Financial statements show the result of the year (Trading and Profit and Loss Account) and the financial position at the end of it (Balance Sheet).
Trading Account
Opening stock, purchases (less returns), direct expenses (wages, carriage inwards, freight) on the debit side; sales (less returns) and closing stock on the credit side. The balance is gross profit or gross loss.
Profit and Loss Account
Indirect expenses (salaries, rent, depreciation, bad debts, interest) on the debit side; gross profit and other incomes on the credit side. The balance is net profit or net loss, transferred to Capital.
Common adjustments
| Adjustment | In the P&L / Trading Account | In the Balance Sheet |
|---|---|---|
| Closing stock | Credit of Trading A/c | Current asset |
| Outstanding expense | Added to the expense | Current liability |
| Prepaid expense | Deducted from the expense | Current asset |
| Accrued income | Added to the income | Current asset |
| Income received in advance | Deducted from the income | Current liability |
| Depreciation | Debit of P&L | Deducted from the asset |
| Further bad debts and provision for doubtful debts | Debit of P&L | Deducted from debtors |
| Interest on capital | Debit of P&L | Added to capital |
| Interest on drawings | Credit of P&L | Deducted from capital |
Tip
Every adjustment appears in two places. Tick each one twice as you complete the statements.
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