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At the end of a financial period, all expense and revenue accounts are closed to a summarizing account usually called a Profit and Loss Account. If the business entity carries on manufacturing activities, a Manufacturing account is also prepared by such business entity before the preparation of Trading Account.
If the amount of sales exceeds the total amount of purchases and expenses directly connected with such purchases, the difference is termed as gross profit. A Profit and Loss Account starts with the amount of gross profit or gross loss brought down from the Trading Account. From the following information of Birbal and Akbar Enterprise prepare a Profit & Loss Account for the year ended 31st December, 2008. After ascertaining the net profit or loss of the business enterprise at the end of a particular period, the businessman would also like to know the financial position of his business as on that date. Generally, sole proprietors and partnership firms prepare their Balance Sheet in the order of liquidity. Annual Report is a document detailing the business activity of a company over the previous year, and containing the three main financial statements: Profit and loss Account, Balance Sheet and Cash Flow Statement as well as a host of other company-related data. A good annual report provides a variety of important financial data, investors can find in-depth information on a company’s products, market segments, competitors, customers, management and legal proceedings. Information incorporated in the Annual Report may be classified into mandatory disclosures and non-mandatory disclosures. Non-mandatory Information, incorporated and reported in a Corporate Annual Report, is not under the mandate of any statute.
5.The Balance Sheet “is a statement at a particular date showing on one side the trader’s property and possessions and on the other hand the liabilities.
Net Profit is a the surplus of Gross Profit over all indirect expenses such as administrative, selling, distribution and non-operating expenses.. Two objects of Balance Sheet are (i) to ascertain the true financial position of the business at a particular point of time and (ii) to find out whether the business entity is solvent or not. In the earlier units, we discussed on Double Entry system, Journals, Ledgers and Trail Balance.
However, item such as Returns Inward which appears on the debit side of the trial balance is shown on the credit side of the Trading Account as deduction from sales. However, Returns Outward account although shows credit balance and appears on the credit side of the trial balance is shown on the debit side of Trading Account as a deduction from Purchases. Trading account is an account which is prepared for ascertaining the overall result of trading i.e. If the amount of sales exceeds the amount of purchases and the expenses directly connected with such purchases, the difference is termed as gross profit.
All expenses which relate to either purchase of raw material or manufacturing of goods, called ‘Direct Expenses’, which are recorded in the Trading Account.
Cost of goods sold=Opening Stock (Inventory) + Purchases + Expenses incurred in connection with purchases and manufacture (Direct expenses) – Closing Stock. 1)Only the sale of goods is treated as sales for the purpose of preparation of Trading Account. 3)If any goods have been sold on approval and included in sales, it should be deducted from sales, if the approval period has not expired. Closing stock account will be posted to the credit side of the trading account and on the other hand, debit aspect of the closing stock account will be shown on the Asset Side of the Balance Sheet, in order to complete the double entry.
Again, the Closing Stock may be given both on the debit side and credit side of the Trial Balance.
Closing stock should be valued either at cost or market price whichever is lower and should be recorded accordingly. 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.
Account exceeds the total of amounts of the credit side, the difference will be termed as Gross Loss. After preparing a Trading Account and ascertaining Gross Profit or Gross Loss, we are to prepare Profit and Loss Account in order to ascertain Net Profit or Net Loss.
If the credit total is heavier, the difference is called Net Profit and if the debit total is heavier, the difference is called Net Loss. Net Profit indicates an increase in proprietor’s equity or capital by the amount of profit while Net Loss indicates a decrease in owner’s equity or capital by the amount. The balance of the Profit & Loss Account, after posting all nominal accounts to the respective side, is termed as Net Profit or Net Loss.
In course of carrying out business activities, each and every entity is required to prepare itself for meeting all eventualities both expected and unexpected. The term ‘Provision’ means the setting aside of an estimated amount to meet known liability or loss the amount of which may not be exactly ascertained.
