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Trading Account:
Learning Objectives:
1.
Define and explain trading account.2. What are the items of a trading account.3. Prepare the format of trading account.4. What are advantages of trading accounting?
Definition and Explanation:
A trading account is an account which contains, " in summarized form, all thetransactions, occurring, throughout the trading period, in commodities in which he deals"and which gives the gross trading result. In short, trading account is the account which is
prepared to determine the gross profit or the gross loss of a trader.
Items of Trading Account:
The following items usually appear in the debit and credit sides of the trading account.
Debit Side Items:
1. The value of opening stocks of goods (i.e., the stock of goods with which thebusiness was started).
2. Net purchase made during the year (i.e., purchases less returns). 3. Direct expenses, if any.
Credit Side Items:
1. Total sales made during the period less the value of returns, i.e., net sales. 2. The value of closing stock of goods.
The difference between the two sides of the trading account represents either gross profit orgross loss. Thus if the credit side is heavier that would mean that the trader has earned
gross profit i.e., the excess of selling price of the goods sold over their purchase price. If thedebit side is heavier it would mean that the trader has suffered gross loss i.e., purchase
price of goods exceeds the selling price.
The balance of trading account which represents either gross profit or gross loss istransferred to profit and loss account.
Format of Trading Account (T or Account Form):
Trading AccountFor the year ending .......20......
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Dr. Cr.
To Opening stock ........To purchases .........
Less Returns ......... ........To Carriage inwards .........
To Cartage .........
To dock charges .........
To Wages .........
To Duty .........
To Freight .........
To Clearing charges .........
To Etc. Etc., .........To Gross profit(Transferred to profit and
loss account) .........
By Sales .........Less returns ......... .........
By Closing stock .........By Gross loss transferredto profit and loss account .........
Trading Accounts Items:
Now we shall discuss the items of trading account one by one.
Opening Stock:
In case of trading concerns it will consist of only finished goods or goods to be sold withoutalteration. In manufacturing concerns, the opening stock will consist of three parts(a). Stock of raw materials.
(b). Stock of partly completed goods or work-in-progress.(c). Stock of finished goods.
In case ofnew business there will be no opening stock.
Purchases:
This item includes both cash and credit purchases of goods bought with the object of sales.
Return Outwards or Purchases Returns:
It means the goods returned by a trader to his suppliers from out of his purchases. Returnoutwards reduce the purchases. It is shown by way of deduction from purchases in thetrading account.
Discount on Purchases:
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It is also shown by way of deduction from purchases in the trading account.
Sales:
This item includes total of both cash and credit sales of goods in which businessman dealsin. It is credited to trading account.
Returns Inwards or Sales Returns:
It means goods returned to a trader by his customers from out of goods sold to them. It isshown by way of deduction from sales on the credit side, of the trading account.
Discount on Sales:
This account has always a debit balance and is shown by deduction from sales in the tradingaccount.
Direct Expenses:
Direct expenses are those expenses which are incurred to convert raw-materials into
finished goods or which may be regarded as a part of the cost of purchasing the goods. e.g.,wages paid by a manufacturer to construct furniture out of raw wood, the expenses incurred
to bring goods from the place of purchase to the business place of the trader etc. All the
direct expenses are charged to the trading account. The items usually included in the directexpenses are:
1. Wages: This item usually signifies some hourly, daily or piecework remunerationpaid to laborers. It is direct expenditure and should be charged to trading account.
2. Manufacturing or Productive Wages: This item usually signifies the wages offactory workmen actually engaged in making or producing something. It is a direct
charge on the cost of manufacturer. It is debited to manufacturing account or trading
account.3. Carriage Inward: Carriage means conveyance charges of goods by land. Carriage
inward are the conveyance expenses incurred to bring the goods purchased in the
godown or shop. It is debited to trading account. In examination questions when theitem only "carriage" is given and is not expressly stated to be inward or outward, it
should be assumed to be inward and debited to trading account. The reason is that
carriage on goods is usually paid by the purchaser. 4. Cartage: The cartage charges on goods purchased are direct expenses and should
be debited to trading account.5. Freight: Freight is the charge made for conveyance of goods by sea. Freight on
goods purchased is charged to trading account. 6. Customs Duty, Octroi Duty etc: When goods are purchased from a foreign country
import duty will be payable. When goods are received from another city, the
municipal corporation may charge octroi duty. All duties on goods purchased should
be debited to trading account.7. Excise Duty: It is a tax levied by the government. If the duty is levied on
production it will be treated as manufacturing expenses and debited to tradingaccount.
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8. Stores Consumed: This item stores denote lubricating oil, tallow, grease, cottonand jute waste, etc., required for running the machinery of manufacturing concern.
The amount of stores consumed is a direct expense and should be charged to tradingaccount.
9. Motive Power: This item includes, coke, gas, water or electric energy consumed inpropelling the machinery. It is debited to manufacturing account in the absence of a
manufacturing account, it is debited to trading account.10.Royalty: Royalty is an amount paid to a person for exploiting rights possessed by
him it is usually paid to patentee, author, or landlord for the right to use his patent,copyright or land. If they are productive expenses, they are debited to
manufacturing account; but in the absence of a manufacturing account, they are
debited to trading account.11.Manufacturing Expense: All other expenses such as factory rent, factory
insurance, factory repair etc., are direct expenses and should be charged to tradingaccount.
Closing Stock and its Valuation:
Closing stock represents the value of goods lying unsold in the hands of a trader at the endof a trading period. The value of closing stock is ascertained by means of compilation of list
of materials, stores and goods actually in possession at the close of the trading period. Thiswork is known as taking the inventory. The inventory or lists of physical stock are thenfaired and valued. The total of the lists will be closing stock. The closing stock is valued at
cost or market price whichever is lower. As this item materially affects the gross profit (or
gross loss), it is essential that all possible care should be taken to calculate the closing stockat a proper value.
The value of closing stock is taken into consideration only at the time of preparing thetrading account and not before. The trial balance is prepared before the preparation of the
trading account. Hence the closing stock does not appear in a trial balance. It is brought
into account by means of a journal entry debiting stock account and crediting the tradingaccount.
Closing Entries for Trading Account:
Closing entries are those which are passed at the end of each financial period for thepurpose of transferring the various revenues items to the trading and profit and loss
account and thus the nominal accounts are closed. I preparing a trading account, theopening stock, purchases, sales, returns both inwards and outwards, direct expenses andclosing stock are transferred to it by means of journal entries as follows:
1. Trading AccountTo Purchases AccountTo Returns Inwards Account
To Direct Expenses Account (wages, carriage etc.)(Being the transfer of the latter accounts to the former.)
