JKSSB FAA EXAM NOTES

Profit & Loss Account and Balance Sheet

Concept Notes + Previous-Year-Style MCQs + Statement/Assertion-Reason Questions

Final Accounts are prepared at the end of the accounting year to ascertain the profit/loss of the business and its financial position. They are prepared in three parts:

• Trading Account — to find Gross Profit or Gross Loss
• Profit & Loss Account — to find Net Profit or Net Loss
• Balance Sheet — to show the financial position (Assets and Liabilities) as on a particular date

Final Accounts are prepared after the Trial Balance has been checked and adjustment entries have been identified.

The Trading Account is a nominal account that shows the result of buying and selling of goods. It is prepared first, and its balance (Gross Profit/Loss) is transferred to the Profit & Loss Account.

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

The Profit & Loss Account is a nominal account prepared to ascertain the Net Profit or Net Loss of the business for the accounting period. It records all indirect expenses and indirect incomes not related to the purchase/manufacture/sale of goods.

Format of Profit & Loss Account

Net Profit/Loss = Gross Profit ± (Indirect Incomes − Indirect Expenses). The Net Profit (or Net Loss) is transferred to the Capital Account in the Balance Sheet — it increases (or decreases) the owner's capital.

Key Points to Remember

• Only revenue (recurring, indirect) items appear in the P&L Account — capital items never appear here.
• Items already shown in Trading Account (like direct expenses) are not repeated in P&L Account.
• Provision for Doubtful Debts is created on Debtors after deducting further/additional bad debts.
• Interest on capital and interest on drawings both pass through the P&L Account (expense and income respectively).
• Abnormal losses (e.g., loss by fire not covered by insurance) are shown in P&L Account, not Trading Account.

A Balance Sheet is a statement (not an account) showing the Assets, Liabilities and Capital of a business as on a particular date. It is based on the Accounting Equation: Assets = Liabilities + Capital.

Format of Balance Sheet (Liquidity Order)

Marshalling of Balance Sheet

• Order of Liquidity: Assets arranged from most liquid (cash) to least liquid (goodwill); Liabilities from most urgent to pay (creditors) to least urgent (capital).
• Order of Permanence: Reverse of liquidity — fixed assets first, then current assets; capital first among liabilities, then current liabilities. (Companies follow the Schedule III format, order of permanence style.)

Classification of Assets and Liabilities

This is the most frequently tested area in JKSSB FAA papers. Every adjustment has a DOUBLE EFFECT — one in the Trading/P&L Account and one in the Balance Sheet.

40 objective questions covering Trading A/c, Profit & Loss A/c, Balance Sheet, and Adjustments — in the style commonly asked in JKSSB FAA / Accounts Assistant papers.

Q1. Profit and Loss Account is prepared to ascertain:

A) Gross Profit or Gross Loss

B) Net Profit or Net Loss

C) Financial position of the business

D) Cash position of the business

Q2. Which of the following is NOT shown in the Profit and Loss Account?

A) Rent paid

B) Carriage inward

C) Discount received

D) Bad debts

Q3. Balance Sheet is a:

A) Nominal Account

B) Real Account

C) Statement, not an account

D) Personal Account

Q4. Closing stock, if given outside the trial balance, is shown in:

A) Trading A/c (Dr) only

B) Trading A/c (Cr) and Balance Sheet (Asset side)

C) Balance Sheet (Liability side) only

D) P&L A/c only

Q5. Wages and salaries combined in the trial balance are treated as:

A) Direct expense, shown in Trading A/c

B) Indirect expense, shown in P&L A/c

C) Split — wages to Trading A/c and salaries to P&L A/c

D) Shown in Balance Sheet

Q6. Carriage outward is an example of:

A) Direct expense

B) Selling and distribution expense

C) Capital expenditure

D) Current liability

Q7. Provision for Doubtful Debts is created on:

A) Total Sales

B) Sundry Debtors after deducting further bad debts

C) Sundry Creditors

D) Closing Stock

Q8. Interest on drawings is:

A) An expense for the business, debited to P&L A/c

B) An income for the business, credited to P&L A/c

C) Not recorded anywhere

D) Added to closing stock

Q9. Goodwill appears in the Balance Sheet under:

A) Current Assets

B) Fixed/Intangible Assets

C) Fictitious Assets

D) Current Liabilities

Q10. Outstanding salary is shown as:

A) An asset in the Balance Sheet

B) Added to salary in P&L A/c and shown as liability in Balance Sheet

C) Deducted from salary in P&L A/c

D) Ignored

Q11. Prepaid insurance is shown in the Balance Sheet as:

A) Current Liability

B) Current Asset

C) Fixed Asset

D) Contingent Liability

Q12. Depreciation on fixed assets is recorded:

A) On the credit side of P&L A/c and added to the asset

B) On the debit side of P&L A/c and deducted from the asset

C) On the debit side of Trading A/c only

D) In the Balance Sheet only, not in P&L A/c

Q13. Which order lists assets from most liquid to least liquid?

