Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
FILED UNDER
MILLIONAIRES
CREDIT CARDS
OPTIONS
DEBT
PERSONAL FINANCE
FIXED INCOME
RETIREMENT
RETIREMENT PLANS
SAVINGS
TAXES
Ryan Barnes
Contact | Author Bio
Budgeting has negative connotations, but it can do wonders for your overall financial picture and it takes very little effort to create and maintain a budget. Think of a budget as simply a tool for organizing cash flows. You are, in essence, a CEO on a smaller scale who is taking steps to ensure your company's (or family's) cash flow is monitored each month. In this article, we'll cover five of the most commonly asked questions with regards to budgeting, and show you how it really is possible to save money, pay off debt and still enjoy life. 1. How much should I set aside for investments? When deciding how much you should put aside to save or invest, there are many factors to consider, including your age, disposable income and liquidity needs.
Your age will help determine not only your asset allocation (younger investors should have higher equity allocations than older ones) but also how much money should be put toward future goals like buying a home or retirement. For example, because younger individuals have lower wages, investors in their 20s or 30s can generally afford to put away smaller amounts than an investor in their 50s with little retirement assets. (For age-specific information, see Retirement Savings Tips For 18To 24-Year-Olds, Tips For 25- To 34-Year-Olds, Tips For 35- To 44-Year-Olds, Tips For 45- To 54-Year-Olds, Tips For 55To 64-Year-Olds and Tips For 65-Year-Olds And Over.)
Disposable income is independent of all your costs that need to be paid out in order to survive. You can spend it on toys or stash it away in savings. The amount of disposable income you have will determine how much fun you can have now, and how much fun you can plan for later in life. (Keep reading about this in Increase Your Disposable Income.)
Liquidity means how fast you can convert your assets to cash. Your level of liquidity will generally determine what kind of interest rates you will receive or how fast you will be able to access your own money. If you were to place your money in accounts that will tax you for taking money out, or will only let you take money out after a large length of time, then you would have a very illiquid financial stance. The amount of personal liquidity that you maintain is up to you, and should be decided before you begin to invest.
Some good ways to begin saving for your future include employer-sponsored retirement accounts (e.g. 401(k)s) that allow you to use pre-tax dollars to fund your account. Many employers even offer to match up to a certain percentage of your annual income. If possible, you should always look to pay into these accounts the maximum that is matched by the company. The employer match is basically free money, and the ability to fund with pre-tax income earns you a free return even before considering any investment returns. Once an employer-sponsored plan has been maximized, any extra money that you can afford to put toward investments should go into fully funding an individual retirement account (IRA) for the current year. Retirement accounts for you or a spouse provide tax-free appreciation of your invested assets, a crucial component of long-term growth found in these key retirement funds. (To learn more about saving for retirement, see Invest On A Shoestring Budget, Retirement Planning Basics, and Weave Your Own Retirement Safety Net.) While there is no magic dollar amount that defines how much should be saved or invested, 10% of your net income is a desirable target (but starting at 5% is still admirable). It is essential that any money set aside for investing should be free and clear of any monthly or
annual expenses. It should also only be considered if you have a "cushion account" of emergency funds that can be accessed quickly, such as in a savings account or Treasury bill. (To find out more about these emergency funds, check out Build Yourself An Emergency Fund and Are You Living Too Close To The Edge?) 2. How much should I allocate to debts like credit cards or car loans? Some of our debt, such as car financing, comes with specific repayment schedules, but rolling debt instruments like credit cards can generally be paid off according to one's personal ability to pay. The ruling maxim here is this - don't allocate money to taxable investment accounts if you have existing credit card balances. Most credit cards charge between 5% and 30% interest annually, which sometimes outpaces what the average investor can expect to earn from stocks, bonds or funds. It's much better to pay the credit cards off first and then begin budgeting some money for taxable investment accounts. Doing so will allow you to save on escalating interest expenses. (To read more about credit cards, see Understanding Credit Card Interest, Expert Tips For Cutting Credit Card Debt and Take Control Of Your Credit Cards.) Some fixed-period loans will allow for overpayment, while others will not. You should evaluate the interest rate being paid to determine if paying a fixed debt off early is the right path. If you have existing credit card debt, chances are that this is costing you more in interest than an auto loan for example. In this case, you should still target paying off the credit card debt first. Some creditors will give you different payment options if you simply contact them by mail or by phone. You may find that you can have your monthly payment increased (as long as you can afford to!) or otherwise adjusted to fit your budget. You'll also want to make sure there are no prepayment penalties for retiring a specific debt early, as these could negate any savings you get on interest costs. If you have too many cards, or don't know which to pay off first, consider getting a consolidation loan to pay off all your other cards and debts and make one manageable payment each month. If you go this consolidation route remember, it is a must that you stop using your credit cards or stop yourself from attaining new loans until after you've paid off this consolidation loan. (For more on consolidation, see Different Needs, Different Loans and Digging Out Of Personal Debt.) 3. Should I overpay on my mortgage (if allowed)? Your mortgage is often the cheapest source of debt you have (assuming that it is a conventional mortgage and not subprime), but it could still make sense to overpay on your monthly payments. First and foremost, all of the higher interest debt that can be settled should be done so first, before considering this option. It is also advisable to have an emergency fund of two to three month's net income before deciding to overpay. Basically, any money that is considered for overpayment should be money that would otherwise go into a savings or an investment account, meaning that all other budget categories are fully funded for the time being. While it is possible to earn more on an investment than would be saved in mortgage interest, it does expose you to the increased risk of market fluctuations. Many people would rather pay a couple of hundred extra dollars per month towards their (typically) largest source of debt than subject a small investment account to possible losses in the markets. The more favorable your interest rate is on your mortgage, the more the scales tip in the favor of keeping the extra money to invest instead. On the other hand, mortgage payments are generally tax-deductible; depending on your overall tax picture the extra deductions could save you more money year to year, making it worthwhile to overpay. You should consult an accountant or Certified Financial Planner (CFP) if your tax picture has a lot of moving parts year to year. (To read more about paying off your mortgage early, see Be Mortgage-Free Faster, Understanding the Mortgage Payment Structure or our Subprime Mortgage Meltdown feature.) 4. How should I maintain and update my budget? In the first few months, it's essential to review account statements regularly and see exactly how much was spent on various expenses. These aggregate figures should be compared to the amount set up in your budget and any adjustments should be made to reflect the reality of your life. This is the best and easiest way for your budget to remain relevant in your financial life. Inevitably you will come across "one time" expenses that you may wish to add up over the course of a year rather than per month. For example, let's say your refrigerator goes on the fritz and it costs $400 to make repairs. While this is a legitimate household maintenance expense, it wouldn't be accurate to add $400 to a section of your budget for household expenses or upkeep. It would be better to add up all of these sporadic expenses to arrive at an annual figure for "home maintenance" or similar category in your budget. Remember, however, if you find that you've budgeted too harshly and have left little room for fun, you will not stick to this budget. If you find that you are covering bills, decreasing debt, filling your emergency fund and savings accounts, but just can't stand missing out on the latest movies or parties with friends, then you should re-evaluate your budget to reflect your new goals. If you don't keep your budget current to your needs, wants and future goals, you simply will abandon it for present pleasures. It's not rocket science, and you can have both. 5. Why do I always seem to have expenses or wants that don't fit into my budget?
One reason why some people stop using a budget is because there are many expenses that don't seem to have a place in their budget. This is partly to be expected, and is easy to fix. Any good budget will have a "miscellaneous" category for all disparate expenses that come up in a given month or year. A target budget for miscellaneous expenses can be made by simply looking over purchases made over a few months time and calculating a simple average. What came up that had to be fixed, bought or borrowed? Would you be able to include those surprises in any of your other categories? If not, then add these miscellaneous costs to your budget to cover for the rest of the year. The point is to decide which costs are fixed (not negotiable and must be paid each month) versus variable (which fluctuate depending on the month or your mood). Your rent, for example is fixed. Your gym membership, however fixed the rate is, can still be cut if you choose to quit, and is therefore variable. Once you figure out if the cost is fixed or variable, you've won half the battle to budgeting.
Read more: http://www.investopedia.com/articles/pf/07/budget-qs.asp#ixzz1ehPG4IR2
1. Organisations need for additional information 2. Making up Final Accounts :: To derive the additional information needed 3. Preparing Trading and Profit & Loss a/c :: To derive information relating to profits 4. Preparing Trading and Profit & Loss a/c :: Illustration. 5. Preparing the Balance Sheet To Derive Information relating to Position :: Illustration 6. Need for a Seperate "Trading a/c" and "Profit & Loss a/c" 7. Transfer of Net Profit to "Capital a/c" or "Profit & Loss Appropriation a/c" 8. Using Trial Balance in the Preparation of Final Accounts 9. What are Adjustments? Dealing with them in preparing Final Accounts 10. Trading Account Ascertaining Cost of Goods Sold. 11. Trading Account Closing Stocks, Opening Stocks Valuation. 12. Trading Account Recording Closing Stock and Opening Stock. 13. Trading Account Purchase Returns and Sales Returns. 14. Bases/Systems of Accounting Cash, Mercantile, Hybrid. 15. Converting the Basis/System of Accounting Cash to Mercantile ... 16. Finding Profits of a period under a Basis given profits under the other
17. 18. More Topics Under Construction. 19.
Adjustments
1. 2. 3. 4. 5. 6. 7. 8.
Expenditure Outstanding and Prepaid Incomes Receivable and Prereceived Drawings of Goods/Stock Used up by owners Personally Goods/Stock used in the building up or construction of an asset Goods/Stock used for Advertisement Purposes Valuation of Normal/Abnormal Losses Abnormal Loss :: Accounting Treatment & Adjustments Normal Loss :: Accounting Treatment & Adjustments
Final Accounts/Accounting
Final
Meaning
1. 2. Occurring at or forming an end or termination Conclusive in a process or progression last, concluding, finishing, closing, ending
Synonyms
o
Final Accounts/Accounting
In its simplest sense, final accounts/accounting should be understood as the accounting activity that is carried on generally towards the end of a period called accounting period.
The basic purpose of accounting is derivation of information. The double entry system of accounting enables an organisation to derive the information that it needs in relation to accounting elements called account heads or ledger accounts. This double entry system of accounting, enables the collection of all the information relating to an element (account) at a single place. For example
To know the value of Furniture with the organisation a "Furniture a/c" is maintained. ... ... To know the amount of expenditure incurred on account of salaries a "Salaries a/c" is maintained. ...
The organisation's informational need defines the elements in the accounting system of the organisation. The more the information needed by the organisation the more the elements (accounting heads) that are to be maintained by the organisations'.
The place where the information relating to an element is collected/available is a Ledger. Each accounting element has a specific identity in the ledger and is known as a ledger account. Every Ledger posting should have a journal support i.e. the information flows into the ledger from/through a journal. There is no ledger without a journal. Recording the accounting transactions into the journal and posting them into the ledger form the core tasks carried on regularly in relation to the accounting process. However these are not the only tasks that exist in relation to an accounting system/process.
Including the tasks of recording the transactions and posting them into the ledger, these are the tasks that we generally come across and assume to be the tasks involved in accounting. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
Whenever a transaction takes place in an organisation, more so, in the case of transactions relevant to accounting, a proof is created in the form of either a voucher or a receipt or an invoice or any other document that gives the details relating to the transaction. Strictly speaking, this task is not a part of the accounting process. It is only a task which would enable the accomplishment of the accounting process or tasks.
Posting
The second accounting task is "Preparing the Ledger based on the information in the Journal". This is called Posting the Journal Entry into the Ledger.
Purpose!!
A Trial Balance is prepared to check the mathematical/arithmetic accuracy of accounting. This is the main and most important purpose of preparation of the Trial Balance and nothing else. However, since it is anyhow prepared for an important purpose, it is used for other purposes wherever possible. Just because it is being used for other purposes (like in the preparation of final accounts), we cannot say that the trial balance is prepared for those other purposes.
Apart from the information relating to the various elements (ledger accounts) that an organisation collects, there is other information that is needed by the organisation. In general, in accounting we can identify two important pieces of information that the organisation needs. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments The ledger accounts collect information relating to each element. All the elements (account heads) are classified into three types. Personal accounts (relating to persons and organisations), Real accounts (relating to tangible aspects) and Nominal accounts (relating to incomes/gains and expenses/losses).
keeps on happening continuously. The information thus collected in the form of ledger accounts does not say anything about the profits made by the organisation. The organisation periodically would be interested in knowing the amount of profit that it has made over the period.
Involvement of a Period
When it comes to thinking about profits there is a period involved in the thought. We think of profits made over a period and not at a particular instance. For example, We think of Profits made
From 1st April to 31st April or During April or During the 6 months ending 30th June For the year from 1st April, 2005 to 31st March 2006.
Position at an instance
When it comes to thinking about the position there is an instance involved in the thought. We think of the position as at a point of time and not a period. For example, We think of the position
As on 24th June or As at the end of a period i.e. on the last day of the period
The organisational accounting system provides information in the form of ledger accounts maintained in the books of accounts. The additional information that is needed is obtained by deriving it from the information that is existing in these ledger accounts.
The ledger accounts relating to the organisation are classified into three types. Personal, Real and Nominal.
Nominal Accounts
Nominal accounts are related to expenses, losses, incomes and gains. Since ascertaining profits or losses involves dealing with incomes, gains, expenses and losses we can conclude that all the nominal accounts together would give us the information relating to the profits or losses made by the organisation. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
Preparation of these ledger accounts requires us to think beyond just transferring the information in the nominal accounts into these accounts.
Real Accounts
Real accounts are related to tangible aspects. In general we can identify that all asset accounts are real accounts.
Personal Accounts
Personal accounts are related to persons and organisations. These are persons/organisation which owe the organisation or to whom the organisation owes. In effect they either form creditors (liabilities) or debtors (assets). Since all the nominal accounts have been dealt with in deriving the information relating to profits and we are left with only the real and personal accounts which represent either assets or liabilities we can conclude that all the real and personal accounts together give us the information relating to the position of the organisation.
Balance Sheet
To derive the information relating to the position of the organisation from these real and personal accounts a statement by name "Balance Sheet" is prepared. However preparing the Balance sheet need us to think a bit beyond just listing out the information relating to the personal and real accounts in the statement.