2. Sales AccountReturns Outward Account
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To Trading Account(Sales etc., transferred to trading account)
3. Closing Stock AccountTo Trading Account
(Being to record closing stock)
Advantages of Trading Account:
The advantages of the trading account are as follows:
1. A trader can find out the gross profit and thereby can ascertain the percentage ofprofit he has earned on the cost of goods sold. This percentage of gross profit may
serve as his ready guide for the adjustment of future sale price. 2. A trading account help a trader to compare his stock at open with that at the close.
He can further find out whether the purchases he has made during the period ofaccount have been judicious.3. Once can compare the figure of sales with similar figure of the previous year and can
find out whether business is improving or declining. 4. If the gross profit disclosed by the trading account is less than expected, an enquiry
can be made into the cause responsible for the decline. And if the gross profit ismore than was expected, steps can be taken to maintain it.
You may also be interested in other articles from "final accounts" chapter:
1. Trading Account2. Profit and Loss Account3. Difference Between Trading Account and Profit and Loss Account 4. Balance Sheet5. Difference Between Trial Balance and Balance Sheet6. Examples of Trading and Profit and Loss Account and Balance Sheet
Read more athttp://accounting4management.com/trading_account.htm#sqDPb3hl4beEOYih.99
http://accounting4management.com/trading_account.htmhttp://accounting4management.com/trading_account.htmhttp://accounting4management.com/profit_and_loss_account.htmhttp://accounting4management.com/profit_and_loss_account.htmhttp://accounting4management.com/difference_between_trading_and_profit_and_loss_account.htmhttp://accounting4management.com/difference_between_trading_and_profit_and_loss_account.htmhttp://accounting4management.com/balance_sheet.htmhttp://accounting4management.com/balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htmhttp://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_balance_sheet.htmhttp://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_balance_sheet.htmhttp://accounting4management.com/trading_account.htm#sqDPb3hl4beEOYih.99http://accounting4management.com/trading_account.htm#sqDPb3hl4beEOYih.99http://accounting4management.com/trading_account.htm#sqDPb3hl4beEOYih.99http://accounting4management.com/trading_account.htm#sqDPb3hl4beEOYih.99http://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htmhttp://accounting4management.com/balance_sheet.htmhttp://accounting4management.com/difference_between_trading_and_profit_and_loss_account.htmhttp://accounting4management.com/profit_and_loss_account.htmhttp://accounting4management.com/trading_account.htm -
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Profit and Loss Account:Learning Objectives:
1. Define and explain profit and loss account.2. Prepare the format of profit and loss account (account form and statement form). 3. Prepare closing journal entries profit and loss account.
Definition and Explanation:
Profit and loss account is the account whereby a trader determines the net result of his
business transactions. It is the account which reveals the net profit (or net loss) of thetrader.
The profit and loss account is opened with gross profit transferred from the trading account(or with gross loss which will be debited to profit and loss account). After this all expenses
and losses (which have not been dealt in the trading account) are transferred to the debit
side of the profit and loss account. If there are any incomes or gains, these will be creditedto the profit and loss account. The excess of the gain over the losses is called the net profitand that of the loss over the gain is called the net loss. The account is closed by transferring
the net profit or loss to capital account of the trader.
Format of the Profit and Loss Account:
Profit and Loss AccountFor the year ended ..............
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To Gross LossTo SalariesTo RentTo Rent and RatesTo Discount AllowedTo Commission Allowed
To InsuranceTo Bank ChargesTo Legal ChargesTo RepairsTo AdvertisingTo Trade ExpensesTo Office ExpensesTo Bad Debts
To Traveling ExpensesTo Etc., Etc.
To Net Profit (transferred to
capital account of the trader)
xxxxxxxxxxxxxxxxxxxxxxxx
xxxxxxxxxxxxxxxxxxxxex.
xxxxxxxxxxxxxxxx
xxxx
By Gross ProfitBy Interest ReceivedBy Discount ReceivedBy Commission ReceivedBy Other ReceiptsBy Etc., Etc.
By Net Loss (transferred to
capital account of the trader)
xxxxxxxxxxxxxxxxxxxxxxxx
xxxx
Closing Entries for Profit and Loss Account:
The following usual entries are passed at the end of each trading period.
1. Transferring all expenses or losses:Profit and loss account
To Each of the various expenses or losses(This entry will close the expenses accounts)
2. Transferring all items of gains etc:Various nominal accounts (representing gains)
To Profit and loss account(This entry will close all the remaining nominal accounts)
3. Transferring net gain to capital account:Profit and loss account
To Capital account(This entry closes the P & L account)
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4. Transferring net loss to capital account:Capital account
To Profit and loss account(This entry closes the P & L account)
Profit and Loss Account in Statement Form/IncomeStatement:
Trading and profit and loss account/income statement may be prepared either in accountform (T form) or in report form (statement form). Trading and profit and loss account in
both the forms give the same information. The account or T form is traditional and is used
widely but in recent years many business houses prefer to present the profit and lossaccount/income statement in the report form.
Format of Profit and Loss Account/Income Statement in Statement Form:
Trading and Profit and Loss Account/Income StatementFor the year ended 31st December, 199-----
Income From Sales:
Sales ------
Less: Sales returns ------
Sales discount ------ ------
Net Sales ------
Cost of Goods Sold:
Merchandise is stock on 1st January ------
Purchases ------
Less: Purchases returns ------
Net purchases ------
Cost of goods available for sale ------
Less merchandise in stock on 31st December ------
Cost of goods sold ------
GROSS PROFIT ------
Operating Expenses:
Selling Expenses:
Sales salaries ------
Advertising expenses ------
Insurance expense - selling ------
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Store supplies expenses ------
Sundry selling expenses ------
Total selling expenses------
General Expenses:Office salaries ------Taxes ------Insurance expenses general ------Office supplies expenses ------
Sundry general expenses ------
Total general expenses ------
Total operating expenses ------
Net profit from operations ------Other Income:
Rent income ------Other Expenses:
Interest expenses ------------
NET PROFIT ------
Explanation of Certain Items of Income Statement:
Income from sales: The total of all charges to customers for goods sold, both for cash and
on credit, is reported in this section. Sales returns and allowances and sales discounts arededucted from the gross amount to yield net sales.
Cost of Goods Sold: Cost of goods sold refers to the cost price of goods which have beensold during a given period of time. In order to calculate the cost of goods sold we shoulddeduct from the total cost of goods purchased the cost of goods at the end of the year. This
can be explained with the help of following formula/equation:
(Opening stock + Cost of goods purchased) - Closing stock = Cost of goods sold
Gross Profit: The excess of the net income from sales over the cost of goods sold is also
called gross profit on sales, trading profit or gross margin. It is as gross because all other
expenses for the period must be deducted from it to obtain the net profit or net income ofthe business.
