This action might not be possible to undo. Are you sure you want to continue?
Trading & Profit and Loss A/c
Trading and P&L A/c and Balance sheet are prepared at the end of the year or at end of the part. So it is called Final Account. 1. Trading and Profit and Loss A/c is prepared to find out Profit or Loss. 2. Balance Sheet is prepared to find out financial position a if concern. Revenue account of trading concern is divided into two-part i.e. 1. Trading Account and 2. Profit and Loss Account. (A) Trading account Trading is the basic process of business. Manufacturing companies, for example, buy in raw materials and use them to make products for sale, whereas retail companies buy in finished goods for sale at a higher price; this is the basis of their trade. The trading account for either of these types of business shows how much profit the firm makes by this basic business process, ignoring other expenses the company may incur. It simply looks at how profitably the firm makes goods or processes them for sale to customers. The profit earned by this process is known as the gross profit. Items appearing in the Debit side of Trading Account. 1. Opening Stock: Stock on hand at the commencement of the year or period is termed as the Opening Stock. 2. Purchases: It indicates total purchases both cash and credit made during the year. 3. Purchases Returns or Returns out words: Purchases Returns must be subtracted from the total purchases to get the net purchases. Net purchases will be shown in the trading account. 4. Direct Expenses on Purchases: Some of the Direct Expenses are. i. Wages: It is also known as productive wages or Manufacturing wages. ii. Carriage or Carriage Inwards: iii. Doctroi Duty: Duty paid on goods for bringing them within municipal limits. iv. Customs duty, dock dues, clearing charges, Import duty etc. v. Fuel, Power, Lighting charges related to production.
Rama Mittal Page 1
Corporate Accounting Unit-3 Oil, Grease and Waste. Packing charges: Such expenses are incurred with a view to put the goods in the Saleable Condition. Items appearing on the credit side of Trading Account 1. Sales: Total Sales (Including both cash and credit) made during the year. 2. Sales Returns or Return Inwards: Sales Returns must be subtracted from the Total Sales to get Net sales. 3. Closing stock: Generally, Closing stock does not appear in the Trial Balance. It appears outside the Trial balance. It represents the value of goods at the end of the trading period. (B) Profit and loss account Trading account reveals Gross Profit or Gross Loss. Gross Profit is transferred to credit side of Profit and Loss A/c. Gross Loss is transferred to debit side of the Profit Loss Account. Thus Profit and Loss A/c is commenced. This Profit & Loss A/c reveals Net Profit or Net loss at a given time of accounting year. Items appearing on Debit side of the Profit & Loss A/c The Expenses incurred in a business is divided in too parts. i.e. one is Direct expenses are recorded in trading A/c., and another one is Indirect expenses, which are recorded on the debit side of Profit & Loss A/c. Indirect Expenses are grouped under four heads: 1. Selling Expenses: All expenses relating to sales such as Carriage outwards, travelling Expenses, Advertising etc., 2. Office Expenses: Expenses incurred on running an office such as Office Salaries, Rent, Tax, Postage, Stationery etc., 3. Maintenance Expenses: Maintenance expenses of assets. It includes Repairs and Renewals, Depreciation etc. 4. Financial Expenses: Interest Paid on loan, Discount allowed etc., are few examples for Financial Expenses. Item appearing on Credit side of Profit and Loss A/c Gross Profit is appeared on the credit side of P & L. A/c. Also other gains and incomes of the business are shown on the credit side. Typical of such gains are items such as Interest received, Rent received, Discounts earned, Commission earned. vi. vii.
Corporate Accounting Unit-3 (C) Balance sheet The Word µBalance Sheet¶ is defined as ³a Statement which sets out the Assets and Liabilities of a business firm and which serves to ascertain the financial position of the same on any particular date.´ On the left hand side of this statement, the liabilities and capital are shown. On the right hand side, all the assets are shown. Therefore the two sides of the Balance sheet must always be equal. Capital arrives Assets exceeds the liabilities. Objectives of balance sheet: 1. It shows accurate financial position of a firm. 2. It is a gist of various transactions at a given period. 3. It clearly indicates, whether the firm has sufficient assents to repay its liabilities. 4. The accuracy of final accounts is verified by this statement 5. It shows the profit or Loss arrived through Profit & Loss A/c.
