Final Accounts with Adjustments: Format and Solved Example

What are final accounts?

Final accounts are the statements a business prepares at the end of its accounting year, which in India is usually 31 March. For a sole proprietor they have three parts:

• Trading account: shows the result of buying and selling goods, which is gross profit or gross loss.
• Profit and loss account: starts from gross profit, adds other incomes and deducts the running costs of the business, giving net profit or net loss.
• Balance sheet: lists what the business owns and owes on the last day of the year, with the owner’s capital updated for the year’s profit.

ICAI’s Foundation study material on final accounts of sole proprietors says the principal function of final accounts is to show “truly and fairly the performance and the financial position” of the business. Performance is the trading and profit and loss account. Position is the balance sheet.

The balance sheet is a statement, not an account. ICAI notes that its two sides are not debit and credit sides. That is why we say “trading and profit and loss account” but “balance sheet”.

Final accounts start where the trial balance format with example ends. Every balance on a trial balance goes either to the trading or profit and loss account (incomes and expenses) or to the balance sheet (assets, liabilities and capital), and none goes to both.

Trading account format

The trading account compares sales with the cost of the goods sold. The debit side carries opening stock, purchases and direct expenses. The credit side carries sales and closing stock. The balancing figure is gross profit, written on the debit side when the credit side is bigger.

Direct expenses are, in NCERT’s words, expenses “directly connected with the manufacture, purchase of goods and bringing them to the point of sale”. The usual ones are wages, carriage inwards, freight inwards, factory lighting, fuel and power, and royalty on production. If an expense helps bring goods in or make them, it belongs in the trading account.

The formula behind it:

Gross profit = Net sales − Cost of goods sold, where cost of goods sold = opening stock + net purchases + direct expenses − closing stock.

Many textbooks write To and By (To Opening stock, By Sales). The solved example below leaves them out; both are accepted.

Profit and loss account format

The profit and loss account starts with gross profit on the credit side. It then charges every indirect expense on the debit side (office, selling and finance costs) and adds every other income on the credit side. The balancing figure on the debit side is net profit, which goes to the capital account.

NCERT puts it in one line: Net profit = Gross profit + Other incomes − Indirect expenses. The entry that closes it is Profit and Loss A/c Dr. To Capital A/c.

Two items never go in the profit and loss account of a sole proprietor. Drawings are a reduction of capital, not an expense. ICAI is direct about it: drawings “should not be debited to the Profit and Loss Account”. And the proprietor’s own income tax is a personal expense, so ICAI debits it to the capital account as well.

In exam answers the trading account and the profit and loss account are usually drawn as one statement, “Trading and Profit and Loss Account for the year ended 31 March 2026”, with gross profit carried down from the first part to the second. That is the layout used in the solved example below.

Final accounts adjustments: where each one goes

A trial balance only shows what was recorded during the year, mostly as cash was paid or received. Profit, though, is measured on the accrual basis. The NCERT chapter “Financial Statements II” puts it this way: revenues are taken “on earned basis and not on receipt basis”, and expenses “on incurred basis and not on paid basis”. So at the year end you correct the gaps: unpaid March salary, insurance paid for next year, wear on machinery, customers who won’t pay. Each is an adjustment, usually given as “additional information” below the trial balance.

NCERT also gives the rule that makes them manageable: “All adjustments are reflected in the final accounts at two places to complete the double entry.” Each adjustment has a journal entry with a debit and a credit, and each side lands somewhere. If you’re unsure which side is which, revise the golden rules of accounting first.

Keep this table next to you while solving. The last two columns show where each adjustment appears.

Look at the pattern in the last column. Anything owed goes to liabilities. Anything paid for in advance or earned but not received goes to assets. Anything that reduces an asset (depreciation, bad debts, provision) is shown as a deduction from that asset.