Assets
Real accounts and Personal accounts are capable of being called assets. Any element (account) that is capable
of being liquidated (that is capable of being converted to cash by giving it away) indicates an asset. Machinery, Furniture, Cash, etc are real accounts that can be called assets.
Liabilities
All elements representing liabilities are Personal accounts. An element that is capable of being cleared by paying out indicates a liability.
Information needs vary from organisation to organisation. Even the information relating to profits and position would also be derived for such periods and on such dates respectively depending on the organisations need or this information.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
Accounting Period
Accounting Period is that period for which the organisation ascertains the profit or loss. If the organisation is trying to ascertain the profits made over a year, then the accounting period is a year. If it is trying to ascertain the profits made over a six months period, then the accounting period is six-months.
There are two aspects relating to an accounting period. The length of the period as well as the being/end dates of the period. These can be ascertained from the way the accounting period is stated. For example, where the accounting period of an organisation is stated as
From 1st July to 31st December, This implies that the length of the accounting period is 6 months. One year and starts on 1st January every year. This implies that the accounting period is from 1st January to 31st December and is one year long.
Statutory Requirements
The need of the organisation to comply with the various laws that it has to adhere to would also influence the decision relating to the accounting period. Say in India, the Income Tax Act, needs organisations to calculate and present their business profits for the period from 1st April to the following 31st March. Therefore, the organisations would follow the same accounting period so that their accounting would serve their informational needs as well as enable them to easily present the information that has to be presented to the Income Tax Department.
The "Trading and Profit & Loss a/c" is a ledger account. Like all ledger accounts, the postings in this ledger account also flow from the journal. "No Journal No Ledger".
For Ascertaining the sum of balances in Nominal Accounts with a Debit Balance
This is done by transferring the balances in the nominal accounts with a debit balance, to an account by name "Trading and Profit & Loss a/c". Transferring a debit balance from one account to a second results in the second account being debited and the first account being credited.
Journal in the books of M/s __ for the period from ____ to _____
Date
V/R No.
Particulars
L/F
March 31st
Trading and Profit & Loss a/c To Nominal a/c [with a debit balance]
Dr
xxxx xxxx
[For the debit balances in the nominal accounts transferred to the "Trading and Profit & Loss a/c" for the purpose of ascertaining the profits on the last day of the accounting period ]
For Ascertaining the sum of balances in Nominal Accounts with a Credit Balance
This is done by transferring the balances in the nominal accounts with a credit balance to an account by name "Trading and Profit & Loss a/c". Transferring a credit balance from one account to a second results in the second account being credited and the first account being debited.
Journal in the books of M/s __ for the period from ____ to _____
V/R No. Debit Amount Credit Amount (in Rs) (in Rs)
Date
Particulars
L/F
March 31st
Nominal a/c [with a credit balance] To Trading and Profit & Loss a/c
Dr
xxxx xxxx
[For the credit balances in the nominal accounts transferred on the last day of the accounting period to the "Trading and Profit & Loss a/c" for the purpose of ascertaining the profits.]
Dr
Cr
Date
Particulars
J/F
Date
Particulars
J/F
31/03/06
xxx 31/03/06
xxx
sub-total
31/03/06
To Bal (Profit)
Total
2,56,000 5,80,000
Total
5,80,000
Thus the "Trading and Profit & Loss a/c", is nothing but a consolidated account formed by transferring the balances in the nominal accounts.
Since the "Trading and Profit & Loss a/c" is prepared by transferring the ledger account balances in all the nominal accounts in the books of accounts it is appropriate to consider it to be a nominal account. Any Ledger account prepared to ascertain the profits or losses out of a set of transactions is a nominal account. Thus, "Trading and Profit & Loss a/c" is a nominal account.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
Accounting period is the period for which we wish to ascertain the profits or losses. The "Trading and Profit & Loss a/c" is prepared at the end of the accounting period. Say if the accounting period is a year from 1st April 2005 to 31st March 2006, the journal entry for transferring the amounts to the "Trading and Profit & Loss a/c" is recorded at the end of the accounting period i.e. on 31st March 2006.
To ascertain the profits, we transfer the balances in the Nominal accounts (with debit balances as well as credit balances) to the "Trading and Profit & Loss a/c", thus creating that ledger account.
Nil Balance
When the total balance in a nominal account is transferred to the "Trading and Profit & Loss a/c", its balance becomes Nil.
Dr
Date Particulars J/F
Cr
(in Rs)
(in Rs)
Total
96,000
How do Nominal a/c's appear in every accounting period if they are closed
The nominal accounts are closed at the end of the accounting period. But we see the same nominal accounts being used in accounting in all the accounting periods. Say, the "Rent Paid a/c" would appear in the accounting books in all the accounting periods. This is for the reason that all the nominal accounts are closed at the end of the accounting period and are opened afresh at the beginning of the next accounting period for being used in that accounting period. Therefore, the "Rent Paid a/c" appearing in the books in a particular accounting period is different from the "Rent Paid a/c" appearing in the same books in any other accounting period. All the nominal accounts are opened anew at the beginning of the accounting period.
Illustration Problem
To get an understanding and feel of the process of final accounting, let us go through an example of an organisations accounting consisting of a few transactions during an accounting period. Following are the transactions relating to M/s Trinity Foods, over an accounting period from 1st June 2005 to 30th June 2006.
Started business with Capital Rs. 1,00,000 Paid into Bank Rs. 10,000 Bought Furniture and paid cash Rs. 25,000 Bought goods for cash Rs. 50,000
Bought goods from Ram on Credit Rs. 15,000 Sold a part of the goods for Rs. 75,000 and paid the proceeds into bank directly Sold the remaining goods on credit for Rs. 50,000 to Rahim Paid Salaries and Wages Rs. 5,000 Paid rent by cheque Rs. 8,000
Journal Entries
Hide/Show
Journal in the books of M/s Trinity Foods for the period from 1st June 2005 to 30th June 2005
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
1st to 30th
Dr
1,00,000 1,00,000
[For the amount brought in by the proprietor towards his capital contribution.] 1st to 30th Bank a/c To Cash a/c [For the amount paid into bank.] 1st to 30th Furniture a/c To Cash a/c [For the amount paid towards purchase of Furniture.] 1st to 30th Purchases a/c To Cash a/c [For the amount paid towards purchase of goods/stock.] 1st to 30th Purchases a/c To Ram a/c Dr 15,000 15,000 Dr 50,000 50,000 Dr 25,000 25,000 Dr 10,000 10,000
[For the value of goods bought from Ram on credit.] 1st to 30th Bank a/c To Sales a/c Dr 75,000 75,000
paid into bank directly.] 1st to 30th Rahim a/c To Sales a/c [For the value of goods sold on credit to Rahim.] 1st to 30th Salaries and Wages a/c To Cash a/c Dr 5,000 5,000 Dr 50,000 50,000
[For the amount paid in cash towards salaries and wages.] 1st to 30th Rent Paid a/c To Bank a/c [For the amount paid towards rent by cheque.] Dr 8,000 8,000
Cr
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th
To Capital a/c
By Bank a/c By Furniture a/c By Purchases a/c 30/06/05 By Sal. & Wages a/c By Balance c/d
Total
1,00,000
Total
1,00,000
30/06/05
To Balance b/d
10,000
Dr
Capital a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
1,00,000 1,00,000
30/06/05
By Balance b/d
1,00,000
Dr
Bank a/c
Amount (in Rs)
Cr
Amount (in Rs)
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th
10,000 1st-30th By Rent Paid 75,000 a/c 30/06/05 By Bal c/d 85,000 77,000
Total
8,000 77,000
Total
85,000
Dr
Furniture a/c
Amount (in Rs)
Cr
Amount (in Rs)
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th
To Cashl a/c
Total
25,000 25,000
Dr
Purchases a/c
Amount (in Rs)
Cr
Amount (in Rs)
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th "
65,000
65,000
Dr
Ram a/c
Amount (in Rs)
Cr
Amount (in Rs)
Date
Particulars
J/F
Date
Particulars
J/F
15,000
1st-30th
By Purchases a/c
Total
15,000
Total
15,000
15,000 15,000
Dr
Sales a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
Total
30/06/05
By Balance b/d
1,25,000
Dr
Rahim a/c
Amount (in Rs)
Cr
Amount (in Rs)
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th
To Sales a/c
Total
50,000 50,000
Dr
Cr
Amount (in Rs)
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th
To Cash a/c
Total
5,000 5,000
Dr
Cr
Amount (in Rs)
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th
To Bank a/c
Total
8,000 8,000
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
The trial balance is nothing but a statement of ledger account balances as on a particular instance.
Trial Balance of M/s Trinity Foods" as on 30th June 2005 Debit Amount (in Rs)
10,000 1,00,000 77,000 25,000 65,000 15,000 1,25,000
Particulars
L/F
Cash a/c Capital a/c Bank a/c Furniture a/c Purchases a/c Ram a/c Sales a/c Rahim a/c Salaries and Wages a/c Rent Paid a/c
Total
2,40,000
2,40,000
Preparing Trading and Profit and Loss Account : Journal & Ledger
Consider the above Trial Balance. There are a total of 4 nominal accounts with either debit or credit balances.
Purchases a/c [Debit Balance] Sales a/c [Credit Balance] Salaries and Wages a/c [Debit Balance] Rent Paid a/c [Debit Balance]
To ascertain the profit or loss made by the organisation, the balance in these accounts should be transferred to the "Trading and Profit & Loss a/c". The journal entries for these transfers would be:
Journal Entries
Hide/Show
Journal in the books of M/s Trinity Foods for the period from 1st June 2005 to 30th June 2005
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
June 30th
Trading and Profit & Loss a/c To Purchases a/c To Salaries & Wages a/c To Rent Paid a/c
Dr
[For the transfer of debit balances in nominal accounts at the end of the accounting period to
the Trading and Profit & Loss a/c for the purpose of ascertaining profits.] June 30th Sales a/c To Trading and Profit & Loss a/c Dr 1,25,000 1,25,000
[For the transfer of credit balances in nominal accounts at the end of the accounting period to the Trading and Profit & Loss a/c for the purpose of ascertaining profits.]
Dr
Cr
Date
Particulars
J/F
Date
Particulars
J/F
By Sales a/c
1,25,000
sub-total
1,25,000
30/06/05
To Bal (Profit)
Total
47,000 1,25,000
Total
1,25,000
Since the credit side total is greater, the account has a credit balance. Since a credit balance in a nominal account indicates a gain, we can say that there is a profit.
Hide/Show
Purchases a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th "
By Bal c/d
65,000
Total
30/06/05
To Balance b/d
Total
Dr
Sales a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
30/06/05
To Bal c/d
Total
Total
1,25,000 1,25,000
Dr
Cr
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th
To Cash a/c
Total
5,000 5,000
30/06/05
By Bal c/d
Total
5,000 5,000
30/06/05
To Balance b/d
Total
5,000 5,000
Dr
Cr
Date
Particulars
J/F
Date
Particulars
J/F
1st-30th
To Bank a/c
Total
8,000 8,000
30/06/05
By Bal c/d
Total
8,000 8,000
30/06/05
To Balance b/d
Total
8,000 8,000
The balance in these nominal accounts becomes zero after the balances are transferred to the "Trading and Profit & Loss a/c". Thus, nominal accounts are closed at the end of the accounting period by transfer to the "Trading and Profit & Loss a/c". In the subsequent accounting period, if the same nominal account heads are used, they are opened anew. Thus these accounts pertaining to the current accounting period are independent of the nominal accounts
with the same name in any other accounting period. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
The trial balance is a list of ledger account balances at an instance when it is drawn. If we consider the instance after having prepared the "Trading and Profit & Loss a/c", we do not find a balance in any nominal account. All the nominal accounts are closed by transfer to the "Trading and Profit & Loss a/c", thereby leaving a nil balance in all of them. The "Trading and Profit & Loss a/c" is also a nominal account and has a credit balance if there is a profit and a debit balance if there is a loss. If we make a trial balance after having prepared the "Trading and Profit & Loss a/c" we will find only real and personal accounts in it apart from the nominal account "Trading and Profit & Loss a/c".
Trial Balance of M/s Trinity Foods" as on 30th June 2005 [After closing Nominal accounts] Debit Amount (in Rs)
10,000 1,00,000 77,000 25,000 50,000 15,000 47,000
Particulars
L/F
Cash a/c Capital a/c Bank a/c Furniture a/c Ram a/c Rahim a/c Trading and Profit & Loss a/c
Total
Author Credit : The Edifier
1,62,000
1,62,000
What is it that comes to our mind when we think of a person's position? It is the value of his/her property and the liabilities he/she has. Even in accounting, in trying to ascertain the position of a business entity, this is what we think of. The position of an organisation is indicated by the value of the assets and liabilities held by the organisation.
The information relating to the assets and liabilities of an organisation is available in the Real and Personal Accounts.
Real Accounts
Real accounts are related to tangible aspects. In general we can identify that all asset accounts are real accounts.
Personal Accounts
Personal accounts are related to persons and organisations. These are persons/organisation which owe the organisation or to whom the organisation owes. In effect they either form creditors (liabilities) or debtors (assets). Since all the nominal accounts have been dealt with in deriving the information relating to profits and we are left with only the real and personal accounts which represent either assets or liabilities we can conclude that all the real and personal accounts together give us the information relating to the position of the organisation.
When does the organisation need the information relating to its position?
The organisation may need this information at many points of time during the course of the conduct of the business. Theoretically, the information may be derived as and when needed by collecting the ledger account balances relating to the real and personal accounts, but is conventionally derived at a point which indicates the end of the accounting period (i.e. the period for which the profits are ascertained). Say if the organisation ascertains the profits made for the period from 1st April 2005 to 31st March 2006, it would ascertain the position as on 31st March 2006. The ending day for an accounting period would be the beginning day for the subsequent accounting period and as such the information relating to the position of the organisation as on the last day of a particular accounting period would be the information relating to its position as on the first day of the subsequent accounting period. Thus we can say that the information relating to position is derived in relation to the opening and closing days of the accounting periods.
Practically, in deriving the information relating to the correct position of the organisation, there are a number of aspects to be taken care of. It is not as simple as collecting the ledger account balances of the real and personal accounts as and when we intend to ascertain the position. For example, the information relating to profits is also necessary to arrive at the position of an organisation. We know that profits increase capital and loss decreases capital. Capital is a liability. Therefore, the balance in capital account cannot be used to reflect the correct position of the business unless the profits or losses (up to that point of time) are adjusted in the capital account. And for this the profits till that point of time are to be ascertained. This should explain the reason why the ascertainment of the position generally goes along with the ascertainment of the profits of the business.