Operating Expenses: The operating expenses also called operating costs of a businessmay be classified under any desired number of headings and sub-headings. In small retailbusiness it is usually satisfactory to classify operating expenses as selling or general.
1. Expenses that are incurred directly in connection with the sale of goods are known asselling expenses. selling expenses include salaries or the salesmen, store supplies
used, depreciation of the store equipment, and advertising.
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2. Expenses incurred in the general administration of the business are known asadministrative expenses or general expenses. Examples of general expenses areoffice salaries, depreciation of equipment, and office supplied used.
Net Profit from Operations: The excess of gross profit on sales over total operating
expenses is called net profit or net profit from operations. If operating expenses should
exceed gross profit, the excess is designated as net loss or net loss from operations.
Other Income: Minor sources of income are classified as other income or non-operatingincome. In a merchandising business this category often include income from interest, rent,dividends and gains from the sale of fixed assets.
Other Expenses: Expenses that cannot be associated definitely with the operations areidentified as other expenses or non-operating expenses. Interest expense that results from
financing activities and losses incurred in the disposal of fixed assets are examples of itemsreported in this section.
The two categories of non-operating items, other income and other expenses, are offset
against each other on the profit and loss account. If the total of other income exceeds thetotal other expenses, the excess is added to net profit from operations; if the reverse is
true, the difference is subtracted from net profit from operations.
Net Profit: The final figure on the profit and loss account is labeled as net profit (or net
loss) or net profit carried to balance sheet. It is the net increase in capital from profitmaking activities.
You may also be interested in other articles from "final accounts" chapter:
1. Trading Account2. Profit and Loss Account3. Difference Between Trading Account and Profit and Loss Account 4. Balance Sheet5. Difference Between Trial Balance and Balance Sheet6. Examples of Trading and Profit and Loss Account and Balance Sheet
Read more at
http://accounting4management.com/profit_and_loss_account.htm#p1rvTHU6qXKklxTH.99
http://accounting4management.com/trading_account.htmhttp://accounting4management.com/trading_account.htmhttp://accounting4management.com/profit_and_loss_account.htmhttp://accounting4management.com/profit_and_loss_account.htmhttp://accounting4management.com/difference_between_trading_and_profit_and_loss_account.htmhttp://accounting4management.com/difference_between_trading_and_profit_and_loss_account.htmhttp://accounting4management.com/balance_sheet.htmhttp://accounting4management.com/balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htmhttp://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_balance_sheet.htmhttp://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_balance_sheet.htmhttp://accounting4management.com/profit_and_loss_account.htm#p1rvTHU6qXKklxTH.99http://accounting4management.com/profit_and_loss_account.htm#p1rvTHU6qXKklxTH.99http://accounting4management.com/profit_and_loss_account.htm#p1rvTHU6qXKklxTH.99http://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htmhttp://accounting4management.com/balance_sheet.htmhttp://accounting4management.com/difference_between_trading_and_profit_and_loss_account.htmhttp://accounting4management.com/profit_and_loss_account.htmhttp://accounting4management.com/trading_account.htm -
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Difference Between Trading Account and
Profit and Loss Account:Learning Objectives:
1. What is the difference between account and profit and loss account?The main difference between trading account and profit and loss account is that the
gross profit or loss which is derived from the trading account shows the trend of thebusiness and the profit and loss account reflects on the management of the business the
final outcomes of the concern. Trading account deals with the cost price of the goods. All
the expenses directly connected with the buying of goods are entered in it. It is creditedwith the sale proceeds of the goods. Profit and loss account deals with the expenses
indirectly connected with the goods (expenses with the selling of the goods.)
You may also be interested in other articles from "final accounts" chapter:
1. Trading Account2. Profit and Loss Account3. Difference Between Trading Account and Profit and Loss Account4. Balance Sheet5. Difference Between Trial Balance and Balance Sheet6. Examples of Trading and Profit and Loss Account and Balance Sheet
Read more at
http://accounting4management.com/difference_between_trading_and_profit_and_loss_account.h
tm#1yZFuRiY7IXUFPdS.99
Distinction/Difference Between Trial Balance
and Balance Sheet:
Learning Objectives:
1. What is the difference between trial balance and balance sheet?
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The following are the points ofdistinction/difference between trial balance andbalance sheet:
Trial Balance Balance Sheet
It is a list of balance extracted from the
ledger accounts
It is a statement of assets and liabilities
It contains the balance of all accounts -real, nominal and personal.
It contains the balance of only thoseaccounts which represents assets andliabilities.
It is prepared before the preparation oftrading and profit and loss account.
It is prepared after the preparation oftrading and profit and loss account.
It does not contain the value of the closingstock of goods.
It contains the value of closing stock,which appears on the assets side.
Expenses due but not paid and incomesdue but not received do not appear in thetrial balance
Expenses due but not paid appear on theliability side and income due but notreceived appear on the asset side of thebalance sheet.
You may also be interested in other articles from "final accounts" chapter:
1. Trading Account2. Profit and Loss Account3. Difference Between Trading Account and Profit and Loss Account4. Balance Sheet5. Difference Between Trial Balance and Balance Sheet6. Examples of Trading and Profit and Loss Account and Balance Sheet
Read more at
http://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htm#
bci1mvVozlsCSUO2.99
http://accounting4management.com/trading_account.htmhttp://accounting4management.com/trading_account.htmhttp://accounting4management.com/profit_and_loss_account.htmhttp://accounting4management.com/profit_and_loss_account.htmhttp://accounting4management.com/difference_between_trading_and_profit_and_loss_account.htmhttp://accounting4management.com/difference_between_trading_and_profit_and_loss_account.htmhttp://accounting4management.com/balance_sheet.htmhttp://accounting4management.com/balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htmhttp://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_balance_sheet.htmhttp://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htm#bci1mvVozlsCSUO2.99http://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htm#bci1mvVozlsCSUO2.99http://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htm#bci1mvVozlsCSUO2.99http://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htm#bci1mvVozlsCSUO2.99http://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htm#bci1mvVozlsCSUO2.99http://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_balance_sheet.htmhttp://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htmhttp://accounting4management.com/balance_sheet.htmhttp://accounting4management.com/difference_between_trading_and_profit_and_loss_account.htmhttp://accounting4management.com/profit_and_loss_account.htmhttp://accounting4management.com/trading_account.htm -
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Distinction/Difference Between Trial Balance
and Balance Sheet:Learning Objectives:
1. What is the difference between trial balance and balance sheet?The following are the points ofdistinction/difference between trial balance and
balance sheet:
Trial Balance Balance Sheet
It is a list of balance extracted from the
ledger accounts
It is a statement of assets and liabilities
It contains the balance of all accounts -real, nominal and personal.
