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When?
What is a Trial Balance
The Trial Balance is a statement of ledger account balances as on a particular instance.
L/F
Debit
Amount
(in Rs)
Opening Stock
Textile Purchases
Wages
Octroi
63,650
22,56,000
3,25,000
1,78,200
Salaries
Rent
Printing and Stationery
Advertisements
Cash
Office Building
Capital
Bank
Motor Vehicles
Sundry Creditors
Sales
P/L Appropriation
Sundry Debtors
Machinery
1,04,000
1,26,000
74,650
86,000
26,000
4,23,450
Total
Credit
Amount
(in Rs)
2,50,000
1,19,000
2,10,000
1,80,000
36,86,000
6,52,950
2,08,000
5,69,000
47,68,950
47,68,950
Computerised Accounting
In mechanised (computerised) accounting systems, trial balance is a statement that can be automatically derived as
and when needed.
Begins with opening the books of accounts for an accounting period by recording the opening entry;
Journal in the books of M/s Amonaya Metals for the period from 1st January 2007 to ____
Date
V/R
No.
1st January
Particulars
Assets a/c
To Liabilities a/c
To Capital a/c
L/F
Dr
This is the journal entry that supports the posting To Balance b/d and By Balance b/d in the various ledger
accounts.
Recording the various transactions all through out the accounting period;
Balancing the ledgers as and when needed and finally at the end of the accounting period;
1.
2.
Closing the Trading a/c by transferring the balance in it to Profit & Loss a/c
3.
4.
Closing the Profit and Loss a/c by transferring the balance in it to Capital a/c (or Profit and Loss
Appropriation a/c)
Preparing the Balance sheet (A statement of balances in all the ledger accounts that remain after making up
and closing the Trading and Profit & Loss a/c.)
The accounting cycle ends with recording the closing entry for closing the books of accounts.
Journal in the books of M/s Amonaya Metals for the period from 1st Jan to 31st Dec 2007
Date
V/R
No.
31st December
Particulars
Liabilities a/c
Capital a/c
To Assets a/c
L/F
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
This is the journal entry that supports the posting To Balance c/d and By Balance c/d in the various ledger
accounts.
All the Nominal accounts that represent direct expenses and direct incomes are closed by transfer to the
Trading a/c.
For this at least two journal entries are recorded.
The Trading a/c is closed by transferring its balance to the Profit and Loss a/c.
For this a journal entry is recorded.
All the Nominal accounts that represent indirect expenses, losses and indirect Incomes are closed by
transfer to the Profit and Loss a/c.
For this at least two journal entries are recorded.
The Profit & Loss a/c is closed by transferring its balance to either the Capital a/c or Profit & Loss
Appropriation a/c.
For this a journal entry is recorded.
All the remaining accounts are listed out in the Balance Sheet.
A closing entry is recorded in relation to this, though it is not directly related to preparing the balance sheet.
If the Final Accounting is to be done in a systematic manner, then all the journal entries mentioned above are to be
recorded and all the ledger accounts that are affected by those transactions are to be posted to and updated. That
would result in the making up of the Trading a/c and Profit and Loss a/c. The balance sheet is prepared by drawing
up a statement of ledger account balances carried forward through the closing entry.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
In manual accounting, the Trading a/c, Profit & Loss a/c and the Balance Sheets can also be prepared using the
information in the Trial Balance avoiding the act of journalising the transactions involved in final accounting.
This is done by showing each item in the ledger accounts (Trading, P/L a/c) or the statement (Balance Sheet) where
it would be ultimately appearing had the actual procedure been adopted. This would have the same affect as
recording the journal and posting into the ledger.
Example
The balance in the Carriage Inwards a/c (direct expenditure) is transferred to the Trading a/c by recording a Journal
entry. By this, the Carriage Inwards a/c would get closed (its balance becomes zero) and the Trading a/c would get
debited with that balance. In preparing the Trading a/c the balance in the Carriage Inwards a/c can be ascertained
from the Trial Balance and shown on the debit side of Trading a/c.
