AccountsISC Class 11 · Final Accounts of a Sole Trader

Trading and Profit and Loss Account with Adjustments: ISC Class 11 Accounts

Updated 17 October 2026 · Fact-checked

The Trading Account finds gross profit: Net sales less cost of goods sold, where cost of goods sold = opening stock + net purchases + direct expenses - closing stock. The Profit and Loss Account starts with gross profit, adds other incomes and deducts indirect expenses (adjusted for outstanding, prepaid and accrued items and depreciation) to give net profit.

Understand Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments

Trading Account (to find gross profit). Debit: opening stock, purchases less returns, direct expenses (wages, carriage inwards, freight, factory expenses, power). Credit: sales less returns, closing stock. Balance: gross profit (credit larger) or gross loss.

Cost of goods sold = Opening stock + Net purchases + Direct expenses - Closing stock. Closing stock appears once only: on the credit of the Trading Account and as a current asset in the Balance Sheet.

Profit and Loss Account (to find net profit). Debit: indirect expenses (salaries, rent, advertising, depreciation, interest, bad debts). Credit: gross profit and other incomes (commission, interest received, discount received). Balance: net profit or net loss, transferred to capital.

Adjustments. Each appears twice: once in the account (modifying the expense or income) and once in the balance sheet.

*Outstanding expense:* add to the expense in the account; liability in the balance sheet.
*Prepaid expense:* deduct from the expense; current asset.
*Accrued income:* add to the income; asset.
*Income received in advance:* deduct from the income; liability.
*Depreciation:* charge in the Profit and Loss; deduct from the asset in the balance sheet.

Classification of expenses. Direct expenses relate to buying and bringing goods to saleable condition. Indirect expenses relate to selling, administration and finance.

Gross profit ratio. Gross profit / Net sales x 100 gives a quick check.

Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments: key facts

Cost of goods sold: COGS = Opening stock + Net purchases + Direct expenses - Closing stock | Net purchases = Purchases - Returns; Trading Account.
Gross profit: Gross profit = Net sales - COGS | Gross profit ratio = Gross profit / Net sales x 100; Net sales = Sales - Returns.
Net profit: Net profit = Gross profit + Other income - Indirect expenses (adjusted) | Adjusted expense = Paid + Outstanding - Prepaid; Profit and Loss Account.

How to answer Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments questions

Work in two accounts, adjusting items once.

1Separate direct and indirect expenses.
2Compute net sales and net purchases, and COGS.
3Adjust each expense and income for outstanding, prepaid and accrued items.
4Find gross profit, then net profit.

Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments 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 juice stall starts the month with fruit worth Rs 4,000, buys more for Rs 36,000, pays Rs 2,000 for carriage on fruit and ends with fruit worth Rs 6,000. Sales are Rs 52,000.

Find the gross profit.

Try it first, then show the solutionSolution

COGS = 4,000 + 36,000 + 2,000 - 6,000 = 36,000.
Gross profit = 52,000 - 36,000 = 16,000.

Answer: Gross profit Rs 16,000.

Memory hook: Open + buy + direct costs - close = cost of sales.

Tricks to remember Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments

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

ODC
Opening, Direct costs, Closing: opening and direct on debit, closing on credit.
Use it when: Trading Account.
Out-add, pre-subtract
Outstanding adds to expense; prepaid subtracts.
Use it when: Adjustments.
Twice rule
Every adjustment appears in two places.
Use it when: Adjustments.

Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments: solved examples

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

Example 1: Direct expense · 1 mark · MCQBoard level

Which of the following is shown in the Trading Account?
(a) Rent (b) Carriage inwards (c) Salaries (d) Advertising

Try it first, then show the solutionSolution

Carriage inwards is a direct cost of purchases.

Answer: (b) Carriage inwards

Example 2: Adjusted expenses · 3 marks · Short answerBoard level

Salaries paid Rs 60,000 include Rs 5,000 for the previous year; Rs 7,000 for this year is unpaid. Rent paid Rs 18,000 includes Rs 3,000 for next year. Find the amounts to charge. (3 marks)

Try it first, then show the solutionSolution

Salaries = 60,000 - 5,000 + 7,000 = Rs 62,000.
Rent = 18,000 - 3,000 = Rs 15,000.

Answer: Salaries Rs 62,000; rent Rs 15,000.

Example 3: Trading and Profit and Loss Account · 8 marks · Long answerHarder board level

From the following find gross profit and net profit: opening stock 40,000; purchases 3,60,000; purchases returns 10,000; sales 6,00,000; sales returns 20,000; carriage inwards 6,000; wages 24,000; salaries 60,000; rent 18,000; commission received 9,000; closing stock 50,000. Adjustments: outstanding salaries 5,000; prepaid rent 3,000; depreciation 8,000. (8 marks)

Try it first, then show the solutionSolution

Net purchases = 3,50,000. COGS = 40,000 + 3,50,000 + 6,000 + 24,000 - 50,000 = 3,70,000.
Net sales = 5,80,000. Gross profit = 2,10,000.
Salaries 65,000; rent 15,000; depreciation 8,000: total 88,000.
Net profit = 2,10,000 + 9,000 - 88,000 = 1,31,000.

Answer:

Trading Account	Rs		Rs
To Opening stock	40,000	By Sales (net)	5,80,000
To Purchases (net)	3,50,000	By Closing stock	50,000
To Carriage inwards	6,000
To Wages	24,000
To Gross profit c/d	2,10,000
Total	6,30,000	Total	6,30,000

Net profit Rs 1,31,000 (expenses 65,000 + 15,000 + 8,000 = 88,000; income 2,10,000 + 9,000 = 2,19,000).

