Accounting · Final Accounts of Sole Proprietors

Final Accounts from Trial Balance with Adjustments (CA Foundation)

Updated 1 October 2026 · Fact-checked

Final accounts from a trial balance means preparing the Trading Account, Profit and Loss Account and Balance Sheet using trial balance figures plus adjustments. Show each adjustment twice: once in an income or expense account and once in the Balance Sheet. Treat goods lost or drawn as a deduction from purchases, then charge the loss or drawings correctly.

Understand Final Accounts from Trial Balance

A trial balance lists all ledger balances at the year end. It does not show profit or the true financial position, because many items are still unrecorded or incomplete. Final accounts fix this.

You prepare three statements in order. The Trading Account finds gross profit. The Profit and Loss Account finds net profit. The Balance Sheet shows assets, liabilities and the owner's capital on the last day of the year.

Adjustments are items given below the trial balance, such as closing stock, outstanding expenses, prepaid expenses, depreciation, bad debts and provisions. The trial balance does not include them. Each adjustment has a double effect: it changes one account in the Trading or P&L Account and it adds or changes one item in the Balance Sheet. If you show only one side, the Balance Sheet will not tally.

Abnormal items need care. Goods drawn by the proprietor are a personal use of business goods. They are not a business expense, so they reduce purchases and increase drawings. Goods lost by fire or theft are also removed from purchases, because they never reached the closing stock or a sale. The loss is an abnormal loss. Charge it to the Profit and Loss Account, after setting off any insurance claim admitted. The admitted claim is a current asset until it is received.

A sole proprietor and the business are treated as separate for accounting. So drawings, personal tax and personal insurance never go to the P&L Account. They reduce capital.

Key rules to remember

Gross profit: Gross profit = (Sales + Closing stock) − (Opening stock + Net purchases + Direct expenses); Net purchases means purchases minus returns, goods drawn and goods lost. Direct expenses include wages and carriage inwards.
Net profit: Net profit = Gross profit + Other incomes − Indirect expenses − Abnormal losses; Indirect expenses are charged on an accrual basis: add outstanding, deduct prepaid.
Expense for the year: Expense charged = Amount per trial balance + Outstanding − Prepaid; Outstanding goes to liabilities. Prepaid goes to assets.
Goods drawn by proprietor: Dr Drawings, Cr Purchases (at cost); In final accounts: deduct from purchases in the Trading Account and deduct from capital in the Balance Sheet.
Goods lost by fire or theft: Dr Loss by fire (or Insurance claim receivable), Cr Purchases (at cost); Admitted claim is shown as an asset. Only the uninsured part is charged to the P&L Account as a loss.
Bad debts and provision: Provision = % × (Debtors − further bad debts). P&L charge = Bad debts + New provision − Old provision; If the old provision is larger than the new one, the difference is a gain and is deducted from expenses.
Closing capital: Closing capital = Opening capital + Net profit − Drawings (cash and goods) + Additional capital; Interest on capital and drawings are included only if the question gives them.

How to solve Final Accounts from Trial Balance questions

Use this order for any trial balance question. It keeps every figure in the right place and lets you check the total at the end.

1Read the adjustments first. Tick each trial balance item it affects and note whether it is a Trading item, a P&L item or a Balance Sheet item.
2Write the Trading Account. Start with opening stock, then purchases less returns, goods drawn and goods lost. Add wages, carriage inwards and other direct costs. Credit sales less returns and closing stock. Find gross profit.
3Write the Profit and Loss Account. Bring down gross profit. Charge every indirect expense after adjusting for outstanding and prepaid. Add depreciation, bad debts, provision changes and abnormal losses. Add any incomes. Find net profit.
4Prepare a small working note for each adjustment: what goes to the P&L, what goes to the Balance Sheet.
5Prepare the Balance Sheet. Capital side: opening capital plus net profit less drawings (cash and goods). Add outstanding expenses and creditors. Asset side: fixed assets after depreciation, debtors less provision, stock, cash, prepaid expenses, claims receivable.
6Total both sides. If they differ, recheck any adjustment you showed only once, and check the stock and drawings.
7Show workings clearly with labels. In a subjective paper, correct workings earn marks even if the final total is wrong.

Quickest way: Adjustment-grid method

When to use it: Use this when the paper has a long trial balance and 6 or more adjustments, and you have limited time.

