Day 8: Final Accounts with Adjustments
✅ Today you will learn
- What final accounts are and why they matter
- Direct vs indirect expenses; capital vs revenue
- Trading account → gross profit
- Profit & loss account → net profit
- Balance sheet and the five common adjustments
🏢 In the real world
On 31 March the bank, the income-tax return and the owner all ask the same two questions: “How much profit did you make?” and “What is the business worth today?” Final accounts answer both. In TallyPrime they appear instantly – but only if adjustments are entered correctly.
The three final statements
| Item | Goes to |
|---|---|
| Opening stock, purchases, purchase returns, wages, carriage inward, freight, factory power | Trading account (direct) |
| Sales, sales returns, closing stock | Trading account |
| Rent, salary, electricity, insurance, advertisement, discount allowed, depreciation, interest on loan | Profit & loss account (indirect) |
| Commission received, discount received, interest received | Profit & loss account (income) |
| Capital, drawings, loans, creditors, outstanding expenses | Balance sheet – liabilities side |
| Fixed assets, closing stock, debtors, cash, bank, prepaid, accrued income | Balance sheet – assets side |
The five common adjustments (each is shown twice)
| Adjustment | Journal entry | Effect 1 | Effect 2 |
|---|---|---|---|
| Closing stock | Closing Stock Dr / Trading A/c Cr | Trading – credit side | Balance sheet – asset |
| Outstanding expense | Expense Dr / Outstanding Expense Cr | Add to the expense (P&L or trading) | Balance sheet – liability |
| Prepaid expense | Prepaid Expense Dr / Expense Cr | Deduct from the expense | Balance sheet – asset |
| Depreciation | Depreciation Dr / Asset Cr | P&L – debit side | Deduct from the asset |
| Accrued income | Accrued Income Dr / Income Cr | Add to the income | Balance sheet – asset |
Information already in the trial balance appears once in final accounts. An adjustment given below the trial balance appears twice – that is why the balance sheet still balances.
In TallyPrime the same reports are at Gateway of Tally → Profit & Loss A/c and Gateway of Tally → Balance Sheet. Adjustments are entered as journal vouchers (F7) dated 31 March; closing stock is taken from inventory or entered in the Closing Stock ledger.
Solved examples
Example 1: Rohit Stationers – year ended 31 March 2027
| Ledger account | Dr (₹) | Cr (₹) |
|---|---|---|
| Capital A/c | 1,98,000 | |
| Sales A/c | 9,80,000 | |
| Sales Returns A/c | 12,000 | |
| Opening Stock A/c | 45,000 | |
| Purchases A/c | 6,40,000 | |
| Purchase Returns A/c | 10,000 | |
| Wages A/c | 18,000 | |
| Carriage Inward A/c | 7,000 | |
| Furniture A/c | 60,000 | |
| Computer A/c | 50,000 | |
| Debtors A/c | 85,000 | |
| Cash A/c | 22,000 | |
| Bank A/c | 1,10,000 | |
| Rent A/c | 72,000 | |
| Salary A/c | 1,44,000 | |
| Electricity A/c | 26,000 | |
| Insurance A/c | 12,000 | |
| Drawings A/c | 60,000 | |
| Discount Allowed A/c | 3,000 | |
| Discount Received A/c | 2,000 | |
| Commission Received A/c | 6,000 | |
| Bank Loan A/c | 1,00,000 | |
| Creditors A/c | 70,000 | |
| Total | 13,66,000 | 13,66,000 |
Trial balance on 31 March 2027
Adjustments: (1) closing stock ₹70,000; (2) salary outstanding ₹12,000; (3) insurance prepaid ₹3,000; (4) depreciation on furniture 10% and computer 20%; (5) commission receivable (accrued) ₹1,000.
