Introduction:- Non-Manufacturing entities are trading entities which are engaged in the purchase and sale of

goods at profit without changing form of goods. These entities do not process the goods. - Profit is obtained

by preparing Income statement (i.e trading A/c and profit and loss). - Financial position of enterprises can be

known by preparing Position statement (Balance Sheet).

(a) INCOME STATEMENT:-This statement is prepared at the close of year. Income statement is divided into two

parts for non-manufacturing concerns. Trading Account:- At the end of the year every business must ascertain it

profit or loss. This is done in two-stage (I) finding out the gross profit (or gross loss) and then finding out net profit

(or net loss). Gross profit is the excess of the net sales (i.e. sales - sales return) over the cost of goods sold. Cost of

goods sold equal to opening stock + purchases during the year + freight inward - Closing Stock of goods. The usual

way to ascertain gross profit is by means of an account called the Trading Account.

In a Trading Firm where business consist of purchases and sales only, the Trading Account is debited with the;

Value of the opening stock, purchases made during the year; and any other expenses which have been incurred to

bring the purchased goods to the firm’s factory or otherwise to make the goods ready for sale. The examples of

such expenses are freight, customs duty and octroi duty on goods purchase. In a manufacturing business, all

expenditures which are incurred up to the time the goods are ready for sale is debited to trading account.

Examples are purchase of raw material, wages paid to workmen, fuel and power used to run the machinery,

carriage on purchase etc.

In respect of Sales, the following point should be taken in to consideration: - If goods have been sold but not yet

dispatched then the goods sold should not be included in the closing stock. Such goods should be kept apart. If

property in the goods has not yet passed to the buyer, then it should not be treated as a sale. In such case the

entry for sale should be reversed. No sales out of the goods received on behalf of others should be treated as sale.

Such sales have to be credited to the account of the consignor. If the sales have already credited to Sales Account,

the following entry should be passed:

Sales Account - Dr ****

To consignor's account ****

Sale of Fixed Assets or of investment should be excluded from sales. Thus if old assets is sold, it must not be

credited to sales Account. If it has been credited, the following entry should be passed:

Sales Account — Dr. ****

To assets Account ****

Goods Sent on Approval:-- Goods sent on 'approval' or 'on sale or return' basis, means the delivery of the goods

to the customers with the option to retain or return them within a specified period. When such transactions are

few, these transactions are accounted for as an ordinary sale. If at the year end goods are still lying with customers

and the specified period has not yet expired, the original entry made for sale is cancelled. Like an ordinary closing

stock, such goods are considered as stock lying with customers on behalf of sellers and are valued at cost.

(B) Position Statement:-Position statement mainly consist Balance sheet which shows assets, and liabilities and

capital of business. For better understanding of financial position additional statement like cash flow statement,

statement showing earning per share, value added statement etc. are prepared. The statement showing the

financial state of affairs is called Balance Sheet.

BALANCE SHEET:-- The Balance Sheet may be defined as "a statement which sets out the assets and liabilities of a

firm or an institution as at a certain date. All the assets account which have not been closed by transfer to either

the Trading Account or the Profit & Loss account must appear in the balance Sheet otherwise the two side of the

balance sheet will not agree and it will not reflect the correct financial position of the business.

The Balance Sheet similarly is required to give true and fair view of the financial position at the end of the year

The study of the Balance Sheet enables the person to judge whether the firm or institution is financially sound or


The Balance Sheet records on one side what the firm or institution possesses, called assets. Assets may be

convertible in to cash or they may be enable the firm to carry on it work (for example patents which permit goods

of a certain type to be produced) or the firm may enjoy some benefits without further payment (like insurance

premium relating to the next year.).

On the other side it records the source from which the necessary funds have been derived - contribution by the

proprietors (capital) and loan raised and credit received from outsiders. The Profit and Loss Account and Balance

Sheet are inter-linked. The Balance Sheet described the financial position while the Profit and Loss Account

supplies much of the explanation of the causes leading to the change in the financial position.

Items to be shown on the Assets side of a Balance Sheet:

 Fixed Assets:- Fixed assets are those assets that are not meant to be sold but are meant to be utilised in the

firm's business. Examples are machinery, patents, buildings and goodwill. Fixed assets can be further classified in

to tangible, intangible, wasting and fictitious assets.

Tangible Assets  Those fixed assets which can be seen and touched.

Intangible Fixed Assets  Those fixed assets which can nether seen nor been touched e.g.. Goodwill, Patents.

Trade Mark.

Wasting assets  Those fixed assets, which are consumed during the course of time A mine, for example, will be

useless when it has been fully exploited. Such assets are often called wasting assets.

Fictitious assets  Those assets, which has no value. An example is preliminary expenses.

 Investment:— an expenditure incurred on assets to earn interest, dividend, income, rent or other benefit

Current Assets:— Those assets which are held:—  In the form of cash  For their conversion into cash e.g. stock

of finished goods, debtors, Bills Receivable, Accrued income.  For their consumption in the production of goods or

rendering of services e.g. stock of raw materials, WIP. Item to be shown on the Liabilities side of a Balance Sheet:

The credit balances of those ledger accounts which have not been closed till the preparation of the Trading and

Profit and Loss account, are shown on the 'Liabilities side of the Balance Sheet.

(a) Liabilities: - It is the claim of outsiders on the assets of business. Usually the following items are included in


i) Long-term liability:-- Those that will be paid after one year. ii) Current Liability: —— Those that must be settled

within one year. (b) Capital: - Capital is the excess of assets over liabilities. It is the claim of owner in total assets of

the business. It refers to the amount invested in an enterprise by the proprietor or partners, which is increased by

the amount of profit earned and is decreased by the losses incurred and the amount withdrawn whether in the

form of cash or kind.


The term ‘Marshalling' refers to the order in which the various assets and liabilities are shown in the Balance

Sheet. The assets and liabilities can be shown either in the order of liquidity or in the order of permanency.

Assets: - Assets can be put down in a Balance Sheet, in two ways - either in the order of liquidity or in the order of


i) Liquidity: - It means the ease with which the assets may be converted into cash; those assets which are most

difficult to convert them in cash are written last.

ii) Permanence: Assets that are to be used permanently in the business and are not meant to be sold are written

first. Assets that are most liquid such as cash in hand are written last.

Liabilities:- Liabilities can also be grouped in two ways — either in order to urgency of permanent or in reverse

order. One way is to first show the capital, then long term liabilities and last of all short term liabilities like amounts

due to supplier of goods or bills payable. The other way is to start with short term liabilities and then show long

term liabilities and last of all capital.

Floating Assets:—Floating assets are those assets which are meant to be converted in cash at earliest opportunity.

Examples are cash, sundry debtors, stock of goods etc. The term floating is derived from the fact that such assets

constantly change in value through transactions that are entered into. The figure total debtors for instance

changes from day to day. Those assets are also known as circulating assets.



In a case where the cost of manufacturing goods is to be ascertained, the Manufacturing Account is prepared. The

main feature of a Manufacturing Account are the following :—

 It is debited with all expenses that are incurred in manufacturing of goods. In this account, besides such expenses

as freight on purchases of raw materials, customs duty, wages, rent and lighting of factory building, we must also

debit the manufacturing account with repairs to plant and machinery. depreciation on machinery, loose tools, etc.

 In this account, we have to show the value of materials consumed instead of showing figures of opening stock,

purchases and closing stock separately.  Raw Material consumed: Opening Stock of Raw material *****

Add: Purchases of Raw Material *****

Less: Closing Stock of Raw Material *****

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