Table of Contents
Preparation of Trading Account
Trading Account is a Nominal Account and all expenses which relate to either purchase or manufacturing of goods are written on the Dr. side of the Trading Account.
Item written on the Dr. side of the Trading Account:
Opening Stock: The stock of goods remaining unsold at the end of the previous year is termed as the opening stock of the current year. In other words, the closing stock of the last year becomes the opening stock of the current year. Opening Stock will include the following:
I. Opening Stock of Raw Material.
II. Opening Stock of Semi-finished goods, and
III. Opening Stock of Finished goods.
2. Purchases and Purchases Returns: Goods which have been bought for resale are termed as Purchases and goods which are returned to suppliers are termed as purchase returns or returns outwards. Purchase Account will be given on the debit side of the trial balance and Purchase Return Account on the credit side of the trial balance. Purchase returns will be shown as a deduction from Purchases on the debit side of the trading account. Purchases include cash as well as credit purchases.
3. Direct Expenses: All expenses incurred in purchasing the goods, brining them to the godown and manufacture of goods are called direct expenses. Direct expenses include the following:
I. Wages: Wages are paid to workers who are directly engaged in the loading, unloading and production of goods and as such are debited to the trading account. It should be noted that:
(i) If the item ‘Wages and Salaries’ is given in the question it will be shown on the trading account. On the contrary, if ‘Salaries and Wages’ is given it will be shown on the profit & loss account.
(ii) If wages are paid for bringing a new machine or for its installation it will be added to the cost of the machine and hence will not be shown in the trading account.
II. Carriage or Carriage Inwards or Freight: These expenses should be debited to trading account because these are generally paid for bringing the goods to the factory or place of business. However, if any carriage or freight is paid on bringing an asset, the amount should be added to the asset account and must not be debited to trading account.
III. Manufacturing Expenses: All expenses incurred in the manufacture of goods are shown on the debit side of the trading account such as Coal, Gas, Fuel, Water, Power, Factory Rent, Factory Lighting etc.
IV. Dock Charges: These are the charges levied on ships and their cargo while entering or leaving docks. If dock charges are paid on import of goods they are shown on the debit side of trading account. In the absence of specific instructions, these are debited to trading account.
V. Import Duty or Custom Duty: Custom Duty is paid on import as well as on export of goods. Custom duty when paid on the purchase of goods is charged to trading account. In the absence of specific instructions, these are debited to trading account.
VI. Octroi: This is levied by the Municipal Committee when the goods enter the city and hence debited to trading account.
VII. Royalty: This is the amount paid to the owner of a mine or patent for using his right or patent. Royalty is usually charged to trading account because it increases the cost of production. However, if it is specifically stated in the question that the Royalty is based on sales, it will be charged to Profit and Loss account.
Items written on the Cr. Side of the Trading Account:
1. Sales and Sales Returns: Both Cash and Credit sales will be included in sales. The sales account will be a credit balance whereas, the sales return account or returns inwards account will be a debit balance. Sales return will be deducted out of Sales on the credit side of the trading account.
2. Closing Stock: The goods remaining unsold at the end of the year is known as Closing Stock. It is valued at cost price or market price whichever is less. It includes the closing stock of raw material, Closing Stock of semi-finished goods and Closing Stock of finished goods.
Normally, the Closing Stock is given outside the Trail Balance. This is so because its valuation is made after the accounts have been closed. It is incorporated in the books by means of the following entry:
Closing Stock A/c Dr.
To Trading A/c
(Closing Stock transferred to Trading A/c)
When the above entry is passed, the Closing Stock Account is opened. On the one hand, it will be posted to the credit side of the trading account and on the other hand, will be shown on the Assets side of the Balance Sheet, in order to complete the double entry. Sometimes, the Closing Stock is given inside the Trail Balance. This mean that the entry to incorporate the closing stock in the books has already been passed. It would imply that the Closing Stock must have been deducted out of Purchases Account. Hence, in such a case, Closing Stock will not be shown in the Trading Account but will appear on the Assets side of the Balance Sheet only.
Closing Entries Relating to Trading Account
The preparation of the Trading Account requires that the balances of all such accounts which are due to appear in the Trading Account are transferred to it. The entries required for such transfer are termed as Closing entries. These will be as follows:
1. Purchases Return Account is closed by transferring its balance to Purchase Account. Following entry is recorded for this purpose.
Purchases Return A/c Dr.
To Purchases A/c
(Transfer of Purchases Return Account to Purchases (Account)
2. Similarly, the Sales Return Account is closed by transferring its balance to the Sales Account as:
Sales A/ct Dr.
To Sales Return A/c
(Transfer of Sales Return Account to Sales Account)
3. Closing entry for those accounts which are to be transferred to the Dr. side of the Trading Account:
Trading A/c Dr.