The information relating to the position of an organisation is presented in the form of a statement titled "Balance Sheet".
Balance Sheet of M/s Trinity Foods as on 30th June 2005 Liabilities Amount Assets Amount
Total Total
Consider the Trial Balance after having ascertained the profits (from the illustration relating to ascertainment of profits)
Trial Balance of M/s Trinity Foods" as on 30th June 2005 (after closing Nominal accounts) Debit Amount (in Rs)
10,000 1,00,000 77,000 25,000 50,000 15,000 47,000
Particulars
L/F
Cash Capital Bank Furniture Ram Rahim Trading and Profit & Loss
Total
1,62,000
1,62,000
Note
After getting accustomed to accounting we avoid using the word a/c in the Ledger accounts, Trial Balance, Balance Sheet and other places where we do not find it essential, just to make the statements and the ledger accounts look more appealing.
Amount
Assets
Amount
10,000 77,000 25,0000 50,000 1,62,000
Be conscious of the fact that the Balance Sheet is just a statement and not a ledger account. We are not transferring the balances in the real and personal accounts into the balance sheet. We are only showing them here.
The "Trading and Profit & Loss a/c" is prepared by transferring the balances in all the nominal accounts to it. This amounts to setting off all the debit balances and the credit balances to obtain the profit/loss made. Thus the "Trading and Profit & Loss a/c" gives us the information relating to the profits available after setting off all expenses/losses with all incomes/gains.
Information obtained from the Trading and Profit and Loss a/c
The "Trading and Profit & Loss a/c" that is prepared to ascertain the profits or losses made by the organisation gives us the information relating to the overall profit or loss made by the organisation.
Illustrative Explanation
The following is the information relating to the Nominal accounts in an organisation for four accounting periods (calendar year being its accounting period)
Account Head
Purchases Salaries Rent Interest Sales
2002
2,00,000 15,000 12,000 80,000 3,00,000
2003
2,40,000 18,000 18,000 96,000 3,60,000
2004
3,25,000 28,000 24,000 1,35,000 4,87,500
2005
4,00,000 32,000 30,000 1,65,000 6,00,000
If we are making a single "Trading and Profit & Loss a/c" the profits/losses made by the organisation would be:
2002
2003
2004
2005
Expenses:
Purchases Salaries Rent Interest Total
Profit/Loss:
Income Expenditure
The profits ascertained through this method indicate a growing loss over the years. If, the organisation should take a decision to whether to continue with the business or not, it has to opt for moving out of the business.
Dr
Trading and Profit & Loss a/c (for the year 2003)
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
To To To To
3,60,000 12,000
Total
3,72,000
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
The combined Trading and Profit and Loss Account gives an overall comprehensive view of the profits or losses.
Breaking the Combined Trading and Profit & Loss account into two Accounts
The same information relating to profits is broken down into two and derived at two different stages. At the first stage, the profit from the core operations relating to the business is derived and in the next stage the overall profits are derived.
2002
2003
2004
2005
3,00,000 3,00,000 2,00,000 2,00,000 1,00,000 18,000 12,000 80,000 1,07,000 7,000
3,60,000 3,60,000 2,40,000 2,40,000 1,20,000 18,000 18,000 96,000 1,32,000 12,000
4,87,500 4,87,500 3,25,000 3,25,000 1,62,500 28,000 24,000 1,35,000 1,87,000 24,500
6,00,000 6,00,000 4,00,000 4,00,000 2,00,000 32,000 30,000 1,65,000 2,27,000 27,000
Direct Expenses:
Purchases Total
Core Profit:
Direct Income Direct Exp.
Indirect Expenses:
Salaries Rent Interest Total
Overall Profit:
Core Profit Indirect Expenses.
If we look at the remade statement, we will be able to identify that the organisation is conducting a business which is generating reasonably good amount of profits (50% on cost or around 33% on sales). The turnover has been increasing, the core profit has been increasing, but the organisation is ultimately making an overall loss. The segregation of information also indicates that the business is good enough to be conducted, but the indirect expenses are a reason for the loss being made by the organisation. This should make the organisation think as to the real reason for the loss being made and take corrective steps or actions if possible. The organisation would be able to arrive at such conclusions only if the information is presented a manner so as to reveal the basic/core profit and the overall profit figures separately. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
Almost in all cases, there are two ledger accounts used in the exercise of ascertaining the profits made by the organisation, (1) "Trading a/c" and (2) "Profit & Loss a/c". The information contained in the combined "Trading and Profit & Loss a/c" is spread over the two accounts.
Hide/Show
The journal entries relating to the preparation of separate "Trading a/c" and "Profit and Loss a/c" would thus be as follows:
Journal in the books of M/s ___ for the period from ____ to ____
V/R No. Debit Amount Credit Amount (in Rs) (in Rs)
Date
Particulars
L/F
31st Dec
Trading a/c
Dr
xxxx
To Direct Expenses a/c [For the transfer of debit balances in the direct expenses accounts to the Trading a/c.] 31st Dec Direct Incomes a/c To Trading a/c [For the transfer of credit balances in the direct incomes accounts to the Trading a/c.] 31st Dec Trading a/c To Profit and Loss a/c Dr Dr
xxxx
xxxx xxxx
xxxx xxxx
[For the transfer of Gross Profit to the Profit and Loss a/c.] 31st Dec Profit and Loss a/c To Trading a/c Dr xxxx xxxx
[For the transfer of Gross Loss to the Profit and Loss a/c.] 31st Dec Profit and Loss a/c To Indirect Expenses/Losses a/c Dr xxxx xxxx
[For the transfer of debit balances in the indirect expenses accounts and accounts indicative of losses to the Profit and Loss a/c.] 31st Dec Indirect Incomes/Gains a/c To Profit and Loss a/c Dr xxxx xxxx
[For the transfer of credit balances in the indirect incomes accounts and accounts indicative of gains to the Profit and Loss a/c.]
Dr
Cr
Particulars
Particulars
3,60,000
3,60,000
3,60,000
Dr
Cr
Particulars
Particulars
1,20,000 12,000
1,32,00
The Trading and Profit and Loss accounts are generally shown together to indicate the flow of information from one to another.
Dr
Trading and Profit and Loss a/c [For the year 2003]
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
3,60,000
1,32,00
Note
Though the heading used here seems to indicate that it is a single account, it is in effect two different accounts.
Trading Account : Gross Profit Profit & Loss Account : Net Profit
Gross Profit
The profit/loss revealed by the "Trading a/c" is called "Gross" Profit/Loss. The "Gross" Profit/Loss is transferred from the "Trading a/c" to the "Profit and Loss a/c" to enable the
Net Profit
The profit/loss revealed by the "Profit and Loss a/c" is called "Net" Profit/Loss. The "Net" Profit/Loss is transferred to the "Capital a/c" or the "Profit and Loss Appropriation a/c", thereby closing the "Profit and Loss a/c".
Nominal Accounts
The "Trading a/c" and "Profit and Loss a/c" are ledger accounts derived by breaking up the information in the "Trading and Profit & Loss a/c" i.e. these accounts together replace the "Trading and Profit & Loss a/c". Since the "Trading and Profit & Loss a/c" is a nominal account, these two accounts are also nominal accounts. Any ledger account made to ascertain the profits or losses made out of a set of transactions is a nominal account.
All the nominal accounts are closed at the end of the accounting period by transfer to either the Trading a/c or the Profit and Loss a/c as the case may be.
Transfer of Profit and Loss a/c balance : To Profit and Loss Appropriation a/c
At the time of starting the business, the owner invests certain amount as his capital contribution for the business either in the form of cash or any other assets. As time goes by, the organisation would be making profits or losses over the various accounting periods that it passes through. When profits or losses are transferred to the Capital account, the balance in that account increases when there are profits and decreases when there are losses. Thus, the capital account balance is a figure that gets altered by the amounts of profits and losses made over the years.
Distinct Information
If the organisation intends to have the information relating to the contribution made by the owners towards capital as well as the addition/shortage of capital that has accumulated in the business on account of the profits/losses made by over the years (through its operations) separately, it would transfer the profits or losses to a separate account by name "Profit and Loss appropriation a/c" or "Retained Earnings a/c" instead of to the "Capital a/c". The basic purpose of accounting is derivation of information and the more the information we need, the more the accounting heads we need to maintain.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs) Credit Amount (in Rs)
Particulars
L/F
Opening Stock a/c Purchases a/c Salaries a/c Rent a/c Wages a/c Carriage Inwards a/c Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Sales a/c Debtors a/c Machinery a/c Bank Loan a/c
20,000 1,20,000 25,000 18,500 47,000 12,400 24,600 44,000 1,84,000 75,000 37,300 3,32,000 62,900 1,76,000 72,100
Total
6,25,400
6,25,400
Dr
Trading a/c [of M/s Razmataz Chemicals for the period ending 31st December 2005]
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To To To To To
Opening Stock Purchases Wages a/c Carriage Inwards a/c Gross Profit
3,32,000
3,32,000
Dr
Profit & Loss a/c [of M/s Razmataz Chemicals for the period ending 31st December 2005]
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
1,32,600
1,32,600
The P/L a/c shows a credit balance when there are profits. Transferring a credit balance from one account to a second would result in the second account being credited and the first account being debited.
Journal
The journal entry for transfer of the net profit from P/L a/c to the Capital a/c would therefore be
Journal in the books of M/s Razmataz Chemicals for the period from __ to 31st December 2005
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
1st to 30th
Dr
89,100 89,100
Ledger
Dr Capital a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
30/06/05
To Bal c/d
2,73,100
__-31st 31/12/05
Total
2,73,100 01/01/06
By Balance b/d
2,73,100
Hide/Show
The "Trial Balance" redrawn after closing the "Profit and Loss a/c"
Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)
24,600 44,000 2,73,100 75,000 37,300 62,900
Particulars
L/F
Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Machinery a/c
1,76,000
72,100
Total
3,82,500
3,82,500
Balance Sheet
Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005 Liabilities
Capital Creditors Bank Loan
Amount
Assets
Amount
24,600 75,000 44,000 62,900 1,76,000 3,82,500
The P/L a/c shows a credit balance when there are profits. Transferring a credit balance from one account to a second would result in the second account being credited and the first account being debited.
Journal
The journal entry for transfer of the net profit from P/L a/c to the "Profit and Loss Appropriation a/c" would be
Journal in the books of M/s Trinity Foods for the period from 1st June 2005 to 30th June 2005
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
1st to 30th
Dr
47,000 47,000
[For the transfer of the net profit to the profit and loss appropriation account.]
Ledger
Dr Profit and Loss Appropriation a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
30/06/05
To Bal c/d
47,000
30/06/05
By Net Profit
47,000
Total
47,000 30/06/05
Total
47,000 47,000
By Balance b/d
Hide/Show
Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)
24,600 44,000 1,84,000 75,000 37,300 62,900 1,76,000 72,100 89,100
Particulars
L/F
Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Machinery a/c Bank Loan a/c Profit and Loss Appropriation a/c
Total
3,82,500
3,82,500
Amount
1,84,000 89,100 37,300 72,100
Assets
Cash Bank Furniture Debtors Machinery
Amount
24,600 75,000 44,000 62,900 1,76,000 3,82,500
3,82,500
Amount Amount
1,84,000 89,100
Assets
Amount Amount
24,600 75,000 44,000 62,900 1,76,000 3,82,500
(Add:) P & L
Appropriation Creditors Bank Loan
Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)
50,000 2,35,000 48,000 8,500 15,000 24,400 18,250 86,000 24,000 2,50,000 61,000 58,250 2,63,400 58,600 1,45,000 2,02,100
Particulars
L/F
Opening Stock a/c Purchases a/c Salaries a/c Postage & Stationary a/c Wages a/c Carriage Outwards a/c Rent & Insurance a/c Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Sales a/c Debtors a/c Land and Buildings a/c Debenture Loan a/c
Total
7,73,750
7,73,750
Dr
Trading a/c [of M/s Razmataz Chemicals for the period ending 31st December 2005]
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To To To To
2,63,400 36,600
3,00,000
3,00,000
Dr
Profit & Loss a/c [of M/s Razmataz Chemicals for the period ending 31st December 2005]
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To To To To To
Gross Loss Salaries Postage and Stationery Carriage Outwards Rent and Insurance
1,35,750
1,35,750
The P/L a/c shows a debit balance when there are losses. Transferring a debit balance from one account to a second would result in the second account being debited and the first account being credited.
Journal
The journal entry for transfer of the net loss from P/L a/c to the Capital a/c would be
Journal in the books of M/s _____ for the period ending 32st December 2005
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
1st to 30th
Dr
1,35,750 1,35,750
Ledger
Dr Capital a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
31/12/05 31/12/05
By Balance b/d
2,50,000
Total
2,50,000 1,14,250
By Balance b/d
Hide/Show
Trial Balance
The "Trial Balance" redrawn after closing the "Profit and Loss a/c"
Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)
86,000 24,000 1,14,250 61,000 58,250 58,600 1,45,000 2,02,100
Particulars
L/F
Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Land and Buildings a/c Debenture Loan a/c
Total
3,74,600
3,74,600
Balance Sheet
Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005 Liabilities
Capital Creditors Debenture Loan
Amount
Assets
Amount
86,000 61,000 24,000 58,600 1,45,000 3,74,600
1,14,250 Cash 58,250 Bank 2,02,100 Furniture Debtors Land and Buildings 3,74,600
The P/L a/c shows a debit balance when there are losses. Transferring a debit balance from one account to a second would result in the second account being debited and the first account being credited.
Journal
The journal entry for transfer of the net loss from P/L a/c to Profit and Loss Appropriation a/c would be
Journal in the books of M/s _____ for the period ending 32st December 2005
Date V/R Particulars L/F Debit Amount Credit Amount
No.
(in Rs)
(in Rs)
1st to 30th
Dr
1,35,750 1,35,750
[For the transfer of the net loss to the profit and loss appropriation account.]
