Chapter 13: Preparation of Final Accounts

📚 JAIIB 2026 • AFM • Module B • Chapter 2 of 7 • Unit 13

Preparation of Final Accounts
(The Grand Finale — Trading A/c, P&L A/c & Balance Sheet!)

You’ve learned journal, ledger, trial balance, adjustments. Now it’s time for the BIG PICTURE — the FINAL accounts! Trading Account shows Gross Profit. P&L Account shows Net Profit. Balance Sheet shows the financial position. These 3 statements tell the COMPLETE story of a business.

⏱ 22 min read🎯 MOST Important Chapter🧠 8 Memory Tricks⚡ 12 Flash Cards

Banky Prepares the Report Card of a Business! 📊

Everything Banky learned so far — journal entries, ledger posting, trial balance, adjustments, depreciation — was leading to THIS moment. Now he’ll prepare the actual Trading A/c, P&L A/c, and Balance Sheet. This is what borrowers show to banks when they want a loan!

“Sir, the borrower handed me 3 financial statements. I need to READ them to decide if we should give the loan. But first — how are these statements PREPARED?” 📋
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Section 1 of 9

Why is This the MOST Important Chapter?

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Banky, EVERYTHING in banking revolves around financial statements! Loan appraisal? Read the P&L and Balance Sheet. Credit monitoring? Compare this year’s statements with last year’s. NPA classification? Check if the business is making profit or loss. If you can’t prepare and read financial statements, you can’t be a banker. This chapter teaches you the COMPLETE process: Trial Balance → Adjustments → Trading A/c → P&L A/c → Balance Sheet.
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Exam

5–8 questions! Adjustment entries, COGS formula, Gross vs Net profit, closing stock valuation, FIFO vs Weighted Avg, P&L Appropriation. HIGHEST weightage!

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Core Banking

Every loan proposal has P&L + BS. Every audit checks these. Every credit review analyses these. This IS your job.

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Life Skill

Even your family budget follows this logic: Income − Expenses = Savings (P&L). House + Car + FD = Loans + Own Money (BS).

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Section 2 of 9

The Full Chapter — Step by Step

Part 1 — The Complete Process Flow

Step 1 — Trial Balance: List all ledger account balances (debit & credit). This is NOT a financial statement — it’s just a CHECKLIST to ensure arithmetic accuracy.

Step 2 — Adjustment Entries: Before preparing final accounts, pass adjustments for: (a) Outstanding expenses (incurred but not paid — debit expense, credit payable), (b) Prepaid expenses (paid but not yet incurred — the portion not used is an asset), (c) Accrued income (earned but not received — debit receivable, credit income), (d) Income received in advance (received but not yet earned — debit income, credit advance received), (e) Depreciation (debit depreciation, credit asset), (f) Closing stock valuation. AS-1 and Ind AS-1 require ACCRUAL basis for all statements (except cash flow).

Step 3 — Trading Account: Calculate Gross Profit. Step 4 — P&L Account: Calculate Net Profit. Step 5 — Balance Sheet: Show financial position.

Banky: “TB → Adjust → Trading → P&L → BS. Like cooking: ingredients (TB) → seasoning (adjustments) → appetizer (Trading) → main course (P&L) → dessert (BS)!”

Part 2 — Trading Account = Gross Profit

The Trading Account calculates the Gross Profit — profit from JUST buying and selling goods (before office expenses).

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses − Closing Stock
Gross Profit = Sales − Cost of Goods Sold

Debit Side (Costs): Opening Stock, Purchases (less returns), Carriage Inward, Freight, Dock Charges, Wages, Duty, Clearing Charges — all DIRECT costs related to buying/making goods.

Credit Side (Revenue): Sales (less returns), Closing Stock. The difference = Gross Profit (if credit > debit) or Gross Loss (if debit > credit). Gross Profit is transferred to the P&L Account.

Closing Stock: NOT available from the ledger! You must physically count and VALUE the inventory. Valued at LOWER of cost or net realisable value (conservatism). Ind AS 2 permits only FIFO or Weighted Average method. LIFO is NOT permitted!

Banky: “Trading A/c = the KITCHEN score. How much did the ingredients cost vs how much did we sell the food for? Gross Profit = the raw cooking profit BEFORE paying rent, electricity, staff!”

Part 3 — P&L Account = Net Profit

The P&L Account takes the Gross Profit and subtracts ALL remaining expenses to find the Net Profit.

Debit Side (Expenses): Salaries, Electricity, Telephone, Conveyance, Office Charges, Depreciation, Taxes, Other Indirect Expenses.

Credit Side (Income): Gross Profit (from Trading A/c), any other income (interest received, commission, rent received). The difference = Net Profit (transferred to Balance Sheet) or Net Loss.

P&L Appropriation Account: A SEPARATE account showing how Net Profit is DISTRIBUTED — transfer to General Reserve, Dividend declared, balance carried forward. Dividends are paid from HERE, not from P&L Account!