A) Order of Permanence

B) Order of Liquidity

C) Order of Maturity

D) Chronological Order

Q14. Bills discounted with the bank but not yet matured is shown as:

A) Current Liability

B) Current Asset

C) Contingent Liability (as a footnote)

D) Fixed Asset

Q15. Net Profit as per Profit and Loss Account is transferred to:

A) Trading Account

B) Capital Account

C) Cash Account

D) Suspense Account

Q16. Loss of goods by fire (uninsured) is:

A) Credited to Trading A/c and debited to P&L A/c

B) Debited to Trading A/c only

C) Ignored in final accounts

D) Shown only in the Balance Sheet

Q17. Manager's commission on net profit (before charging such commission) is calculated on:

A) Net profit before charging such commission

B) Net profit after charging such commission

C) Gross profit

D) Sales

Q18. Which of these is a fictitious asset?

A) Goodwill

B) Preliminary expenses not yet written off

C) Closing stock

D) Sundry debtors

Q19. The Accounting Equation is:

A) Assets = Liabilities − Capital

B) Assets = Liabilities + Capital

C) Capital = Assets + Liabilities

D) Liabilities = Assets + Capital

Q20. Goods withdrawn by the proprietor for personal use should be:

A) Added to Sales

B) Deducted from Purchases and deducted from Capital

C) Deducted from Purchases and added to Capital

D) Ignored

Q21. Gross Profit is transferred from Trading Account to:

A) Balance Sheet directly

B) Profit and Loss Account

C) Capital Account directly

D) Cash Account

Q22. Which item will NOT appear in a Balance Sheet?

A) Sundry Debtors

B) Carriage Inward

C) Bank Overdraft

D) Prepaid Rent

Q23. A bank overdraft is classified as a:

A) Fixed Asset

B) Current Liability

C) Contingent Liability

D) Long-term Investment

Q24. Free samples distributed to customers are:

A) Added to sales

B) Deducted from purchases and treated as an advertisement expense

C) Ignored in accounts

D) Shown as a current asset

Q25. Which of the following appears on the credit side of the Profit and Loss Account?

A) Rent paid

B) Discount received

C) Bad debts written off

D) Depreciation

Q26. Income received in advance is also known as:

A) Accrued income

B) Unearned income

C) Outstanding income

D) Deferred expenditure

Q27. Sundry Debtors in the Balance Sheet are shown at:

A) Gross amount only

B) Amount after deducting further bad debts and provision for doubtful debts

C) Cost price

D) Market value

Q28. The main difference between Trading Account and Profit & Loss Account is that Trading Account deals with:

A) Only cash transactions

B) Direct expenses/income related to buying and selling of goods, while P&L deals with indirect expenses/incomes

C) Only fixed assets

D) Only capital items

Q29. Which of the following is a capital expenditure and should NOT appear in the Profit & Loss Account?

A) Purchase of machinery

B) Wages

C) Rent

D) Insurance premium

Q30. If a provision for doubtful debts already exists and a new (higher) provision is required, the increase is:

A) Credited to P&L A/c

B) Debited to P&L A/c

C) Added to Sales

D) Ignored

Q31. Which of the following is shown as a deduction from Capital in the Balance Sheet?

A) Net Profit

B) Drawings

C) Interest on Capital

D) Reserve Fund

Q32. Under the 'Order of Permanence', the Balance Sheet begins with:

A) Cash in hand

B) Fixed Assets / Capital

C) Current Liabilities

D) Goodwill only

Q33. An asset that has no physical existence but has value is called:

A) Current Asset

B) Intangible Asset

C) Fictitious Asset

D) Tangible Asset

Q34. Which of the following is a nominal account?

A) Balance Sheet

B) Profit and Loss Account

C) Cash Account

D) Capital Account

Q35. Insurance claim admitted (but not yet received) against a fire loss is shown in the Balance Sheet as:

A) Current Liability

B) Current Asset (Insurance Claim Receivable)

C) Fixed Asset

D) Contingent Liability

Q36. Which of the following reduces both sides of the Balance Sheet equally?

