Financial Statements 1 Class 11 NCERT Guide

What Financial Statements-I Really Means

Financial Statements-I is mainly about preparing final accounts from a trial balance without complex year-end adjustments. The Trading Account measures gross profit or gross loss from buying and selling goods. The Profit and Loss Account then deducts indirect expenses and adds indirect incomes to find net profit or net loss. Finally, the Balance Sheet shows the financial position on a particular date by listing assets on one side and liabilities plus capital on the other. The important idea is classification: the same rupee amount can change the answer if it is placed in the wrong statement.

Key Terms and Formulas

Trading Account

A nominal account prepared to calculate gross profit or gross loss from direct trading activities such as opening stock, purchases, direct expenses and sales.

Gross Profit

The excess of net sales over cost of goods sold. Formula: Gross Profit = Net Sales - Cost of Goods Sold.

Profit and Loss Account

An account prepared after the Trading Account to calculate net profit or net loss by considering indirect expenses and indirect incomes.

Balance Sheet

A statement of assets, liabilities and capital on a particular date. It is not an account because it is prepared from real and personal account balances.

Cost of Goods Sold

Opening Stock + Net Purchases + Direct Expenses - Closing Stock. It represents the cost of goods actually sold during the year.

Step-by-Step Method to Prepare Final Accounts

1. Start with the trial balance — Read each item carefully and identify whether it is a direct expense, indirect expense, income, asset, liability, capital, drawing or stock item. Do not start placing amounts mechanically.
2. Prepare the Trading Account first — Debit opening stock, purchases less returns and direct expenses such as wages or carriage inward. Credit sales less sales returns and closing stock. The balancing figure is gross profit or gross loss.
3. Prepare the Profit and Loss Account — Bring gross profit to the credit side or gross loss to the debit side. Debit indirect expenses such as salaries, rent, insurance, bad debts and depreciation. Credit indirect incomes such as commission received or discount received. The balance is net profit or net loss.
4. Prepare the Balance Sheet — Add net profit to capital or deduct net loss from capital. Deduct drawings. Show liabilities and capital on one side and assets such as cash, debtors, stock, furniture and machinery on the other side.

Worked Examples with Steps

• Example 1: From the following data, calculate gross profit: Opening stock ₹20,000, purchases ₹80,000, purchase returns ₹5,000, wages ₹10,000, sales ₹1,40,000, sales returns ₹8,000, closing stock ₹25,000. Step 1: Net purchases = Purchases - Purchase returns = ₹80,000 - ₹5,000 = ₹75,000. Step 2: Net sales = Sales - Sales returns = ₹1,40,000 - ₹8,000 = ₹1,32,000. Step 3: Cost of goods sold = Opening stock + Net purchases + Wages - Closing stock = ₹20,000 + ₹75,000 + ₹10,000 - ₹25,000 = ₹80,000. Final answer: Gross profit = Net sales - Cost of goods sold = ₹1,32,000 - ₹80,000 = ₹52,000.
• Example 2: A firm has gross profit ₹60,000, salaries ₹18,000, rent ₹9,000, carriage outward ₹3,000, discount received ₹2,000 and commission received ₹5,000. Find net profit. Step 1: Indirect expenses = Salaries + Rent + Carriage outward = ₹18,000 + ₹9,000 + ₹3,000 = ₹30,000. Step 2: Indirect incomes = Discount received + Commission received = ₹2,000 + ₹5,000 = ₹7,000. Step 3: Net profit = Gross profit + indirect incomes - indirect expenses = ₹60,000 + ₹7,000 - ₹30,000. Final answer: Net profit = ₹37,000.
• Example 3: Capital at the beginning is ₹2,00,000. During the year, drawings are ₹24,000 and net profit is ₹45,000. Creditors are ₹70,000. Assets total ₹2,91,000. Check the Balance Sheet total. Step 1: Closing capital = Opening capital + Net profit - Drawings = ₹2,00,000 + ₹45,000 - ₹24,000 = ₹2,21,000. Step 2: Liabilities side total = Closing capital + Creditors = ₹2,21,000 + ₹70,000 = ₹2,91,000. Step 3: Compare with assets total ₹2,91,000. Final answer: Balance Sheet agrees at ₹2,91,000.

Board Exam Tips and Common Traps

In CBSE answers, marks are often lost due to wrong classification rather than wrong arithmetic. Carriage inward, wages and octroi are direct expenses and go to the Trading Account; carriage outward, salaries and office rent go to Profit and Loss Account. Closing stock is credited in the Trading Account and shown as an asset in the Balance Sheet when it appears outside the trial balance. Drawings never go to Profit and Loss Account; they reduce capital in the Balance Sheet.

Must-Remember Points

• Use net purchases and net sales after deducting returns; do not use gross figures when returns are given.
• Gross profit is transferred to the credit side of Profit and Loss Account; gross loss is transferred to the debit side.
• Balance Sheet is prepared on a date, while Trading and Profit and Loss Account are prepared for a period.
• Assets should normally show debit balances and liabilities or capital should show credit balances.
• If the Balance Sheet does not tally, recheck capital adjustment, drawings, closing stock and placement of direct versus indirect expenses.

Practice Questions with Solutions

• Q: Calculate cost of goods sold from: Opening stock ₹30,000, purchases ₹1,20,000, purchase returns ₹10,000, wages ₹15,000 and closing stock ₹40,000. A: Step 1: Find net purchases = ₹1,20,000 - ₹10,000 = ₹1,10,000. Step 2: Apply cost of goods sold formula = Opening stock + Net purchases + Direct expenses - Closing stock. Step 3: Cost of goods sold = ₹30,000 + ₹1,10,000 + ₹15,000 - ₹40,000 = ₹1,15,000. Final answer: Cost of goods sold is ₹1,15,000.
• Q: Sales are ₹2,50,000, sales returns ₹12,000 and cost of goods sold is ₹1,75,000. Find gross profit. A: Step 1: Calculate net sales = Sales - Sales returns = ₹2,50,000 - ₹12,000 = ₹2,38,000. Step 2: Gross profit = Net sales - Cost of goods sold. Step 3: Gross profit = ₹2,38,000 - ₹1,75,000 = ₹63,000. Final answer: Gross profit is ₹63,000.
• Q: Gross profit is ₹90,000. Indirect expenses are salaries ₹22,000, rent ₹12,000 and advertisement ₹8,000. Indirect income is discount received ₹3,500. Calculate net profit. A: Step 1: Total indirect expenses = ₹22,000 + ₹12,000 + ₹8,000 = ₹42,000. Step 2: Total indirect income = ₹3,500. Step 3: Net profit = Gross profit + indirect income - indirect expenses = ₹90,000 + ₹3,500 - ₹42,000. Final answer: Net profit is ₹51,500.
• Q: Opening capital is ₹1,50,000. Net profit is ₹36,000 and drawings are ₹18,000. Liabilities are creditors ₹40,000 and bills payable ₹12,000. Find total assets. A: Step 1: Closing capital = Opening capital + Net profit - Drawings = ₹1,50,000 + ₹36,000 - ₹18,000 = ₹1,68,000. Step 2: Total liabilities excluding capital = Creditors + Bills payable = ₹40,000 + ₹12,000 = ₹52,000. Step 3: Total assets = Closing capital + outside liabilities = ₹1,68,000 + ₹52,000. Final answer: Total assets are ₹2,20,000.

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