Major headings of the assets and liabilities-side of a company¶s balances sheet as per Schedule VI, Part I. Major headings of Assets side i. ii. iii. iv. v. Fixed Assets Investments Current Assets, Loans and Advances: Current Assets, Loans and Advances Miscellaneous Expenditures Profit & Loss Account (Loss in Business)
Major headings of Liabilities side i. ii. iii. iv. v. Share Capital Reserves and Surplus Secured Loans Unsecured Loans Current Liabilities and Provisions a. Current Liabilities b. Provisions What is contingent liability? A possible future liability, which depends on the happenings of certain uncertain event, is called contingent liability. These liabilities are not shown in the total of liability side, but are shown as a footnote to the balance sheet.
Rama Mittal Page 3
Corporate Accounting Unit-3 The following are some examples of contingent liabilities: i. ii. iii. iv. v. Uncalled liabilities on partly paid shares Liabilities under Guarantee Arrears of dividends on cumulative preference shares Claim against the company now acknowledged as debts Liabilities on Bills Receivable discounted but not matured.
Difference between a trial balance and a balance sheet
1. It shows the balances of all ledger accounts. 2. It is prepared after the completion of the ledger accounts or arrival of the balances. 3. Its object is to check the arithmetical accuracy. 4. Items shown in the Trial balance are not in order. 5. It shows the opening stock 6. It has the headings, debit and credit.
1. It shows the balances of personal and real accounts only. 2. It is prepared after the completion of Trading and P&L A/c. 3.Its object is to reveal the financial position of the business 4. But in the B/S, the items shown must be in order. 5. It shows the closing stock 6.It has the heading of Assets and Liabilities
Example- under what headings will you shows the following items in the balance sheet of a company: i. ii. iii. iv. v. Goodwill Unclaimed Dividends Provision for Tax Share Premium Account Loose Tools
Answer: Items Goodwill Unclaimed Dividend Headings Fixed Assets Current Liabilities and Provisions Sub-headings ² Current Liabilities
Corporate Accounting Unit-3 Provision for Tax Current Liabilities and Provisions Provisions ² Current Assets
Share Premium Reserves and Surplus A/c Loose Tools Current Assets, Loans and Advances
Example- Give the headings under which the following items will be shown in a company¶s balance sheet as per Schedule VI, Part I: i. ii. iii. iv. v. Sundry Creditors Debentures Sinking Fund Bills Receivable Discount on Issue of Debentures Motor Car
Answer: Items Sundry Creditors Headings Current Liabilities and Provisions Current Asset, Loans and Advances Miscellaneous Expenditures Fixed Assets Sub-headings Current Liabilities ² Loans and Advances ² ²
Debentures Sinking Fund Reserves and Surplus Bills Receivable Discount on Issue of Debentures Motor Car
Example- Give the headings under which any four of the following items will be shown in Company¶s Balance Sheet. i. ii. iii. iv. v. Debentures Interest accrued on investment Goodwill Preliminary Expenses Bills of Exchange
Answer: Items Debentures
Headings Secured Loans
Corporate Accounting Unit-3 Interest accrued on Investment Goodwill Preliminary Expenses Bills of Exchange Current Assets, Loans and Advances Fixed Assets Miscellaneous Expenditures Current Assets, Loans and Advances Current Assets ² ² Loans and Advances
Form of Balance Sheet Part 1 to Schedule VI of the Indian Companies Act, 1956 gives the format in which the balance sheet is to be prepared. The schedule gives 2 types of formats, the horizontal format and the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under: BALANCE SHEET As on«««««. (Horizontal Form)
Liabilities (a) Share Capital (b) Reserves and surplus c) Loans d) Current liabilities & Provisions
Assets (a) Fixed assets (b) Investments c) Current assets, loans and advances (d) Miscellaneous expenditure (e) Profit & Loss Account
Corporate Accounting Unit-3 Format of balance sheet (in horizontal form) according to the requirements of Schedule VI of the Companies Act 1956. Balance Sheet As on²Liabilities (Rs.) (1) Share Capital Authorised Capital: « Shares of Rs. « each Issued Capital: « Equity Shares of Rs. « each « Preference Share of Rs. « each Subscribed Capital: Equity Shares of Rs. « each Rs. « Called up XXX Preference Share of Rs. « each Rs. « Called up XXX Less Calls Unpaid XXX (i) By directors XXX (ii) By Others XXX Add Forfeited shares XXX (2) RESERVES AND SURPLUS: 1. Capital Reserve, not available for Dividend 2. Capital Redemption Reserve 3. Share Premium Account 4. Other Reserves specifying the nature of reserve and the amount in respect thereof.Less: Debit balance in Profit & Loss account (if any) Amount (Rs.) Assets (Rs.) (1) FIXED ASSETS: 1. Goodwill XXX 2. Land 3. Building XXX 4. Leaseholds XXX 5. Railway Sidings 6. Plant and Machinery 7. Furniture and Fittings 8. Development of Property 9. Patents, Trade Marks 10. Live Stocks 11. Vehicles etc. XXX (2) INVESTMENTS: (3) CURRENT ASSETS, LOANS AND ADVANCES: XXX (A) Current Assets: XXX 1. Interest accrued on investments XXX 2. Stores and Spare parts XXX 3. Loose Tools XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Amount (Rs.)