A) Depreciation on furniture

B) Payment of a creditor by cash

C) Purchase of machinery on credit

D) Sale of goods on credit at a profit

Q37. Total of Trial Balance does not appear on the face of the:

A) Trading Account

B) Profit and Loss Account

C) Balance Sheet

D) All final accounts avoid trial balance totals

Q38. Abnormal loss of stock (net of insurance claim) is ultimately borne by:

A) Trading Account fully

B) Profit and Loss Account

C) Capital Account directly

D) Suspense Account

Q39. Which of the following is correct regarding a Balance Sheet?

A) It is prepared for a period

B) It is prepared as on a particular date

C) It shows profit or loss

D) It is a nominal account

Q40. Rent received in advance should be:

A) Added to rent received in P&L A/c

B) Deducted from rent received in P&L A/c and shown as a current liability

C) Shown as a current asset

D) Ignored

Answer Key: 1-B, 2-B, 3-C, 4-B, 5-C, 6-B, 7-B, 8-B, 9-B, 10-B, 11-B, 12-B, 13-B, 14-C, 15-B, 16-A, 17-A, 18-B, 19-B, 20-B, 21-B, 22-B, 23-B, 24-B, 25-B, 26-B, 27-B, 28-B, 29-A, 30-B, 31-B, 32-B, 33-B, 34-B, 35-B, 36-A, 37-C, 38-B, 39-B, 40-B

JKSSB frequently asks 'which of the statements is/are correct' and Assertion-Reason type questions. Practice set below.

S1. Consider the following statements about the Profit & Loss Account: (i) It is prepared to find out the financial position of a business. (ii) It records only indirect expenses and indirect incomes. (iii) Its balance is transferred to the Capital Account. Which of the above statements is/are correct?

A) (i) and (ii) only

B) (ii) and (iii) only

C) (i), (ii) and (iii)

D) (i) only

Answer: B — Statement (i) is incorrect because financial position is shown by the Balance Sheet, not the P&L Account.

S2. Consider the following statements regarding the Balance Sheet: (i) It is an account with a debit and credit side. (ii) It follows the accounting equation Assets = Liabilities + Capital. (iii) It is prepared as on a specific date, not for a period. Which of the above statements is/are correct?

A) (i) and (ii) only

B) (ii) and (iii) only

C) (i) and (iii) only

D) All of the above

Answer: B — A Balance Sheet is a statement, not an account, so it has no debit/credit side in the accounting sense; statement (i) is incorrect.

S3. Assertion (A): Closing stock given outside the trial balance is shown both in the Trading Account and the Balance Sheet. Reason (R): Adjustments outside the trial balance require a double effect — once in the final accounts (Trading/P&L) and once in the Balance Sheet.

A) Both A and R are true, and R is the correct explanation of A

B) Both A and R are true, but R is NOT the correct explanation of A

C) A is true but R is false

D) A is false but R is true

Answer: A

S4. Assertion (A): Provision for doubtful debts is deducted from Sundry Debtors in the Balance Sheet. Reason (R): Provision for doubtful debts represents an estimated future loss and is treated as a liability, not an asset reduction.

A) Both A and R are true, and R is the correct explanation of A

B) A is true, but R is false — the provision is deducted from debtors (an asset), not shown as a separate liability

C) A is false, R is true

D) Both A and R are false

Answer: B

S5. Consider the following statements about adjustments: (i) Outstanding expenses are added to the concerned expense in the P&L Account and shown as a current liability. (ii) Prepaid expenses are added to the concerned expense in the P&L Account and shown as a current asset. (iii) Accrued income is added to the concerned income and shown as a current asset. Which statements are correct?

A) (i) and (ii) only

B) (i) and (iii) only

C) (ii) and (iii) only

D) (i), (ii) and (iii)

Answer: B — Statement (ii) is incorrect; prepaid expenses are DEDUCTED from the concerned expense, not added.

S6. Assertion (A): Goodwill is shown under intangible fixed assets in the Balance Sheet. Reason (R): Goodwill has no physical existence but has a realisable value.

A) Both A and R are true, and R is the correct explanation of A

B) Both A and R are true, but R is not the correct explanation of A

C) A is true, R is false

D) A is false, R is true

Answer: A

S7. Consider the following statements about capital expenditure vs revenue expenditure: (i) Purchase of machinery is capital expenditure and appears in the Balance Sheet. (ii) Wages paid for erection of new machinery are revenue expenditure and appear in the P&L Account. (iii) Repairs to an existing machine are revenue expenditure. Which of the statements is/are correct?