Ledger
Dr Profit and Loss Appropriation a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
31/12/05
To Net Loss
Total
1,35,750 1,35,750
31/12/05
By Balance c/d
Total
1,35,750 1,35,750
30/06/05
To Balance b/d
1,35,750
Hide/Show
The "Trial Balance" redrawn after closing the "Profit and Loss a/c"
Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)
86,000 24,000 2,50,000 61,000 58,250 58,600 1,45,000 2,02,100 1,35,750
Particulars
L/F
Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Land and Buildings a/c Debenture Loan a/c Profit and Loss Appropriation a/c
Total
5,10,350
5,10,350
Balance Sheet
Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005
Liabilities
Capital Creditors Debenture Loan
Amount
Assets
Amount
86,000 61,000 24,000 58,600 1,45,000 1,35,750 5,10,350
2,50,000 Cash 58,250 Bank 2,02,100 Furniture Debtors Land and Buildings P & L Appropriation 5,10,350
Alternative
Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005 Liabilities
Capital
Amount Amount
2,50,000 1,35,750 Cash
Assets
Amount Amount
86,000 61,000 24,000 58,600 1,45,000 3,74,600
(Less:) P & L
Appropr. Creditors Debenture Loan
The basic purpose of accounting is derivation of information. Where the organisation feels that in addition to having the information relating to the Capital a/c and the accumulated profits separately, it also needs to know the total amount of capital available with it (including accumulations), the two accounts are clubbed and shown in the Balance Sheet. Since here both the accounts lie on different sides of the balance sheet, the two amounts are set off. Showing an item on a particular side and deducting the item from another item on the opposite side of the balance sheet would give the same effect.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
The profit from the "Profit & Loss a/c" i. To Capital a/c The posting on a. b. ii. The debit side of Profit and Loss a/c should read "To Capital a/c" The credit side of Capital a/c should read "By Profit and Loss a/c"
To Profit and Loss Appropriation a/c The posting on a. b. The debit side of Profit and Loss a/c should read "To Profit and Loss Appropriation a/c" The credit side of Profit and Loss Appropriation a/c should read "By Profit and Loss a/c"
The loss from the "Profit & Loss a/c" i. To Capital a/c The posting on a. b. ii. The credit side of Profit and Loss a/c should read "By Capital a/c" The debit side of Capital a/c should read "To Profit and Loss a/c"
To Profit and Loss Appropriation a/c The posting on a. b. The credit side of Profit and Loss a/c should read "By Profit and Loss Appropriation a/c" The debit side of Profit and Loss Appropriation a/c should read "To Profit and Loss a/c"
Journal in the books of M/s Razmataz Chemicals for the period from __ to 31st December 2005
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
1st to 30th
Dr
89,100 89,100
Transfer of Credit balance From Profit and Loss a/c To Capital a/c Transferring a credit balance from one account to a second would result in the second account being credited and the first account being debited.
Transfer of Debit balance From Capital a/c To Profit and Loss a/c Transferring a debit balance from one account to a second would result in the second account being debited and the first account being credited.
Therefore, to give us the additional information relating to the reason and direction of transfer, we create and use additional ledger accounts by name "Net Profit a/c" and "Net Loss a/c".
Journal/Ledger Hide/Show
Journal in the books of M/s Razmataz Chemicals for the period from ___ to 31st December 2005
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
1st to 30th
Profit and Loss a/c To Net Profit a/c [For the transfer of the net profit to the Net Profit account.]
Dr
47,000 47,000
1st to 30th
Net Profit a/c To Profit and Loss Appropriation a/c (Or) Capital a/c
Dr
89,100 89,100
[For the transfer of the net profit from the Net Profit account to the capital account or the profit and loss appropriation account.]
Dr
Cr
Date
Particulars
J/F
Date
Particulars
J/F
31/12/05
89,100
31/12/05
89,100
89,100
Total
89,100
The Profit and Loss a/c would straight away reveal the information that there is Net Profit and has been transferred. The Capital a/c or the Profit and Loss Appropriation a/c would reveal the information that Net Profit
Journal/Ledger Hide/Show
Journal in the books of M/s Razmataz Chemicals for the period from ___ to 31st December 2005
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
1st to 30th
Net Loss a/c To Profit & Loss a/c [For the transfer of the net loss to the Net Loss account.]
Dr
1,35,750 1,35,750
1st to 30th
Dr
1,35,750 1,35,750
[For the transfer of the net loss from the Net Loss account to the profit and loss appropriation account.]
Dr
Cr
Date
Particulars
J/F
Date
Particulars
J/F
31/12/05
1,35,750 1,35,750
31/12/05
1,35,750 1,35,750
The Profit and Loss a/c would straight away reveal the information that there is Net Loss and has been transferred. The Capital a/c or the Profit and Loss Appropriation a/c would reveal the information that Net Loss has been received by transfer.
Control Accounts
Accounts which are created and closed instantaneously and whose sole purpose is to enable the derivation of
greater information are called "Control Accounts". Use of Controlling accounts is a procedure that we adopt frequently in accounting.
Manual Accounting
In manual accounting, we just assume the presence of such accounts and use the useful phrases wherever needed. We do not record the journal entries relating to these and carry on posting as if we have recorded the journal.
Computerised Accounting
If you intend to make use of such a facility in computerised accounting, care should be taken to ensure that all the relevant controlling accounts are created and the required journal entries are passed.
A Nominal Account
If Profit & Loss Appropriation a/c is maintained, the Net profit or loss revealed by the Profit and Loss a/c in every accounting period is transferred to that account. Thus the accumulated balance in the Profit & Loss Appropriation a/c also indicates either a profit or loss which qualifies it to be called a nominal account. All the nominal accounts are closed at the end of the accounting period by transfer to either the Trading a/c or the Profit and Loss a/c as the case may be.
However, the Profit & Loss Appropriation a/c, though a nominal account is not closed. The balance in that account is carried over to the subsequent accounting periods just like balances in the case of Real or Personal accounts. With regard to this characteristic, the Profit & Loss Appropriation a/c is a special account.
Trial Balance of M/s Wearall Textlies as on 31st March 2006 Debit Amount (in Rs)
63,650
Particulars
L/F
Opening Stock
Textile Purchases Wages Octroi Salaries Rent Printing and Stationery Advertisements Cash Office Building Capital Bank Motor Vehicles Sundry Creditors Sales P/L Appropriation Sundry Debtors Machinery
22,56,000 3,25,000 1,78,200 1,04,000 1,26,000 74,650 86,000 26,000 4,23,450 2,50,000 1,19,000 2,10,000 1,80,000 36,86,000 6,52,950 2,08,000 5,69,000
Total
47,68,950
47,68,950
Computerised Accounting
In mechanised (computerised) accounting systems, trial balance is a statement that can be automatically derived as and when needed.
Preparation of a trial balance is not an act which forms a part of the activities involved in the accounting cycle. The Accounting Cycle (activities involved)
Begins with opening the books of accounts for an accounting period by recording the opening entry;
Journal in the books of M/s Amonaya Metals for the period from 1st January 2007 to ____
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
1st January
Dr
[For bringing the balances in the various ledger accounts at the end of the previous accounting period into books.]
This is the journal entry that supports the posting To Balance b/d and By Balance b/d in the various ledger accounts. Recording the various transactions all through out the accounting period; Balancing the ledgers as and when needed and finally at the end of the accounting period; Recording the transactions for making up the final accounts 1. 2. 3. 4. Making the Trading a/c Closing the Trading a/c by transferring the balance in it to Profit & Loss a/c Making the Profit and Loss a/c Closing the Profit and Loss a/c by transferring the balance in it to Capital a/c (or Profit and Loss Appropriation a/c)
Preparing the Balance sheet (A statement of balances in all the ledger accounts that remain after making up and closing the Trading and Profit & Loss a/c.) The accounting cycle ends with recording the closing entry for closing the books of accounts.
Journal in the books of M/s Amonaya Metals for the period from 1st Jan to 31st Dec 2007
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
31st December
Dr
[For carrying the balances in the various ledger accounts at the end of the accounting period to the subsequent accounting period.]
This is the journal entry that supports the posting To Balance c/d and By Balance c/d in the various
ledger accounts.
Final Accounting deals with all the ledger account balances at the end of the accounting period in one way or the other.
All the Nominal accounts that represent direct expenses and direct incomes are closed by transfer to the Trading a/c. For this at least two journal entries are recorded.
The Trading a/c is closed by transferring its balance to the Profit and Loss a/c. For this a journal entry is recorded. All the Nominal accounts that represent indirect expenses, losses and indirect Incomes are closed by transfer to the Profit and Loss a/c. For this at least two journal entries are recorded.
The Profit & Loss a/c is closed by transferring its balance to either the Capital a/c or Profit & Loss Appropriation a/c. For this a journal entry is recorded.
All the remaining accounts are listed out in the Balance Sheet. A closing entry is recorded in relation to this, though it is not directly related to preparing the balance sheet.
If the Final Accounting is to be done in a systematic manner, then all the journal entries mentioned above are to be recorded and all the ledger accounts that are affected by those transactions are to be posted to and updated. That would result in the making up of the Trading a/c and Profit and Loss a/c. The balance sheet is prepared by drawing up a statement of ledger account balances carried forward through the closing entry. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
In manual accounting, the Trading a/c, Profit & Loss a/c and the Balance Sheets can also be prepared using the information in the Trial Balance avoiding the act of journalising the transactions involved in final accounting. This is done by showing each item in the ledger accounts (Trading, P/L a/c) or the statement (Balance Sheet) where it would be ultimately appearing had the actual procedure been adopted. This would have the same affect as recording the journal and posting into the ledger.
Example
The balance in the Carriage Inwards a/c (direct expenditure) is transferred to the Trading a/c by recording a Journal entry. By this, the Carriage Inwards a/c would get closed (its balance becomes zero) and the Trading a/c would get debited with that balance. In preparing the Trading a/c the balance in the Carriage Inwards a/c can be ascertained from the Trial Balance and shown on the debit side of Trading a/c.
almost all cases in manual accounting, the process of recording the journal entries required for final accounting and updating the ledger is bypassed to reduce the burden of the work involved.
In making up final accounts using the information in the Trial Balance, we should ensure that each item of information (representing a ledger account balance) should be dealt with only once. In final accounting each piece of information can appear either on the debit or credit sides of the Trading a/c or "Profit & Loss a/c" or on the assets or liabilities side of the "Balance Sheet". Each item from the Trial Balance should be dealt with only once in Final Accounting.
Account
Description
Account Type
Where
Which Side
Amount
Opening Stock Textile Purchases Wages Octroi Salaries Rent Printing and Stationery Advertisements Cash Office Building Capital Bank Motor Vehicles Sundry Creditors Sales P/L Appropriation Sundry Debtors Machinery
Direct Expenses Direct Expenses Direct Expenses Direct Expenses Indirect Expenses Indirect Expenses Indirect Expenses Indirect Expenses Asset Asset Liability Liability/Asset Asset Liability Direct Incomes Accumulatd Profit Asset Asset
Nominal Nominal Nominal Nominal Nominal Nominal Nominal Nominal Real Real Personal Personal Real Personal Nominal Spl. Nominal Personal Real
Debit Debit Debit Debit Debit Debit Debit Debit Debit Debit Credit Debit Debit Credit Credit Credit Debit Debit
Trading a/c Trading a/c Trading a/c Trading a/c P/L a/c P/L a/c P/L a/c P/L a/c B/S B/S B/S B/S B/S B/S Trading a/c B/S B/S B/S
Debit Debit Debit Debit Debit Debit Debit Debit Assets Assets Liabilities Assets Assets Liabilities Credit Liabilities Assets Assets
63,650 22,56,000 3,25,000 1,78,200 1,04,000 1,26,000 74,650 86,000 26,000 4,23,450 2,50,000 1,19,000 2,10,000 1,80,000 36,86,000 6,52,950 2,08,000 5,69,000
the right places i.e. on the appropriate side of Trading a/c, Profit and Loss a/c or the Balance Sheet.
Dr
Trading and Profit & Loss a/c [For the year ending 31/03/06]
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To To To To To
36,86,000
36,86,000 8,63,150
To To To To To
8,63,150
Balance Sheet of M/s Wearall Textlies as on 31st March 2006 Liabilities Amount Assets Amount
26,000 4,23,450 1,19,000 2,10,000 2,08,000 5,69,000 15,55,450
Capital 2,50,000 Cash Sundry Creditors 1,80,000 Bank P/L Appropriation 11,25,450 Office Building [6,52,950 + 4,72,500] Motor Vehicles Sundry Debtors Machinery 15,55,450
Care in dealing with Profit and Loss Appropriation a/c (or Capital a/c)
The balance in the "Profit & Loss Appropriation a/c" as shown in the Trial Balance represents the balance carried forward from the previous accounting period (i.e. year ending 31st March 2005). The Profit and Loss a/c relating to the current period is closed by transfer its balance to the "Profit & Loss Appropriation a/c"
Dr
Cr
Date
Particulars
J/F
Date
Particulars
J/F
31/03/06
To Bal c/d
11,25,450
31/03/06
By Bal b/d
6,52,950
31/03/06
Total
By Net Profit
Total
4,72,500 11,25,450
11,25,450 01/04/06
By Balance b/d
11,25,450
Therefore, while showing the information (balance) relating to the Profit & Loss Appropriation a/c in the Balance sheet, care should be taken to make appropriate adjustment to the balance on account of the transfer of balance from the Profit and Loss a/c. The balance that appears in the balance sheet is not the one that appears in the trial balance, but the one that takes into consideration the adjustment on account of current periods profit or loss also. If the balance in Profit and Loss a/c is transferred to the Capital a/c, then such a care should be taken with regard to the Capital a/c balance.
The Trial Balance is a statement of ledger account balances as on a particular date (instance). Final Accounting is done towards the end of the accounting period. The trial balance that we consider in the preparation of final accounts is the one that is prepared towards the end of the accounting period i.e. on the last day of the accounting period.
There might be a number of accounting transactions which might not have been taken into consideration by the time the Trial Balance has been prepared. Some of the reasons for the presence of such transactions are
iii.
Incomes - Outstanding/Pre-received
The transactions which have not yet been journalised, appended to the trial balance are what we call adjustments. Thus we can say that Adjustments are transactions relating to the business which have not been journalised by the end of the accounting period.
Illustration
Trial Balance of M/s Azaya Traders" as on 30th June 2006. Debit Amount (in Rs)
86,000 11,36,000 1,53,000 18,000 26,900 64,000 52,500 1,78,300 62,500 3,44,700 37,980 42,780 2,68,000 15,48,700 2,56,000 4,80,000
Particulars
L/F
Opening Stock Purchases Salaries Wages Carriage Inwards Trading Charges Carriage Outwards Rent received Cash Capital Bank (Overdraft) Comission Creditors Sales Debtors Machinery
Total
23,77,680
23,77,680
Adjustments
The following additional information is available 1. A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books.