Draw a small table with columns: Item, Trial Balance, Adjustment, Final figure, Where it goes. Fill it for every adjusted item.
Copy unadjusted trial balance items straight to Trading, P&L or Balance Sheet. Debit-side revenue items go to Trading or P&L. Debit-side real and personal items go to assets. Credit-side balances (other than sales, returns and incomes) go to liabilities or capital.
Cross each item off the trial balance as you place it. Every item must be used once, and each adjustment twice.
Calculate gross profit and net profit first. Then fill the Balance Sheet, using capital as the balancing check.
Keep the format for a Balance Sheet: liabilities on the left, assets on the right, with totals aligned. Write adjusted figures in a bracket, for example Debtors 78,000 less Provision 3,900.

Common mistakes in Final Accounts from Trial Balance

Treating goods drawn by the proprietor as an expense in the P&L Account.
Students see 'goods taken' as a cost of the business.
Fix: Credit purchases at cost in the Trading Account and deduct the same amount from capital. It never touches the P&L Account.
Charging the full value of goods destroyed by fire to P&L when an insurance claim is admitted.
Students forget that the claim is a receivable.
Fix: Deduct the goods from purchases. Show the admitted claim as a current asset. Charge only the uninsured part to the P&L Account.
Deducting lost goods from closing stock as well as from purchases.
The question wording does not say whether the given stock is before or after the loss.
Fix: Check the wording. If closing stock is a physical count after the event, do not adjust it again. If it is the book figure before the event, reduce it by the cost of goods lost and drawn.
Showing an adjustment only once.
Students rush to fill the P&L Account and forget the Balance Sheet effect.
Fix: Use the adjustment grid. Tick both columns for outstanding, prepaid, depreciation, provision and claims.
Applying the provision for doubtful debts on gross debtors.
Students ignore the further bad debts given in adjustments.
Fix: First deduct further bad debts from debtors. Then compute the provision on the balance. Charge only the change from the old provision.
Putting drawings and personal expenses in the P&L Account.
They appear in the trial balance as debit balances like expenses.
Fix: Drawings reduce capital. If an expense is personal, move it to drawings.

Worked examples

Example 1

The trial balance of Mr. Rao as at 31 March 2025 shows (₹): Opening stock 40,000; Purchases 3,20,000; Wages 30,000; Carriage inwards 10,000; Salaries 48,000; Rent 24,000; Insurance 12,000; Furniture 60,000; Debtors 80,000; Cash 15,000; Drawings 20,000; Bad debts 2,000 (all debit). Credits: Sales 4,80,000; Creditors 70,000; Capital 1,08,000; Provision for doubtful debts 3,000. Adjustments: (1) Closing stock at hand ₹55,000, after the events in (2) and (3). (2) Goods costing ₹5,000 were taken by the proprietor for personal use; no entry made. (3) Goods costing ₹8,000 were destroyed by fire; the insurer admitted a claim of ₹6,000; no entry made. (4) Salaries outstanding ₹4,000. (5) Insurance prepaid ₹3,000. (6) Further bad debts ₹2,000; maintain provision at 5% on remaining debtors. (7) Depreciate furniture at 10%. Prepare the Trading Account, Profit and Loss Account and Balance Sheet.

Show the solution

Check the trial balance. Debit total: 40,000 + 3,20,000 + 30,000 + 10,000 + 48,000 + 24,000 + 12,000 + 60,000 + 80,000 + 15,000 + 20,000 + 2,000 = ₹6,61,000. Credit total: 4,80,000 + 70,000 + 1,08,000 + 3,000 = ₹6,61,000. It agrees.
Adjusted purchases: 3,20,000 − 5,000 (goods drawn) − 8,000 (goods lost) = ₹3,07,000.
Trading Account, Dr side: Opening stock 40,000 + Purchases 3,07,000 + Wages 30,000 + Carriage inwards 10,000 = ₹3,87,000. Cr side: Sales 4,80,000 + Closing stock 55,000 = ₹5,35,000. Gross profit = 5,35,000 − 3,87,000 = ₹1,48,000.
P&L expenses: Salaries 48,000 + 4,000 = 52,000. Rent 24,000. Insurance 12,000 − 3,000 = 9,000. Bad debts 2,000 + 2,000 = 4,000.
Provision: Debtors 80,000 − 2,000 = 78,000. 5% = 3,900. Old provision 3,000. Additional charge = ₹900.
Depreciation on furniture = 10% of 60,000 = ₹6,000.
Loss by fire = 8,000 − 6,000 claim = ₹2,000.
Total P&L charges = 52,000 + 24,000 + 9,000 + 4,000 + 900 + 6,000 + 2,000 = ₹97,900. Net profit = 1,48,000 − 97,900 = ₹50,100.
Capital: 1,08,000 + 50,100 − drawings (20,000 cash + 5,000 goods = 25,000) = ₹1,33,100.
Balance Sheet liabilities: Capital 1,33,100 + Creditors 70,000 + Outstanding salaries 4,000 = ₹2,07,100.
Balance Sheet assets: Furniture 60,000 − 6,000 = 54,000. Debtors 78,000 less provision 3,900 = 74,100. Cash 15,000. Closing stock 55,000. Prepaid insurance 3,000. Insurance claim receivable 6,000. Total = ₹2,07,100. Both sides agree.

