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Class 11 Accountancy Chapter 9 Financial Statements — I & II — Formulas & Key Points

Financial Statements—Trading and Profit & Loss Account together with the Balance Sheet—are the capstone of CBSE Class 11 Accountancy. They convert trial-balance data into a clear picture of profitability and financial position. This formula sheet presents every standard equation, adjustment entry and sectional format directly from NCERT Chapter 9 Parts I & II, so you can tackle board numericals with confidence.

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Key takeaways

✓Gross Profit = Net Sales − Cost of Goods Sold; Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses − Closing Stock.
✓Net Profit = Gross Profit + Other Incomes − Operating & Non-Operating Expenses.
✓Balance Sheet equation: Assets = Liabilities + Capital; always list assets on the right (or top in vertical form) and liabilities + capital on the left (or bottom).
✓Closing Stock appears in the credit side of Trading Account and as a Current Asset in the Balance Sheet.
✓Outstanding expenses increase liabilities; prepaid expenses become current assets; both require adjustment journal entries.
✓Depreciation reduces asset value and is treated as an expense in P&L; Provision for Doubtful Debts reduces debtors in the Balance Sheet.
✓Follow NCERT's sectional grouping: Fixed Assets, Investments, Current Assets, Loans & Advances; Long-term Liabilities, Current Liabilities, Capital in Balance Sheet.

Trading Account Formulas & Structure

The Trading Account determines Gross Profit (or Gross Loss) by matching revenue from sales against the cost of goods sold. It is the first stage of the final accounts. Below is the standard horizontal format with debit and credit sides. The formula for Gross Profit is central to every manufacturing or trading business. Opening stock and purchases appear on the debit side; sales and closing stock on the credit side. Direct expenses—carriage inward, wages, factory power—are added to the cost of goods sold. Carriage outward is an indirect expense and goes to P&L Account, not Trading Account.

Gross Profit = Net Sales − Cost of Goods Sold
Cost of Goods Sold (COGS) = Opening Stock + Net Purchases + Direct Expenses − Closing Stock
Net Purchases = Purchases − Purchase Returns
Net Sales = Sales − Sales Returns
If credit side total > debit side total, the difference is Gross Profit; if debit > credit, it is Gross Loss

Profit & Loss Account Formulas

The Profit & Loss Account starts with Gross Profit (or Gross Loss) from the Trading Account and adds other incomes, then subtracts all indirect (operating and non-operating) expenses to arrive at Net Profit or Net Loss. Operating expenses include salaries, rent, depreciation, office expenses, selling expenses. Non-operating expenses cover interest on loans and abnormal losses. Other incomes—interest received, commission received, discount received—boost profit. The final figure (Net Profit) is transferred to the Capital Account in the Balance Sheet. If expenses exceed Gross Profit plus other incomes, you have a Net Loss, which reduces capital.

Net Profit = Gross Profit + Other Incomes − All Indirect Expenses
Net Loss = (Gross Profit + Other Incomes) when this sum is less than Indirect Expenses
Operating Expenses: Salaries, Rent, Insurance, Depreciation, Bad Debts, Office & Selling Expenses
Non-Operating Expenses: Interest on Loan, Loss on Sale of Asset
Other Incomes: Interest Received, Commission Received, Rent Received, Discount Received

Balance Sheet Equation & Format

The Balance Sheet is a statement (not an account) that lists assets, liabilities and capital as at a specific date. The fundamental accounting equation is Assets = Liabilities + Capital. In horizontal format, Liabilities and Capital appear on the left; Assets on the right. In vertical format (more common in modern practice), Equity & Liabilities appear first, followed by Assets. CBSE NCERT Chapter 9 uses the horizontal format for teaching. Remember: the Balance Sheet must always tally; any imbalance indicates an error in ledger posting or adjustment. Capital is increased by Net Profit and fresh capital introduced, and decreased by Net Loss and drawings. The adjusted capital figure appears in the Balance Sheet under the heading 'Capital'.