Adjustments explained, one by one

Closing stock

Closing stock is the cost of goods still unsold on the last day. It isn’t in the trial balance because it is counted at the year end. You show it on the credit side of the trading account (it reduces the cost of goods sold) and as a current asset in the balance sheet. Next year it becomes opening stock.

ICAI’s study material gives the valuation rule: “cost or net realisable value whichever is lower”. So if your stock cost ₹90,000 but can only be sold for ₹80,000 after selling costs, you’d value it at ₹80,000.

There’s one exception worth learning. If closing stock already appears inside the trial balance, it has been adjusted through purchases. Then you show it only in the balance sheet, not again in the trading account. ICAI and NCERT both explain this case.

Outstanding, prepaid, accrued and advance items

An outstanding expense belongs to this year but hasn’t been paid, such as March wages paid in April: add it to the expense and show it as a current liability. A prepaid expense has been paid but partly covers next year: deduct it from the expense and show it as a current asset.

Insurance is the usual prepaid case. If you pay ₹18,000 on 1 July 2025 for one year, three months (April to June 2026) belong to 2026-27, so ₹18,000 × 3/12 = ₹4,500 is prepaid. NCERT works the same logic with a ₹1,200 premium.

Incomes mirror this. Accrued income is earned but not yet received, like interest on a fixed deposit that the bank credits later: add it to the income and show it as a current asset. Income received in advance (unearned income) is money received now for next year’s work: deduct it from the income and show it as a current liability, because you still owe the service.

Depreciation

Depreciation is the fall in an asset’s value through use and time. It is an expense, so it goes on the debit side of the P&L. The same amount is deducted from the asset in the balance sheet. NCERT’s example is furniture of ₹15,000 at 10%: ₹1,500 to the P&L, and furniture shown at ₹13,500. In the exam, read the rate and the period carefully. If an asset was bought during the year, the question usually tells you whether to charge depreciation for part of the year.

Bad debts and provision for doubtful debts

This adjustment has the most moving parts, so take it slowly. There are three different numbers:

• Bad debts in the trial balance: already written off during the year. They are already deducted from debtors. Just take them to the P&L.
• Further bad debts (given as an adjustment): newly found to be irrecoverable. Add them to bad debts in the P&L, and deduct them from debtors in the balance sheet.
• Provision for doubtful debts: an estimate of future bad debts, usually a percentage of debtors after deducting further bad debts. NCERT calculates it that way.

If the trial balance already has a provision (the “old provision”), NCERT says it “should also be taken into account”. The charge to the P&L becomes:

Bad debts + Further bad debts + New provision − Old provision

If the answer is negative, the old provision was more than enough, and the difference goes to the credit side of the P&L instead. In the balance sheet, debtors are shown less further bad debts and less the new provision. The old provision doesn’t appear there at all.

Interest on capital and interest on drawings

Interest on capital shows the owner what the business earns after paying a fair return on the money they put in. NCERT calculates it on the capital at the beginning of the year. It is debited to the P&L (so net profit falls) and added to capital in the balance sheet. The owner’s total doesn’t change; it is just split differently.

Interest on drawings works the other way. It is charged to the owner for taking money out during the year. It is credited to the P&L as an income and deducted from capital in the balance sheet, next to drawings.

Other adjustments you may meet

• Provision for discount on debtors: NCERT says it is made on good debtors, after deducting further bad debts and the provision for doubtful debts.
• Manager’s commission: if nothing is said, NCERT assumes it is a percentage of net profit before charging the commission. If it is “after charging”, use profit before commission × rate ÷ (100 + rate).
• Goods taken by the owner, or given as free samples: ICAI deducts them from purchases and debits drawings (or advertisement, for samples).

For practice writing each entry before you post it, our journal entries questions with answers include adjustment entries.

Final accounts with adjustments: solved example

Here is a full Class 11 and B.Com-level question. Mehra Stationers is a made-up sole proprietor, and all figures are hypothetical. Try it on paper first, then check each step.