It contains the balance of only thoseaccounts which represents assets and
liabilities.
It is prepared before the preparation oftrading and profit and loss account.
It is prepared after the preparation oftrading and profit and loss account.
It does not contain the value of the closingstock of goods.
It contains the value of closing stock,which appears on the assets side.
Expenses due but not paid and incomesdue but not received do not appear in the
trial balance
Expenses due but not paid appear on theliability side and income due but not
received appear on the asset side of the
balance sheet.
You may also be interested in other articles from "final accounts" chapter:
1. Trading Account2. Profit and Loss Account3. Difference Between Trading Account and Profit and Loss Account 4. Balance Sheet5. Difference Between Trial Balance and Balance Sheet6. Examples of Trading and Profit and Loss Account and Balance Sheet
Read more at
http://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htm#TlSf0sUG4wYBMbER.99
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Examples of Trading and Profit and Loss
Account and Balance Sheet:
Learning Objectives:
1. Prepare trading and profit and loss account and balance sheet. Example 1:
From the following balances extracted from the books of X & Co., prepare a trading and
profit and loss account and balance sheet on 31st December, 1991.
$ $Stock on 1st January 11,000 Returns outwards 500
Bills receivables 4,500 Trade expenses 200Purchases 39,000 Office fixtures 1,000Wages 2,800 Cash in hand 500
Insurance 700 Cash at bank 4,750
Sundry debtors 30,000 Tent and taxes 1,100Carriage inwards 800 Carriage outwards 1,450Commission (Dr.) 800 Sales 60,000Interest on capital 700 Bills payable 3,000Stationary 450 Creditors 19,650Returns inwards 1,300 Capital 17,900
The stock on 21st December, 1991 was valued at $25,000.
Solution:
X & Co.Trading and Profit and Loss Account
For the year ended 31st December, 1991
To Opening stock 11,000 |By Sales 60,000
To Purchases 39,000 |Less
returns i/w1,300
Less returns o/w 500 | 58,700
38,500
|By Closing
stock25,000
To Carriage inwards 800 |
To Wages 2,800 |
To Gross profit c/d 30,600 |
|
83,700 | 83,700|
To Stationary 450 |By Gross 30,600
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profit b/d
To Rent and rates 1,100 |
To Carriageoutwards
1,450 |
To Insurance 700 |
To Trade expenses 200 |
To Commission 800 |
To Interest on
capital700 |
To Net profit
transferred tocapital a/c
25,200|
|
|
30,600 | 30,600|
X & Co.
Balance SheetAs at 31st December, 1991
Liabilities $ | Assets $Creditors 19,650 |Cash in hand 500
Bills payable 3,000 |Cash at bank 4,750
Capital 17,900 |Sundry debtors 30,000Add Net profit 25,200 |Bill receivable 4,500
43,100 |Stock 25,000|Office equipment 1,000|
65,750|
65,750|
Example 2:
The following trial balance was taken from the books of Habib-ur-Rehman on December 31,19 ....
Cash 13,000Sundry debtors 10,000
Bill receivable 8,500
Opening stock 45,000Building 50,000
Furniture and fittings 10,000
Investment (Temporary) 5,000
Plant and Machinery 15,500
Bills payable 9,000
Sundry creditors 20,000
Habib's capital 78,200
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Habib's drawings 1,000
Sales 100,000
Sales discount 400
Purchases 30,000
Freight in 1,000
Purchase discount 500Sales salary expenses 5,000
Advertising expenses 4,000
Miscellaneous sales expenses 500
Office salary expenses 8,000
Misc. general expenses 1,000
Interest income 1,000
Interest expenses 800
2,08,700 2,08,700
Closing stock on December 31, 19 ... was $10,000
Required: Prepare income statement/trading and profit and loss account and balance sheetfrom the above trial balance in report form.
Solution:
Habib-ur-Rehman
Income Statement/Profit and Loss AccountFor the year ended December 31, 19.....
Gross sales 100,000Less: Sales discount 400
Net Sales 99,600
Cost of Goods Sold:
Opening stock 45,000Purchases 30,000
Add: Freight in 1,000
31,000
Less purchase discount 500
Net purchases 30,500
Cost of goods available fort sale 75,500
Less closing stock 10,000
Cost of goods sold 65,500
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Gross profit 34,100
Operating Expenses:Selling Expenses:
Sales salary expenses 5,000
Advertising expenses 4,000Misc. selling expenses 500
9,500General Expense:
Office salaries expenses 8,000
Misc. general expenses 1,000
9,000
Total operating expenses 18,500
Net profit from operations 15,600
Other Expenses and Incomes:Interest income 1,000
Interest expenses 800
Net increase 200
Net income 15,800
Habib-ur-Rehman
Balance SheetAs at December 31, 19.....
ASSETSCurrent Assets:
Cash 13,000
Sundry debtors 10,000
Bills receivable 8,500Stock on Dec. 31, 19 .. 10,000
Investment 5,000
Total Current Assets 46,500Fixed Assets:
Buildings 50,000
Plant and Machinery 15,500
Furniture and fittings 10,000
Total Fixed Assets 75,500
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Total Assets 122,000
LIABILITIES:
Current Liabilities:
Sundry creditors 20,000Bills payable 9,000
Total Current Liabilities 29,000Fixed Liabilities:
Habib's capital 78,200
Net income for the year 15,800
94,000Less: Drawings 1,000
93,000
Total Liabilities and Capital 122,000
You may also be interested in other articles from "final accounts" chapter:
1. Trading Account2. Profit and Loss Account3. Difference Between Trading Account and Profit and Loss Account 4. Balance Sheet5. Difference Between Trial Balance and Balance Sheet6. Examples of Trading and Profit and Loss Account and Balance Sheet
Read more at
http://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_ba
lance_sheet.htm#lPwOktlXbDCR061B.99
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Trading and Profit And Loss AccountPosted: July 3, 2011 inBasics Accounting SkillsTags:cost of goods sold,expenses,gains,gross profit,net purchases,net sales,revenues,turnover
4
Trading and Profit and Loss Account*
This will be a complete briefing on this topic, it might gets harder to digest for people who doesnt quite understand
Principles of Accounting.
Trading and Profit and Loss Account is opened up by business nature of sole-proprietorship, partnership, company
and manufacturing company.
Purposes of Trading and Profit and Loss Account
1) To calculate the profits or losses of a business.