As credit sales are made in a particular year during which debtors are created, the profit on such sales is included in the Trading and Profit and Loss Account of that year as revenues are ascertained on the basis of accrual assumption. Hence, it is not only fair but also logical that doubtful debts being a business loss in connection with credit sales must be provided for out of the revenue earned during the period so that the Profit and Loss Account of the following year is not burdened with the loss of earlier years. Journal entries are necessary to adjust the revenue and expenses accounts at the end of each accounting year.
In order to ascertain the financial results, he prepares Trading and Profit and Loss Account.
According to CARTER ‘A Balance Sheet is a statement drawn up at the end of each trading or financial period, setting forth the various assets and liabilities of the concern as at this date. However, it is also described as a classified summary of debit and credit balances existing in the ledger after the Profit and Loss Account that has been constructed. Fixed Assets: “Fixed Assets are those assets of a business which are of a permanent nature and are held for the purpose of earning revenue and not with a view to resale”. Tangible Fixed Assets: The fixed assets which have physical existence and which can be seen and touched are known as Tangible Fixed Assets viz.
Intangible Fixed Assets: The fixed assets which have no physical existence and which cannot be seen and touched are known as Intangible Fixed Assets viz. Wasting assets: Wasting assets are those fixed assets whose value gradually reduces on account of use and finally exhausts completely viz. Current Assets: They are those assets which are made or acquired and merely held for a short period of time with a view to reselling them at a profit in the ordinary course of business such as stock.
Sundry Debtors and Creditors: Sundry debtors and creditors indicates the total of balances of debtors and creditors at the end of the year. The term liability denotes claims against the assets of the business by the outsiders and the proprietor. This is the financial statement that summarizes revenues and expenses for a specific period of time, usually a month or a year.


It shows financial the activity of a business during that period and indicates any profit or loss earned. On the contrary, if the total of purchases and direct expenses exceed the sales, the difference is called gross loss.
As such, all those expenses and losses which have not been debited to the Trading Account will now be debited to Profit & Loss Account.
This account in combined form is shown in two parts – first part is called the Trading Account and the other part is called Profit and Loss Account. For this purpose a statement, wherein all the Assets and Liabilities of the business enterprise are included, is prepared. Assets are shown on the right hand side and the liabilities are shown on the left hand side of the Balance Sheet. The presentation of various assets and liabilities in a certain order is known as ‘Marshalling of Assets and Liabilities’. Thus, current liabilities are written first of all, then fixed or long-term liabilities and lastly, the proprietor’s capital. Assets which are most difficult to be converted into cash are written first and the assets which are most liquid such as Cash in hand are written last. Corporations that have shareholders must prepare an Annual Report and make it available to the corporation’s shareholders. An ideal Annual report generally includes the following information: general and international business environment, socio-economic condition of the country, industry structure and development, business environment in which the company is working, industry and company opportunities and thereto and financial highlights.
Equity ratio, Earnings per share in rupee, Cash earnings per shares in rupee; Profit after tax to average net worth, Net worth per equity share in rupee.
Names and addresses of Bankers, Auditors, Stock exchanges; and Registrar and Transfer agents. Annual statement showing the representation of SC,ST and OBC in the company in various positions.
From the following extract of the Trial Balance of Sri Ram and the additional information, prepare a Trading Account for the year that ended on 31st March, 2008. So, we got a fair idea on debit and credit, golden rules of accounting, preparation of Trail balance and so on. These are to be considered by adjusting the items of expenses, losses, assets, drawings, incomes, liabilities or capital as applicable while preparing the Final Accounts.
On the contrary, if the purchases and direct expenses exceed the sales, the difference is called gross loss.
On the contrary, if ‘Salaries and Wages’ is given it will be shown in the profit & loss account. However, if any carriage or freight is paid for carrying charge of an asset, the amount should be added to the asset account and should not be debited to trading account. If dock charges are paid on import of goods they are shown on the debit side of trading account. Custom duty when paid on the purchase of goods is charged to trading account and when it is paid on the sale of good it is charged to profit and loss Account. Where the payment of royalty is based on production, it is usually charged to trading account because it increases the cost of production.