To Opening Stock A/ct
To Purchases A/c
To Wages A/c
To Direct Expenses A/c
To Carriage A/c
To Gas, Fuel & Power A/c
To Freight, Octroi & Cartage A/c
To Manufacturing exp. A/c
To Factory Rent & Lighting A/c
To Custom Duty A/c
To Royalty A/c
(Transfer of above accounts to the Dr. side of the Trading A/c)
4. Closing entry for those accounts which are to be transferred to the Cr. Side of the Trading Account:
Sales A/c Dr.
Closing Stock A/c Dr.
To Trading A/c
(Transfer of above accounts to the Cr. Side of the Trading A/c)
5. Another Closing entry is needed to close the trading account itself. If the credit side of the Trading Account exceeds the debit, the difference will be Gross Profit. The Gross Profit will be transferred to the credit of a newly opened account called profit and loss account:
Trading A/c Dr.
To Profit & Loss A/c
(Transfer of Gross Profit to the Credit side of P & L A/c)
6. If the debt side of the Trading Account exceeds the credit, the difference will be Gross Loss. It will be transferred to the debit of P & L a/c by means of the following entry:
Profit and Loss A/c Dr.
To Trading A/c
(Transfer of Gross Loss to the Debit side of P & L A/c)
Form of Trading Account
TRADING A/C
(for the year ended……………..)
Dr. Cr.
Particular |
Amount |
Particulars |
Amount |
Rs. |
Rs. |
||
To Opening Stock
To Purchases Less: Purchase Returns or Returns outward To Wages To Wages & Salaries To Direct Expenses To Carriage, or To Carriage inwards, or To Carriage on Purchase To Gas, Fuel and Power To Freight, octroi and cartage To Manufacturing Expenses, or Productive Expenses To Factory Expenses, such as: Factory Lighting Factory Rent etc. To Dock Charges and Clearing charges To Import Duty or Custom duty To Royalty To Gross Profit Transferred to P & L A/c (Balancing Figures |
By Sales
Less: Sales Returns or Returns inwards By Closing Stock By Gross loss (if any) transferred to Profit and Loss A/c (Balancing Figure) |
||
Notes: (1) In the heading of the Trading Account the words ‘For the year ended……’ are used. Because it discloses the position of the business for the full accounting year and not at a particular point of time.
(2) No separate column for date is prepared in the Final Accounts because the date will be already mentioned in the heading itself.
(3) No column for L.F. is prepared in Final Accounts because these are prepared from trial balance and not from ledge accounts directly.
Illustration:
Prepare a Trading Account for the year ended 31st December 2010 from the following balances:
Rs. |
Rs. |
||
Opening Stock |
4,00,000 |
Purchases Return |
1,20,000 |
Purchases |
20,00,000 |
Sales Return |
2,00,000 |
Sales |
50,00,000 |
Carriage on Purchase |
80,000 |
Freight and Octroi |
65,000 |
Carriage on sales |
1,00,000 |
Wages |
3,00,000 |
Factory Rent |
1,20,000 |
Factory Lighting |
1,08,000 |
Office Rent |
75,000 |
Coal, Gas and Water |
22,000 |
Import Duty |
3,20,000 |
Closing Stock is valued at Rs. 6,00,000.
Solution:
TRADING A/C
(for the year ended……………..)
Dr. Cr.
Particular |
|
Amount |
Particulars |
|
Amount |
|
Rs. |
|
Rs. |
||
To Opening Stock |
|
4,00,000 |
By Sales |
50,00,000 |
|
To Purchases |
20,00,000 |
|
Less: Sales Returns |
2,00,000 |
48,00,000 |
Less:Purchases Return |
1,20,000 |
18,80,000 |
By Closing Stock |
|
6,00,000 |
To Freight and Octroi |
|
65,000 |
|
|
|
To Wages |
|
3,00,000 |
|
|
|
To Factory Lighting |
|
1,08,000 |
|
|
|
To Coal, Gas and
Water |
|
22,000 |
|
|
|
To Carriage on
Purchase |
|
80,000 |
|
|
|
To Factory Rent |
|
1,20,000 |
|
|
|
To Import Duty |
|
3,20,000 |
|
|
|
To Gross Profit
transferred to Profit & Loss A/c |
|
21,05,000 |
|
|
|
|
54,00,000 |
|
54,00,000 |
||
|
|
|
Preparation of Profit and Loss Account
A Profit and Loss Account is started with the amount of gross profit or gross loss brought down from the Trading Account. As such, all those expenses and losses which have not been debited to the Trading Account are now debited to Profit & Loss Account. These expenses include administrative expenses, selling expenses, distribution expenses etc. These are called ‘Indirect Expenses’. Profit and Loss Account is a Nominal Account and as such, all the expenses and losses are shown on its debit side and all the incomes and gains are shown on its credit side.
Items written on the Dr. side of Profit & Loss Account
1. Gross Loss: If trading account discloses Gross Loss, it is shown on the debit side first of all.
2. Office and Administrative Expenses: Such as salary of office employees, office rent, lighting, postage, printing, legal charges, audit fee etc.