Answer: Gross profit ₹1,48,000; net profit ₹50,100; capital at year end ₹1,33,100; Balance Sheet total ₹2,07,100.

Example 2

For the year ended 31 March 2025, a trader's books show: Sales ₹8,00,000; Opening stock ₹50,000; Purchases ₹6,00,000; Direct expenses ₹20,000. Goods costing ₹10,000 were taken by the proprietor for personal use. On 20 March goods costing ₹30,000 were stolen. The insurance company admitted a claim of ₹22,000. None of this has been recorded. The closing stock counted on 31 March, after the theft, is ₹70,000. Find the gross profit and show how the theft and drawings affect the final accounts.

Show the solution

Adjusted purchases: 6,00,000 − 10,000 (drawings) − 30,000 (stolen) = ₹5,60,000.
Trading Account, Dr side: Opening stock 50,000 + Purchases 5,60,000 + Direct expenses 20,000 = ₹6,30,000.
Cr side: Sales 8,00,000 + Closing stock 70,000 = ₹8,70,000. Gross profit = 8,70,000 − 6,30,000 = ₹2,40,000.
Stock is a physical count after the theft, so it is not reduced again.
Loss by theft = 30,000 − 22,000 = ₹8,000. Charge this to the Profit and Loss Account as an abnormal loss.
Balance Sheet: show Insurance claim receivable ₹22,000 under current assets. Deduct goods drawn ₹10,000 from capital along with other drawings.

Answer: Gross profit ₹2,40,000. The P&L Account is charged with an abnormal loss of ₹8,000. The Balance Sheet shows a claim receivable of ₹22,000 and capital reduced by ₹10,000 for goods drawn.

Exam tips

Read the wording on closing stock: 'stock at hand', 'physical stock' or 'stock per books'. It decides whether you adjust it again for goods lost or drawn.
Write a one-line working for each adjustment, for example 'Provision: 5% × 78,000 = 3,900'. Step marks are given for workings.
Where an RTP or MTP question mixes many adjustments, tick each one on the question paper as you place it in both statements.
Value goods drawn at cost unless the question says otherwise. A sale-price figure given as the selling price must be converted to cost using the stated profit margin.
Check that the Balance Sheet agrees before writing a neat copy. A difference usually means one adjustment was shown only once.

Practice questions from Final Accounts of Sole Proprietors

Final Accounts from Trial Balance: frequently asked questions

How do I treat goods lost by fire in final accounts?

Deduct the cost of the lost goods from purchases in the Trading Account. If an insurance claim is admitted, show it as a current asset. Charge the uninsured balance to the Profit and Loss Account as an abnormal loss.

Where do goods drawn by the proprietor go?

Credit them to purchases (or the Trading Account) at cost. Debit them to drawings. In the Balance Sheet, deduct them from capital along with cash drawings.

What is the difference between an item in the trial balance and an adjustment?

Trial balance items are already recorded in the ledger. Adjustments are given separately and are not yet recorded. Each adjustment must be shown in an income or expense account and in the Balance Sheet.

Should closing stock given in adjustments be adjusted for goods lost?

It depends on the wording. If it is a physical count after the loss, use it as it is. If it is the figure before the loss, reduce it by the cost of the lost goods.

In what order should I prepare final accounts?

Prepare the Trading Account first, then the Profit and Loss Account, and then the Balance Sheet. Net profit from the P&L Account is needed to compute closing capital.