Balance Sheet Equation: Assets = Liabilities + Capital
Adjusted Capital = Opening Capital + Additional Capital + Net Profit − Drawings − Net Loss
Liabilities side: Long-term Liabilities (Loans), Current Liabilities (Creditors, Outstanding Expenses, Bank Overdraft), Capital
Assets side: Fixed Assets (Land, Building, Plant, Furniture less Depreciation), Current Assets (Cash, Bank, Debtors less Provision, Stock, Prepaid Expenses)
Closing Stock, Prepaid Expenses, Accrued Income appear as Current Assets; Outstanding Expenses appear as Current Liabilities

Key Adjustments: Closing Stock

Closing stock is the value of unsold goods at the end of the accounting period. It is unique because it appears in two places: (1) credit side of Trading Account (reducing cost of goods sold) and (2) assets side of the Balance Sheet under Current Assets. The adjustment journal entry at year-end is: Debit Closing Stock Account, Credit Trading Account. This entry ensures that only goods actually sold are charged as cost; unsold inventory is carried forward as an asset. Closing stock is valued at cost or market price, whichever is lower, following the principle of conservatism. Many students forget the dual appearance and lose marks in board exams.

Journal entry: Closing Stock A/c Dr … To Trading A/c
Appears on credit side of Trading Account (deducted from COGS)
Appears as a Current Asset in the Balance Sheet
Valued at Cost or Net Realisable Value, whichever is lower
Opening stock of next year = Closing stock of current year

Adjustments: Outstanding & Prepaid Expenses

Outstanding expenses are expenses that have been incurred during the period but not yet paid (e.g. salaries for March paid in April). They must be added to the relevant expense in the P&L Account and shown as a Current Liability in the Balance Sheet. The adjustment entry is: Expense A/c Dr, To Outstanding Expense A/c. Prepaid expenses are amounts paid in advance (e.g. insurance paid in March for April–June coverage). They must be deducted from the expense in P&L and shown as a Current Asset. The entry is: Prepaid Expense A/c Dr, To Expense A/c. Both adjustments ensure expenses are matched to the period they relate to, following the Matching Principle under accrual accounting.

Outstanding Expense: Expense A/c Dr … To Outstanding Expense A/c. Add to expense in P&L; show as Current Liability.
Prepaid Expense: Prepaid Expense A/c Dr … To Expense A/c. Deduct from expense in P&L; show as Current Asset.
Example: Rent ₹12,000 in trial balance; outstanding rent ₹1,000. Rent in P&L = 12,000 + 1,000 = ₹13,000; Outstanding Rent ₹1,000 appears under Current Liabilities.
Example: Insurance ₹6,000 in trial balance; prepaid insurance ₹500. Insurance in P&L = 6,000 − 500 = ₹5,500; Prepaid Insurance ₹500 appears under Current Assets.

Adjustments: Accrued & Unearned Income

Accrued income (also called income receivable) is income earned but not yet received in cash (e.g. interest on investment for the last quarter not yet credited). It must be added to the relevant income in the P&L Account and shown as a Current Asset. Entry: Accrued Income A/c Dr, To Income A/c. Unearned income (also called income received in advance) is cash received for services not yet rendered (e.g. rent for next month received in advance). It must be deducted from income in P&L and shown as a Current Liability. Entry: Income A/c Dr, To Unearned Income A/c. These adjustments ensure that only income pertaining to the current period is recognised in the Profit & Loss Account, adhering to the Revenue Recognition Principle. Students often confuse accrued income with prepaid expenses; remember accrued income is an asset, unearned income is a liability.

Accrued Income: Accrued Income A/c Dr … To Income A/c. Add to income in P&L; show as Current Asset.
Unearned Income: Income A/c Dr … To Unearned Income A/c. Deduct from income in P&L; show as Current Liability.
Example: Commission Received ₹10,000 in trial balance; commission receivable ₹1,000. Commission in P&L = 10,000 + 1,000 = ₹11,000; Commission Receivable ₹1,000 under Current Assets.
Example: Rent Received ₹24,000 in trial balance; includes ₹2,000 for next year. Rent in P&L = 24,000 − 2,000 = ₹22,000; Unearned Rent ₹2,000 under Current Liabilities.