3. Selling and Distribution Expenses: Such as advertisement charges, commission, carriage outwards, bad-debts, packing charges etc.
4. Miscellaneous Expenses: Such as interest on loan, interest on capital, repair charges, depreciation, charity etc.
Items written on the Cr. side of Profit & Loss Account
1. Gross Profit: the starting point of the Cr. side of Profit and Loss Account is the gross profit brought down from the Trading Account.
2. Other Incomes and Gains: All items of incomes and gains are shown on the credit side of the Profit & Loss Account, such as income from investments, rent received, discount received, commission earned, interest received, dividend received etc.
If the credit side of the profit and loss account exceeds that of debit side, the difference is termed as net profit. On the other hand, the excess of the debit side over the credit side is termed as net loss. Net profit is added to the capital whereas net loss is deducted from the capital.
Closing Entries relating to Profit and Loss Account
The preparation of profit and loss account requires that the balances of all concerned items are transferred to it by passing the following closing entries:
1. Accounts of various items of expenses and losses are transferred to the debit side of Profit and Loss Account by means of the following entry:
Profit and Loss A/c Dr.
To Salaries A/c
To Rent, Rates and Taxes A/c
To Printing and Stationer A/c
To Postage and Telegrams A/c
To General Expenses etc.
(Transfer of nominal accounts showing Dr. balances to the Debit of P & L A/c)
2. Balances of all the accounts of incomes and gains will be transferred to the credit side of Profit and Loss Account by means of the following entry:
Interest Received A/c Dr.
Commission Received A/c Dr.
Rent Received A/c Dr.
To Profit and Loss A/c
(Transfer of nominal accounts showing Cr. balances to the Credit of P & L A/c)
3. For the transfer of credit balance of Profit & Loss A/c, known as net profit:
Profit and Loss A/c Dr.
To Capital A/c
(Transfer of net profit to Capital A/c)
4. For the transfer of debit balance of Profit & Loss A/c, known as net loss: Capital A/c Dr.
To Profit and Loss A/c
(Transfer of net loss to Capital A/c)
Form of Profit and Loss Account
PROFIT AND LOSS A/C
(for the year ending………….)
Dr. Cr.
Particular |
Amount |
Particulars |
Amount |
Rs. |
Rs. |
||
To Gross Loss b/d (if any)
(Transferred from Trading A/c) Office Expenses: To Salaries To Salaries & Wages To Rent, Rates & Taxes To Printing & Stationery To Postage & Telegram To Lighting To Insurance Premium To Telephone Charges To Legal Charges To Audit Fees To Travelling Expenses To Establishment Expenses To Trade Expenses To General Expenses Selling and Distribution Expenses: To Carriage Outwards, or Carriage on Sales To Advertisement To Commission To Brokerage To Bad-debts To Export Duty Packing charges To Delivery Van Expenses To Stable Expenses Miscellaneous Expenses: To Discount To Repairs To Depreciation To Interest (Dr.) To Bank Charges To Entertainment Expenses To Conveyance Expenses To Donation and Charity To Loss on Sale of Assets To Net Profit: Transferred to Capital A/c |
By Gross Profit b/d
(Transferred from Trading A/c) By Rent from Tenant By Rent (Cr.) By Discount received or discount (Cr.) By Commission Received By Interest on Investments By Dividend on Shares By Bad-Debts Recovered By apprentice Premium* By Profit on sale of Assets By Income from other Sources By Miscellaneous Receipts By Net Loss (if any) Transferred to Capital A/c |
||
Notes: (1) Those expenses which are not related to the business are not written in the Profit and Loss Account such as (i) Domestic and household expenses of the proprietor, (ii) Income-Tax, and (iii) Life Insurance Premium etc. These expenses are known as Drawings and deducted from Capital at the liabilities side of the Balance Sheet.
(2) Only those items of expenses and incomes are shown in the Profit & Loss Account which have not been shown in the Trading Account.
* Income received by providing training to someone is called “Apprentice Premium”.
Illustration:
From the following particulars, prepare a Profit & Loss Account for the year ending 31st December, 2010.
Rs. |
Rs. |
||
Gross Profit |
21,05,000 |
Discount allowed |
30,000 |
Trade Expenses |
20,000 |
Lighting |
7,800 |
Carriage on Sales |
1,00,000 |
Commission Received |
8,400 |
Office Salaries |
1,58,000 |
Bad-debts |
12,000 |
Postage and Telegram |
7,200 |
Discount (Cr.) |
6,000 |
Office Rent |
75,00 |
Interest on Loan |
22,000 |
Legal Charges |
4,000 |
Stable Expenses |
14,000 |
Audit Fee |
16,000 |
Export Duty |
23,000 |
Donation |
11,000 |
Miscellaneous Receipts |
5,000 |
Sundry Expenses |
3,600 |
Unproductive Expenses |
41,000 |
Selling Expenses |
53,200 |
Travelling Expenses |
25,000 |
Solution:
PROFIT AND LOSS ACCOUNT
for the year ending on 31st December, 2010
Dr. Cr.