Description
Direct Expenses
Direct Expenses
Direct Expenses
Direct Expenses
Indirect
Expenses
Indirect
Expenses
Indirect
Expenses
Indirect
Expenses
Account
Type
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Real
Real
Personal
Personal
Balance
Nature
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Credit
Debit
Where
Trading
a/c
Trading
a/c
Trading
a/c
Trading
a/c
P/L a/c
P/L a/c
P/L a/c
P/L a/c
Which
Side
Amount
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Assets
Assets
Liabilities
Assets
63,650
22,56,000
3,25,000
1,78,200
1,04,000
1,26,000
74,650
86,000
26,000
4,23,450
2,50,000
1,19,000
Motor Vehicles
Sundry Creditors
Sales
P/L Appropriation
Sundry Debtors
Machinery
Asset
Asset
Liability
Liability/Asset
Asset
Liability
Direct Incomes
Accumulatd
Profit
Asset
Asset
Real
Personal
Nominal
Spl.
Nominal
Personal
Real
Debit
Credit
Credit
Credit
Debit
Debit
B/S
B/S
B/S
B/S
B/S
B/S
Trading
a/c
B/S
B/S
B/S
Assets
Liabilities
Credit
Liabilities
Assets
Assets
2,10,000
1,80,000
36,86,000
6,52,950
2,08,000
5,69,000
Dr
Trading and Profit & Loss a/c [For the year ending 31/03/06]
Particulars
To
To
To
To
To
Opening Stock
Textile Purchases
Wages
Octroi
Gross Profit
Amount
Particulars
(in Rs)
63,650
22,56,000
3,25,000
1,78,200
8,63,150
By Sales
36,86,000
To
To
To
To
To
Salaries
Rent
Printing and Stationery
Advertisements
Net Profit
1,04,000
1,26,000
74,650
86,000
4,72,500
Cr
Amount
(in Rs)
36,86,000
36,86,000
By Gross Profit
8,63,150
8,63,150
8,63,150
Amount
Assets
Amount
Capital
2,50,000
Sundry Creditors
1,80,000
P/L Appropriation
11,25,450
[6,52,950 + 4,72,500]
Cash
Bank
Office Building
Motor Vehicles
Sundry Debtors
Machinery
26,000
4,23,450
1,19,000
2,10,000
2,08,000
5,69,000
15,55,450
15,55,450
The balance in the "Profit & Loss Appropriation a/c" as shown in the Trial Balance represents the balance carried
forward from the previous accounting period (i.e. year ending 31st March 2005).
The Profit and Loss a/c relating to the current period is closed by transfer its balance to the "Profit & Loss
Appropriation a/c"
Dr
Particulars
Total
J/F
Amount
Date
(in Rs)
11,25,450
Cr
Particulars
J/F
Total
11,25,450
Amount
(in Rs)
6,52,950
4,72,500
11,25,450
11,25,450
Therefore, while showing the information (balance) relating to the Profit & Loss Appropriation a/c in the Balance
sheet, care should be taken to make appropriate adjustment to the balance on account of the transfer of balance
from the Profit and Loss a/c.
The balance that appears in the balance sheet is not the one that appears in the trial balance, but the one that takes
into consideration the adjustment on account of current periods profit or loss also.
If the balance in Profit and Loss a/c is transferred to the Capital a/c, then such a care should be taken with regard to
the Capital a/c balance.
What are
Adjustments?
The transactions which have not yet been journalised, appended to the trial balance are what we call adjustments.
Thus we can say that Adjustments are transactions relating to the business which have not been journalised by the
end of the accounting period.
Illustration
Trial Balance of M/s Azaya Traders" as on 30th June 2006.
Particulars
Opening Stock
Purchases
Salaries
Wages
Carriage Inwards
Trading Charges
Carriage Outwards
Rent received
Cash
Capital
Bank (Overdraft)
Comission
Creditors
L/F
Debit
Amount
(in Rs)
Credit
Amount
(in Rs)
86,000
11,36,000
1,53,000
18,000
26,900
64,000
52,500
1,78,300
62,500
3,44,700
37,980
42,780
2,68,000
Sales
Debtors
Machinery
Total
15,48,700
2,56,000
4,80,000
23,77,680
23,77,680
Adjustments
The following additional information is available
1. A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in
the books.
2. Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.
The additional information presented after the trial balance contains information relating to accounting transactions,
which are to be identified from the wordings.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
Transaction
Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.
This represents an error of principle whereby an expenditure that was to be debited in a particular account has been
debited to another account.
To bring the effect of this transaction into books, the journal entry to rectify this error has to be recorded.
Journal/Ledger
Hide/Show
Journal in the books of M/s Azaya Traders for the year ending 30th June 2006
Date
V/R
No.
30/06/06
Particulars
L/F
Wages a/c
To Salaries a/c
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
2,00,000
2,00,000
Dr
Salaries a/c
Date
Particulars
J/F
Amount
(in Rs)
1,53,000
Date
Cr
Particulars
30/06/06 By Wages
30/06/06 Bal c/d
J/F
1,53,000
01/07/06 To Balance b/d
Dr
Amount
(in Rs)
43,000
1,10,000
1,53,000
1,10,000
Wages a/c
Date
Particulars
J/F
Amount
(in Rs)
43,000
Date
Cr
Particulars
43,000
01/07/06 To Balance b/d
J/F
Amount
(in Rs)
43,000
43,000
43,000
To bring the effect of this transaction, the amount involved in the transaction (Rs. 43,000) is added to
the Wages a/c balance (Rs. 18,000) shown on the debit side of the "Trading a/c".
These are the adjustments to be made to bring the affect of the above transaction into the books of accounts.
Illustration
Problem
Draw up the final accounts from the following trial balance and the additional information that follows it.
L/F
Debit
Amount
(in Rs)
Credit
Amount
(in Rs)
86,000
11,36,000
1,53,000
18,000
26,900
64,000
52,500
1,78,300
62,500
3,44,700
37,980
42,780
2,68,000
15,48,700
2,56,000
4,80,000
Total
23,77,680
23,77,680
A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the
books.
2.
Illustration Working
Notes
An analysis of the various ledger accounts in the trial balance would enable us to decide what to be done with each
item in the trial balance.
Description
Opening Stock
Purchases
Salaries
Wages
Carriage Inwards
Trading Charges
Carriage Outwards
Rent received
Cash
Capital
Bank (Overdraft)
Comission
Creditors
Sales
Debtors
Machinery
Direct Expenses
Direct Expenses
Indirect
Expenses
Direct Expenses
Direct Expenses
Indirect
Expenses
Indirect
Expenses
Indirect Incomes
Asset
Liability
Liability
Indirect Expense
Liability
Direct Incomes
Asset
Asset
Account
Type
Balance
Nature
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Real
Personal
Personal
Nominal
Personal
Nominal
Personal
Real
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Credit
Debit
Credit
Credit
Debit
Credit
Credit
Debit
Debit
Where
Trading
a/c
Trading
a/c
P/L a/c
Trading
a/c
Trading
a/c
P/L a/c
P/L a/c
P/L a/c
B/S
B/S
B/S
P/L a/c
B/S
B/S
B/SB/S
What
Side
Amount
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Credit
Assets
Liabilities
Liabilities
Debit
Liabilities
Credit
Assets
Assets
86,000
11,36,000
1,53,000
18,000
26,900
64,000
52,500
1,78,300
62,500
3,44,700
37,980
42,780
2,68,000
15,48,700
2,56,000
4,80,000
An analysis of the additional transactions would enable us to identify what is to be done to incorporate their effect in
accounting.
1.
A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the
books.
Entry
Dr. Machinery a/c
Cr. Ramsay Machine Tools a/c
2.
Effect
1. (+) To Machinery a/c on the Assets side of the Balance Sheet
2. (+) To Ramsay Machine Tools a/c on the Liabilities side of the Balance
Sheet
Journal in the books of M/s Azaya Traders for the year ending 30th June 2006
Date
V/R
No.