In such a case, the debit balance will be shown on the asset side of the balance sheet and the balance appearing on the credit will be shown on the credit side of the Trading Account. While preparing final account, if the figure of both cost price and market price of the closing stock is given, the closing stock will be shown both in the trading account and the balance sheet either at the cost price or market price whichever is lower. Profit and Loss Account is the statement wherein the various items of profit and revenue earned on one hand and the losses, and expenses incurred on the other hand are collected and set off and the resulting balance represents the Net Profit or Net Loss of the period under review. If the credit side of the profit and loss account is more than the total of the debit side, the difference is termed as net profit. In order to ensure that the profit has not been distributed out of capital, it is important that necessary provisions are made and reserves are created out of profit at the time of preparation of final accounts.
The loss when actually occurs is adjusted against such provision and thus the profit of the year in which such loss occurs is not affected. For example; total amount to be spent on repairs and renewals during the life of an asset is estimated and spread over on an average basis because the amount of expenses in earlier years would be comparatively lower than that of the later years.
The old provision is deducted from the total of bad debts and new provision at the debit side of profit and loss account. The people to whom goods have been sold on credit are known as ‘Debtor’ and the total of all the debtors is termed as ‘Sundry Debtors ’. Doubtful Debts is a business loss arising from credit sales; so it is logical that such a loss is charged against the revenue earned through credit sales of that year according to the matching principle. They are given below in a tabular form with their effect in the Profit and Loss Account and the Balance Sheet. The Trading Account shows gross profit while the Profit and Loss Account shows the net profit. They also include such other assets as are constantly circulating and arise out of the business dealings.
It is kept aside to strengthen the financial position of the business and is shown on the Liabilities Side of the Balance Sheet.
It is a liability of the business and is shown on the liabilities side of the Balance Sheet. It is a liability of the business and will be shown on the liabilities side of the Balance Sheet.
Current assets consist of stock debtors, bills receivable, short term investments, cash at bank, cash in hand and prepaid expenses, while current liabilities consist of creditors, bills payable, bank overdraft and liabilities for outstanding expenses. This is divided in a Trading Account which calculates the Gross Profit for the period, and a Profit and Loss Account which calculates Net profit for the period.
In the trading account the cost of goods sold is subtracted from Net Sales for the period to calculate Gross Profit. The nature of the business entity may be ‘Sole proprietorship, Partnership, Joint Stock Company and so on. In this account, the amount of purchases of goods and also the expenses which are incurred in bringing those goods to a saleable state are recorded. All expenses which relate to either purchase or manufacturing of goods are written on the Debit side of the Trading Account. The trading account and the profit and loss account are both ‘accounts’ in terms of double-entry book-keeping. Adjustments requires both the Trading and Profit and Loss Account and the Balance Sheet depending on the nature of the adjustment.
Ascertainment of overall result of trading is the ascertainment of gross profit earned or gross loss incurred as a result of the trading activities by a business during a particular accounting period.


The excess of revenue generated over cost of manufacture or purchase of goods is known as gross profit. All expenses which relate to either purchase or manufacturing of goods are written on the debit side of the Trading Account. Purchases account shown debit balance and hence it appears on the debit side of the Trial balance.
If dock charges are paid on export of goods they are shown on the debit side of the Profit and Loss account. However, if it is specifically started in the problem that the Royalty is payable on the basis of sales, it will be charged to Profit and Loss Account. For example, the cost price of stock held by a trader on 31-3-2004 is Rs.12, 000 and will be recorded in the books of account accordingly. It means, the expenses for earning the income are set off against that income to ascertain Net Profit or Net Loss. American Accountants call this Account as “Loss and Gain Account” which is more appropriate in relation to its formation. 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 the credit side of this account. On the other hand, if the total of the debit side exceeds the total of the credit side, the difference is termed as net loss. Charge against profit means that the amount which should be provided for even if there is no profit. A definite sum is charged every year out of profit and loss account to meet the known contingency. In case old provision exceeds the total of bad debts and new provision, the treatment should preferably be made at the credit side of profit and loss account, where the total of bad debts and new provision should be deducted from old provision. Moreover, on the basis of the modifying principle of conservatism and according to the principle of revenue recognition, expected loss must be taken into account during that year while ascertaining net profit. While preparing final accounts the amount of provision for doubtful debts will be shown on the debit side of the Profit and Loss Account and the same will be shown as deduction from Sundry Debtors in the Balance Sheet.