The question: trial balance as at 31 March 2026

Adjustments:

1. Closing stock on 31 March 2026 was valued at ₹90,000 (cost, which is lower than its net realisable value).
2. Wages outstanding ₹3,000; salaries for March 2026 outstanding ₹9,000.
3. The insurance premium of ₹18,000 was paid on 1 July 2025 for one year.
4. Interest on the fixed deposit at 8% a year has accrued for the whole year but hasn’t been received.
5. Commission received includes ₹2,000 for work to be done in 2026-27.
6. Depreciate shop equipment and furniture by 10% each.
7. Write off further bad debts of ₹2,000 and keep a provision for doubtful debts at 5% on debtors.
8. Allow interest on capital at 6% a year, and charge interest on drawings of ₹1,500.

Step 1: the workings

Step 2: trading account for the year ended 31 March 2026

Net purchases are ₹5,32,000 and net sales ₹9,48,000. Outstanding wages join wages here because wages are a direct expense. Closing stock sits on the credit side. The credit side totals ₹10,38,000, so gross profit is ₹3,89,000.

Step 3: profit and loss account for the year ended 31 March 2026

Notice what is not here: drawings, and the old provision as a separate line. Carriage outwards is an indirect (selling) expense, so it comes here, not in the trading account. Net profit is ₹1,37,100.

Step 4: balance sheet as at 31 March 2026

Every adjustment now gets its second entry: outstanding items and advance income as liabilities, prepaid and accrued items as assets, depreciation and the provision as deductions. Capital picks up interest on capital and net profit, and loses drawings and interest on drawings.

Both sides total ₹5,57,600, so the final accounts are complete. Closing capital is ₹3,50,000 + ₹21,000 + ₹1,37,100 − ₹48,000 − ₹1,500 = ₹4,58,600. This is the horizontal (T-form) layout used for sole traders; the vertical and company formats are in our balance sheet format guide.

A quick self-check: every one of the twelve adjustments should appear exactly twice across the three statements. Interest on capital, for example, is in the P&L debit side and in capital. Count them before you hand in the answer.

Common mistakes in final accounts

• Taking an adjustment to one place only. Depreciation charged in the P&L but the asset left at its old figure leaves the balance sheet out by exactly that amount.
• Calculating the provision on debtors before deducting further bad debts.
• Debiting drawings or the owner’s income tax to the P&L. Both reduce capital.
• Mixing direct and indirect expenses. Carriage inwards goes to trading; carriage outwards goes to P&L.
• Adding drawings to capital instead of deducting them.

If your balance sheet doesn’t agree, look for an adjustment equal to the difference, or to half of it (an item on the wrong side doubles the gap).

Free final accounts format in Excel and PDF

Both files are free to download, with no form to fill in:

• Final accounts with adjustments, Excel (.xlsx): the Mehra Stationers trial balance and adjustments on an Inputs sheet, with the trading and P&L account and the balance sheet built by formulas. Change any yellow cell and gross profit, net profit and the “Balanced” check update. A blank format sheet is included for your own questions.
• Final accounts format and solved example, PDF: the blank trading and profit and loss account format, the question and the full solution, ready to print.

If you’d like to build sheets like this yourself, the SUM and IF formulas used here are covered in our Excel formulas for accounting guide.

Final accounts in Hindi (अंतिम खाते: हिंदी में सार)

How we teach this at IPA

At IPA, the Institute of Professional Accountants in Laxmi Nagar, final accounts sit in the first module of the 12-month ADFA course (Advanced Diploma in Financial Accounting). That module runs from vouchers, day books, the cash book and ledgers to bank reconciliation, the trading and profit and loss account, the balance sheet, rectification and depreciation entries, and balance sheet finalisation.

Students first prepare final accounts by hand, the way this guide does, and then post the same kind of books in Tally Prime and BUSY, where the reports are produced from the vouchers. The course runs in the classroom and online, with weekday and weekend batches. If you’re preparing for interviews, our accounting interview questions and answers include final accounts questions freshers are asked.

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