2.
The additional information presented after the trial balance contains information relating to accounting transactions, which are to be identified from the wordings. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
Since adjustments are also transactions relating to the business, we need to bring them into the accounting books by journalising them. The trial balance is used for final accounting, so as to eliminate a lot of physical work (in manual accounting) in the form of recording transactions for making up final accounts, posting them into respective ledger accounts, balancing of ledger accounts effected by these transactions. Therefore even for the purpose of bringing the transactions represented by the adjustments into books a method has been designed which would not require us to record these transaction, post them and balance the ledger accounts affected. This method incorporates the effect of the transactions into the final accounts without having to go through the regular process of recording, posting, balancing etc.
Transaction
Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries. This represents an error of principle whereby an expenditure that was to be debited in a particular account has been debited to another account. To bring the effect of this transaction into books, the journal entry to rectify this error has to be recorded.
Journal/Ledger Hide/Show
Journal in the books of M/s Azaya Traders for the year ending 30th June 2006
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
30/06/06
Dr
2,00,000 2,00,000
[For the transfer of wages erroneously treated as salaries from the "salaries a/c" to the "Wages a/c".] The transaction posted into the relevant ledger accounts
Dr
Date Particulars J/F
Salaries a/c
Amount Date Particulars J/F Amount
Cr
(in Rs)
(in Rs)
Dr
Wages a/c
Amount (in Rs)
Cr
Amount (in Rs)
Date
Particulars
J/F
Date
Particulars
J/F
43,000 43,000
43,000 43,000
43,000
Adjustments are transactions relating to business which have not yet been journalised.
Therefore, to make the adjustments one should have an idea of the journal entry related to the transaction indicated by the adjustment. If we know the Journal entry, we can identify the effect of the same on the ledger accounts and thus be able to identify the adjustments to be made. The adjustments are made at the time of making up the final accounts within the three parts that make up the final accounting, i.e. the "Trading a/c", "Profit & Loss a/c" and the "Balance Sheet".
Illustration Problem
Draw up the final accounts from the following trial balance and the additional information that follows it.
Trial Balance of M/s Azaya Traders" as on 30th June 2006. Debit Amount (in Rs)
86,000 11,36,000 1,53,000 18,000 26,900 64,000 52,500 1,78,300 62,500 3,44,700 37,980 42,780 2,68,000 15,48,700 2,56,000 4,80,000
Particulars
L/F
Opening Stock Purchases Salaries Wages Carriage Inwards Trading Charges Carriage Outwards Rent received Cash Capital Bank (Overdraft) Comission Creditors Sales Debtors Machinery
Total
The following additional information is available 1.
23,77,680
23,77,680
A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books. Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.
2.
An analysis of the various ledger accounts in the trial balance would enable us to decide what to be done with each item in the trial balance.
Account
Description
Account Type
Where
What Side
Amount
Opening Stock Purchases Salaries Wages Carriage Inwards Trading Charges Carriage Outwards Rent received Cash Capital Bank (Overdraft) Comission Creditors Sales Debtors Machinery
Direct Expenses Direct Expenses Indirect Expenses Direct Expenses Direct Expenses Indirect Expenses Indirect Expenses Indirect Incomes Asset Liability Liability Indirect Expense Liability Direct Incomes Asset Asset
Nominal Nominal Nominal Nominal Nominal Nominal Nominal Nominal Real Personal Personal Nominal Personal Nominal Personal Real
Debit Debit Debit Debit Debit Debit Debit Credit Debit Credit Credit Debit Credit Credit Debit Debit
Trading a/c Trading a/c P/L a/c Trading a/c Trading a/c P/L a/c P/L a/c P/L a/c B/S B/S B/S P/L a/c B/S B/S B/SB/S
Debit Debit Debit Debit Debit Debit Debit Credit Assets Liabilities Liabilities Debit Liabilities Credit Assets Assets
86,000 11,36,000 1,53,000 18,000 26,900 64,000 52,500 1,78,300 62,500 3,44,700 37,980 42,780 2,68,000 15,48,700 2,56,000 4,80,000
An analysis of the additional transactions would enable us to identify what is to be done to incorporate their effect in accounting. 1. A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books.
Entry
Effect
Dr. Machinery a/c 1. (+) To Machinery a/c on the Assets side of the Balance Sheet Cr. Ramsay Machine Tools a/c 2. (+) To Ramsay Machine Tools a/c on the Liabilities side of the Balance Sheet 2. Detailed Explanation
Hide/Show
Transaction
A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the books. This represents an error of omission whereby a transaction has been omitted from being recorded in the books.
To bring the effect of this transaction into books, the relevant journal entry has to be recorded.
Journal/Ledger
Journal in the books of M/s Azaya Traders for the year ending 30th June 2006
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
30/06/06
Dr
2,00,000 2,00,000
[For the value of machine purchased on credit.] The transaction posted into the relevant ledger accounts
Dr
Machinery a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
6,80,000
6,80,000
Dr
Cr
Date
Particulars
J/F
Date
Particulars
J/F
2,00,000) is added to the Machinery a/c balance (Rs. 4,80,000) shown on the assets side of the "Balance Sheet".
(+) To Ramsay Machine Tools a/c on the Liabilities side of the Balance Sheet
Ramsay Machine Tools a/c (which is not present in the books i.e. it has no balance in it) is credited resulting in the "Ramsay Machine Tools a/c" being created anew resulting in a credit balance in the account. Ramsay Machine Tools a/c is a personal account since it relates to an organisation. It has a credit balance and therefore is an equivalent of a creditor. Thus it is to be shown on the liabilities side of the Balance Sheet. To bring the effect of this transaction, the amount involved in the transaction (Rs. 2,00,000) is shown on the name of Ramsay Machine Tools on the liabilities side of the balance sheet. We can also interpret this as adding the amount to the existing nil balance. These are the adjustments to be made to bring the affect of the above transaction into the books of accounts.
3.
Entry
Dr. Wages a/c Cr. Salaries a/c 4.
Effect
1. (+) To Wages a/c on the Debit side of the Trading a/c 2. () From Salaries a/c on the Debit side of the Profit and Loss a/c
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
Illustration Solution
Making up the final accounts would involve nothing more than putting the items from the trial balance in the right places i.e. in either the "Trading a/c" or "Profit and Loss a/c" or the "Balance Sheet" and making subsequent adjustments.
Dr
Trading and Profit & Loss a/c of M/s Azaya Traders for the year ending 30/06/06
Amount (in Rs) Amount (in Rs) Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To Opening Stock To Purchases To Wages (+) Salary (Tr) To Carriage Inwards To Gross Profit
15,48,700
To Salaries () Tr. to Wages To Trading Charges Carriage Outwards To Comission To Net Profit
1,53,000 43,000
By Gross Profit 1,10,000 By Rent Received 64,000 52,500 42,780 1,47,820 4,17,100
4,17,100
Amount Amount
3,44,700 1,47,820
Assets
Amount Amount
62,500 2,56,000 6,80,000
Cash 4,92,520 Debtors 37,980 Machinery 4,80,000 (+) New Machine 2,00,000 4,68,000 9,98,500
9,98,500
The effect of the additional transactions (adjustments) are incorporated into the accounts by mathematical adjustments wherever needed.
Where an item appears in the trial balance it is to be dealt with only once and where an adjustment is being dealt with it is to be dealt with at two or more places depending on the number of elements effected by the transaction.
Direct Expenditure
In financial accounting, we use the term Direct Expense in relation to assets. Any expenditure that goes into the value of an asset is identified as Direct Expenditure for that asset.
Example
If a machine is purchased at Delhi and brought to Tenali for use, then all the expenses incurred before bringing the machine into working mode (usable condition) like transportation charges from Delhi to Tenali, Unloading Charges at Tenali, Installation Charges etc., should be considered to be part of the value of the machine. These expenses should not be debited to the respective expenditure accounts, but should be debited to the Machinery a/c. The Machinery a/c balance which indicates the value of the asset would be the sum of the cost of the machine, the transportation charges, unloading charges, installations charges, etc..
Is Stock an Asset?
At the end of the accounting period, while preparing the final accounts we treat stock an asset and show it in the Balance Sheet on the assets side. Thus we can say that stock has dual nature. All throughout the year the amount spent on it is expenditure and only for the moment the balance sheet is prepared it is an asset.
Value of Stock
All the expenses incurred on the stock till it is placed in the sales area would form direct expenses for the stock and should be treated as a part of the value of stock. In situations where it would be difficult/impossible to collect all the expenses in detail, this idea is modified to mean the expenses incurred before that stage till which point it would be convenient to collect information.
In relation to a trading business, the stock used for sale would be an asset. The usable condition for that stock would be, it being placed ready for sale in the showroom. Therefore, the direct expenses in relation to this stock would be all the expenses incurred before placing it in the show room or any other relevant place ready for sale. Conventionally, expenses like Wages, Carriage Inwards (carriage on purchases), Octroi, Excise, Duties etc., Stock purchased, etc. are treated as direct expenses apart from the actual cost of the goods purchased which is revealed by the "Purchases a/c". It is not a rule that only these form direct expenses. Any expenditure that would have been incurred in relation to stock before it is made ready for sale would form direct expenditure for the stock. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
1.
2. 3. 4. 5.
Opening Stock at the beginning of the accounting period, Rs. 20,000. Purchases of goods/stock during the accounting period : Rs. 2,48,000. Direct expenses incurred :Rs. 54,000. Unsold stock at the end of the accounting period valued at Rs. 36,000. Value of Stock used for other purposes Rs. 14,000.
Particulars
Opening Stock
Amount
Amount
20,000
The formula for calculating the value of Cost of Goods Sold based on the above calculations can be written as
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses Closing Stock Stock Unused for trading Stock Unused for Trading
Stock with the organisation may have been used for purposes other than trading. The value of such stock unused for trading purposes has to be deducted from the total value of stock so as to arrive at the value of cost of goods sold. Some such instances
Goods being taken away by the proprietor for personal purposes; Stock used in building up an asset; Stock used for advertisement purposes; Normal loss of stock; Abnormal loss of stock; Stock used up for other types of businesses (like consignments, branches, joint ventures etc)
Sales Opening Stock Purchases Direct Expenses + Closing Stock + Stock Unused for trading (Sales + Closing Stock + Stock Unused for trading) (Opening Stock + Purchases + Direct Expenses)
Thus we do not specifically need to calculate the value of cost of goods sold for finding gross profit, only its affect is to be brought into account. Such an ascertainment of Gross Profit is done in the Trading and Profit and Loss account.
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
"Purchases a/c" is a nominal account with a debit balance and is a direct expenditure (for stock). Since Purchases a/c is closed by transfer to the Trading a/c, it appears on the debit side of Trading a/c. Transferring a debit balance from one account to a second results in the second account being debited and the first account being credited.
Thus, all the accounts representing the figures that are added to purchases appear on the debit side
"Sales a/c" is a nominal account with a credit balance and is a direct income. Since Sales a/c is closed by transfer to the Trading a/c, it appears on the credit side of Trading a/c. Transferring a credit balance from one account to a second results in the second account being credited and the first account being debited.
Thus, all the accounts representing the figures that are added to sales appear on the credit side
Each ledger account serves one or more informational needs of the organisation. The Trading a/c gives the information relating to the Gross Profit made by the organisation. It can also be used to derive the information relating to the "Cost of Goods Sold".
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
36,000 14,000
50,000
The trading account before crediting sales would have a greater total on the debit side and thus has a debit balance. That debit balance represents the cost of goods sold. Thus, to ascertain the cost of goods sold, we need to balance the "Trading a/c" without crediting sales. The Sales a/c can be subsequently transferred to the Trading a/c to ascertain the Gross Profit.
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
20,000 By Closing Stock 2,48,000 By Goods Unused 54,000 By Cost of Goods Sold c/d 3,22,000
3,80,000
If such a two stage Trading a/c is prepared, we would be able to ascertain the Cost of Goods Sold as well as Gross Profit from the Trading a/c itself.
Dr
Particulars
Trading a/c
Amount Particulars Amount
Cr
(in Rs)
(in Rs)
To To To To
20,000 By Sales 2,48,000 By Goods Unused 54,000 By Closing Stock 1,08,000 4,30,000
4,30,000
To obtain the value of cost of goods sold from this we use the definition for gross profit. Cost of Goods Sold = Sales Gross Profit [Since Gross Profit = Sales Cost of Goods Sold] = Rs. 3,80,000 Rs. 1,08,000 = Rs. 2,72,000
The value of Cost of Goods Sold can also be obtained specifically, by maintaining a separate account for the purpose. This may be named "Goods Consumed a/c" (any other indicative name may be used). The basic purpose of accounting is derivation of information and the more the information we need, the more the accounting heads we need to maintain.
The Goods Consumed a/c is nothing but the first part of the trading account where it was balanced twice.
Dr
Cr
Particulars
Particulars
20,000 By Goods Unused 2,48,000 By Closing Stock 54,000 By Trading a/c 3,22,000
The balance in the Goods Consumed a/c represents Cost of Goods sold. This account is closed by transferring the balance to the Trading a/c.
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
3,80,000
3,80,000
The stock that is used within the organisation (stock drawn by the proprietor for own purposes, stock used for building an asset, stock used for advertisement purposes, etc.,) have to be valued at cost. This is for the reason that if such usages are recorded at a value which includes an element of profit, the transaction when recorded would generate a profit, which would amount to making a profit out of a transaction with oneself.
Principle of Mutuality One cannot make a profit out of a transaction with oneself
Illustrative Explanation
Consider the following data relating to an organisation which started its operations on 28th December 2006:
Opening Stock :: Nil; Purchases :: Rs. 1,20,000; Direct Expenses :: Rs. 30,000 Sales :: Nil Stock used by the organisation internally Rs. 20,000 (Valued at Cost). Generally Sales are made by adding 25% profit to cost Closing Stock :: ?