2) To prepare reports for stakeholders, *stakeholders are people who are interested in your business, it could be
creditors or investors.
3) To calculate tax required by government policies.
Understand Gross Profit
Understand what is Gross Profit! Students doesnt know what is the meaning of gross profit, they only know its
profit! Its the same thing as knowing nothing.
GROSS PROFIT is profit resulting from your sales over cost of goods sold.
Imagine you yourself selling one DVD movie to one customer at $4. This is your sale, $4.
The cost of your empty DVD disc is $0.50. This is your cost of goods sold. * Students tend to be confused with the
term goods. Goods are a term used to refer to a lot of things, and in this case, it means lots of empty DVDs. But for
illustration purposes. I only used one DVD as an example.
Go back to the definition of Gross Profit,
We can rewrite it as
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Gross Profit = Sales Cost of Goods Sold
= 4 0.50
= 3.50
Understand Cost of Goods Sold
Now, I wonder if you had realized that the phrase cost of goods sold does seems tricky.
Cost of Goods Sold can be further broken down into its part,
Opening Stock + Purchases Closing Stock = Cost of Goods Sold
You can skip the explanation if you want, but for some reason, I think learning it can actually enforce your memory.
There are cases where students sometimes couldnt recall memory due to last minute revising. And this will be the
time you apply your understanding.
At the beginning of the year, you have 200 empty DVDs at hand. And during the year, you have purchased 400
empty DVDs. At the end of the year, you are left with 100 empty DVDs. Assume the price of Empty DVDs at $0.50.
If you really concentrate on the word Cost Of Goods Sold, you will see that it means the original cost of empty DVDs
that have been sold. Now, this 100 empty DVDs left are unsold. Therefore, there are not included in the calculation
of Cost of Goods Sold.
If you go back to the definition of Cost of Goods Sold, you will see the relation of subtracting closing stock.
Now, back to Opening Stock and Purchases. Why do we have to add it up?
Imagine your shop is selling DVDs, if you doesnt buy empty DVDs, how can you sell your final DVDs to customer?
Now if you already have 200 empty DVDs at hand, you need to buy more in order to sell enough for your customers.
This is the reason why Opening Stock needs to add up with Purchases.
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By combining all of this explanation, therefore we arrived at the same formula given earlier of:
Cost Of Goods Sold = Opening Stock + Purchases Closing Stock
Now we are all done, this is how we can start to draw Trading Account.
Trading Account
Trading Account was simply a calculation of Gross Profit. You will get to see it later. But for now, just know this,
Gross Profit = Sales Cost of Goods Sold
Gross Profit = Sales (Opening Stock + Purchases Closing Stock)
In Trading Account, different countries used different formats to draw such account, either a vertical or horizontal
Trading Account. Now, students always think that Trading Account was easy, but for some reasons, failure to draw
the format correctly will give you a wrong answer at the end, and for this reason, I wanted students to
UNDERSTAND every single terms.
Points to remember:
1) Mark is awarded to title.
2) Use Net Sales instead of Sales*
3) Use Net Purchase instead of Purchase*
*If applicable, I will further explain it later on.
Now, my notes intend to prepare students for O Level Examination, and for this reason, my notes will be complete to
that standard. Trading Account wouldnt be that simple in Cambridge Examination.
Net Sales / Turnover
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Sales needs to be net, that is to say, after any deduction on sales. Say for example, you have been selling 400 DVDs
to customers, they are bound to be some customers which would come after you claiming bad DVDs. And in this
case, say 30 DVDs were returned to you. This is called Sales Return or Return Inward. You need to memorize both of
the terms. Assuming the selling price was at $4. Now we try to compute the Net Sales.
Net Sales / Turnover = Sales Sales Return / Return Inwards
Net Sales = (400 30) x 4
= 370 x 4
In exam, sales return was sometimes used instead of return inwards,or otherwise. Therefore, it is important to
remember their terms.
Net Purchases
Just like Net Sales, Net Purchases were simply any addition or deduction made to the original purchases. In this case,
imagine you purchase 600 empty DVDs. The cost of this purchases may include cost of insurance, freight cost or
transportation cost or carriage inwards, purchase return or return outwards and etc. As long as anything that you
paid in order to get that 600 DVDs into your shop, you add it. Whilst anything you return back to your suppliers, you
deduct it from your original purchases.
Net Purchases = Purchases + Any Cost That You Paid Return Inward
* The reason that I put any cost that you paid is because there are too much additions that can be done, students
should remember the general rule of anything that you paid to get the DVDs into your shop.
Profit And Loss Account
To simply show you what is inside Profit And Loss Account,
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Net Profit = Gross Profit + Revenues/Gain Expenses
= A positive amount is called Net Profit
= A negative amount is called Net Loss
In most examination, the answers will always be Net Profit. Unless you are in A Level, then a loss is also possible.
Revenues/Gains
Revenues or Gains are any amount of money that profits a business. For instance, discount received from purchasing
the empty DVDs.
Position on Vertical format, below Gross Profit, above Expenses.
Position on Horizontal format, Credit side.
Expenses
Expenses are any amount that do not profits a business but are necessary to keep the business operating. Example
of expenses include rent, wages, salaries, electricity, depreciation, discount allowed and etc.
Position on Vertical Format, below Revenues, above Net Profit.
Position on Horizontal Format, Debit side.
Combining Trading and Profit and Loss Account Horizontal Format
(Name of the Owner or Corporate Name) Horizontal Style
Trading and Profit and Loss Account for the year ended 31 December XXXX
$ $
Opening Stock XXX Sales XXX
(+) Purchases XXX (-) Return Inwards (XXX)
(-)Return Outwards (XXX) XXX
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XXX
(-) Closing Stock (XXX)
Cost Of Goods Sold XXX
Gross Profit c/d XXX
XXX XXX
(-) Expenses Gross Profit b/d XXX
Wages XXX (+) Gains/Revenues
Lighting XXX Discount received XXX
Rent XXX
General Expenses XXX
Carriage Outwards XXX (XXX)
Net profit XXX XXX
Combining Trading and Profit and Loss Account Vertical Format
Will re-update this soon.
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Correction of Errors not affected by Trial BalancePosted: December 16, 2012 inAccounting TopicTags:compensating error,complete reversal entry,error of commission,error of omission,error of originalentry,error of principle,trial balance
0
Accounting is based on double-entry rule; a debit entry will result in another corresponding credit entry and a credit
entry will result in another corresponding debit entry. So, a trial balance will tend to balance. But trial balance do not
always give you the correct balances. And there are also circumstances where the trial balance is balanced but are
incorrect. Its getting pretty confused here, you just need to note that when trial balance balanced, it doesnt
necessary mean that the trial balance is correct.