Depreciation & Provision for Doubtful Debts Formulas

Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. Two common methods are Straight-Line and Written-Down-Value (WDV). Under Straight-Line, annual depreciation is constant: Depreciation = (Cost − Scrap Value) ÷ Useful Life. Under WDV, depreciation is a fixed percentage of the reducing book value each year. Depreciation is debited to P&L Account and credited to the asset account (or to a Provision for Depreciation account, shown as a deduction from the asset in the Balance Sheet). Provision for Doubtful Debts is an estimated allowance for debtors who may not pay. The entry is: Bad Debts A/c Dr (or P&L), To Provision for Doubtful Debts A/c. In the Balance Sheet, debtors are shown net: Sundry Debtors − Provision for Doubtful Debts. If additional provision is required, the new provision is the difference between desired provision and existing provision.

Straight-Line Depreciation = (Cost − Scrap Value) ÷ Useful Life (in years)
WDV Depreciation = Opening Book Value × Rate%
Journal for Depreciation: Depreciation A/c Dr … To Asset A/c (or To Provision for Depreciation A/c)
Provision for Doubtful Debts: Bad Debts A/c Dr … To Provision for Doubtful Debts A/c
Net Debtors in Balance Sheet = Sundry Debtors − Provision for Doubtful Debts

Common Mistakes & How to Avoid Them

CBSE Class 11 students routinely lose 5–8 marks in board exams due to preventable errors in financial statements. The most frequent mistake is forgetting to show closing stock in both Trading Account (credit side) and Balance Sheet (Current Assets). Another classic error is posting carriage outward to the Trading Account instead of the P&L Account; remember, only carriage inward (on purchases) is a direct expense. Students often write 'Net Profit' on the debit side of P&L when it should appear on the credit side as a balancing figure transferred to capital. In the Balance Sheet, many reverse the sides—assets on the left and liabilities on the right—which contradicts the NCERT horizontal format. Outstanding expenses must appear as Current Liabilities, not subtracted from expenses. Prepaid expenses must appear as Current Assets, not added to expenses. Lastly, forgetting to adjust capital for net profit and drawings before showing it in the Balance Sheet is a frequent slip. Practice at least five full-chapter numericals from NCERT and sample papers to internalize these points.

Always show closing stock twice: credit side of Trading Account and under Current Assets in Balance Sheet.
Carriage inward (on purchases) → Trading Account (direct expense); Carriage outward (on sales) → P&L Account (indirect expense).
Net Profit appears on the credit side (or bottom) of P&L, then transferred to Capital in Balance Sheet.
Outstanding Expenses are liabilities; Prepaid Expenses are assets—never reverse them.
Depreciation reduces the asset value; show 'Asset (original cost) − Depreciation = Net Block' or use a separate Provision for Depreciation account.
Bad Debts already written off go to P&L; Provision for Doubtful Debts is a reserve, deducted from debtors in Balance Sheet.
In horizontal Balance Sheet, Liabilities & Capital on the left, Assets on the right (NCERT standard).
Adjusted Capital = Opening Capital + Additional Capital + Net Profit − Drawings − Net Loss. Use this final figure in the Balance Sheet.

Grouping & Order in Balance Sheet (NCERT Format)

NCERT Class 11 Accountancy follows a specific sectional grouping and order for the Balance Sheet. On the Liabilities side, the sequence is: (1) Capital (including reserves and Net Profit), (2) Long-term Liabilities (e.g. bank loan, mortgage), (3) Current Liabilities (creditors, outstanding expenses, bank overdraft). On the Assets side: (1) Fixed Assets (Land, Building, Plant, Furniture, Vehicles—each shown at cost less accumulated depreciation), (2) Investments (long-term securities), (3) Current Assets (Stock, Debtors less Provision, Cash, Bank, Prepaid Expenses), (4) Loans & Advances (if any). Within each group, items are often listed in order of permanence—land first among fixed assets, cash last among current assets. This logical grouping helps stakeholders quickly assess liquidity (current assets vs current liabilities) and solvency (total assets vs total liabilities). Always label your Balance Sheet with 'as at [date]' because it is a position statement, not a period statement. Practicing the correct order will earn you presentation marks in CBSE board exams and builds good professional habits for higher accountancy studies.