The accounting period ends on 31st December 2006. Value of Closing Stock with the Organisation = Total Value of Stock Value of Stock used up internally = Purchases + Direct Expenses Rs. 20,000 = (Rs. 1,20,000 + Rs. 30,000) Rs. 20,000 = Rs. 1,30,000
Sales value of the stock used within the organisation = Cost + 25% of Cost = Rs. 20,000 + 25% of Rs. 20,000 = Rs. 20,000 + Rs. 5,000 = Rs. 25,000
Trading a/c
Amount (in Rs) Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
25,000 1,30,000
1,55,000
1,55,000
There is no commercial activity (no sales), there is no scope for earning profits. But the Trading a/c reveals a Gross Profit of Rs. 5,000 which is on account of the stock used up internally being recorded at sales value. Such profit generation is inappropriate for the reason that in using up stock within the organisation, the organisation is not conducting a transaction with an outside party. Thus to avoid profit generation in such cases, the stocks so used are to be valued at cost.
Trading a/c
Amount (in Rs) Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
20,000 1,30,000
1,50,000 The Trading a/c would reveal no profit when the stock used up internally is valued at cost.
1,50,000
We may be able to ascertain what is left out if we know what has been sold. This logic may be applied in finding
the value of closing stock. However, to know this, we need to ascertain the value of cost of goods sold. i. ii. iii. Gross Profit = Sales Cost of Goods Sold Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses Closing Stock Gross Profit = Sales (Opening Stock + Purchases + Direct Expenses Closing Stock) [From (i) and (ii)] = Sales Opening Stock Purchases Direct Expenses + Closing Stock Closing Stock = Opening Stock + Purchases + Direct Expenses + Gross Profit Sales [From (iii)]
iv.
To use this relation to obtain the value of closing stock, we need the information relating to Gross Profit. All other information in this relation is readily available from the accounting records.
Ratio : Percentage
Ratio is a comparison between two numerical quantities of the same kind. Ratio between two quantities is expressed in the form a : b or a b , where "a" and "b" do not have a common factor.
To Sales
Gross Profit Gross Profit Ratio = Net Sales Gross Profit Gross Profit as a % of Sales = Net Sales (Or)= Gross Profit Ratio (to Sales) 100 100
Show/Hide
The data relating to the Gross Profit as a % of Sales given can be considered in three different forms. The formula used for conversion (expressing the interrelationship) varies depending on the form of the data considered.
Data on 1 Scale
Expressing the data on 1 scale, amounts to expressing the value either in decimals or as a fraction. Consider the following data:
Gross Profit = Sales Gross Profit Ratio (to Sales) =xy = xy Cost of Goods Sold = Sales Gross Profit = x xy = x (1 y) Gross Profit Gross Profit Ratio (to Cost) = Cost of Goods Sold xy = x (1 y) y = (1 y)
Example
Given Gross Profit Ratio (to Sales) is 0.25 y = 0.25 y Therefore, Gross Profit Ratio (to Cost) = (1 y) = 0.25 (1 0.25)
0.25 = 0.75 1 = 3 = 0.33 Gross Profit (as a % to Cost) = Gross Profit Ratio (to Cost) 100 = 0.33 100 1 = 33 3 %
(1
m = 100 m = 100 m
100
Example
Given Gross Profit is 25% of Sales m =25 m Therefore, Gross Profit as a % of Cost = 100 m 25 = 100 25 25 = 75 100 = 3 1 = 33 3 100 100 100
Substituting this value for 'y' in the formula in (1) we get, y Gross Profit Ratio (to Cost) = (1 y)
1 a = 1 a 1 a = a1 a 1 = a 1 = a1 a1 a
(1
Example
1 Given Gross Profit Ratio (to Sales) = 4 1 Gross Profit Ratio (to Cost) = a1 1 = 41 1 = 3 Gross Profit (as a % to Cost) = Gross Profit Ratio (to Cost) 100 1 = 3 1 = 33 3 % 100 a=4
Show/Hide
The data relating to the Gross Profit as a % of Cost of Goods Sold given can be considered in three different
The gross profit earned by an organsation is in almost all cases not a figure that can be easily derived (without the availability of the value of closing stock). Deriving the value of closing stock would be far easier than deriving the value of gross profit made (based on sales).
Physical Stock
Closing stock is the stock/goods unsold at the end of the accounting period. The details relating to the physical stock would be readily available with the organisation only if the inventory records are being maintained by the organisation. In other cases the physical stock would have to be ascertained by stock taking.
Stock Value
There is no specific ledger account in financial accounting that would give us the information relating to the value of closing stock ready hand. The value of closing stock is available ready hand only if inventory records are being maintained that too from the inventory records. The value of Closing Stock is ascertained by Physical Verification of Stock on the last day of the accounting period and its valuation at Cost or Market Price (Net Realisable Value) whichever is lesser
This is the most common method for valuing the closing stock. The information relating to the value of closing stock is not regularly required by the organisation. It is however required at the end of the accounting period for the purpose of evaluation of the Cost of Goods Sold.
Convention of Conservatism
Convention of Conservatism
By the Convention of Conservatism we take into consideration all those expenses and losses of which we are aware, even if they relate to the subsequent accounting periods.
The act of valuing closing stock at cost or market price is based on the "Convention of Conservatism".
Following is the "Trading a/c" relating to an organisation, wherein the Closing Stock has been recorded at cost.
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To To To To
3,80,000 36,000
4,16,000
f i n a l , a
c c o u n t s , f i n a n c i a l , a c c o u n t i n g , t r a d i n g , p r o f i t , l o s s , a c c o u n t ,
b a l a n c e , s h e e t , t r i a l , b a l a n c e , w o r k , s h e e t , a d j u s t m e n t s
Batch N :: 600 units valued at Rs. 36/unit with a total value of Rs. 21,600 Batch M :: 600 units valued at Rs. 24/unit with a total value of Rs. 14,400
The convention of conservatism asks us to take into consideration all those expenses and losses relating to the subsequent periods of which we are aware.
Future Losses
Where the Net realisable value of stock is less than its cost, the organisation may incur a loss. In the above case, the organisation may have to incur a loss of Rs. 900 [Rs. 14,400 (cost) Rs. 13,500 (net realisable value)].
When?
This loss would have to be borne by the organisation if it sells the stock at the net realisable rate. Since it is the end of the accounting period, such a sale at such a price, if at all it takes place, would be in the subsequent accounting period. Thus, the organisation may have to incur this loss in the future.
Based on the Convention of Conservatism, the loss though it may have to be incurred in the future period, is absorbed in the current period itself, since its information is known. This will be the case where the lower valuation is on account of conditions which are certain (obsolete goods, demand going down etc).
The Closing Stock a/c relating to an accounting period and the Opening Stock a/c relating to the subsequent accounting period represent the same account. Therefore, the value of the closing stock at the end of the accounting period and the opening stock at the beginning of the subsequent accounting period are the same.
Note
The value of Opening and Closing stocks relating to a particular accounting period do not mean the same. They are two indicated by distinct ledger accounts - Opening stock by "Opening Stock a/c" which is a nominal account and Closing stock by "Closing Stock a/c" which is a Real account. They may or may not have the same values.
The valuation of closing stock and recording of the value of closing stock in the books are two different aspects. After ascertaining the value of the closing stock, it is to be brought into the books of accounts. The basic purpose of accounting is derivation of information and the more information we need the more the accounting heads we need to maintain.
For each additional piece of information that we intend to derive from the books of accounts, we create and use an additional ledger account. Thus, to derive the information relating to Closing Stock we maintain a real account by name "Closing Stock a/c". The "Closing Stock a/c" gives the information relating to the value of the stock (as an asset) unsold at the end of the accounting period.
Recording
The value of closing stock is not available ready hand in the books of accounts. It is specifically ascertained at the end of the accounting period by physical verification of stock and its valuation at cost or market price whichever is lower.
Thus, by recording the journal entry for Closing Stock, we are in effect bringing the value of Closing Stock into books.
Credit :
There are three possible variations in the account to be credited for recording the value of closing stock. i. ii. iii. Trading a/c Goods Consumed a/c Purchases a/c
The ledger account to be credited is dependent on which account is used to reflect the value of cost of goods sold as well as the time of recording the entry.
Particulars
Opening Stock
Amount
Amount
20,000
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
3,22,000
3,22,000
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
20,000 By Cost of Goods Sold c/d 2,48,000 By Closing Stock 54,000 3,22,000
2,86,000 36,000
3,22,000
2,86,000
Journal/Ledger
The Journal entry for recording the value of closing stock in such a case would be
Journal in the books of M/s ___ for the period from ____ to ____
V/R No. Debit Amount Credit Amount (in Rs) (in Rs)
Date
Particulars
L/F
31st Dec
Closing Stock a/c To Trading a/c [For recording the value of Closing Stock in the books.]
Dr
36,000 36,000
Dr
Cr
Particulars
Particulars
To Trading a/c
36,000 36,000
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To Opening Stock
20,000 By Sales
3,80,000
36,000
4,16,000
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
Where the organisation intends to specifically identify the cost of goods consumed, a separate ledger account by name "Goods Consumed a/c" may be created and used for that purpose.
Dr
Cr
Particulars
Particulars
Dr
Cr
Particulars
Particulars
2,86,000 36,000
3,22,000
The amount transferred to the Trading account represents the Cost of Goods Sold
Journal/Ledger
The Journal entry for recording the value of closing stock in the books would be
Journal in the books of M/s ___ for the period from ____ to ____
V/R No. Debit Amount Credit Amount (in Rs) (in Rs)
Date
Particulars
L/F
31st Dec
Closing Stock a/c To Goods Consumed a/c [For recording the value of Closing Stock in the books.]
Dr
36,000 36,000
Dr
Cr
Particulars
Particulars
2,86,000 36,000
3,22,000
The balance in the "Goods Consumed a/c" represents the cost of goods sold and is transferred to the "Trading a/c" to ascertain the Gross Profit.
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
3,80,000
3,80,000
The balancing figure in the "Goods Consumed a/c" transferred to the "Trading a/c" does not represent cost of goods sold, in the following cases
Dr
Particulars
Cr
(in Rs)
(in Rs)
Cost of Goods Sold implies the total value of goods sold which includes both cost of the goods (represented by purchases a/c balance) and direct expenses related to the goods. Since Direct Expenses have not been debited to Goods Consumed a/c, the balancing figure represents the value of goods sold excluding direct expenses thereon.
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
3,80,000
3,80,000
Exception
Recording Closing Stock through Goods Consumed a/c would be rational if its value does not include any part of the direct expenses incurred during the current period which have been debited to the Trading a/c.
Dr
Cr
Particulars
Particulars
The balance in the Goods Consumed a/c transferred to the Trading a/c represents the value of goods that have
been purchased and sold away during the current period. This does not include the value of opening stock that might also have been sold away. Thus this balance, cannot be called "cost of goods sold" though it represents value.
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
3,80,000
3,80,000
Exception
Recording Closing Stock through Goods Consumed a/c would be rational closing stock includes only that stock which has been purchased during the current accounting period. This would be the case where the quantity of closing stock is less than the quantity purchased during the current period and stock is being used up on FIFO basis.
Where the following conditions exist, we can credit "Purchases a/c" with the value of closing stock.
Closing stock is physically relatable to the stock that has been purchased during the current period. [This would be the case where FIFO method is adopted for physical usage of stock] There are no direct expenses in relation to the stock purchased during the current period (Or) The value of closing stock does not include the direct expenses incurred during the current period
Journal/Ledger
The Journal entry for recording the value of closing stock in the books would be
Journal in the books of M/s ___ for the period from ____ to ____
V/R No. Debit Amount Credit Amount (in Rs) (in Rs)
Date
Particulars
L/F
31st Dec
Dr
36,000
To Purchases a/c [For recording the value of Closing Stock in the books.]
36,000
Dr
Purchases a/c
Amount (in Rs) Amount (in Rs)
Cr
Date
Particulars
J/F
Date
Particulars
J/F
1st-31st
To Cash/Bank/Crs
2,48,000
31/12/05 31/12/05
2,48,000
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To To To To
3,80,000
3,80,000
Conventional use
Technically we can credit the value of closing stock to Purchases a/c only when the above conditions are satisfied. The use of "Trading a/c" or "Goods Consumed a/c" for crediting the value of closing stock, is possible only if the journal entry for brining the value of closing stock into books is being recorded at the time of preparation of final accounts. Where we are recording the value of closing stock in the accounting books before the preparation of final accounts, it is a convention that we credit "Purchases a/c" (on account of the absence of "Trading a/c" or "Goods Consumed a/c" for use). final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
The "Closing Stock a/c" and the end of an accounting period and the "Opening Stock a/c" at the beginning of the subsequent accounting period represent the same account.
Closing Entry
The journal entry for closing the books of accounts during an accounting period
Journal in the books of M/s ___ for the period from ____ to ____
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
31st Dec
Creditors a/c Bank Loan a/c Profit & Loss Appropriation a/c Capital a/c To Closing Stock a/c To Cash a/c To Debtors a/c To Furniture a/c
Dr Dr Dr Dr
[For the balances in the ledger accounts carried forward to the next accounting period.]
Balance Sheet of M/s ______ as on the Last Day Liabilities Amount Assets Amount
42,000 36,000 1,26,000 61,000 2,65,000
Capital 1,00,000 Cash Profit & Loss Appropriation 54,000 Closing Stock Creditors 48,000 Debtors Bank Loan 63,000 Furniture 2,65,000
Balance Sheet of M/s ______ as on the First Day Liabilities Amount Assets Amount
42,000 36,000 1,26,000 61,000 2,65,000
Capital 1,00,000 Cash Profit & Loss Appropriation 54,000 Closing Stock Creditors 48,000 Debtors Bank Loan 63,000 Furniture 2,65,000
Opening Entry
The opening entry is based on the opening balance sheet.
Journal in the books of M/s ___ for the period from ____ to ____
V/R No. Debit Amount (in Rs) Credit Amount (in Rs)
Date
Particulars
L/F
31st Dec
Cash a/c Opening Stock a/c Debtors a/c Furniture a/c To Capital a/c To Profit & Loss Appropriation a/c To Bank Loan a/c To Creditors a/c
Dr Dr Dr Dr
[For the opening balances in the various ledger accounts brought forward into the books of accounts from the previous accounting period.] Where the Opening Entry is being recorded, the phrase "Closing Stock" is replaced by the phrase "Opening Stock".
The value of closing stock is ascertained through physical verification of the stock and its valuation at cost or market price whichever is lesser. Thus recording the entries for brining in the value of closing stock into books may not be complete by the time
trial balance is drawn up. If the value of closing stock is not available (or is not recorded) by the time of making up the trial balance at the end of the accounting period, it would appear as a part of the transactions appended to the trial balance which are to be adjusted. Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded. In adjusting the value of closing stock we consider the entry for recording the same to be the one where the Trading a/c or Purchases a/c is credited.
