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Financial Statements of
CHAPTER Sole Proprietorship
CHAPTER

18 (Final Accounts: Trading Account, Profit &

Loss Account and Balance Sheet)

MEANING OF KEY TERMS USED IN THE CHAPTER

1. Financial Financial Statements are the statements which show the financial
Statements performance and financial position of the business. It includes Trading Account,
Profit & Loss Account and Balance Sheet.
2. Trading Account Trading Account shows gross profit earned or gross loss incurred. It is credited with
net sales, other direct incomes and closing stock. It is debited by opening stock,
net purchases and direct expenses, i.e., wages, freight, carriage inwards, etc.
3. Profit & Loss Profit & Loss Account shows net profit earned or net loss incurred.
Account It is credited with gross profit and other incomes and debited with indirect expenses.
The difference between the totals of two sides is either net profit or net loss.

4. Balance Sheet Balance Sheet shows the financial position of the business. It is a statement
to which balances of assets, liabilities and capital accounts are showed at a
particular date.
5. Capital Expenditure Capital Expenditure is that expenditure which gives benefit of enduring nature,
i.e., the benefit of which extends to a period or periods beyond the accounting period.

6. Revenue Revenue Expenditure is that expenditure the benefit of which is exhausted
Expenditure within the accounting period.
7. Deferred Revenue Deferred Revenue Expenditure is expense or loss incurred by the firm which
Expenditure are written off in more than one accounting period. They are categorised as
Fictitious Assets.
8. Capital Receipts Capital Receipts are those receipts which are not received in the normal course
of business, such as capital introduced, loan received, etc.

9. Revenue Receipts Revenue Receipts are those receipts which are received in the normal course of
business, such as revenue from sale of goods and services.
10. Contingent Liability Contingent Liability is a liability that becomes payable on the happening of an
event and not otherwise.
11. Grouping Grouping means placing items of one nature under a common head.
12. Marshalling Marshalling is arranging the assets and liabilities in a particular order, i.e., in order
of liquidity or in order of permanence.
13. Opening Entry Opening Entry is the Journal entry through which the closing balances of the
previous year are brought forward in the current year’s books of account.