Liabilities side order: Capital, Long-term Liabilities, Current Liabilities.
Assets side order: Fixed Assets, Investments, Current Assets, Loans & Advances.
Fixed Assets: list in decreasing order of permanence—Land, Building, Plant & Machinery, Furniture, Vehicles.
Current Assets: Stock, Debtors (less Provision), Cash in Hand, Cash at Bank, Prepaid Expenses.
Current Liabilities: Creditors, Bills Payable, Outstanding Expenses, Bank Overdraft.
Always head the Balance Sheet 'Balance Sheet of [Name] as at [Date]'.

Marshalling of Assets & Liabilities

Marshalling means arranging assets and liabilities in a specific order. Two common methods exist: (1) Order of Liquidity—assets arranged from most liquid (cash) to least liquid (land); liabilities from those payable earliest to those payable last. (2) Order of Permanence—assets arranged from least liquid (land) to most liquid (cash); liabilities from long-term (capital) to short-term (creditors). CBSE NCERT Chapter 9 uses the Order of Permanence for the horizontal Balance Sheet, which is why Capital appears first on the liabilities side and Land appears first on the assets side. Many professional balance sheets (especially for companies) use the vertical format in order of liquidity, placing current assets before fixed assets. For your Class 11 exams, stick to the NCERT order of permanence unless the question specifies otherwise. Understanding marshalling helps in ratio analysis and financial statement analysis in Class 12, so master the logic now.

Order of Permanence: Capital → Long-term Liabilities → Current Liabilities; Land → Building → Plant → Current Assets.
Order of Liquidity: Current Liabilities → Long-term Liabilities → Capital; Current Assets → Fixed Assets.
NCERT Class 11 horizontal format follows Order of Permanence.
Vertical format (used in company accounts) often follows Order of Liquidity.

Three Mini Worked Examples

Below are three compact numerical problems that pull together Trading Account, P&L Account, adjustments and Balance Sheet. Work through each step-by-step to reinforce formula application. Example 1 covers basic Trading and P&L without adjustments. Example 2 introduces closing stock and outstanding expense adjustments. Example 3 combines depreciation, provision for doubtful debts, prepaid expense and drawings. These mirror the difficulty of CBSE board 4-mark and 6-mark questions. Practice writing the full format on paper, not just calculating mentally, because board exams reward neat tabular presentation and proper headings. After solving, cross-check that your Balance Sheet tallies and that closing stock appears in both places. Regular timed practice of such examples—aiming for 10–12 minutes per full set—will build speed and accuracy for the actual exam hall.

One-Glance Last-Minute Revision Box

Print or screenshot this section for quick review 30 minutes before your exam. Gross Profit formula: Net Sales minus COGS. COGS formula: Opening Stock plus Net Purchases plus Direct Expenses minus Closing Stock. Net Profit formula: Gross Profit plus Other Incomes minus All Indirect Expenses. Balance Sheet equation: Assets equal Liabilities plus Capital. Closing Stock appears credit side Trading Account and as Current Asset in Balance Sheet. Outstanding Expense: add to expense in P&L, show as Current Liability. Prepaid Expense: deduct from expense in P&L, show as Current Asset. Accrued Income: add to income in P&L, show as Current Asset. Unearned Income: deduct from income in P&L, show as Current Liability. Depreciation: debit P&L, credit Asset or Provision for Depreciation account; reduces asset value in Balance Sheet. Provision for Doubtful Debts: debit Bad Debts or P&L, credit Provision; deduct from Debtors in Balance Sheet. Adjusted Capital: Opening Capital plus Additional Capital plus Net Profit minus Drawings minus Net Loss. Balance Sheet sectional order (NCERT): Liabilities side—Capital, Long-term Liabilities, Current Liabilities; Assets side—Fixed Assets, Investments, Current Assets. Always check that total of both sides tally. Carriage inward goes to Trading Account; carriage outward goes to P&L Account. Net Profit goes on credit side of P&L and is added to Capital in Balance Sheet. Practice writing full format answers with proper headings and double underlines for totals to secure full marks in board exams.