If you think you need to revise back on Trial Balance, clickhere.
There are six of them:
1) Error of Omission As the name implies, this means that a transaction or event has been completely left out from
the books. Follow the DebitPEDARI rule and the Credit SCROLG rule to re-correct the error.
2) Error of Commission This error means that posting is done to the wrong account of the same category. Here,
the category can be Debtors and Creditors. This error occur when you are supposed to post to a debtor name Carol,
but due to a lot of debtors with similar names, say Caroline, then you could have posted in to Caroline account
instead of Carol account.
3) Error of Principle This error means that posting is done to a different category of account. So the PEDARI is
consider to be different category, and so does SCROLG. So instead of posting to an expenses account, some could
have mistakenly posted in assets account. In addition to debit side, when it comes to SCROLG, some could have
mistakenly posted in revenues instead of gains. An emphasis here is that most often the mistakes apply to only
expenses and assetsand gains and revenues. The reason why I have made an emphasis here is that the
errors most likely come from mistakenly treatedexpenses as assetsandgains as revenuesor the reverse.
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4) Error of Original Entry This error means that a wrong amount has been initially recorded in the book of original
entry and subsequently posted to the ledger accounts. This error is just as simple as the name implies.
5) Compensating Errors This error means that the debit side of an account is compensated by another error of the
same/equal amount on the credit side in another account.
6) Error of Complete Reversal Entry As the name implies, this means that the debit and credit entry recorded for a
particular transaction are reversed. The transactions are incorrect but because the amount is the same or equal at
both sides, the trial balance still balanced.
1st JAN: This post is till ongoing.
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ARCHIVE FOR THE BASICS ACCOUNTING SKILLS CATEGORY
Balance SheetPosted: July 3, 2011 inBasics Accounting SkillsTags:assets,liabilities
5
Balance Sheet
Balance Sheet was simply the result of accounting equation.
Assets = Capital + Liabilities
In Balance Sheet, The accounting equation was shown in this manners
Assets = Liabilities + Capital
Or
Assets Liabilities = Capital
Whichever method that your teacher taught you, you can see that it is derived from the accounting equation.
There are again two formats in the Balance Sheet, whichever your teacher taught you to use. Horizontal and vertical.
There are several things that you will need to know if you didnt really know how to open up Balance Sheet,
otherwise you can skip this.
Assets
There are two headings under assets, Fixed Assets and Current Assets.
Fixed Assets are usually long life, are used in the business and are not for resale purposes.
Examples, land and buildings, fixtures and fittings, machinery and motor vehicles.
Generally, those that can last long are first in the list of fixed assets, followed by those that do not last long.
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Current Assets are easily convertible to cash such as cash in hand, cash at bank, stock and debtors.
Liabilities
There are also two heading under liabilities, Current Liabilities and Long term Liabilities.
Current Liabilities payments that need to be made to creditors within a one year time period
Long term Liabilities payments that need to be made to creditors within more than one year period
Horizontal Format
(Name of the Shop) Horizontal Style
(Balance Sheet as at 31st December 20XX)
Fixed Assets $ $ Owners Equity $ $
Furniture and Fittings XXX Capital XXX
Office Equipment XXX (+) Net Profit XXX
or (-) Net Loss (XXX)
Current Assets (-) Drawings (XXX)
Stock XXX XXX
Debtors XXX
Bank XXX Current Liabilities
Cash XXX Creditors XXX
XXX
XXX XXX
Vertical Format
(Name of the Shop) Vertical Style
(Balance Sheet as at 31st December 20XX)
$ $
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Fixed Assets
Furniture and Fittings XXX
Office Equipment XXX
XXX
Current Assets
Stock XXX
Debtors XXX
Bank XXX
Cash XXX
XXX
Less: Current Liabilities
Creditors (XXX) XXX
Owners Equity
Capital XXX
Add: Net Profit or Less: Net Loss XXX
XXX
Less Drawings (XXX)
XXX
Trading and Profit And Loss AccountPosted: July 3, 2011 inBasics Accounting SkillsTags:cost of goods sold,expenses,gains,gross profit,net purchases,net sales,revenues,turnover
4
Trading and Profit and Loss Account*
This will be a complete briefing on this topic, it might gets harder to digest for people who doesnt quite understand
Principles of Accounting.
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Trading and Profit and Loss Account is opened up by business nature of sole-proprietorship, partnership, company
and manufacturing company.
Purposes of Trading and Profit and Loss Account
1) To calculate the profits or losses of a business.
2) To prepare reports for stakeholders, *stakeholders are people who are interested in your business, it could be
creditors or investors.
3) To calculate tax required by government policies.
Understand Gross Profit
Understand what is Gross Profit! Students doesnt know what is the meaning of gross profit, they only know its
profit! Its the same thing as knowing nothing.
GROSS PROFIT is profit resulting from your sales over cost of goods sold.
Imagine you yourself selling one DVD movie to one customer at $4. This is your sale, $4.
The cost of your empty DVD disc is $0.50. This is your cost of goods sold. * Students tend to be confused with the
term goods. Goods are a term used to refer to a lot of things, and in this case, it means lots of empty DVDs. But for
illustration purposes. I only used one DVD as an example.
Go back to the definition of Gross Profit,
We can rewrite it as
Gross Profit = Sales Cost of Goods Sold
= 4 0.50
= 3.50
Understand Cost of Goods Sold
Now, I wonder if you had realized that the phrase cost of goods sold does seems tricky.
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Cost of Goods Sold can be further broken down into its part,
Opening Stock + Purchases Closing Stock = Cost of Goods Sold
You can skip the explanation if you want, but for some reason, I think learning it can actually enforce your memory.
There are cases where students sometimes couldnt recall memory due to last minute revising. And this will be the
time you apply your understanding.
At the beginning of the year, you have 200 empty DVDs at hand. And during the year, you have purchased 400
empty DVDs. At the end of the year, you are left with 100 empty DVDs. Assume the price of Empty DVDs at $0.50.
If you really concentrate on the word Cost Of Goods Sold, you will see that it means the original cost of empty DVDs
that have been sold. Now, this 100 empty DVDs left are unsold. Therefore, there are not included in the calculation
of Cost of Goods Sold.
If you go back to the definition of Cost of Goods Sold, you will see the relation of subtracting closing stock.
Now, back to Opening Stock and Purchases. Why do we have to add it up?
Imagine your shop is selling DVDs, if you doesnt buy empty DVDs, how can you sell your final DVDs to customer?
Now if you already have 200 empty DVDs at hand, you need to buy more in order to sell enough for your customers.