After ascertaining net profit, the businessman desires to know his financial position and the correctness of his net profit disclosed by the Profit and Loss Account. They are not represented by any tangible possession or property and hence they have no market value. At the end of each financial period, all the outstanding balances of the debtors and creditors are taken out from the Ledger and two separate lists are prepared with those balances. They are assets and will be shown in the Balance Sheet on the ‘Assets Side’ as a separate item named as ‘Accrued Income from Investment’. It is that part of the Capital, which is left after the purchase of, fixed assets and any long term investment.
The bookkeeping methods involved in making a financial record of business transactions under double entry system and in the preparation of statements concerning the assets, liabilities, and operating results of a business.
In other words, all expenses which relate to either purchase of raw material or manufacturing of goods called ‘Direct Expenses’, are recorded in the Trading Account. The Annual Report contains information such as basic financial statements, management’s opinion of the past year’s operations, and the corporation’s future prospects.
It includes the accounts of all expenses, incomes, assets, liabilities, capital and drawings.
It may be shown by way of deduction from Purchases on the debit side of the Trading Account or it may be shown on the Credit side of the Trading Account. Now, a person purchases three packets of such biscuits and the seller packs these three packets for handing over the purchaser, the expenses incurred on such secondary packing is indirect and will be treated as selling expenses and debited to Profit and Loss Account. Hence, in such a case, Closing Stock will not be shown in the Trading Account but will appear only on the Assets side of the Balance Sheet.
For the purpose of making provision, the amount of provision to be made is debited to the Profit and Loss account in order to ascertain the correct profit. Provisions account should be compulsorily posted at the debit side of profit and loss account, whether the firm earns profit or suffers loss. The total debtors of a firm may be classified into: Good debts, Bad debts and Doubtful debts. Also show how the Provision for Doubtful Debts will appear in the Profit and Loss Account and the Balance Sheet. As assets and liabilities continuously change during the operation of the business, he is also interested in knowing the composition of various assets and liabilities and the amount of capital standing at the end of the period. Examples are – removal of (Business from one place to other) expenses, preliminary expenses, loss or issue of shares and debentures, etc. Trading and profit and loss accounts are prepared to find out the profit or loss of the concerned accounting period.
However, it is customary to produce annual or final accounts for the benefit of the Inland Revenue, bank manager and other interested parties. By contrast, the balance sheet is not an account, but is simply a statement of account balances remaining after the trading and profit and loss accounts have been prepared. Opening Stock will include the Stock of Raw Materials, Semi-finished goods and finished goods. However, normally it is shown by way of deduction from Purchases in order to show the figure of net purchase in the Trading Account. An alternative way to show the sales returns is to put it in the debit side of the Trading Account. Net profit is added to the capital whereas net loss is deducted from the capital in the balance sheet. Hence, it will put equal burden each on the Profit and Loss Account of each year in respect of expenses of repairs. In order to obtain this information at the end of a trading period, a businessman sets out various assets and liabilities as on that date in the form of a statement which is known as Balance Sheet.
As this statement shows the position of assets and liabilities of an entity on a particular date, it is also known as ‘Position Statement’.
Stock of goods is also termed as inventory and, therefore, opening stock is termed as opening inventory. Trading and P&L account and Balance sheet are prepared to give the final results of the business that is why both are collectively called as Final Accounts. Final Accounts are prepared from the figures appearing in Trial Balance and additional information.



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