (goodwill, land) and capital first; the reverse of liquidity.

4. Q4 · 3 marks · Short answerHarder exam level

   Suppose opening stock is ₹45,000, net purchases ₹2,80,000, wages ₹20,000, carriage inwards ₹5,000 and net sales ₹4,00,000 at a gross profit of 25% on sales. Find the closing stock.

   Hint

   COGS = 75% of sales.

   Answer

   COGS = 75% × 4,00,000 = ₹3,00,000. Closing stock = 45,000 + 2,80,000 + 20,000 + 5,000 − 3,00,000 = ₹50,000.

5. Q5 · 2 marks · Short answerHarder exam level

   Suppose commission received is ₹18,000, of which ₹3,000 relates to next year, and interest of ₹2,500 is accrued but not received. Show the treatment.

   Hint

   One deduction, one addition.

   Answer

   P&L credit: commission 18,000 − 3,000 = ₹15,000; interest + ₹2,500. Balance Sheet: commission received in advance ₹3,000 (liability); accrued interest ₹2,500 (asset).

6. Q6 · 3 marks · Short answerHarder exam level

   Suppose debtors are ₹2,10,000, further bad debts ₹10,000, PDD 5% and provision for discount 2%; old PDD ₹7,000. Find the total charge to P&L for these items (no bad debts in the trial balance) and the debtors shown.

   Hint

   Discount on debtors after PDD.

   Answer

   New PDD = 5% × 2,00,000 = ₹10,000; discount = 2% × 1,90,000 = ₹3,800. Charge = 10,000 + 10,000 − 7,000 + 3,800 = ₹16,800. Debtors shown = 2,00,000 − 10,000 − 3,800 = ₹1,86,200.

7. Q7 · 2 marks · Short answerHarder exam level

   Suppose net profit before manager's commission is ₹3,30,000. The manager is entitled to 10% of net profit after charging his commission, and the owner insists the commission must not exceed ₹25,000. Find the commission and net profit.

   Hint

   Compute, then apply the cap.

   Answer

   Formula gives 3,30,000 × 10/110 = ₹30,000, but the cap applies: commission ₹25,000; net profit ₹3,05,000.

8. Q8 · 3 marks · Short answerHOTS / competency

   Goods costing ₹8,000 were destroyed by fire and a claim of ₹5,000 was admitted. A student debited ₹3,000 to P&L as loss by fire and showed the ₹5,000 claim as an asset, but did not reduce purchases. State the effect on gross profit, net profit and the Balance Sheet.

   Hint

   The destroyed goods are still inside cost of goods sold.

   Answer

   Purchases are ₹8,000 too high, so gross profit is understated by ₹8,000 (the abnormal loss has entered the Trading Account). Net profit is also understated by ₹8,000, because the loss is now charged twice: ₹8,000 through purchases and ₹3,000 in P&L. The Balance Sheet will not agree: capital is ₹8,000 too low while the assets (including the claim) are correct.

9. Q9 · 2 marks · Short answerHOTS / competency

   Suppose a trader's trial balance shows 'Adjusted purchases ₹3,60,000' and 'Closing stock ₹50,000', with sales ₹5,00,000 and wages ₹20,000. Prepare the Trading Account outline and say where closing stock goes.

   Hint

   Opening stock is inside adjusted purchases.

   Answer

   Trading Dr: Adjusted purchases 3,60,000; Wages 20,000; GP 1,20,000. Cr: Sales 5,00,000. Closing stock ₹50,000 appears only in the Balance Sheet (assets).

10. Q10 · 2 marks · Short answerHOTS / competency

    Suppose prepaid insurance of ₹2,000 appears in the trial balance and the adjustment list also says 'insurance prepaid ₹2,000'. A student deducts ₹2,000 from insurance in the P&L and also shows ₹2,000 in the Balance Sheet. Explain the error.

    Hint

    Already recorded.

    Answer

    Because prepaid insurance is already in the trial balance, the adjusting entry has been passed and the insurance account already excludes it. Deducting it again from the P&L insurance double-counts; it should appear only in the Balance Sheet (once).

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.COGS formula?Show answer

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

2. 2.Manager's commission 5% after charging on ₹1,05,000?Show answer

   ₹5,000 (1,05,000 × 5/105).

3. 3.Free samples: which two places?Show answer

   Less from purchases; debit advertisement in P&L.

4. 4.Item in trial balance: how many times in final accounts?Show answer

   Once.

5. 5.Adjustment outside trial balance: how many times?Show answer

   Twice.

6. 6.Order of liquidity starts with?Show answer

   Cash in hand.

Quick revision checklist

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

• ☐Trading: GP; P&L: NP; Balance Sheet: position 'as at'.
• ☐COGS = OS + Net purchases + Direct exp − CS.
• ☐Twice-rule for every adjustment outside the trial balance.
• ☐Goods out without sale: deduct from purchases at cost.
• ☐Abnormal loss: out of Trading; loss − claim in P&L; claim as asset.
• ☐PDD on (debtors − bad debts); discount on (debtors − bad debts − PDD).
• ☐Commission after: × rate/(100 + rate).
• ☐Operating profit = NP + non-operating losses − non-operating incomes.

Final Accounts of a Sole Trader: frequently asked questions