This is the reason why Opening Stock needs to add up with Purchases.
By combining all of this explanation, therefore we arrived at the same formula given earlier of:
Cost Of Goods Sold = Opening Stock + Purchases Closing Stock
Now we are all done, this is how we can start to draw Trading Account.
Trading Account
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Trading Account was simply a calculation of Gross Profit. You will get to see it later. But for now, just know this,
Gross Profit = Sales Cost of Goods Sold
Gross Profit = Sales (Opening Stock + Purchases Closing Stock)
In Trading Account, different countries used different formats to draw such account, either a vertical or horizontal
Trading Account. Now, students always think that Trading Account was easy, but for some reasons, failure to draw
the format correctly will give you a wrong answer at the end, and for this reason, I wanted students to
UNDERSTAND every single terms.
Points to remember:
1) Mark is awarded to title.
2) Use Net Sales instead of Sales*
3) Use Net Purchase instead of Purchase*
*If applicable, I will further explain it later on.
Now, my notes intend to prepare students for O Level Examination, and for this reason, my notes will be complete to
that standard. Trading Account wouldnt be that simple in Cambridge Examination.
Net Sales / Turnover
Sales needs to be net, that is to say, after any deduction on sales. Say for example, you have been selling 400 DVDs
to customers, they are bound to be some customers which would come after you claiming bad DVDs. And in this
case, say 30 DVDs were returned to you. This is called Sales Return or Return Inward. You need to memorize both of
the terms. Assuming the selling price was at $4. Now we try to compute the Net Sales.
Net Sales / Turnover = Sales Sales Return / Return Inwards
Net Sales = (400 30) x 4
= 370 x 4
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In exam, sales return was sometimes used instead of return inwards,or otherwise. Therefore, it is important to
remember their terms.
Net Purchases
Just like Net Sales, Net Purchases were simply any addition or deduction made to the original purchases. In this case,
imagine you purchase 600 empty DVDs. The cost of this purchases may include cost of insurance, freight cost or
transportation cost or carriage inwards, purchase return or return outwards and etc. As long as anything that you
paid in order to get that 600 DVDs into your shop, you add it. Whilst anything you return back to your suppliers, you
deduct it from your original purchases.
Net Purchases = Purchases + Any Cost That You Paid Return Inward
* The reason that I put any cost that you paid is because there are too much additions that can be done, students
should remember the general rule of anything that you paid to get the DVDs into your shop.
Profit And Loss Account
To simply show you what is inside Profit And Loss Account,
Net Profit = Gross Profit + Revenues/Gain Expenses
= A positive amount is called Net Profit
= A negative amount is called Net Loss
In most examination, the answers will always be Net Profit. Unless you are in A Level, then a loss is also possible.
Revenues/Gains
Revenues or Gains are any amount of money that profits a business. For instance, discount received from purchasing
the empty DVDs.
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Position on Vertical format, below Gross Profit, above Expenses.
Position on Horizontal format, Credit side.
Expenses
Expenses are any amount that do not profits a business but are necessary to keep the business operating. Example
of expenses include rent, wages, salaries, electricity, depreciation, discount allowed and etc.
Position on Vertical Format, below Revenues, above Net Profit.
Position on Horizontal Format, Debit side.
Combining Trading and Profit and Loss Account Horizontal Format
(Name of the Owner or Corporate Name) Horizontal Style
Trading and Profit and Loss Account for the year ended 31 December XXXX
$ $
Opening Stock XXX Sales XXX
(+) Purchases XXX (-) Return Inwards (XXX)
(-)Return Outwards (XXX) XXX
XXX
(-) Closing Stock (XXX)
Cost Of Goods Sold XXX
Gross Profit c/d XXX
XXX XXX
(-) Expenses Gross Profit b/d XXX
Wages XXX (+) Gains/Revenues
Lighting XXX Discount received XXX
Rent XXX
General Expenses XXX
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Carriage Outwards XXX (XXX)
Net profit XXX XXX
Combining Trading and Profit and Loss Account Vertical Format
Will re-update this soon.
Trial BalancePosted: July 3, 2011 inBasics Accounting Skills
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Trial Balance (All format will be posted in a later date, I am still on my way to finish up notes.)
Trial Balance is best understood when you have an in depth understanding with Double Entry System.
In double entry system/method;
- for every entry in the debit side there is a credit entry
- for every entry in the credit side there is a debit entry
Assuming that in a month, a business starts drawing out its trial balance. No matter how many transactions that a
business have, the trial balance will always balanced. I.e. Debit side = Credit side.
Students were confused on where to put different transactions into which side. Well, I am going to tell you right
now, which most textbooks didnt told you. As a general rule:
Debit Side, remember PEDARI
- P for Purchases
- E for Expenses
- D for Debtors
- A for Assets
- RI for Return Inwards
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Credit Side, remember SCROLG
- S for Sales
- C for Creditors
- RO for Return Outwards
- L for Liabilities
- G for Gains
All thanks to my secondary school teacher that makes this the most useful information in my whole accounting
education.
Format of Trial Balance
Trial Balance as on 31 December 20XX
Dr Cr
$$$ $$$
Purchases XXX
Expenses XXX
Debtors XXX
Assets XXX
Return Inwards XXX
Sales XXX
Creditors XXX
Return Outwards XXX
Liabilities XXX
Gains/ Revenues XXX
Total XXX XXX
I will reexplained some of this as we moved on, as for now just remember the rule. And note that, this is a general
rule. Students should know which transactions to be posted into the relevant categories.
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ARCHIVE FOR THE ACCOUNTING TOPIC CATEGORY
Correction of Errors not affected by Trial BalancePosted: December 16, 2012 inAccounting TopicTags:compensating error,complete reversal entry,error of commission,error of omission,error of originalentry,error of principle,trial balance
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Accounting is based on double-entry rule; a debit entry will result in another corresponding credit entry and a credit
entry will result in another corresponding debit entry. So, a trial balance will tend to balance. But trial balance do not
always give you the correct balances. And there are also circumstances where the trial balance is balanced but are
incorrect. Its getting pretty confused here, you just need to note that when trial balance balanced, it doesnt
necessary mean that the trial balance is correct.
If you think you need to revise back on Trial Balance, clickhere.
There are six of them:
1) Error of Omission As the name implies, this means that a transaction or event has been completely left out from
the books. Follow the DebitPEDARI rule and the Credit SCROLG rule to re-correct the error.
2) Error of Commission This error means that posting is done to the wrong account of the same category. Here,
the category can be Debtors and Creditors. This error occur when you are supposed to post to a debtor name Carol,
but due to a lot of debtors with similar names, say Caroline, then you could have posted in to Caroline account
instead of Carol account.