|
Particulars |
Amount |
Particulars |
Amount |
||
|
Rs. |
Rs. |
||||
| To Trade Expenses |
20,000 |
By Gross Profit |
21,05,000 |
||
| To Carriage on Sales |
1,00,000 |
By Commission Received |
8,400 |
||
| To Office Salaries |
1,58,000 |
By Discount |
6,000 |
||
| To Postage & Telegram |
7,200 |
By Miscellaneous Receipts |
5,000 |
||
| To Office Rent |
75,000 |
|
|||
| To Legal Charges |
4,000 |
|
|||
| To Audit Fee |
16,000 |
|
|||
| To Donation |
11,000 |
|
|||
| To Sundry Expenses |
3,600 |
|
|||
| To Selling Expenses |
53,200 |
|
|||
| To Discount Allowed |
30,000 |
|
|||
| To Lighting |
7,800 |
|
|||
| To Bad-Debts |
12,000 |
|
|||
| To Interest on Loan |
22,000 |
|
|||
| To Stable Expenses |
14,000 |
|
|||
| To Export Duty |
23,000 |
|
|||
| To Unproductive Expenses |
41,000 |
|
|||
| To Travelling Expenses |
25,000 |
|
|||
| To Net Profit transferred to Capital Account |
15,01,600 |
|
|||
|
21,24,400 |
21,24,400 |
||||
Drafting a Balance Sheet
Characteristics of Balance Sheet:
1. A Balance Sheet is a part of the Final Account. This is the reason that the Trading and Profit &Loss Account and the Balance Sheet are together called ‘Final Accounts’. However, the Balance Sheet is a statement and not an account. It has no debit or credit side and as such the words ‘To’ and ‘By’ are not used before the names of the accounts written therein.
2. A Balance Sheet is a summary of the Personal and Real Accounts, which are still open and have not been closed by transfer to the Trading and Profit & Loss Account. Debit balances of all Personal and Real Accounts are put on the right-hand side known as Assets side, whereas the credit balances are put on the left-hand side known as Liabilities side.
3. The totals of the two sides of the Balance Sheet must be equal. If the totals are not equal, there will be an error somewhere.
4. Balance sheet is prepared on a particular date and not for a fixed period. As such, it discloses the financial position of a business on a particular date and not for a period. It is True only for the date on which it is prepared because even a single transaction would cause a change in the assets and liabilities.
5. It shows the financial position of the business according to the going concern concept.
Grouping and Marshalling of Assets and Liabilities in Balance Sheet
The Assets and Liabilities shown in the Balance Sheet are properly grouped and presented in a particular order. The term ‘grouping’ means showing the items of similar nature under a common heading. For example, the amount owing from various customers will be shown under the heading ‘Sundry Debtors’. Similarly, under the heading ‘Current Assets’, the balance of Cash, bank, debtors, stock etc. will be shown.
‘Marshalling’ is the arrangement of various assets and liabilities in a proper order. Marshalling can be made in one of the following two ways:
1. In the Order of Liquidity: According to this method, an asset which is most easily convertible into Cash such as Cash in hand is written first and then will follow those asses which are comparatively less easily convertible, so that the least liquid asset such as goodwill, is shown last.
In the same way, those liabilities which are to be paid at the earliest will be written first. In other words, current liabilities are written first of all, then fixed or long-term liabilities and lastly, the proprietor’s capital.
Generally, sole proprietors and partnership firms prepare their Balance Sheet in the order of liquidity. Proforma of a Balance Sheet in the order of liquidity will be as follows:
BALANCE SHEET
as on or as at………………….
Particular |
Amount |
Particulars |
Amount |
Rs. |
Rs. |
||
Current Liabilities:
Bank Overdraft Bill Payable Sundry Creditors Outstanding Expenses Unearned Income Fixed Liabilities: Long Term Loans Reserves: Capital: Add: Net Profit Less: Drawings Less: Income Tax Less: Life Insurance Premium
|
Current Assets:
Cash in Hand Cash at Bank Bills Receivable Short-Term Investments Sundry Debtors Closing Stock Prepaid Expenses(3) Accrued Income Fixed Assets: Furniture Loose Tools Motor Vehicle Long Term Investments Plant and Machinery Land and Buildings Patents Goodwill |
||
Notes: (1) The words ‘As at’ or ‘As on’ are used in the heading of the Balance Sheet. Because it is true only for the date on which it is prepared.
(2) The total of both the sides of the Balance Sheet is always equal.
(3) Prepaid expenses are treated as current assets. Though Cash cannot be realised from prepaid expenses, the service will be available against these without further payment.
