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Fundamentals of Financial and Cost Accounting · Financial Statements of a Not-for-Profit Organisation

Accounting for Specific Activities: Trading and Professional Firms

Updated 10 October 2026 · Fact-checked

A club that runs a canteen, bar or billiards prepares a separate Trading Account for that activity. Only the profit or loss goes to the Income and Expenditure Account. Professionals such as doctors and lawyers keep Receipts and Payments records, then adjust them for outstanding and advance items to get income and expenditure.

Understand Accounting for Specific Activities: Trading and Professional Firms

A not-for-profit organisation (NPO) such as a club mainly serves its members. Some activities, like a canteen, bar or billiards table, sell goods or services. Their results should be seen separately, so we prepare a Trading Account for each one.

The canteen Trading Account works like the normal one. The debit side has opening stock, purchases and direct expenses like wages of canteen staff. The credit side has sales and closing stock. The balancing figure is profit or loss on canteen. Only this net figure goes to the Income and Expenditure Account: profit on the income side, loss on the expenditure side.

Purchases must be adjusted for creditors: Purchases = Cash paid + Closing creditors - Opening creditors. Sales are adjusted for debtors in the same way. If the question gives only a Receipts and Payments Account, you must work out these figures first.

Some activities, like billiards or games, have no stock. Their account shows receipts (fees, hire) against direct expenses (marker's wages, repairs). The difference is the profit or loss to transfer.

Professional bodies and professionals like doctors, lawyers and consultants usually record cash receipts of fees and cash expenses. To find the true result, you prepare an Income and Expenditure Account on the accrual basis. You add fees earned but not received, remove fees received in advance, and adjust expenses for outstanding and prepaid amounts. Depreciation on instruments, books and furniture is also charged.

Key formulas to remember

Canteen profit or loss
Sales + Closing stock - Opening stock - Purchases - Direct expenses
A positive result is profit, a negative result is loss. Transfer only this net figure.
Purchases
Cash paid to creditors + Closing creditors - Opening creditors
Use this when only cash payments and creditor balances are given.
Sales
Cash received from debtors + Closing debtors - Opening debtors + Cash sales
Include cash sales if separately given.
Stock consumed
Opening stock + Purchases - Closing stock
This is the cost of goods sold by the canteen.
Fees earned of a professional
Fees received + Closing fees receivable - Opening fees receivable - Advance fees received this year (closing) + Opening advance fees
Fees are income only when earned, not when received. Opening advance fees relate to this year's work.
Treatment in Income and Expenditure Account
Profit on canteen/bar/billiards: income side. Loss: expenditure side
Never show the full sales and purchases there.

How to solve Accounting for Specific Activities: Trading and Professional Firms questions

Use this order for any question on canteen, bar, billiards or professional income.

  1. 1Read which activity is separate and list the opening and closing figures given: stock, debtors, creditors.
  2. 2Work out purchases from cash paid and creditors. Work out sales from cash received and debtors if needed.
  3. 3Prepare the activity's Trading Account: debit opening stock, purchases and direct expenses; credit sales and closing stock.
  4. 4Find the balancing figure as profit or loss on the activity.
  5. 5Show only that net figure in the Income and Expenditure Account, profit on income side and loss on expenditure side.
  6. 6For professionals, adjust fees and expenses for outstanding, prepaid and advance items, and charge depreciation.
  7. 7Do not show the same item again. If expenses are already in the Trading Account, leave them out of the general expenses.
  8. 8Check that the stock appears in the Balance Sheet as an asset.

Quickest way: Net result shortcut for MCQs

When to use it: Use when the MCQ asks only for profit or loss on canteen or the figure to be shown in Income and Expenditure Account.

  1. Find the adjusted purchases first, since this is where most errors happen.
  2. Compute: Sales + Closing stock - Opening stock - Purchases - Direct expenses.
  3. Sign decides the side: positive is income, negative is expenditure.
  4. Eliminate options that show gross sales or purchases in the Income and Expenditure Account.
  5. For professionals, only change the cash figure by closing minus opening amounts for each item.