| Trading Account of Rohit Stationers for the year ended 31 March 2027 | |||||
|---|---|---|---|---|---|
| Particulars | ₹ | Particulars | ₹ | ||
| To Opening Stock | 45,000 | By Sales | 9,80,000 | ||
| To Purchases | 6,40,000 | Less: Sales Returns | 12,000 | ||
| Less: Purchase Returns | 10,000 | 9,68,000 | |||
| 6,30,000 | By Closing Stock | 70,000 | |||
| To Wages | 18,000 | ||||
| To Carriage Inward | 7,000 | ||||
| To Gross Profit c/d | 3,38,000 | ||||
| 10,38,000 | 10,38,000 | ||||
| Profit & Loss Account of Rohit Stationers for the year ended 31 March 2027 | |||||
|---|---|---|---|---|---|
| Particulars | ₹ | Particulars | ₹ | ||
| To Rent | 72,000 | By Gross Profit b/d | 3,38,000 | ||
| To Salary (1,44,000 + 12,000 outstanding) | 1,56,000 | By Commission Received (6,000 + 1,000 accrued) | 7,000 | ||
| To Electricity | 26,000 | By Discount Received | 2,000 | ||
| To Insurance (12,000 – 3,000 prepaid) | 9,000 | ||||
| To Discount Allowed | 3,000 | ||||
| To Depreciation on Furniture @ 10% | 6,000 | ||||
| To Depreciation on Computer @ 20% | 10,000 | ||||
| To Net Profit (transferred to Capital) | 65,000 | ||||
| 3,47,000 | 3,47,000 | ||||
| Balance Sheet of Rohit Stationers as at 31 March 2027 | |||||
|---|---|---|---|---|---|
| Particulars | ₹ | Particulars | ₹ | ||
| Liabilities | Assets | ||||
| Capital | 1,98,000 | Furniture | 60,000 | ||
| Add: Net Profit | 65,000 | Less: Depreciation | 6,000 | ||
| Less: Drawings | 60,000 | 54,000 | |||
| 2,03,000 | Computer | 50,000 | |||
| Bank Loan | 1,00,000 | Less: Depreciation | 10,000 | ||
| Creditors | 70,000 | 40,000 | |||
| Outstanding Salary | 12,000 | Closing Stock | 70,000 | ||
| Debtors | 85,000 | ||||
| Bank | 1,10,000 | ||||
| Cash | 22,000 | ||||
| Prepaid Insurance | 3,000 | ||||
| Accrued Commission Received | 1,000 | ||||
| 3,85,000 | 3,85,000 | ||||
Result: gross profit ₹3,38,000, net profit ₹65,000, closing capital ₹2,03,000, balance sheet total ₹3,85,000 on both sides.
Practice exercises (unsolved – answer hidden)
Try each exercise on paper or in TallyPrime first, then open the answer to check.
🏋️ Practice – do it yourself
Show solution
| Trading Account of Kavya Traders for the year ended 31 March 2027 | |||||
|---|---|---|---|---|---|
| Particulars | ₹ | Particulars | ₹ | ||
| To Opening Stock | 30,000 | By Sales | 5,20,000 | ||
| To Purchases | 3,40,000 | Less: Sales Returns | 0 | ||
| Less: Purchase Returns | 0 | 5,20,000 | |||
| 3,40,000 | By Closing Stock | 42,000 | |||
| To Wages | 30,000 | ||||
| To Gross Profit c/d | 1,62,000 | ||||
| 5,62,000 | 5,62,000 | ||||
| Profit & Loss Account of Kavya Traders for the year ended 31 March 2027 | |||||
|---|---|---|---|---|---|
| Particulars | ₹ | Particulars | ₹ | ||
| To Rent | 36,000 | By Gross Profit b/d | 1,62,000 | ||
| To Salary | 60,000 | ||||
| To Insurance (8,000 – 2,000 prepaid) | 6,000 | ||||
| To Depreciation on Machinery @ 10% | 15,000 | ||||
| To Net Profit (transferred to Capital) | 45,000 | ||||
| 1,62,000 | 1,62,000 | ||||
| Balance Sheet of Kavya Traders as at 31 March 2027 | |||||
|---|---|---|---|---|---|
| Particulars | ₹ | Particulars | ₹ | ||
| Liabilities | Assets | ||||
| Capital | 2,58,000 | Machinery | 1,50,000 | ||
| Add: Net Profit | 45,000 | Less: Depreciation | 15,000 | ||
| Less: Drawings | 24,000 | 1,35,000 | |||
| 2,79,000 | Closing Stock | 42,000 | |||
| Creditors | 45,000 | Debtors | 60,000 | ||
| Outstanding Wages | 5,000 | Bank | 72,000 | ||
| Cash | 18,000 | ||||
| Prepaid Insurance | 2,000 | ||||
| 3,29,000 | 3,29,000 | ||||
Gross profit ₹1,62,000; net profit ₹45,000; balance sheet total ₹3,29,000.
Show solution
(a) Capital (b) Revenue (c) Revenue (d) Capital – added to the machine’s cost (e) Revenue.🏅 Job skills unlocked today
Quick quiz
🧠 Quick Quiz – test yourself
Interview corner
💼 Interview Corner
Difference between gross profit and net profit?
Gross profit = net sales – cost of goods sold (trading account). Net profit = gross profit + other incomes – indirect expenses (P&L account).
How is prepaid insurance treated?
Deducted from insurance in the P&L account and shown as a current asset in the balance sheet.
Summary
- Trading account gives gross profit; P&L gives net profit; balance sheet shows the position.
- Adjustments appear twice; trial balance items once.
- Capital expenditure → balance sheet; revenue expenditure → P&L.
- Module A done – from Day 9 the same work moves into TallyPrime.
Day 9: TallyPrime – installation, the Gateway of Tally, the top menu and the shortcut keys you will use daily.
Frequently Asked Questions
Why does the balance sheet always tally?
Do small traders need a balance sheet?
Tally and TallyPrime are trademarks of Tally Solutions Pvt. Ltd. This is an independent course, not affiliated with or endorsed by Tally Solutions. All business names, GSTINs and figures in the examples are fictional samples.
