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  1. Preparation of Trial balance. Trial balance should be prepared before preparing Balance sheet. If the debit and credit sides of trial balance do not tally the difference should be provisionally transferred to suspense account and the suspense account should be shown in the Balance sheet.
  2. Showing items from Trial balance at one place. All the items appearing in the trial balance are shown at one place only whether at the debit side of trading account or profit and loss account or assets or at the credit side of trading account or profit and loss account or liabilities.
  3. Posting from Trial balance. Accounts appearing at the debit side of Trial balance are shown at the debit side of Trading account or profit and loss or at the assets side of the Balance sheet. In the same way, accounts appearing at the credit side of trial balance are shown the credit side of Trading or profit and loss account or at the liabilities side.
  4. Posting of expenses. All direct expenses, i.e., expenses for manufacturing and acquiring goods are written in trading account. Indirect expenses and losses regarding selling and distribution of goods are written in profit and loss account.
  5. Personal and Real accounts. All the personal and real accounts are recorded in the Balance sheet.
  6. Factory and office expenses. All factory expenses are direct expenses. They are written at the debit side of trading account. Office expenses are indirect expenses and they are written at the debit side of Profit and loss account.
  7. Treatment of rent, discount, interest and commission. Rent, discount, interest and commission may be an income or an expense. If these expenses are paid they are our expenses. If they are received it will be an income and posted at the credit side of Profit and loss account. If there is no Trial balance or no specific word as allowed or received these items should be treated as expense and posted to be debit of profit and loss account.


Illustration 4. From the following Trial Balance extracted from the books of Mahinder Singh, prepare Trading and Profit & Loss Ale for the year ending March 31st, 2004 and the Balance sheet as on that date. 

Name of Account                                                                     Debit               Credit

Balances          Balances

Drawing and Capital                                                                          20,000             1, 99,000

Plant & Machinery                                                                              80,000

Debtors & creditors                                                                            70,000             50,000

Purchases and sales                                                                            1, 10,000         2, 20,000

Returns                                                                                                10,000             7,000

Wages                                                                                                  40,000

Cash in hand                                                                                       5,000

Cash at Bank                                                                                       10,000

Salaries                                                                                               30,900

Repairs                                                                                                8,000

Stock                                                                                                    45,000

Rent                                                                                                     10,000

Manufacturing Expenses                                                                     7,000

Bill receivable                                                                                     12,000

Bill Payable                                                                                                                 20,000

Bad debts                                                                                            5,000

Carriage                                                                                              9,000

Furniture                                                                                             15,000

Income tax                                                                                           10,000

4,96,000          4,96,000 

Closing stock was valued at $ 50,000.


Trading and Profit and Loss Account

Dr.                                                                                                                                           Cr.

Expenses/Losses                      Amount            Revenue/Gain                          Amount

$                                                                      $.


To Opening Stock                   45,000             By Sales 2,20,000

To Purchases   1,10,000                                 Less : Returns 10,000             2, 10,000

Less : Returns 7,000                1,03,000          By Closing stock                     50,000

To Manufacturing Expenses   7,000

To Carriage                             9,000

To Wages                                40,000

To Gross Profit c/d                 56,000

2,60,000                                                          2,60,000


To Salaries                               30,000             By Gross Profit b/d                 56,000

To Repairs                               8,000

To Rent                                   10,000

To Bad debts                          5,000

To Net Profit transferred to Capital A/c 3.000

56,000                                                             56,000


Balance Sheet

Liabilities                                             Amount                        Assets                          Amount

                                                              $                                                                                  $

Capital                                   1,99,000                                  Plant & Machinery                  80,000

Add : Net Profit                     3,000                                       Furniture                                 15,000

  2,02,000                                  Bills receivable                        12,000


Less : Drawings           20,000                                     Sundry Debtors                       70,000

1,82,000                                  Closing stock                          50,000

Less : Income tax        10,000             1,72,000          Cash at bank                          10,000

Sundry creditors                                 50,000             Cash in hand                           5,000

Bills payable                                        20,000

2,42,000                                                          2,42,000


Notes: It should be noted that Drawings, debtors and returns inward have debit balance, so the amount of these items should be picked from the debit side of Trial balance. In the same way Capital, creditors and returns outward have credit balance, so picked up from the credit side of Trial balance.