Banky: “P&L = the FINAL report card. Gross Profit − all office expenses = Net Profit. Then Appropriation = ‘How we spent the profit’ — reserves, dividends, carry forward!”

Part 4 — Balance Sheet = Financial Position Snapshot

The Balance Sheet shows what the business OWNS (assets) and what it OWES (liabilities + capital) on a specific date. It’s a SNAPSHOT — like a photograph at one moment in time.

How is it prepared? After transferring all nominal accounts (expenses/income) to P&L, only PERSONAL and REAL accounts remain in the ledger. These remaining balances, plus Net Profit from P&L, form the Balance Sheet. Debit balances = Assets. Credit balances = Liabilities.

Key insight: Net Profit goes to LIABILITIES side (owner’s claim increases). Net Loss goes to ASSETS side (reduces owner’s claim).

Cash Flow Statement: Prepared using BS and P&L data. Governed by AS-3 and Ind AS-7. Covered in Chapter 16.

Banky: “Balance Sheet = a PHOTO of the business at midnight on 31st March. P&L = a VIDEO of what happened during the entire year. Photo is static, video is dynamic!”
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Section 3 of 9

Exam-Ready Points

Must Remember!

  • Trial Balance is NOT a financial statement. It’s just a checklist for arithmetic accuracy.
  • Adjustment Entries: Convert records from cash basis to ACCRUAL basis. Required by AS-1 / Ind AS-1.
  • 4 types of adjustments (OPAI): Outstanding expenses, Prepaid expenses, Accrued income, Income received in advance.
  • Depreciation entry: Made WITHOUT any financial transaction — it’s a BOOK entry only. Does NOT affect cash.
  • Closing Stock: NOT available from ledger. Must be physically counted and valued. Debit Stock A/c, Credit Trading A/c.
  • Stock valuation: Lower of cost or NRV. Ind AS 2 permits FIFO or Weighted Average ONLY. LIFO is NOT permitted!
  • COGS formula: Opening Stock + Purchases + Direct Expenses − Closing Stock
  • Gross Profit = Sales − COGS. Appears in Trading Account. Transferred to P&L.
  • Net Profit = Gross Profit + Other Income − All Indirect Expenses. Appears in P&L Account.
  • P&L Appropriation: Shows distribution of profit — reserves, dividends, carry forward. Dividends declared HERE.
  • Closing entries: Transfer ALL income/expense accounts to P&L. Their balance becomes NIL.
  • Balance Sheet: Only Personal + Real account balances remain. Plus Net Profit from P&L.
  • Net Profit → Liabilities side (owner’s claim increases). Net Loss → deducted from Capital.
  • Overvaluation of closing stock = INFLATED profit. Undervaluation = understated profit.
  • At year-end, balances of ALL income & expenditure accounts are transferred to P&L (not all ledger accounts!).

Past Exam Questions

Q: At the end of accounting period, balances of ___ are transferred to P&L?
A: All the income and expenditure accounts (not ALL ledger accounts!)
Q: Which account is used for providing dividend?
A: Profit & Loss Appropriation Account
Q: Which entry is made without any financial transaction?
A: Depreciation during the year (book entry only, no cash movement)
Q: Ind AS permits which methods for inventory valuation?
A: FIFO or Weighted Average method (NOT LIFO!)
Q: Advance rent received — adjustment entry?
A: Debit ‘Rent Received’ A/c, Credit ‘Advance Rent Received’ A/c
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Section 4 of 9

Memory Tricks

Trick 1 — Process Flow

TB → Adj → T → P&L → BS
“Teachers Always Take Perfect Breaks!”
Trial Balance → Adjustments → Trading →
Profit & Loss → Balance Sheet
5 steps in order. TB is not a financial statement. Trading gives Gross Profit. P&L gives Net Profit. BS shows position.

Trick 2 — COGS Formula

Cost of Goods Sold
“OPEN the PURCHASE, ADD expenses,
CLOSE the stock!”
Opening + Purchases + Expenses − Closing
= Cost of Goods SOLD!
What you started with + what you bought + direct costs − what’s left = cost of what you sold.

Trick 3 — Trading vs P&L

Gross vs Net
Trading = GROSS profit (raw material profit)
P&L = NET profit (after ALL expenses)
Gross is always greater-or-equal to Net!
Gross = before office expenses. Net = after everything. Gross is always ≥ Net (expenses reduce it).

Trick 4 — Closing Stock

NOT from ledger!
“Count the PENS in the box!
Ledger doesn’t know how many are left!
Physically COUNT + VALUE
Lower of Cost or NRV!”
Stock account doesn’t change during the year. You must physically verify and value at year-end.

Trick 5 — FIFO vs LIFO

Ind AS 2 rules
“LIFO LEFT India!”
FIFO = First In First Out (allowed)
Weighted Average (allowed)
LIFO = Last In First Out (BANNED!)
Ind AS 2 permits FIFO and Weighted Average only. LIFO is banned in India.