30/06/06
Particulars
L/F
Machinery a/c
To M/s Ramsay Machine Tools a/c
Dr
Credit
Amount
(in Rs)
Debit Amount
(in Rs)
2,00,000
2,00,000
Dr
Machinery a/c
Date
Particulars
J/F
Amount
Date
(in Rs)
4,80,000
2,00,000
Cr
Particulars
J/F
6,80,000
01/07/06 To Balance b/d
Dr
Particulars
6,80,000
6,80,000
6,80,000
J/F
Amount
Date
(in Rs)
2,00,000
Cr
Particulars
J/F
2,00,000
Amount
(in Rs)
2,00,000
2,00,000
2,00,000
Entry
Dr. Wages a/c
Cr. Salaries a/c
4.
(in Rs)
3.
Amount
Effect
1. (+) To Wages a/c on the Debit side of the Trading a/c
2. () From Salaries a/c on the Debit side of the Profit and Loss a/c
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
Illustration
Solution
Making up the final accounts would involve nothing more than putting the items from the trial balance in the right
places i.e. in either the "Trading a/c" or "Profit and Loss a/c" or the "Balance Sheet" and making subsequent
adjustments.
Dr
Trading and Profit & Loss a/c of M/s Azaya Traders for the year ending 30/06/06
Particulars
To Opening Stock
To Purchases
Amount
Amount
(in Rs)
(in Rs)
Particulars
86,000 By Sales
11,36,000
Amount
Amount
(in Rs)
(in Rs)
Cr
15,48,700
To Wages
(+) Salary (Tr)
18,000
43,000
To Carriage Inwards
To Gross Profit
61,000
26,900
2,38,800
15,48,700
To Salaries
() Tr. to Wages
1,53,000
43,000
To Trading Charges
Carriage Outwards
To Comission
To Net Profit
15,48,700
By Gross Profit
1,10,000 By Rent Received
64,000
52,500
42,780
1,47,820
2,38,800
1,78,300
4,17,100
4,17,100
Amount
3,44,700
1,47,820
2,68,000
2,00,000
Amount
Assets
Cash
4,92,520 Debtors
37,980 Machinery
(+) New Machine
Amount
Amount
62,500
2,56,000
4,80,000
2,00,000
6,80,000
4,68,000
9,98,500
9,98,500
The effect of the additional transactions (adjustments) are incorporated into the accounts by mathematical
adjustments wherever needed.
Direct Expenditure
In financial accounting, we use the term Direct Expense in relation to assets.
Any expenditure that goes into the value of an asset is identified as Direct Expenditure for that asset.
Example
If a machine is purchased at Delhi and brought to Tenali for use, then all the expenses incurred before bringing the
machine into working mode (usable condition) like transportation charges from Delhi to Tenali, Unloading Charges at
Tenali, Installation Charges etc., should be considered to be part of the value of the machine.
These expenses should not be debited to the respective expenditure accounts, but should be debited to the
Machinery a/c. The Machinery a/c balance which indicates the value of the asset would be the sum of the cost of the
machine, the transportation charges, unloading charges, installations charges, etc..
Is Stock an
Asset?
Dual nature of Stock
Purchases : During the Accounting Period
Whenever we purchase stock/goods we debit the Purchases a/c (Nominal account). This implies that we treat the
amount spent on purchasing stock as an expenditure.
Such a treatment is adopted all throughout the year.
Value of Stock
All the expenses incurred on the stock till it is placed in the sales area would form direct expenses for the stock and
should be treated as a part of the value of stock.
In situations where it would be difficult/impossible to collect all the expenses in detail, this idea is modified to mean
the expenses incurred before that stage till which point it would be convenient to collect information.
Cost of Goods
Sold
Cost of Goods Sold = Value of the Goods Sold
The cost of goods sold is a term used to indicate the value of the goods sold.
This value is needed to identify the amount of basic/core (gross) profit made by the organisation
2.
3.
4.
Unsold stock at the end of the accounting period valued at Rs. 36,000.
5.
