The process of preparing income statement is explained below
(i) First of all a Trial Balance is prepared on the basis of the balances of various accounts in the ledger.
(ii) After that trading account is prepared by recording Opening Stock, Purchases, Manufacturing Expenses and other direct expenses on the debit side.
(iii) On the other hand sales and closing stock is recorded on the credit side of the trading account.
(iv) After that the balancing figure of trading account is determined by totalling both the sides, if the credit side exceeds the debit side, then the balancing figure is termed as gross profit, but if the debit side exceeds the credit side, then the balancing figure is termed as gross loss.
(v) Carry forward the Gross Profit (Gross Loss) to the credit (debit) side of the Profit and Loss Account.
(vi) After that all the operating and non-operating revenue expenditures with their relevant adjustments are recorded on the debit side of the profit and loss account. Record all current year’s operating and non operating revenue incomes with their relevant adjustments on the credit side of the profit and loss account.
(vii) Ascertain the balancing figure by totalling both the sides of the profit and loss* account. If the credit exceeds the debit side, then the balancing figure is termed as net profit, but if the debit side exceeds the credit side, then the balancing figure is termed as net loss. The process of preparing Balance Sheet is given below
(i) First of all match the total of both the side of trail balance. If there is any difference in the debit side of trail balance it will be posted in assets side of balance sheet and if there is any difference in credit side of balance sheet it will be posted in the liabilities side of the balance sheet.
(ii) Record all the debit balances of real and personal accounts on the left hand side (i.e., Assets side) of the balance sheet after making all adjustments for provision and other related items.
(iii) Record all the credit balances of real and personal accounts on the right hand side (i.e., Liabilities side) of the balance sheet after making all adjustments for interest and outstanding items.
(iv) Add Net Profit to the opening capital and deduct Net Loss, if any from the opening capital.
(v) Acertain the total of two sides, which must be equal.
