Question

Identify the correct sequence to be followed while preparing the final account of a partnership firm:
(A) Profit and Loss Appropriation Account
(B) Profit and Loss Account
(C) Trading Account
(D) Balance Sheet

• A. (C), (B), (A), (D)
• B. (A), (C), (B), (D)
• C. (B), (A), (D), (C)
• D. (C), (B), (D), (A)

Answer 1

The Correct Option is A

The Sequence of Preparing Financial Statements 

The preparation of financial statements generally follows a specific order to ensure a logical flow of information and to present a comprehensive view of a company's financial performance and position.

The Correct Sequence

The correct sequence for preparing the major financial statements is:

1. Trading Account: Used to determine the gross profit or gross loss from buying and selling goods.
2. Profit and Loss Account: Used to determine the net profit or net loss by considering all revenues and expenses.
3. Profit and Loss Appropriation Account: Used (in partnerships) to show how profits are distributed among partners.
4. Balance Sheet: Presents a snapshot of a company's assets, liabilities, and equity at a specific point in time.

The conclusion for the prompt

Hence the correct order is Trading Account -> Profit and Loss Account -> Profit and Loss Appropriation Account -> Balance Sheet corresponding with option 1

Answer 2

Sequence of Financial Statements 

The preparation of financial statements generally follows a specific sequence to provide a comprehensive view of a company's financial performance and position. This sequence ensures that information flows logically and consistently between the statements.

Typical Sequence

The typical sequence for preparing financial statements is as follows:

1. Trading Account: This account is prepared first to determine the gross profit or gross loss from the company's trading activities (i.e., buying and selling goods).
2. Profit and Loss Account: This account takes the gross profit or gross loss from the Trading Account and deducts operating expenses to arrive at the net profit or net loss for the period.
3. Profit and Loss Appropriation Account: This account (primarily used for partnerships) shows how the net profit is distributed among the partners (e.g., salaries, interest on capital, profit sharing).
4. Balance Sheet: The Balance Sheet presents a snapshot of the company's assets, liabilities, and equity at a specific point in time. It reflects the cumulative effect of the transactions recorded in the previous accounts.

Importance of the Sequence

Following this sequence is important because each financial statement builds upon the information presented in the preceding statement. The net profit (or loss) from the Profit and Loss Account, for example, directly impacts the retained earnings section of the Balance Sheet.