1. Meaning
Statements prepared at the end of the accounting period to ascertain the financial performance (Profit/Loss) and financial position (Assets/Liabilities) of the business.
Structure: Trading A/c => Profit & Loss A/c => Balance Sheet.
2. Trading Account
Prepared to ascertain Gross Profit or Gross Loss.
- Records direct expenses (Wages, Carriage Inward, Manufacturing Exp).
- Records direct incomes (Sales).
- Formula: COGS = Opening Stock + Net Purchases + Direct Expenses - Closing Stock.
3. Profit and Loss Account
Prepared to ascertain Net Profit or Net Loss.
- Starts with Gross Profit/Loss transferred from Trading A/c.
- Records all indirect expenses (Salaries, Rent, Depreciation, Bad Debts).
- Records all indirect incomes (Interest received, Discount received).
4. Balance Sheet
A statement showing the financial position of the business as on a specific date.
- Liabilities Side: Capital + Net Profit - Drawings + Liabilities.
- Assets Side: Fixed Assets + Current Assets.
- Marshalling: Arrangement of assets/liabilities (Liquidity order or Permanence order).
5. Expenditure
- Capital Expenditure: Benefit for long period (e.g., Purchase of Land). Shown in Balance Sheet.
- Revenue Expenditure: Benefit for current period (e.g., Rent). Shown in Trading/P&L.
- Deferred Revenue Expenditure: Large revenue exp with long-term benefit (e.g., Heavy Advertisement).