Where the closing stock is recorded by crediting its value to the Trading a/c
Entry
Dr. Closing Stock a/c Cr. Trading a/c
Effect
1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet 2. (+) Show the Value of Closing Stock on the Credit side of Trading a/c
Where the closing stock is recorded by crediting its value to Purchases a/c
Entry
Dr. Closing Stock a/c Cr. Purchases a/c
Effect
1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet 2. () Deduct the Value of Closing Stock from Purchases on the Debit side of Trading a/c
Entry
Dr. Closing Stock a/c Cr. Goods Consumed a/c
Effec
1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet 2. (+) Show the Value of Closing Stock on the Credit side Goods Consumed a/c
This assumption is generally avoided, where the value of closing stock has to be dealt with as an adjustment.
Where "Closing Stock a/c" is present in the Trial Balance, it is an indication of the Journal entry for recording the value of closing stock has already been recorded.
Particulars
Opening Stock a/c Purchases a/c Closing Stock a/c Trading a/c
36,000 36,000
Total
xxx
xxx
Where Closing Stock a/c and Trading a/c appear in Trial Balance
Dr. Closing Stock a/c The entry used for recording the value of closing stock. Cr. Trading a/c
Trading a/c does not appear, but Purchases a/c appears in the Trial Balance
Trial Balance of M/s ___ " as on 30th June 2005 Debit Credit L/F Amount Amount (in Rs) (in Rs)
20,000 2,12,000
Particulars
36,000
Total
xxx
xxx
Where Closing Stock a/c and Purchases a/c appear in Trial Balance
Dr. Closing Stock a/c The entry used for recording the value of closing stock. Cr. Purchases a/c
Both Trading a/c and "Purchases a/c" do not appear in the Trial Balance
Trial Balance of M/s ___ " as on 30th June 2005 Debit Credit L/F Amount Amount (in Rs) (in Rs)
Particulars
2,32,000
36,000
Total
xxx
xxx
Where Purchases a/c and Trading a/c do not appear in the Trial Balance and
Where Closing Stock a/c and Goods Consumed a/c appear in Trial Balance
Dr. Closing Stock a/c The entry used for recording the value of closing stock. Cr. Goods Consumed a/c
Each ledger account provides one or more pieces of information. To enable derivation of additional information relating to returns of goods/stock, we record the transactions relating to purchase returns as well as sales returns using Purchase Returns a/c and Sales Returns a/c respectively.
Being a nominal account, this account is closed at the end of the accounting period.
By Setting off related Ledger account balances. By Transferring the balance in the returns accounts to Trading a/c and making adjustments thereon.
This information is generally derived at the end of the accounting period. However, it can be derived as and when needed, by deducting the balance in the returns account from the balance in the main account. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
SET OFF Setting off of ledger accounts is clubbing two accounts with opposite balances. In
setting off ledger account balances, we close the account with the lower balance by transferring it to the account with a higher balance.
The balance remaining in the Purchases a/c would thus represent net purchases. While closing the purchases account at the end of the accounting period, this balance is transferred to the Trading a/c
Journal/Ledger
Show/Hide
Journal in the books of M/s __ for the period from ____ to _____
V/R No. Debit Amount Credit Amount (in Rs) (in Rs)
Date
Particulars
L/F
March 31st
Dr
80,000 80,000
[For transferring the balance in the purchase returns account to the purchases account to derive the net purchases]
Dr
Cr
Particulars
Particulars
To Purchases a/c
80,000 80,000
By By
80,000
Dr
Purchases a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To To
The balance remaining in the Sales a/c would thus represent net sales. While closing the Sales account at the end of the accounting period, this balance is transferred to the Trading a/c
Journal/Ledger
Show/Hide
Journal in the books of M/s __ for the period from ____ to _____
V/R No. Debit Amount Credit Amount (in Rs) (in Rs)
Date
Particulars
L/F
March 31st
Dr
72,500 72,500
Dr
Cr
Particulars
Particulars
To To
72,500 72,500
Dr
Sales a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
8,24,000
Dr
Trading a/c
Amount (in Rs)
Cr
Amount (in Rs)
Particulars
Particulars
To To To To To To
40,000 By Sales 5,00,000 Closing Stock 45,000 32,000 15,000 2,40,500 8,27,500
7,51,500 76,000
8,27,500
The Purchase Returns a/c and the Sales Returns a/c being nominal accounts are closed at the end of the accounting period by transfer to the Trading a/c (instead of to the Purchases a/c and Sales a/c respectively). The Purchase Returns a/c carries a credit balance and the "Sales Returns a/c" carries a credit balance.
Journal
The journal entries for closing these accounts by transfer to the trading account would be
Journal in the books of M/s __ for the period from ____ to _____
V/R No. Debit Amount Credit Amount (in Rs) (in Rs)
Date
Particulars
L/F
March 31st
Dr
80,000 80,000
[For transferring the balance in the purchase returns account at the end of the accounting period to the trading account] March 31st Trading a/c To Sales Returns a/c Dr 72,500 72,500
[For transferring the balance in the sales returns account at the end of the accounting period to the trading account]
Dr
Trading a/c
Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To To To To To To To
Opening Stock Purchases Sales Returns Wages Octroi Carriage Inwards Gross Profit
40,000 By Sales 5,80,000 By Purchase Returns 72,500 Closing Stock 45,000 32,000 15,000 2,40,500 9,80,000
9,80,000
We cannot derive the information relating to Net Purchases and Net Sales by just Posting the entries to the Trading a/c. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments
Since the information relating to Net Purchases and Net Sales is not revealed by just transferring the balances in
the returns accounts to the Trading a/c we need to make adjustments to derive that information.
Net Purchases
Posting (showing) an amount on the credit side of an account is an equivalent of deducting the amount from an item on the debit side.
Thus the Purchase Returns a/c balance instead of being shown on the credit side is deducted from Purchases a/c balance on the debit side of the Trading a/c, thereby giving the figure of Net Purchases in the Trading a/c itself.
Net Sales
Posting (showing) an amount on the debit side of an account is an equivalent of deducting the amount from an item on the credit side.
Thus, the Sales Returns a/c balance instead of being shown on the debit side would be deducted from Sales a/c on the credit side of the Trading a/c, thereby giving us the figure of Net Sales in the Trading account itself.
Trading a/c
Amount (in Rs) Amount (in Rs) Amount (in Rs)
Cr
Particulars
Particulars
To Opening Stock To Purchases () Pur. Returns To To To To Wages Octroi Carriage Inwards Gross Profit
5,80,000 80,000
40,000 By Sales () Sales Returns 5,00,000 Closing Stock 45,000 32,000 15,000 2,40,500 8,27,500
8,24,000 72,500
7,51,500 76,000
8,27,500
Revenue
Income, turnover, revenue are terms used synonymously to mean the amount of money that an organisation receives from its activities like sale of products, providing services to customers etc. Depending on the nature of the organisation and the type of activity it is involved in the revenue streams are varied Sale or Products, Providing Services are the activities most common to business organisations. Taxes, Duties, Fees etc are the major sources of revenue for Governments. Donations, Grants, Subscriptions, etc are some of the sources of revenue for non-profit organisations.
The terms Revenue and Sales or Turnover are interchangeably used. This makes sense only
when sales are expressed in terms of value and not in terms of quantity. Gross Revenue and Net Revenue are terms which are indicative of Gross Sales and Net Sales after setting off sales returns
Revenue would be meaningful only when it is expressed in relation to a period. Say the
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments revenue is Rs. 5 crores is would not make much sense unless we express the period involved. Saying the revenue for the last month is Rs. 5 Crores does sound meaningful.
Revenue is often referred to as top line since it is the first item that we consider in preparing the income statements or accounts. On the Credit Side of the Trading account we find sales generally towards the top as the first or second item. Similarly Net Profit (revenue left after deducting all expenses) is termed "Bottom Line". In the Profit and Loss account, Net Profit/Loss is the last item that appears towards the end. Even in an income statement (which is nothing but the Trading and Profit & Loss a/c prepared in a form suitable for financial analysis) we start by considering the gross sales (i.e. gross revenue) and end with arriving at the net profit.
Revenue Recognition
Revenues are
realized when goods and services are exchanged for cash or receivables (debtors). realizable when assets received in exchange for goods and services are readily convertible to
cash or receivables (debtors). earned when the duties to be entitled to compensation are performed. Recognising revenue implies the act that would make the organisation consider that they have earned the revenue involved in the transaction. Based on when the revenue is recognised final,accounts,financial, there are two types of accounting systems (1) Cash Basis of Accounting and accounting,trading,profit,loss,a (2) Accrual Basis or Mercantile System of Accounting ccount,balance,sheet,trial,bala 1. Cash Basis Accounting nce,work,sheet,adjustments Under cash basis accounting revenues are recognized and earned only when cash is received irrespective of when and how the services were performed or goods delivered. To put it in different terms, the cash basis of accounting asks you to take into consideration all those incomes/gains that have been received in cash or other assets and expenses/losses that have been paid out in cash or other assets during the accounting period in consideration.
2.
Under accrual or mercantile basis accounting, revenues are recognized and earned when they are realized or realizable irrespective of when the cash is received. To put it in different terms, the accrual basis of accounting asks you to take into consideration all those incomes/gains and expenses/losses pertaining to the accounting period for which you are trying to ascertain the profits and losses irrespective of whether the incomes are received in cash or not and the expenses are paid out in cash or not.
3.
This is not a system of accounting on its own. It is a combination of the Cash Basis Accounting and Accrual Basis Accounting. This system is based on the concept of conservatism.
Under the hybrid system of accounting, incomes are recognised as in Cash Basis Accounting i.e. when they are received in cash and expenses are recognised on accrual basis i.e. during the accounting period in which they arise irrespective of when they are paid.
From Cash Basis to Accrual/Mercantile Basis would require the following information to be
brought into the books of accounts. From Mercantile/Accrual Basis to Mercantile Basis would require the following information to be written off from the books of accounts.
1.
The amount of expenses that have been incurred but have not yet been paid out. Separate ledger accounts may be used for each distinct expenditure (like outstanding salaries a/c, Rent payable a/c, Interest unpaid a/c etc.) or a single account may be used in place of all these (like outstanding expenses a/c or creditors for expenses a/c).
2.
The amount of expenses that have not yet been incurred but have been paid out in advance. Separate ledger accounts may be used for each distinct expenditure (like Advance salaries a/c, Rent prepaid a/c, Interest paid in advance a/c etc.) or a single account may be used in place of all these (like Prepaid expenses a/c or expenses paid in advance a/c).
3.
The amount of incomes (revenue) that have arisen and have not yet been received.
Separate ledger accounts may be used for each such income (like Interest Receivable a/c, Commission Due a/c, etc.) or a single account may be used in place of all these (like Incomes Still Receivable a/c).
4.
Incomes that have not yet arisen but have been received in advance. Separate ledger accounts may be used for each such income (like Interest received in advance a/c, Commission Pre received a/c, etc.) or a single account may be used in place of all these (like Prereceived Incomes a/c or Incomes received in advance a/c).
Any Nominal Account Head prefixed or suffixed by the terms outstanding, prepaid, pre-received, still receivable, etc., indicates a personal account and not a nominal account. Depending on the nature of the balance in the account, it is an equivalent of either a creditor or a debtor.
To convert the accounting system from cash basis to accrual basis from a particular point of time, one needs to identify the values attributable to the accounts of the nature as described above and bring them into the books of accounts, which would take care of the adjustments to be made in the books for the incomes/expenses relating to the past periods. From thereon, the incomes and expenses have to be recorded on accrual basis. The ledger accounts to be brought into the books of accounts are personal accounts and are an equivalent of either debtors or creditors. Brining the ledger accounts equivalent to debtors would amount to brining in an undisclosed asset into the books, which would result in a gain. Brining the ledger accounts equivalent to creditors would amount to brining in an undisclosed liabilities into the books, which would result in a loss. A ledger account by name "Profit and Loss Adjustment a/c" is used to record thess gains or losses.
Journal Entries
Hide/Show
Journal in the books of M/s _____ for the period from _____ to _____
Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs)
31/12/05
Profit & Loss Adjustment a/c To Expenses Outstanding a/c [For brining the expenses outstanding to be paid into the books of accounts.]
Dr
26,000 26,000
31/12/05
Expenses Prepaid a/c To Profit & Loss Adjustment a/c [For brining the expenses paid in advance into the books of accounts.]
Dr
16,400 16,400
31/12/05
11,100 11,100
[For brining in the amount of incomes received in advane into books of accounts.] 31/12/05 Incomes Receivable a/c To Profit & Loss Adjustment a/c Dr 5,200 5,200
Cr
Amount
26,000 26,000
26,000 26,000
26,000
Dr
Date Particulars
Cr
Amount
16,400 16,400
16,400 16,400
16,400
Dr
Date Particulars
Cr
Amount
11,100 11,100
11,100 11,100
11,100
Dr
Date Particulars
Cr
Amount
5,200 5,200
5,200 5,200
5,200
Dr
Date Particulars
Cr
Amount
The overall gain or loss revealed by the "P/L Adjustment a/c" is written off to the "P/L Appropriation a/c" or the "Capital a/c", depending on where the accumulated profits of the previous periods have been transferred. These would bring in all the adjustments needed for the various accruals, outstandings and prepaids that have not been taken into consideration in the previous periods on account of not having received the cash relating to the same.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments particular point of time, one needs to identify the accounts of the nature as described above and write them off from the books of accounts, which would take care of the adjustments to be made in the books for the incomes/expenses relating to the past periods. From thereon, the incomes and expenses have to be recorded on cash basis.
The ledger accounts to be written off from the books of accounts are personal accounts and
are an equivalent of either debtors or creditors. Writing off the ledger accounts equivalent to debtors would amount to writing off an existing asset in the books, which would result in a loss. Writing off the ledger accounts equivalent to creditors would amount to writing off an existing liability in the books, which would result in a gain. A ledger account by name "Profit and Loss Adjustment a/c" is used to record these losses or gains.