A) (i) and (iii) only

B) (i) and (ii) only

C) (ii) and (iii) only

D) (i), (ii) and (iii)

Answer: A — Statement (ii) is incorrect; wages for erection/installation of new machinery are capital expenditure, added to the cost of the asset.

S8. Assertion (A): A bank overdraft is shown as a current liability in the Balance Sheet. Reason (R): A bank overdraft represents an amount payable by the business to the bank on demand.

A) Both A and R are true, and R is the correct explanation of A

B) Both A and R are true, but R is not the correct explanation of A

C) A is true, R is false

D) A is false, R is true

Answer: A

S9. Consider the following statements about the Trading Account: (i) It shows Gross Profit or Gross Loss. (ii) Carriage outward appears on its debit side. (iii) Its balance is transferred to the Profit & Loss Account. Which statements are correct?

A) (i) and (ii) only

B) (i) and (iii) only

C) (ii) and (iii) only

D) (i), (ii) and (iii)

Answer: B — Statement (ii) is incorrect; carriage outward is an indirect (selling) expense shown in the P&L Account, not the Trading Account.

S10. Assertion (A): Contingent liabilities are not included in the total of the Balance Sheet. Reason (R): A contingent liability is a possible obligation that depends on the occurrence of a future uncertain event.

A) Both A and R are true, and R is the correct explanation of A

B) Both A and R are true, but R is not the correct explanation of A

C) A is true, R is false

D) A is false, R is true

Answer: A

S11. Consider the following statements about Manager's Commission: (i) Commission on net profit before charging such commission is calculated as: Net Profit (before commission) × Rate/100. (ii) Commission on net profit after charging such commission is calculated as: Net Profit (before commission) × Rate/(100+Rate). (iii) Manager's commission outstanding is shown as a current asset. Which are correct?

A) (i) and (ii) only

B) (i) and (iii) only

C) (ii) and (iii) only

D) (i), (ii) and (iii)

Answer: A — Statement (iii) is incorrect; outstanding commission is a current liability, not an asset.

S12. Assertion (A): Drawings of goods by the proprietor are deducted from Purchases in the Trading Account. Reason (R): Goods withdrawn for personal use are no longer available for sale, so they must be excluded from the cost of goods sold.

A) Both A and R are true, and R is the correct explanation of A

B) Both A and R are true, but R is not the correct explanation of A

C) A is true, R is false

D) A is false, R is true

Answer: A

S13. Consider the following statements: (i) The Balance Sheet is prepared before the Trading and Profit & Loss Account. (ii) The Profit & Loss Account cannot be prepared without first finding Gross Profit/Loss. (iii) The Balance Sheet uses the closing balances after preparing the Trading and P&L Account. Which of these are correct?

A) (i) and (ii) only

B) (ii) and (iii) only

C) (i) and (iii) only

D) (i), (ii) and (iii)

Answer: B — Statement (i) is incorrect; the Balance Sheet is prepared last, after the Trading and P&L Account.

S14. Assertion (A): Preliminary expenses not yet written off are shown as a fictitious asset in the Balance Sheet. Reason (R): Fictitious assets have no realisable value but are carried forward to be written off over future years.

A) Both A and R are true, and R is the correct explanation of A

B) Both A and R are true, but R is not the correct explanation of A

C) A is true, R is false

D) A is false, R is true

Answer: A

S15. Consider the following statements on loss of stock by fire: (i) The full value of stock lost is credited to the Trading Account. (ii) If insured and claim is fully admitted, the entire loss is debited to the P&L Account. (iii) The insurance company's admitted claim (not yet received) is shown as a current asset. Which statements are correct?

A) (i) and (iii) only

B) (i) and (ii) only

C) (ii) and (iii) only

D) (i), (ii) and (iii)

Answer: A — Statement (ii) is incorrect; if the claim is fully admitted, nothing (or only the shortfall) is debited to the P&L Account — the insurer bears the admitted portion.

• Trading A/c → Gross Profit/Loss (direct items only)
• P&L A/c → Net Profit/Loss (indirect items only)
• Balance Sheet → Financial position (Assets = Liabilities + Capital), prepared last, as on a date
• Every adjustment outside the trial balance = TWO effects (double entry rule of adjustments)
• Capital expenditure → Balance Sheet; Revenue expenditure → Trading/P&L Account
• Contingent liabilities → shown as footnote only, not added to the total

Recommended: Cross-check with official JKSSB previous year papers at jkssb.nic.in and JKSSB FAA topic-wise solved paper compilations for verbatim past questions.