Example 4: Work backwards · 5 marks · Long answerHarder board level

Sales are Rs 8,00,000 and gross profit is 25% of sales. Opening stock is Rs 80,000, purchases Rs 5,60,000. Find COGS and closing stock. Indirect expenses are Rs 1,20,000 and other income Rs 15,000; find net profit. (5 marks)

Try it first, then show the solutionSolution

Gross profit = 2,00,000; COGS = 6,00,000.
Closing stock = 80,000 + 5,60,000 - 6,00,000 = Rs 40,000.
Net profit = 2,00,000 + 15,000 - 1,20,000 = Rs 95,000.

Answer: COGS Rs 6,00,000; closing stock Rs 40,000; net profit Rs 95,000.

Example 5: Error in closing stock · 4 marks · Short answerHOTS / competency

Closing stock of Rs 50,000 was entered as Rs 60,000 in a year when the true net profit was Rs 1,31,000. Find the reported profit and the effect on the balance sheet and on the next year's profit. (4 marks)

Try it first, then show the solutionSolution

Reported profit = 1,31,000 + 10,000 = 1,41,000.
Balance sheet: stock and capital overstated by 10,000.
Next year the opening stock is overstated, so the next year's COGS is overstated and profit is understated by 10,000.

Answer: Reported profit Rs 1,41,000; assets and capital overstated by Rs 10,000; next year's profit understated by Rs 10,000.

Where students lose marks in Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments

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

Mistake: Showing closing stock on the debit
Mixing with opening stock.
Wrong working
To Closing stock 50,000
Right working
By Closing stock 50,000
Do this: Closing stock is credited.
Usually costs: 2 marks.
Mistake: Adding prepaid to the expense
Wrong direction.
Wrong working
Rent 18,000 + 3,000
Right working
Rent 18,000 - 3,000
Do this: Prepaid is deducted.
Usually costs: 2 marks.
Mistake: Wages in the Profit and Loss Account
Treating as indirect.
Wrong working
Wages under P&L
Right working
Wages in Trading
Do this: Wages to produce goods are direct.
Usually costs: 1-2 marks.

Exam tips

Show working notes for adjusted expenses.
Show net sales and net purchases, not gross.
Check gross profit against the gross profit ratio.

Practice questions on Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments

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

Q1 · 1 mark · MCQBoard level
Cost of goods sold is calculated as:
(a) Opening stock + Net purchases + Direct expenses - Closing stock (b) Sales - Purchases (c) Opening stock - Closing stock (d) Purchases + Sales
Hint
Include direct expenses and use net purchases.
Answer
(a) Opening stock + Net purchases + Direct expenses - Closing stock
Q2 · 3 marks · Short answerBoard level
Distinguish between direct and indirect expenses with two examples each. (3 marks)
Hint
Trading versus P&L.
Answer
Direct expenses are incurred to buy or make goods (wages, carriage inwards) and go to the Trading Account. Indirect expenses relate to running the business (rent, salaries) and go to the Profit and Loss Account.
Q3 · 7 marks · Long answerHarder board level
Opening stock 25,000; purchases 2,40,000; sales 3,50,000; wages 15,000; carriage inwards 5,000; closing stock 35,000; rent 12,000; insurance 6,000 (Rs 1,500 prepaid); salaries 40,000 (Rs 4,000 unpaid); interest received 3,000; depreciation 6,000. Find gross profit and net profit. (7 marks)
Hint
COGS = 2,50,000.
Answer
COGS = 25,000 + 2,40,000 + 15,000 + 5,000 - 35,000 = 2,50,000. Gross profit = 1,00,000. Expenses: rent 12,000 + insurance 4,500 + salaries 44,000 + depreciation 6,000 = 66,500. Net profit = 1,00,000 + 3,000 - 66,500 = Rs 36,500.
Q4 · 6 marks · Long answerHarder board level
Gross profit is Rs 1,80,000. Salaries paid 50,000 (Rs 6,000 outstanding at start, Rs 4,000 outstanding at end); rent paid 20,000 (prepaid Rs 2,500 at end; Rs 1,500 prepaid at start); commission received 8,000 (Rs 1,000 received in advance at end). Depreciation 9,000. Find net profit. (6 marks)
Hint
Adjust opening items too.
Answer
Salaries = 50,000 - 6,000 + 4,000 = 48,000. Rent = 20,000 + 1,500 - 2,500 = 19,000. Commission = 8,000 - 1,000 = 7,000. Net profit = 1,80,000 + 7,000 - 48,000 - 19,000 - 9,000 = Rs 1,11,000.
Q5 · 4 marks · Short answerHOTS / competency
Closing stock of Rs 30,000 was left out of the books altogether. The reported gross profit was Rs 90,000 and net profit Rs 40,000. Find the correct figures and the effect on assets. (4 marks)
Hint
Credit closing stock.
Answer
Correct gross profit = 1,20,000; net profit = 70,000. The balance sheet omitted stock of Rs 30,000, so assets and capital were understated by Rs 30,000.

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.COGS formula?Show answer
Opening stock + Net purchases + Direct expenses - Closing stock.
2.Gross profit equals?Show answer
Net sales - COGS.
3.Outstanding expense is a?Show answer
Liability.
4.Closing stock is on which side of Trading?Show answer
Credit.
5.Depreciation goes to?Show answer
Profit and Loss Account.

Trading and Profit and Loss Account with Outstanding, Prepaid and Depreciation Adjustments: frequently asked questions

Is carriage outwards direct?

No, indirect (selling).

Where does net profit go?

To capital.

Do returns appear?

Yes, deducted from sales and purchases.

Are adjustments in trial balance?

No, they are given separately.