Trick 6 — P&L Appropriation

Where dividends come from
“Net Profit is the CAKE
Appropriation = HOW you CUT it!
Slice 1 → Reserves
Slice 2 → Dividends
Slice 3 → Carry Forward”
Dividends are declared in P&L APPROPRIATION account — NOT in P&L account itself.

Trick 7 — BS = Photo, P&L = Video

Static vs Dynamic
“Balance Sheet = PHOTO (one date)
P&L = VIDEO (whole year)”
BS shows position “as on” a date. P&L shows results “for the year ended” a date.

Trick 8 — 4 Adjustments

OPAI
“OPAI = Outstanding, Prepaid,
Accrued, Income-in-advance”
Convert cash basis to accrual basis!
4 types of year-end adjustments. All convert from cash basis to accrual basis as required by Ind AS-1.
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Section 5 of 9

The Whole Chapter in One Picture

AFM Chapter 13 – Preparation of Final Accounts TRIAL BALANCE ADJUSTMENTS TRADING A/c P and L A/c BALANCE SHEET TRADING ACCOUNT = GROSS PROFIT Dr: Opening Stock + Purchases + Direct Expenses Cr: Sales + Closing Stock | COGS = Op.Stock + Purch – Cl.Stock P and L ACCOUNT = NET PROFIT Dr: Salary, Rent, Depreciation, Taxes, Indirect expenses Cr: Gross Profit + Other income | Net Profit to BS CLOSING STOCK = Count + Value NOT from ledger! | Lower of Cost or NRV | FIFO or Weighted Avg | NO LIFO! 4 ADJUSTMENTS (OPAI) Outstanding | Prepaid | Accrued Income | Income in Advance BALANCE SHEET = Snapshot on a date | Personal + Real accounts only Net Profit to Liabilities side | Net Loss deducted from Capital | Debit = Assets | Credit = Liabilities bankerbro.com/ – JAIIB AFM – Module B Ch 2 (Unit 13)
Section 6 of 9

Last-Minute Flash Cards

Process Flow
TB → Adjust → Trading → P&L → BS
“Teachers Always Take Perfect Breaks!” TB is NOT a financial statement.
COGS Formula
Opening Stock + Purchases + Expenses − Closing Stock
Direct costs only! Indirect expenses go to P&L, not Trading.
Gross Profit
= Sales − Cost of Goods Sold (in Trading A/c)
Raw profit BEFORE office expenses. Transferred to P&L Account.
Net Profit
= Gross Profit + Other Income − All Expenses (in P&L)
The FINAL profit. Goes to BS Liabilities side (owner’s claim).
Closing Stock
NOT from ledger! Physical count + value required
Lower of Cost or NRV. Overvaluation = inflated profit!
Ind AS 2 — Inventory
FIFO allowed | Weighted Average allowed | LIFO BANNED
“LIFO Left India!” Only FIFO and Weighted Avg permitted.
Dividends
Declared in P&L APPROPRIATION A/c — NOT P&L!
Appropriation = how to CUT the profit cake. Reserves + Dividends + Carry forward.
Depreciation Entry
Made WITHOUT any financial transaction
Book entry only. No cash movement. Debit Depreciation, Credit Asset.
4 Adjustments (OPAI)
Outstanding | Prepaid | Accrued | In-Advance
All convert cash basis to accrual basis. Required by Ind AS-1.
BS = Photo, P&L = Video
BS = “as on” a date | P&L = “for the year”
BS is static snapshot. P&L is dynamic story of the entire year.
What Goes to BS?
Only Personal + Real account balances + Net Profit
Nominal accounts → P&L (closed). Personal & Real → BS (carry forward).
Advance Rent Received
Dr Rent Received | Cr Advance Rent Received
Income received but NOT yet earned → reverse from income, show as liability.

Module B Chapter 2 (Unit 13) Done!

  • Process: Trial Balance → Adjustments → Trading A/c (Gross Profit) → P&L (Net Profit) → Balance Sheet.
  • COGS: Opening Stock + Purchases + Direct Expenses − Closing Stock. Gross Profit = Sales − COGS.
  • Closing Stock: Physical count + value. Lower of cost/NRV. FIFO or Weighted Avg only (Ind AS 2). No LIFO!
  • 4 Adjustments (OPAI): Outstanding, Prepaid, Accrued income, Income in advance. Accrual basis (Ind AS-1).
  • P&L Appropriation: Where dividends are declared. Not P&L Account itself.
  • Balance Sheet: Snapshot on a date. Only Personal & Real accounts + Net Profit/Loss.

Banky says: “TB to Adjust to Trading to PandL to BS! LIFO Left India! Dividends from APPROPRIATION, not PandL! Now I can PREPARE and READ financial statements!”

Next: Chapter 14 — Company Accounts Part I (Types of companies, shares, issue of shares)!

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