Journal in the books of M/s _____ for the period from _____ to _____
Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs)
31/12/05
Dr
31,650 31,650
[For writing off the expenses outstanding to be paid, recorded as a liability, from the books of accounts.] 31/12/05 Profit & Loss Adjustment a/c To Expenses Prepaid a/c Dr 18,700 18,700
[For writing off the expenses paid in advance, recorded as an asset, from the books of accounts.] 31/12/05 Incomes Pre-received a/c To Profit & Loss Adjustment a/c Dr 13,650 13,650
[For writing off the amount of incomes received in advance, recorded as a liability, from books of accounts.] 31/12/05 Profit & Loss Adjustment a/c Dr 8,750
To Incomes Receivable a/c [For writing off the incomes receivable, recorded as an asset, from the books of accounts.]
8,750
Dr
Ledger Accounts
Hide/Show
Cr
Amount
31,650 31,650
31,650 31,650
Dr
Date Particulars
Cr
Amount
18,700 18,700
18,700 18,700
Dr
Date Particulars
Cr
Amount
13,650 13,650
13,650 13,650
Dr
Date Particulars
Cr
Amount
8,750 8,750
8,750 8,750
Dr
Date Particulars
Cr
Amount
31,650 13,650
45,300
45,300
The overall gain or loss revealed by the "P/L Adjustment a/c" is written off to the "P/L
Appropriation a/c" or the "Capital a/c", depending on where the accumulated profits of the previous periods have been transferred.
These would bring in all the adjustments needed for the various accruals, outstandings and
prepaids that have been taken into consideration in the previous periods on account of not having received the cash relating to the same.
Finding Income under Mercantile System from income under Cash System.
Income/Profits
The profits relating to a particular accounting period are revealed by the "Profit & Loss a/c" relating to that period. The profits are derived by transferring the ledger account balances in the nominal accounts to the "Trading a/" or "Profit & Loss a/c" as the case may be. The basis of accounting followed i.e. cash basis or mercantile basis would decide the amount of incomes/expenses in relation to the accounting period. Since the figure of profit is dependent on the incomes/expenses, we can say that the figure of profit would vary depending on the method of accounting being followed by the organisation.
Adjusting Expenditure
Consider an expenditure like Salary. Within an accounting period, salary is expended as well as paid. The amount of salary paid can be identified from the amount of cash paid or cheques issued towards salaries. The amount of salary expended i.e. the expenditure on account of salary relating to the current accounting period can be identified by making appropriate adjustments for outstanding and prepaid salaries both at the beginning and ending of the accounting period.
This represents the amount of expenditure that has been outstanding at the beginning of the accounting period. This would have to be cleared by paying out the amount in the current period. Therefore, the cash paid in the current period towards the expenditure is assumed to include this outstanding amount also (unless there is an indication to the contrary). Thus to find the expenditure relating to the current period only, this amount has to be deducted from the Cash Paid for the expense during the current period.
This represents the amount of expenditure that has been paid in advance during the previous period. The prepaid expenses account shows a debit balance at the end of the previous accounting period. It is an equivalent of a debtor and is treated as an asset. During
the current accounting period, this account is closed by transferring the balance to the expenditure account. Thus to find the expenditure relating to the current period only, this amount has to be added to the Cash Paid for the expense during the current period.
This represents the amount of expenditure relating to the current accounting period that has not yet been paid. Thus to find the expenditure relating to the current period only, this amount has to be added to the Cash Paid for the expense during the current period.
This represents the amount of expenditure relating to the subsequent accounting periods that has been paid in advance during the current accounting period. Thus to find the expenditure relating to the current period only, this amount has to be deducted from the Cash Paid for the expense during the current period.
Particulars
Expenditure paid in Cash during the Current Period (+) Opening Expenses Prepaid Closing Expenses Outstanding
Amount
15,425 45,300
Amount
2,48,000 60,725 3,08,725 45,300 2,66,775
adjustment relating to expenses can be summarised as follows: Paid + Opening Expenditure Prepaid Opening Expenditure Outstanding + Closing Expenditure Outstanding Closing Expenditure Prepaid = Expenditure Incurred.
Using the above relation, either the cash paid (which would be the expenditure to be considered in cash basis accounting) or the expenditure pertaining to the current period (which would be the expenditure to be considered under the mercantile basis accounting) can be found.
Cr
Amount
23,750
Dr
Date Particulars
Cr
Amount
01/01/05 To Expenditure
18,200
45,300 63,500
45,300 63,500
4,300
Dr
Date Particulars J/F
Expenditure a/c
Amount (in Rs) Date Particulars J/F Amount (in Rs)
Cr
01/01/05 To Exp. Prepaid 1st_31st a/c 31/12/05 To Cash/Bank a/c To Exp. Out a/c
15,425 01/01/05 By Exp. Out. a/c 2,48,000 1st_31st By P/L a/c 45,300 31/12/05 By Exp. Prepaid a/c 3,08,725
3,08,725
Dr
Date Particulars J/F
Expenditure a/c
Amount (in Rs) Date Particulars J/F Amount (in Rs)
Cr
15,425 01/01/05 By Bal b/d 2,48,000 1st_31st By P/L a/c 45,300 31/12/05 By Bal c/d 3,08,725
45,300
Dr
Date Particulars J/F
Expenditure a/c
Amount (in Rs) Date Particulars J/F Amount (in Rs)
Cr
18,200
3,08,725 45,300
Dr
Date Particulars J/F
Expenditure a/c
Amount (in Rs) Date Particulars J/F Amount (in Rs)
Cr
23,750
But, the prepaid expenditure is not an asset that is liquidated by realising it in cash. It is liquidated by absorbing (writing off) the asset as an expenditure during the subsequent periods.
Adjusting Incomes
Consider an income like Interest. Within an accounting period, interest is earned as well as received in cash. The amount of interest received can be identified from the amount of cash/cheques received towards interest. The amount of interest earned i.e. the income on account of salary relating to the current accounting period can be identified by making appropriate adjustments for outstanding and pre-received interest both at the beginning and ending of the accounting period.
This represents the amount of income that has been outstanding and still receivable at the beginning of the accounting period. This would be cleared by realising the amount in the current period. Therefore, the cash received in the current period towards the income is assumed to include this outstanding amount also (unless there is an indication to the contrary). Thus to find the income relating to the current period only, this amount has to be deducted from the Cash received towards the income during the current period.
This represents the amount of income that has been received in advance during the previous period. The pre-received income account shows a credit balance at the end of the previous accounting period. It is an equivalent of a creditor and is treated as a liability. During the current accounting period, this account is closed by transferring the balance to the income account. Thus to find the income relating to the current period only, this amount has to be added to the Cash received for the income during the current period.
This represents the amount of income relating to the current accounting period that has not yet been received. Thus to find the income relating to the current period only, this amount has to be added to the Cash received towards the income during the current period.
This represents the amount of income relating to the subsequent accounting periods that has been received in advance during the current accounting period. Thus to find the income relating to the current period only, this amount has to be deducted from the Cash received towards the income during the current period.
Particulars
Cash Received during the Current Period (+) Opening Income Pre-received Closing Income Receivable
Amount
8,125 5,245 6,850 3,750
Amount
1,32,500 13,370 1,45,870 10,600 1,35,270
Income relating to the current period The adjustment relating to the incomes can be summarised as follows: Cash Received + Opening Income Pre-received Opening Income Receivable + Closing Income Receivable Closing Income Pre-received = Income. Using the above relation, either the cash received (which would be the income to be considered in cash basis accounting) or the income pertaining to the current period (which would be the income to be considered under the mercantile basis accounting) can be found.
Cr
8,125 01/01/05 By Bal b/d 3,750 31/12/05 By Income a/c 11,875 01/01/06 By Balance b/d
3,750
Dr
Date Particulars
Cr
5,245
Dr
Date Particulars J/F
Income a/c
Amount (in Rs) Date Particulars J/F Amount (in Rs)
Cr
01/01/05 To Inc. Rec a/c 1st_31st To P/L a/c 31/12/05 To Inc. Pre. a/c
6,850 01/01/05 By Inc. Pre. a/c 1,35,270 1st_31st By Cash/Bank 3,750 31/12/05 a/c By Inc. Rec. a/c 1,45,870
Dr
Date Particulars J/F
Income a/c
Amount (in Rs) Date Particulars J/F Amount (in Rs)
Cr
6,850 01/01/05 By Bal b/d 1,35,270 1st_31st By Cash/Bank 3,750 31/12/05 a/c By Bal c/d 1,45,870
Dr
Date Particulars J/F
Income a/c
Amount (in Rs) Date Particulars J/F Amount (in Rs)
Cr
5,245
Dr
Date Particulars J/F
Income a/c
Amount (in Rs) Date Particulars J/F Amount (in Rs)
Cr
8,125
3,750
A Nominal Account with a balance represents a personal account. It is an equivalent of a debtor (debit balance) or a creditor (credit balance) depending on the nature of balance. Statement for Finding Income under Mercantile System
Particulars
Profit/Income under Cash Basis Accounting (+) Opening Expenses Outstanding Opening Incomes Pre-received Closing Expenses Prepaid Closing Incomes Receivable
Amount
18,200 8,125 23,750 5,245 15,425 6,850 45,300 3,750
Amount
2,48,000
55,320 3,03,320
49,775 2,53,545
Particulars
Profit/Income under Mercantile/Accrual Basis Accounting
Amount
15,425
Amount
2,53,545
Approximately 150 universities worldwide offer a degree in Financial Engineering or one of three closely related fields: Mathematical Finance, Quantitative Finance, and Computational Finance.
W hy Financial Engineering?
As the financial world becomes increasingly complex, financial and non-financial institutions are actively working to manage riskwhether market risk (interest rate risk, equity risk, commodity risk, currency risk), credit risk (default risk and migration risk), or various types of operational risk, which can comprise thousands of correlated positions. In investment banking, numerous intricate structures used to increase investor returns as well as reduce various types of risk have come to the market, such as CMOs (Collateralized Mortgage Obligations) and CDOs (Collateralized Debt Obligations). Mathematics and Computer Science are two critical tools for valuing and managing institutions complex risks and financial structures. This is precisely where Financial Engineering comes in, applying Mathematics and Computer Science in order to value and reduce risks in the financial sector and thereby avoid, or at least reduce, financial crises.
F inancial Engineering at Shidler
The Shidler College of Business offers a unique degree in Financial Engineering with a mission of excellence in research, education, the community, and the environment. Since Hawai'i's mid-Pacific location exposes our state and businesses to hurricanes and floods, the Shidler MFE program will also specifically focus on modeling, valuation, and hedging of weather derivatives. We are also one of the first MFE programs, which offer a course on correlation modeling. The MFE program will operate in conjunction with related disciplines at the University of Hawai'i, primarily the Department of Mathematics, College of Information and Computer Science, and the School of Ocean and Earth Science and Technology (SOEST).
W ho is Shidler?
The MFE program is tremendously grateful for unprecedented support from Jay Shidler, a Hawai'i-based entrepreneur, real estate investor, and philanthropist for whom the college is named. We are also proud to note that he is a University of Hawai'i at Manoa business school graduate, class of 1968.
Shidlers rigorous MFE program is designed to compete with the nations top schools, employing world-class professors and practitioners to guarantee the highest academic standards. Perks of the Program
Small class size (35 student max) Laptops are provided for the duration of the program We are one of the few programs to offer a course on weather derivatives and environmental finance We have a Bloomberg terminal and the latest books and journals Lectures are recorded in our high tech class room for students to review Job interview training is provided as well as aggressive job placement
Students have an opportunity to take part in applying what they learn to advise a hedge fund with over $100,000 under management
A cademic Calendar
The MFE is an intensive one-year program, commencing in August and finishing exactly one year later. Our full-time academic calendar consists of a Fall Semester, Spring Semester, a Summer 1 term, and a Summer 2 Internship term from mid-July to the end of August. We are also accepting part time students. *Part time students are considered on a case by case basis. For additional information contact us.
C ourses
FALL SEMESTER
Programming in Finance
Financial Derivatives
SPRING SEMESTER
SUMMER ONE
Public Presentation
SUMMER TWO
A prospective Shidler MFE student will preferably have an undergraduate degree in a quantitative field such as Mathematics, Physics, or Computer Science. Students with undergraduate degrees in Finance and related fields will also be considered.
A dmission Criteria
A high score in the quantitative part of the GRE exam (GMAT is not accepted) is required for admission. Excellent academic grades are also essential. Work experience is desired.
A pplication Documents
A) Click on Online Application and fill out general application forms. B) Send - CV (curriculum vita) - Short statement of purpose - 2 references
- Other supporting documents such as publications, achievements, etc to Pedro Villarreal at villarr@hawaii.edu
A pplication Deadline
Early applications are encouraged. The deadlines for the September 2011 to August 2012 academic year is: January 15 (Early Admission), March 15 (Second Round of Admissions Deadline) April 1 (International Applicants Deadline), & May 1 (Final Round of Admissions Deadline). *Late applications are accepted on a case by case basis.
Shidler College of Business, MFE program University of Hawai'i 2404 Maile Way, Honolulu, HI 96822
A pplication Documents
Tuition Estimate for the 2010/2011 academic year, 30 credit hours: Tuition - $32,000* (Residents - $20,000) *Tuition subject to change.
S cholarships
Scholarships will be awarded on the basis of GRE score, academic achievements, and work experience. Scholarship
D escription
The Shidler Master of Financial Engineering scholarship is available only to full-time graduate students enrolled in the Master's in Financial Engineering Program at the Shidler College of Business. If you would like to be considered for this scholarship you must apply by using the online application form below. Being admited into the MFE program does not guarantee a scholarship award.
P urpose
The purpose of this fund is to provide scholarships to full-time graduate students enrolled in the Master's in Financial Engineering Program at the Shidler College of Business.
S cholarship Criteria
Campus: Manoa Level: Graduate Need Based: any College: Shidler College of Business Standing: any Min GPA: 3.0 Major: Financial Engineering Residency: any Gender: Any
Additional requirements: The prospective recipient should also have overall good academic achievement as shown by grades, number and quality of their publications if any, and extracurricular activities in addition to high GRE scores, particularly in the quantitative section. Preference will be given to students with professional experience in an MFE-related field, such as derivatives trading, risk management, or portfolio management.
A pplication Process
Additional information regarding taxes is listed below. You must read and understand the tax information prior to applying for this scholarship. It is a programmatic scholarship account that is used to award scholarships to those students admitted to the MFE program. Please direct any questions about the Shidler Master of Financial Engineering program Scholarship or the MFE program to 956-0327. Scholarship recipients will be notified within one week after the scholarship deadline, May 5th, if they have been awarded scholarship.