2. In the Order of Permanence: This method is exactly the reverse of the first method discussed above. Assets which are most difficult to be converted into cash such as Goodwill are written first and the assets which are most liquid such as Cash in hand are written last. Similarly, those liabilities which are to be paid last, will be written first. In other words, the proprietor’s capital is written first of all, then fixed or long term liabilities and lastly, the current liabilities. Joint stock companies are required under the Companies Act to prepare their Balance Sheet in the order of permanence.
It is essential to understand the classification of various assets and liabilities before preparing a Balance Sheet.
Classification of Assets
According to the nature of assets, these may be classified into the following:
1. Fixed Assets: Fixed assets are those which are acquired for continued use and last for many years such as Land & Building, Plant and Machinery, Motor Vehicles, Furniture etc. According to Finney & Miller, “Fixed Assets are assets of a relatively permanent nature used in the operations of business and not intended for sale.”
As the purpose of keeping such assets is not to sell but use them, changes in their market values are ignored and these are always shown in the Balance Sheet at cost less depreciation.
2. Current Assets: Current assets are those which are either in the form of cash or can be easily converted into cash within one year of the date of Balance Sheet. In the words of Hovard & Upton, “The current assets are usually defined as those assets which are convertible into cash through the normal course of business within a short time ordinarily in a year.”
Current assets include Cash, Bills Receivable, Short Term Investments, Debtors, Prepaid Expenses, Accrued Income, Closing Stock etc. While valuing these assets, Closing Stock is valued at cost or realisable value whichever is less and a reasonable provision for doubtful debts is deducted out of Sundry Debtors.
3. Liquid Assets: Liquid assets are those which are either in the form of Cash or can be quickly converted into cash, such as Cash, Bills Receivable, Short Term Investments, Debtors, Accrued Income etc. In other words, if Prepaid Expenses and Closing Stock are excluded from Current Assets, the balance will be Liquid Assets.
4. Fictitious or Nominal Assets: These are the assets which cannot be realised in Cash or no further benefit can be derived from these assets. Such assets include Debit balance of P & L A/c and the expenditure not yet written off such as Advertisement Expenses etc. These assets are not really assets but are shown on the Assets side only for the purpose of transferring them to the Profit & Loss Account gradually over a period of time.
5. Wasting Assets: These are the assets which are exhausted or consumed over a period of time such as mines and oil wells. Their value reduces through being worked. These also include Patents and the properties taken on lease for a defi9nite period of time.
6. Tangible and Intangible Assets: Tangible asses are those which have a physical existence or which can be seen and felt like Plant and Machinery, Building, Furniture, Stock, Cash etc. Intangible assets are those which do not have any physical existence or which cannot been seen or felt such as the Goodwill, Trade Marks, Patents etc. Intangible assets are as much valuable as tangible assets because they also help the firm in earning profits. For example, Goodwill helps in attracting customers and patents are actually the know-how which help in producing the goods.
Classification of Liabilities
According to their nature, the liabilities may be classified as follows:
1. Fixed or Long-term Liabilities: Those liabilities which are to be repaid after one year or more are termed as long-term liabilities. These include Public Deposits, Long-term Loans, Debentures etc.
2. Current or Short-term Liabilities: Those liabilities which are expected to be paid within one year of the date of the Balance Sheet are termed as current or short-term liabilities. These include Bank Overdraft, Creditors, Bills Payable, Outstanding expenses etc.
3. Contingent Liabilities: These are the liabilities which will become payable only on the happening of some specific event, otherwise not. Such as:
(i) Liabilities for bill discounted: In case a bill discounted from the bank is dishonoured by the acceptor on the due date, the firm will become liable to the bank.
(ii) Liability in respect of a suit pending in a court of law: This would become an actual liability if the suit is decided against the firm.
(iii) Liability in respect of a guarantee given for another person: The firm would become liable to pay the amount if the person for whom guarantee is given fails to meet his obligation.
Contingent liabilities are not shown in the Balance Sheet: They are, however, shown as a footnote just below the balance sheet so that their existence may be revealed.
Difference between Trial Balance and Balance Sheet
S.No. |
Basis of Difference |
Trial Balance |
Balance Sheet |
1. |
Object |
It is prepared to check the arithmetical accuracy of the books of accounts. |
It is prepared to know the true financial position of the firm. |
2. |
Information about profit or loss |
It is not possible to have information about net profit or net |
Since net profit or loss is recorded in the Capital shown in Balance Sheet, it is possible to have the information about net profit or net loss from a Balance Sheet. |
3. |
Necessity |
Though desirable, its preparation is not necessary. |
It is necessary to prepare a Balance Sheet. |
4. |
Headings |
The headings of its two columns are debit and credit. |
The headings of its two sides are assets and liabilities. |
5. |
Period |
It is normally prepared every month or whenever needed. |
It is normally prepared half-yearly or yearly at the end of the accounting period. |
6. |
Types of Accounts |
All types of accounts whether personal, real or nominal must be written in it. |
Only personal and real accounts are included in it. |
7. |
Closing Stock |
Normally, it does not contain the item of Closing Stock. |
It contains the item of Closing Stock. |
8. |
Adjustments |
It can be prepared without making adjustments for outstanding expenses, prepaid expenses, accrued incomes etc. |
It cannot be prepared without making adjustments for outstanding expenses, prepaid expenses, accrued incomes etc. |
9. |
Evidence |
It is not accepted by the court as documentary evidence. |
It is accepted by the court as documentary evidence. It is also helpful while making payment of income-tax and sales-tax. |
Important Points to prepare Final Accounts:
1. If a trial balance is not given in the question, it is better to prepare a Trial Balance first of all. If there is a difference in the Trial Balance, the difference is placed to a ‘Suspense A/c’ and shown in the Balance Sheet.