Frequently asked questions

Why does closing stock appear in both Trading Account and Balance Sheet?+

Closing stock appears on the credit side of the Trading Account to reduce the cost of goods sold (because unsold goods should not be charged as expense). It also appears as a Current Asset in the Balance Sheet because it represents inventory owned by the business at year-end. This dual entry ensures accurate profit calculation and reflects the true asset position.

What is the difference between Gross Profit and Net Profit?+

Gross Profit is the surplus of Net Sales over Cost of Goods Sold, calculated in the Trading Account. It shows profitability from core trading operations before deducting operating expenses. Net Profit is Gross Profit plus other incomes minus all indirect (operating and non-operating) expenses, calculated in the P&L Account. Net Profit represents the final surplus available to the owner after meeting all costs.

How do I treat carriage inward and carriage outward in final accounts?+

Carriage inward (freight paid to bring goods into the business) is a direct expense, so it appears on the debit side of the Trading Account and is added to cost of goods sold. Carriage outward (freight paid to deliver goods to customers) is an indirect selling expense, so it appears on the debit side of the Profit & Loss Account and is not included in COGS.

What is the journal entry for outstanding expenses and where do they appear?+

The adjustment entry is: Expense Account Dr, To Outstanding Expense Account. The expense is increased in the P&L Account by the outstanding amount, and the outstanding expense is shown as a Current Liability in the Balance Sheet. For example, if Rent is ₹12,000 and ₹1,000 is outstanding, P&L shows Rent ₹13,000 and Balance Sheet shows Outstanding Rent ₹1,000 under Current Liabilities.

How do prepaid expenses affect the financial statements?+

The adjustment entry is: Prepaid Expense Account Dr, To Expense Account. The expense in the P&L Account is reduced by the prepaid amount (because that portion relates to the next period), and the prepaid expense is shown as a Current Asset in the Balance Sheet. For example, Insurance ₹6,000 with ₹500 prepaid means P&L shows ₹5,500 and Balance Sheet shows Prepaid Insurance ₹500.

What is the formula for adjusted capital in the Balance Sheet?+

Adjusted Capital = Opening Capital + Additional Capital Introduced + Net Profit − Drawings − Net Loss. This final figure appears in the Balance Sheet under 'Capital'. Many students forget to add net profit or subtract drawings, leading to a Balance Sheet that does not tally. Always perform this adjustment before preparing the Balance Sheet.

How is depreciation treated in final accounts?+

Depreciation is an indirect expense. The journal entry is: Depreciation Account Dr, To Asset Account (or To Provision for Depreciation Account). It is debited to the P&L Account, reducing net profit. In the Balance Sheet, the asset is shown at original cost minus accumulated depreciation (net book value), or separately as 'Asset at cost' and 'Less: Provision for Depreciation'.

What is Provision for Doubtful Debts and how is it shown in the Balance Sheet?+

Provision for Doubtful Debts is an estimated allowance for debtors who may default. The entry is: Bad Debts Account Dr (or P&L Account Dr), To Provision for Doubtful Debts Account. In the Balance Sheet, debtors are shown net: Sundry Debtors minus Provision for Doubtful Debts. For example, Debtors ₹50,000 with 5% provision means ₹47,500 is shown as the net debtor figure.

What is the correct order of items in the NCERT horizontal Balance Sheet?+

Liabilities side (left): Capital (including reserves and net profit), Long-term Liabilities (loans), Current Liabilities (creditors, outstanding expenses). Assets side (right): Fixed Assets (land, building, plant, furniture), Investments, Current Assets (stock, debtors, cash, prepaid expenses). This is the Order of Permanence used in NCERT Class 11 Accountancy Chapter 9.

Can I use CBSETUTOR.ai to practice Chapter 9 numericals with instant solutions?+

Yes. CBSETUTOR.ai offers a 24×7 AI tutor for Classes 6–12 at a flat ₹999/month with a 3-day free trial. Upload a photo of any Trading Account, P&L or Balance Sheet problem from your textbook or sample paper, and receive a step-by-step worked solution with formula explanations. The AI identifies common errors—missing closing stock, wrong sides, adjustment mistakes—and guides you to correct answers, making it ideal for self-paced revision of Chapter 9.

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