Common mistakes in Accounting for Specific Activities: Trading and Professional Firms

  • Showing canteen sales and purchases in the Income and Expenditure Account

    Students copy every item from the Receipts and Payments Account.

    Fix: Transfer only the net profit or loss of the canteen.

  • Using cash paid as purchases

    Creditor balances are ignored in a hurry.

    Fix: Always add closing creditors and subtract opening creditors before using the figure.

  • Putting canteen loss on the income side

    Students remember that the canteen is an income item and forget the sign.

    Fix: Profit goes to income side, loss to expenditure side.

  • Leaving out closing stock of canteen

    Stock is given in an adjustment note and is missed.

    Fix: Add closing stock to the credit side and show it in the Balance Sheet.

  • Treating cash fees of a professional as full income

    The cash basis is carried over from the Receipts and Payments Account.

    Fix: Adjust for fees receivable and advance fees to reach fees earned.

Worked examples

Example 1

A club gives these canteen details: opening stock ₹10,000; closing stock ₹14,000; opening creditors ₹6,000; closing creditors ₹9,000; cash paid to creditors ₹70,000; sales ₹1,00,000; canteen wages ₹8,000. Find the canteen profit or loss to be shown in the Income and Expenditure Account.

Show the solution
  1. Purchases = 70,000 + 9,000 - 6,000 = ₹73,000.
  2. Debit side: opening stock 10,000 + purchases 73,000 + wages 8,000 = ₹91,000.
  3. Credit side: sales 1,00,000 + closing stock 14,000 = ₹1,14,000.
  4. Profit = 1,14,000 - 91,000 = ₹23,000.

Answer: Canteen profit of ₹23,000 goes to the income side of the Income and Expenditure Account.

Example 2

A doctor received fees of ₹3,60,000 in the year. Fees outstanding were ₹40,000 at the start and ₹55,000 at the end. Fees received in advance at the end were ₹10,000, with none at the start. Clinic expenses paid were ₹1,20,000, and ₹8,000 of these were outstanding at the start of the year. Outstanding expenses at the end were ₹12,000. Find the fees earned and the expenses for the year.

Show the solution
  1. Fees earned = 3,60,000 + 55,000 - 40,000 - 10,000 = ₹3,65,000.
  2. Expenses = 1,20,000 + closing outstanding 12,000 - opening outstanding 8,000 = ₹1,24,000.
  3. Surplus before depreciation = 3,65,000 - 1,24,000 = ₹2,41,000.

Answer: Fees earned are ₹3,65,000, expenses are ₹1,24,000 and the surplus before depreciation is ₹2,41,000.

Exam tips

  • Look first for the words 'separate account' or 'trading account'. Then compute only the net figure.
  • Always check whether purchases or sales need creditor and debtor adjustment.
  • In MCQs, wrong options often show gross figures or the wrong side. Eliminate them first.
  • For professionals, write fees earned and expenses incurred before you touch depreciation.
  • There is no negative marking, so attempt every question.

Practice questions from Financial Statements of a Not-for-Profit Organisation

Accounting for Specific Activities: Trading and Professional Firms in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounting for Specific Activities: Trading and Professional Firms: frequently asked questions

Why do clubs prepare a separate trading account for canteen?

It shows whether the canteen makes a profit or a loss. Only that net result then goes to the Income and Expenditure Account, which keeps the main account clear.

Where does profit on billiards or canteen appear in NPO accounts?

Profit appears on the income side of the Income and Expenditure Account. A loss appears on the expenditure side.

How is closing stock of canteen treated?

It is shown on the credit side of the canteen Trading Account to find profit. It is also an asset in the Balance Sheet.

How do you find income of a doctor or lawyer from cash records?

Adjust cash fees for amounts receivable and received in advance to get fees earned. Adjust expenses for outstanding and prepaid items, then deduct depreciation.