2. It should be remembered that all items which appear in the Trial Balance should be shown only once whereas items which appear outside the Trial Balance, known as adjustments, have to be shown at two places.
3. The items which appear on the debit side of the Trial Balance should be shown either on the debit side of the Trading or Profit and Loss A/c or on the Assets side of the Balance Sheet.
4. The items which appear on the credit side of the Trial Balance should be shown either on the credit side of the Trading or Profit & Loss A/c or on the Liabilities side of the Balance Sheet.
5. All accounts relating to Goods such as Purchases, Sales, Purchase Returns and Sales Returns are written in the Trading Account. In addition to these, the Trading Account will also be debited with all expenses which are directly related to either purchase or manufacturing of goods. All the remaining expenses or the balances of the Nominal Accounts are shown in the Profit & Loss Account.
6. The balances of Personal and Real Accounts are always shown in the Balance Sheet.
7. If the expenses in respect of ‘Rent’ and ‘Lighting’ are clearly stated as having been incurred in respect of factory, these will be shown in the Trading Account, otherwise these will be shown in Profit & Loss Account. For example, if ‘Factory Rent’ is given in the question, it will be shown in Trading Account. Instead, if ‘Rent’ is given, it will be shown in Profit & Loss Account.
8. If a trial balance is not given in the question, and it is not clearly stated whether a particular item is expense or income, it will be treated as expense such as Discount, commission, Brokerage or Rent etc.
9. The total of both sides of the Balance Sheet will always be equal.
Illustration:
From the following balances of Siya Ram, Prepare a Balance Sheet as on 31st December, 2010.
|
Particulars |
Amount (Dr.) |
Amount (Cr.) |
| Plant and machinery |
8,00,000 |
|
| Land and Building |
6,00,000 |
|
| Furniture |
1,50,000 |
|
| Cash in Hand |
20,000 |
|
| Bank Overdraft |
|
1,80,000 |
| Debtors and Creditors |
3,20,000 |
2,40,000 |
| Bills Receivable and Bill Payable |
1,00,000 |
60,000 |
| Closing Stock |
4,00,000 |
|
| Investments (Short-term) |
80,000 |
|
| Capital |
|
15,00,000 |
| Drawings |
1,30,000 |
|
| Net Profit |
|
6,20,000 |
|
26,00,0000 |
26,00,0000 |
|
Solution:
BALANCE SHEET
as on 31st December, 2010
Liabilities |
|
Amount |
Assets |
|
Amount |
|
Rs. |
|
Rs. |
||
Bank overdraft |
|
1,80,000 |
Cash in Hand |
|
20,000 |
B/P |
|
60,000 |
B/R |
|
1,00,000 |
Creditors |
|
2,40,000 |
Investments (Short-term) |
|
80,000 |
Capital |
|
|
Debtors |
|
3,20,000 |
Add: Net Profit |
15,00,000 |
|
Closing Stock |
|
4,00,000 |
6,20,000 |
|
Furniture |
|
1,50,000 |
|
21,20,000 |
|
Plant & Machinery |
|
8,00,000 |
|
Less:Drawings |
1,30,000 |
19,90,000 |
Land & Building |
|
6,00,000 |
|
24,70,000 |
|
24,70,000 |
||
|
|
|
Illustration:
From the following Trial Balance of Radhe Shyam Trading and Profit and Loss A/c for the year ending 31st December, 2010 and Balance Sheet as on that date. The Closing Stock on 31st December, 2010 was valued at Rs. 2,50,000.