3) Error of Principle This error means that posting is done to a different category of account. So the PEDARI is
consider to be different category, and so does SCROLG. So instead of posting to an expenses account, some could
have mistakenly posted in assets account. In addition to debit side, when it comes to SCROLG, some could have
mistakenly posted in revenues instead of gains. An emphasis here is that most often the mistakes apply to only
expenses and assetsand gains and revenues. The reason why I have made an emphasis here is that the
errors most likely come from mistakenly treatedexpenses as assetsandgains as revenuesor the reverse.
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4) Error of Original Entry This error means that a wrong amount has been initially recorded in the book of original
entry and subsequently posted to the ledger accounts. This error is just as simple as the name implies.
5) Compensating Errors This error means that the debit side of an account is compensated by another error of the
same/equal amount on the credit side in another account.
6) Error of Complete Reversal Entry As the name implies, this means that the debit and credit entry recorded for a
particular transaction are reversed. The transactions are incorrect but because the amount is the same or equal at
both sides, the trial balance still balanced.
1st JAN: This post is till ongoing.
Control AccountsPosted: November 26, 2012 inAccounting TopicTags:creditors control account,debtors control account
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In real business operations, paying on cash may not be the only option of purchasing goods. Often, customers
(debtors) purchased from you on credit. And you, as the owner, purchased goods from suppliers (creditors) on
credit. So, recording numerous numbers of customers and suppliers on credit (throughout one year period) could
create a lot of errors. One way to ensure arithmetic accuracy is to do control accounts by bringing multiple
debtors/creditors in a year to the control accounts (like a summary throughout the year).
Control accounts are a type of accounting control which is used mainly in manual accounting systems. Control
accounts are similar to trial ledger to check for arithmetical accuracy of the accounts, just that control accounts are
more detailed in nature and only governs one activities at a time, such as the creditors and debtors amounts.
Please take note that sales ledger control account isalso known as debtors control account and
purchases ledger control account is the same as creditors control account. Both names should be
familiarized because all the names are often used during examination. It is not hard to understand the meaning
behind each name, you sale your products/services to a debtors and hence the name sales ledger control account
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and debtors control account. Likewise, you purchase your products from creditors and hence the name
purchase ledger control account and creditors control account.
It should be noted that the following are not included in control accounts,
1) Bad debts recovered
2) Cash sales
3) Cash purchases
4) Increase in provision for doubtful debts
These four items do not affect debtors and creditors account.
Format for Debtors Control Account
Not being able to memorize this format could put you in trouble. A simple way to understand this format is to
assume the normal debtor account. A normal debtor account will have a debit entry, representing an increase in the
debtor account. An a credit entry represents a decrease in the debtor account. A short summary is represented
below.
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Format for Creditors Control Account
So the same thing goes with understanding this format,
anything that will increase the creditors account will have to be credited, and anything that will decrease the
creditors account will have to be debited.
Contra Entry
If you recall that there is a contra entry for cash and bank account; this application is similar to control accounts.
Contra entry occurs when you have a creditor that is a debtor at the same time. So, a supplier or (a creditor) will
supply you with goods on credit and at the same time purchasing goods (now acting as a debtor) from you on credit.
Contra amount is given most of the time.
DepreciationDisposal AccountPosted: July 27, 2012 inAccounting Topic
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Disposal is generally simple to do, I have not seen students facing much difficulty in a straight forward question.
Disposal account is opened upon the sale of an asset, because we have to delete the item from our accounts.
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Some important points to take note in this topic:
1) The asset values at its original cost or historical cost.
2)Accumulated depreciation of the asset will have to be disposed of.
3) There is a cash transaction involved for the disposal of the asset (i.e. you sold your asset for cash or trade-in.)
4) There will be a profit or loss arising from such disposal. (No gain no loss could also be possible but rarely
occurs.)
5) (*Optional) You will need to charge the profit or loss from disposal to the Profit & Loss Account.
The T-accounts and explanation are shown below:
As an example, if a motor vehicle was purchased at the start of the year at $50,000, and then disposed off at the
end of the second year at a disposal value of $35,000. In this case, lets assume that the depreciation was
accumulated to $10,000 (straight line method, $5,000 per year).
Motor Vehicle A/C
1-Jan Cash 50,000 31-Dec Motor Vehicle disposals 50,000
You are disposing of an asset worth
$50,000
Here, students often confused why credit a $ 50,000 motor vehicle account. The reason was obvious, the vehicle that
you will throw away is originally worth $50,000. Most students tend to write down the disposal value of $35,000
which is wrong> Imagine that your motor vehicle was gone and that your motor vehicle account still has a balance
carried down of $15,000 ($50,000-$35,000), this is unexplainable (a gone vehicle with a worthiness of $15,000?).
Therefore, any assets sold should be reduced with its original cost.
Provision of Depreciation: Motor Vehicle
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31-Dec Motor Vehicle disposals 10,000 31-Dec Balance c/d 10,000
Because we are supposed to close of all accounts related to the motor vehicle that we brought, all relevant accounts
should be closed. If you note that the words Motor Vehicle disposals appear in the accounts of Motor Vehicle and
Provision for depreciation. This signals another account that will be used to close all relevant accounts. (Take note
that the account for provision of depreciation is kinda simplified, it only shows accumulated depreciation for second
year.)
Important Information: In this example, the asset was purchased at 1st January and sold at the end of the year
of the second year 31st December, so it has to be fully depreciated for two years. For A Level students, most
often, you will need to pay attention to the date and the month of the purchase and accounts for the
depreciation accordingly to the months used during the financial year. However, you should also note if there
is any additional information given on the companys depreciation policy. The depreciation policy is to be given
highest priority.
Motor Vehicle Disposals A/C
31-Dec Motor Vehicle 50,000 31-Dec Provision for depreciation 10,000
Cash 35,000
Loss on disposal 5,000
Motor Vehicle Disposals account will be the final account. Those that I have embolded means it were transferred
from the first two accounts that we closed. The cash will be amount that we received or the amount that the motor
vehicle was disposed off. Since every account has to be balanced, there will be shortage of amount in the credit side
of the disposal account by $ 5,000. This is a loss on disposal. Cant picture why? Here, the motor vehicle is worth
$50k originally and at the end of the second year, the motor vehicle should worth $40k (after depreciation). And
because you sold it for $35k, you are losing the $5,000.
You will also need to note that the reverse of loss on disposal will be on the debit side (profit on disposal).
If the question requires you to open upprofit and loss account, then you should! If you are unsure, just note that
Loss is an expense, it falls at debit entry in the profit and loss account. Profit is a gain, it falls at credit entry in the
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