Corporate Accounting Unit-3 5. Surplus, that is balance in Profit and Loss account after providing for proposed allocation 6. Proposed addition to reserves 7. Sinking Funds XXX 4. Stock in trade XXX
XXX 5. Work in progress XXX 6. Sundry Debtors: Less: Provision
XXX XXX XXX XXX
(3) SECURED LOANS: 1. Debentures 2. Loans and Advances from Banks.
7. (a) Cash balance in hand (b) Bank balance XXX (B) Loans and Advances: XXX 8. (a) Advances and loans to subsidiaries(b) advances and loans to partnership firms in which the Company or any of its subsidiaries is a partner XXX 9. Bills of Exchange XXX 10. Advances recoverable in cash or in kind (e.g. Rates, Taxes, Insurance, etc. prepaid) XXX 11. Balances with customs, Port Trusts, and excise authorities etc. (4) MISCELLANEOUS EXPENDITURE: XXX 1. Preliminary Expenses XXX 2. Expenses, including commission or Brokerage on under writing XXX 3. Discount allowed on the issue of Shares or Debentures
3. Loans and Advances from subsidiaries 4. Other Loans and Advances
5. Interest accrued and due on secured loans (4) UNSECURED LOANS: 1. Fixed Deposits 2. Loans and Advances from subsidiaries 3. Short Term Loans and Advances a. From Banks b. From Others 4. Other Loans and Advances (From Bank or others) (5) CURRENT LIABILITIES AND PROVISIONS: (A) Current Liabilities:
XXX 4. Interest paid out of capital during construction period 5. Development expenditure 6. Other sums (specifying
XXX XXX XXX
Corporate Accounting Unit-3 nature) 1. Acceptances XXX 5. PROFIT & LOSS ACCOUNT: (This is shown only when its debit balance count not be written off out of others reserves) XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX
2. Sundry Creditors 3. Subsidiary Companies 4. Unclaimed Dividends 5. Interest accrued but not due on loans 6. Advance payments and unexpired discounts 7. Other Liabilities (if any) (B) Provisions: 8. Proposed Dividends 9. Provision for Taxation 10. Provision for Provident Fund schemes 11. Provision for insurance, pension and similar staff benefit schemes. 12. Other Provisions Total
Corporate Accounting Unit-3
In the vertical format, the various heads of liabilities and assets are arranged vertically and current liabilities are shown as deduction, from current assets. Whatever information is required to be given in the horizontal format must also be given in the vertical format. Summarized prescribed vertical form of balance sheet is given below: Format of balance sheet (in vertical form) according to the requirements of Schedule VI of the Companies Act 1956.
BALANCE SHEET As on«««««.
Particulars Am. as on the last Am. as on the last
date of current year date of previousyear I. Sources of Funds (1) Shareholders¶ funds (2) Loan funds Total ««« «««
II Application of Funds (1) Fixed assets (2) Investments (3) Current assets, loans and advances Less: Current liabilities & provisions (4) (a) Miscellaneous expenditure. (b) Profit & Loss Account Total ««« ««« ««« ««« ««« ««« ««« «««
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.