|
Debit Balances |
Amount (Rs.) |
Credit Balance |
Amount (Rs.) |
||
| Stock (1-1-2010) |
2,00,000 |
Sundry Creditors |
1,50,000 |
||
| Purchases |
7,50,000 |
Purchases Return |
30,000 |
||
| Sales Return |
80,000 |
Sales |
25,00,000 |
||
| Freight and Carriage |
75,000 |
Commission |
33,000 |
||
| Wages |
3,65,000 |
Capital |
17,00,000 |
||
| Salaries |
1,20,000 |
Interest on Bank Deposit |
20,000 |
||
| Repairs |
12,000 |
B/P |
62,000 |
||
| Trade Expenses |
40,000 |
|
|||
| Rent and Taxes |
2,40,000 |
|
|||
| Cash in Hand |
57,000 |
|
|||
| B/R |
40,000 |
|
|||
|
5,50,000 |
|
||||
| Plant and Machinery |
16,00,000 |
|
|||
| Withdrawals (Drawings) |
1,66,000 |
|
|||
| Bank Deposit |
2,00,000 |
|
|||
|
44,95,000 |
44,95,000 |
||||
Solution:
TRADING AND PROFIT & LOSS ACCOUNT
for the year ending 31st December, 2010
Liabilities |
|
Amount |
Assets |
|
Amount |
|
Rs. |
|
Rs. |
||
To Opening Stock |
|
2,00,000 |
By Sales |
25,00,000 |
|
To Purchases |
7,50,000 |
|
Less: Sales Return |
80,000 |
24,20,000 |
Less:Purchases Return |
30,000 |
7,20,000 |
By Closing Stock |
|
2,50,000 |
To Freight & Carriage |
|
75,000 |
|
|
|
To Wages |
|
3,65,000 |
|
|
|
To Gross Profit c/d |
|
13,10,000 |
|
|
|
|
26,70,000 |
|
26,70,000 |
||
To Salaries |
|
1,20,000 |
By Gross Profit b/d |
|
13,10,000 |
To Repairs |
|
12,000 |
By Commission |
|
33,000 |
To Trade Expenses |
|
40,000 |
By Interest on Bank
Deposit |
|
20,000 |
To Rent & Taxes |
|
2,40,000 |
|
|
|
To Net profit transferred to Capital A/c |
|
9,51,000 |
|
|
|
|
13,63,000 |
|
13,63,000 |
||
|
|
|
BALANCE SHEET
as on 31st December, 2010
Liabilities |
|
Amount |
Assets |
|
Amount |
|
Rs. |
|
Rs. |
||
B/P |
|
62,000 |
Cash in Hand |
|
57,000 |
Sundry Creditors |
|
1,50,000 |
B/R |
|
40,000 |
Capital |
17,00,000 |
|
Sundry Debtors |
|
5,50,000 |
Add: Net Profit |
9,50,000 |
|
Closing Stock |
|
2,50,000 |
26,51,000 |
|
Bank Deposit |
|
2,00,000 |
|
Less:Drawings |
1,66,000 |
24,85,000 |
Plant & Machinery |
|
16,00,000 |
|
26,97,000 |
|
26,97,000 |
||
|
|
|
Note: The heading of Trading A/c and Profit & Loss A/c is put collectively as ‘Trading and Profit & Loss A/c’. The first part of this Account is Trading A/c, whereas the second part is Profit & Loss A/c. Trading Account, in fact, is apart of Profit & Loss Account.
Illustration:
From the following balances prepare a Trading, Profit & Loss Account and Balance Sheet.
Rs. |
Rs. |
||
Carriage on Goods Purchased |
80,000 |
Cash in Hand |
25,000 |
Carriage on Goods Sold |
35,000 |
Banker’s A/c (Cr.) |
3,00,000 |
Manufacturing Expenses |
4,20,000 |
Motor Car |
6,00,000 |
Advertisement |
70,000 |
Drawings |
80,000 |
Freight and Octroi |
44,000 |
Audit Fees |
27,000 |
Lighting |
60,000 |
Plant |
15,39,000 |
Customer’s A/c |
8,00,000 |
Repairs to Plant |
22,000 |
Supplier’s A/c |
6,10,000 |
Stock at the end |
7,60,000 |
Duty and Clearing Charges |
52,000 |
Purchase Less Returns |
16,00,000 |
Postage and Telegram |
8,000 |
Commission on Purchases |
20,000 |
Fire Insurance Premium |
36,000 |
Incidental Trade Exp. |
32,000 |
Patents |
1,20,000 |
Investments |
3,00,000 |
Income Tax |
2,40,000 |
Interest on Investments |
45,000 |
Office Expenses |
72,000 |
Capital A/c |
10,00,000 |
|
Sales Less Returns |
52,00,000 |
|
|
Rent |
1,20,000 |
|
|
Discount Paid |
27,000 |
|
|
Discount on Purchases |
34,000 |
|
Solution:
TRADING AND PROFIT & LOSS ACCOUNT
for the year ending ……………………
Rs. |
Rs. |
||
To Purchases Less Returns |
16,00,000 |
By Sales Less Returns |
52,00,000 |
To Commission on Purchases |
20,000 |
|
|
To Carriage on goods Purchased |
80,000 |
|
|
To Manufacturing Expenses |
4,20,000 |
|
|
To Freight and Octroi |
44,000 |
|
|
To Duty & Clearing Charges |
52,000 |
|
|
To Gross Profit c/d |
29,84,000 |
|
|
52,00,000 |
52,00,000 |
||
|
|
||
To Carriage on Goods Sold |
35,000 |
By Gross Profit b/d |
29,84,000 |
To Advertisement |
70,000 |
By Interest on Investments |
45,000 |
To Lighting |
60,000 |
By Discount on Purchases |
34,000 |
To Postage & Telegram |
8,000 |
|
|
To Fire Insurance Premium |
36,000 |
|
|
To Office Expenses |
72,000 |
|
|
To Audit Fees |
27,000 |
|
|
To Repair to Plant |
22,000 |
|
|
To Incidental Trade Expenses |
32,000 |
|
|
To Rent |
1,20,000 |
|
|
To Discount Paid |
27,000 |
|
|
To Net Profit Transferred to
Capital A/c |
25,54,000 |
|
|
30,63,000 |
30,63,000 |
||
Note: If Closing Stock appears inside the Trial Balance, it will be shown only at one place, i.e., only on the assets side of the Balance Sheet.
