Financial Statements - I

Gross profit is not total revenue. It is the excess of sales over cost of goods sold. So the statement is false.

Opening stock appears on the debit side of the trading account because it is part of the cost of goods sold for the current year.

Rent, rates and taxes is an indirect expense, not a direct expense. Direct expenses are connected with bringing goods to the point of sale.

If the credit side of the profit and loss account is greater than the debit side, the difference is net profit.

Closing stock is credited to the trading account.

The accuracy of books of account is tested by the trial balance.

On returning goods to the seller, the buyer sends a debit note.

The financial position of a business is determined by the balance sheet.

On receiving returned goods from the buyer, the seller sends a credit note.

The financial statements listed here are profit and loss account and balance sheet.

The correct order is Gross Profit → Operating Profit → Net Profit.

While calculating operating profit, abnormal items and expenses of a purely financial nature are not taken into account.

From the chapter, the formula is:

Operating profit = Net profit + Non-operating expenses - Non-operating incomes.

So the correct option is the one matching this formula.

From the given balances:

### 1) Gross profit
- Sales = ₹75,250
- Sales return = ₹1,250
- Net sales = ₹75,250 - ₹1,250 = ₹74,000
- Purchases = ₹32,250
- Purchases return = ₹250
- Net purchases = ₹32,250 - ₹250 = ₹32,000
- Add opening stock = ₹7,600
- Add wages = ₹2,600

Cost of goods sold:
$$7,600 + 32,000 + 2,600 = 42,200$$

Gross profit:
$$74,000 - 42,200 = 31,800$$

So gross profit = ₹31,800.

### 2) Operating profit
Operating expenses are:
- Rent = ₹300
- Stationery and printing = ₹250
- Salaries = ₹3,000
- Misc. expenses = ₹200
- Travelling expenses = ₹500
- Advertisement = ₹1,800
- Commission paid = ₹150
- Office expenses = ₹1,600
- Depreciation = ₹800

Total operating expenses:
$$300+250+3,000+200+500+1,800+150+1,600+800 = 8,600$$

Operating profit:
$$31,800 - 8,600 = 23,200$$

So operating profit = ₹23,200.

### 3) Net profit
Add non-operating incomes:
- Profit on sale of investment = ₹500
- Dividend on investment = ₹2,500

Total non-operating incomes = ₹3,000

Subtract loss on sale of old furniture = ₹300

Net profit:
$$23,200 + 3,000 - 300 = 25,900$$

So net profit = ₹25,900.

Here the items are arranged in order of permanence and order of liquidity, and grouped under logical heads.

## 1) Order of permanence
### Liabilities
1. Owner’s equity
2. Long-term loans
3. Short-term loans
4. Bills payable
5. Sundry creditors
6. Bank overdraft

### Assets
1. Land
2. Building
3. Machinery / fixed assets in general if included later
4. Work in progress
5. Raw material
6. Finished goods
7. Bills receivable
8. Sundry debtors
9. Cash at bank
10. Cash in hand

## 2) Order of liquidity
### Liabilities
1. Bank overdraft
2. Bills payable
3. Sundry creditors
4. Short-term loans
5. Long-term loans
6. Owner’s equity

### Assets
1. Cash in hand
2. Cash at bank
3. Bills receivable
4. Sundry debtors
5. Finished goods
6. Work in progress
7. Raw material
8. Building
9. Land

## 3) Grouping under logical heads
### Liabilities
- Owner’s funds: Owner’s equity
- Non-current liabilities: Long-term loans
- Current liabilities: Bank overdraft, Bills payable, Sundry creditors, Short-term loans

### Assets
- Non-current assets: Land, Building
- Current assets: Cash in hand, Cash at bank, Bills receivable, Sundry debtors, Finished goods, Work in progress, Raw material

This question refers to Illustration 8. The prepared statements are:

## Trading and Profit and Loss Account
### for the year ended March 31, 2026

Dr. | | Cr. |
- Purchases less return = ₹1,60,000
- Commission on purchases = ₹2,000
- Carriage on goods purchased = ₹8,000
- Manufacturing expenses = ₹42,000
- Factory lighting = ₹4,400
- Dock and Clearing charges = ₹5,200
- Gross profit c/d = ₹2,98,400

Total = ₹5,20,000

On the credit side:
- Sales less return = ₹5,20,000
- Gross profit b/d = ₹2,98,400
- Interest on investment = ₹4,500
- Discount on purchases = ₹3,400

Indirect expenses:
- Carriage on sales = ₹3,500
- Advertisement = ₹7,000
- Excise duty = ₹6,000
- Postage and telegram = ₹800
- Fire insurance premium = ₹3,600
- Office expenses = ₹7,200
- Audit fees = ₹2,700
- Repairs to plant = ₹2,200
- Incidental trading expenses = ₹3,200
- Sales tax paid = ₹12,000
- Discount allowed = ₹2,700

Net profit = ₹2,55,400.

## Balance Sheet
### as at March 31, 2026

Liabilities
- Bank overdraft = ₹30,000
- Creditors = ₹61,000
- Capital = ₹1,00,000
- Add net profit = ₹2,55,400
- Less drawings = ₹8,000
- Less income tax = ₹24,000
- Final capital = ₹3,23,400

Assets
- Cash in hand = ₹2,500
- Debtors = ₹80,000
- Closing stock = ₹76,000
- Investment = ₹30,000
- Motor car = ₹60,000
- Plant = ₹1,53,900
- Patents = ₹12,000

Total balance sheet = ₹4,14,400.

This question refers to Illustration 9. The prepared statements are:

## Trading and Profit and Loss Account
### for the year ended March 31, 2026

Gross profit is computed as:
- Sales = ₹2,56,000
- Less returns = ₹4,000
- Net sales = ₹2,52,000
- Opening stock = ₹15,310
- Purchases = ₹82,400
- Less returns = ₹2,400
- Add direct expenses included in trading account as per solution
- Closing stock = ₹25,400

The book’s computed gross profit is ₹98,690.

## Net profit
From gross profit, deduct indirect expenses and add incomes:
- Discount (Dr.) = ₹7,500
- Bad debts = ₹5,850
- Administrative expenses = ₹5,000
- Depreciation = ₹4,200
- Charity = ₹500
- Bank charges = ₹180
- Establishment expenses = ₹3,600
- Interest on loan = ₹3,000

Add incomes:
- Commission = ₹1,200
- Bad debts recovered = ₹2,000
- Apprenticeship premium = ₹4,800

Net profit = ₹76,860.

## Balance Sheet
### as at March 31, 2026

Liabilities
- Sales tax collected = ₹2,000
- Sundry creditors = ₹12,000
- Loan = ₹25,000
- Capital = ₹2,50,000
- Add net profit = ₹76,860
- Less drawings = ₹48,000
- Final capital = ₹2,78,860

Assets
- Cash balance = ₹4,460
- Bank balance = ₹4,000
- Sundry debtors = ₹57,000
- Closing stock = ₹25,400
- Leasehold building = ₹1,50,000
- Plant = ₹42,000
- Patents = ₹10,000
- Goodwill = ₹5,000
- Trade mark = ₹20,000

Total balance sheet = ₹3,17,860.

The objectives of preparing financial statements are:

1. To present a true and fair view of the financial performance of the business.
2. To present a true and fair view of the financial position of the business.

These statements help users understand the business results and position.

The purpose of preparing the trading and profit and loss account is to ascertain the profit earned or loss sustained by the business during an accounting period. It summarises revenues and expenses and gives the net result.