Illustration:
From the following balances prepare Final Accounts as on 31st December, 2010.
Rs. |
Rs. |
||
Opening Stock |
1,53,100 |
Capital |
25,00,000 |
Purchase |
8,24,000 |
Drawings |
4,80,000 |
Sales |
25,60,000 |
Sundry Debtors |
5,70,000 |
Returns (Dr.) |
40,000 |
Sundry Creditors |
1,40,000 |
Returns (Cr.) |
24,000 |
Depreciation |
42,000 |
Factory Rent |
1,80,000 |
Charity |
5,000 |
Custom Duty |
1,15,000 |
Cash Balance |
44,600 |
Coal, Gas and Power |
60,000 |
Bank Balance |
40,000 |
Wages & Salary |
3,66,000 |
Bank Charges |
1,800 |
Discount (Dr.) |
75,000 |
Establishment Expenses |
36,000 |
Commission (Cr.) |
12,000 |
Plant |
4,20,000 |
Bad-Debts |
58,500 |
Leasehold Building |
15,00,000 |
Bad-Debts Recovered |
20,000 |
Goodwill |
2,00,000 |
Apprentice Premium |
48,000 |
Patents |
1,00,000 |
Productive Expenses |
26,000 |
Trade Marks |
50,000 |
Unproductive Expenses |
50,000 |
Loan Cr. |
2,50,000 |
Carriage |
87,000 |
Interest on Loan |
30,000 |
The value of Closing Stock on 31st December, 2010 was Rs. 2,54,000.
Solution:
TRADING AND PROFIT & LOSS ACCOUNT
for the year ending 31st December, 2010
|
Rs. |
|
Rs. |
||
To Opening Stock |
|
1,53,100 |
By Sales |
25,60,000 |
|
To Purchases |
8,24,000 |
|
Less:Returns (Dr.) |
40,000 |
25,20,000 |
Less: Returns (Cr.) |
24,000 |
8,00,00 |
By Closing Stock |
|
2,54,000 |
To Factory Rent |
|
1,80,000 |
|
|
|
To Custom Duty |
|
1,15,000(1) |
|
|
|
To Coal, Gas and Power |
|
60,000 |
|
|
|
To Wages & Salary |
|
3,66,000 |
|
|
|
To Productive Expenses |
|
26,000 |
|
|
|
To Carriage |
|
87,000 |
|
|
|
To Gross Profit c/d |
|
9,86,900 |
|
|
|
|
27,74,000 |
|
27,74,000 |
||
|
|
|
|
||
To Discount |
|
75,000 |
By Gross Profit b/d |
|
9,86,900 |
To Bad-Debts |
|
58,500 |
By Commission |
|
12,000 |
To Unproductive Expenses |
|
50,000 |
By Bad Debts Recovered |
|
20,000 |
To Depreciation |
|
42,000 |
By Apprentice Premium |
|
48,000(2) |
To Charity |
|
5,000 |
|
|
|
To Bank Charges |
|
1,800 |
|
|
|
To Establishment Expenses |
|
36,000 |
|
|
|
To Interest on Loan |
|
30,000 |
|
|
|
To Net Profit transferred to Capital A/c |
|
7,68,600 |
|
|
|
|
10,66,900 |
|
10,66,900 |
||
|
|
|
BALANCE SHEET
as on 31st December, 2010
Liabilities |
|
Amount |
Assets |
|
Amount |
|
Rs. |
|
Rs. |
||
Sundry Creditors |
|
1,40,000 |
Cash Balance |
|
44,600 |
Loan |
|
2,50,000 |
Bank Balance |
|
40,000 |
Capital |
25,00,000 |
|
Sundry Debtors |
|
5,70,000 |
Add: Net Profit |
7,68,600 |
|
Closing Stock |
|
2,54,000 |
32,68,600 |
|
Plant |
|
4,20,000 |
|
Less:Drawings |
4,80,000 |
27,88,600 |
LeaseholdBuilding |
|
15,00,000 |
|
|
Patents |
|
1,00,000 |
|
|
|
Trade Marks |
|
50,000 |
|
|
|
Goodwill |
|
2,00,000 |
|
|
31,78,600 |
|
31,78,600 |
||
|
|
|