Particulars
Amount
Opening Stock
20,000
2,48,000
54,000
Amount
3,02,000
3,22,000
36,000
14,000
50,000
2,72,000
The formula for calculating the value of Cost of Goods Sold based on the above calculations can be written as
Sales (Opening Stock + Purchases + Direct Expenses Closing Stock Stock Unused for
trading)
= Sales Opening Stock Purchases Direct Expenses + Closing Stock + Stock Unused for trading
=
(Sales + Closing Stock + Stock Unused for trading) (Opening Stock + Purchases + Direct
Expenses)
Thus we do not specifically need to calculate the value of cost of goods sold for finding gross profit, only its affect is
to be brought into account.
Such an ascertainment of Gross Profit is done in the Trading and Profit and Loss account.
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
(in Rs)
Cr
Particulars
Amount
(in Rs)
By Sales
By Stock Unused
By Closing Stock
"Purchases a/c" is a nominal account with a debit balance and is a direct expenditure (for stock).
Since Purchases a/c is closed by transfer to the Trading a/c, it appears on the debit side of Trading a/c.
Transferring a debit balance from one account to a second results in the second
account being debited and the first account being credited.
Thus, all the accounts representing the figures that are added to purchases appear on the debit side
"Sales a/c" is a nominal account with a credit balance and is a direct income.
Since Sales a/c is closed by transfer to the Trading a/c, it appears on the credit side of Trading a/c.
Transferring a credit balance from one account to a second results in the second
account being credited and the first account being debited.
Thus, all the accounts representing the figures that are added to sales appear on the credit side
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
sub-total
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
Cr
By Closing Stock
By Stock Unused
sub-total
3,22,000
Amount
(in Rs)
36,000
14,000
50,000
The trading account before crediting sales would have a greater total on the debit side and thus has a debit balance.
That debit balance represents the cost of goods sold.
Thus, to ascertain the cost of goods sold, we need to balance the "Trading a/c" without crediting sales.
The Sales a/c can be subsequently transferred to the Trading a/c to ascertain the Gross Profit.
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
Cr
By Closing Stock
By Goods Unused
By Cost of Goods Sold c/d
3,22,000
To Cost of Goods Sold b/d
To Gross Profit
2,72,000
1,08,000
Amount
(in Rs)
36,000
14,000
2,72,000
3,22,000
By Sales
3,80,000
3,80,000
3,80,000
If such a two stage Trading a/c is prepared, we would be able to ascertain the Cost of Goods Sold as well as Gross
Profit from the Trading a/c itself.
Dr
Trading a/c
Particulars
To
To
To
To
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
(in Rs)
20,000
2,48,000
54,000
1,08,000
Cr
Particulars
By Sales
By Goods Unused
By Closing Stock
4,30,000
Amount
(in Rs)
3,80,000
14,000
36,000
4,30,000
To obtain the value of cost of goods sold from this we use the definition for gross profit.
Cost of Goods Sold = Sales Gross Profit [Since Gross Profit = Sales Cost of Goods Sold]
= Rs. 3,80,000 Rs. 1,08,000
= Rs. 2,72,000
Dr
To Opening Stock
To Purchases
To Direct Expenses
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
By Goods Unused
By Closing Stock
By Trading a/c
3,22,000
Cr
Amount
(in Rs)
14,000
36,000
2,72,000
3,22,000
The balance in the Goods Consumed a/c represents Cost of Goods sold. This account is closed by transferring the
balance to the Trading a/c.
Dr
Trading a/c
Particulars
To Goods Consumed
To Gross Profit
Amount
Particulars
(in Rs)
2,72,000
1,08,000
3,80,000
Cr
By Sales
Amount
(in Rs)
3,80,000
3,80,000
Principle of Mutuality One cannot make a profit out of a transaction with oneself
Illustrative Explanation
Consider the following data relating to an organisation which started its operations on 28th December 2006:
Closing Stock :: ?
The accounting period ends on 31st December 2006.
Value of Closing Stock with the Organisation = Total Value of Stock Value of Stock used up internally
= Purchases + Direct Expenses Rs. 20,000
= (Rs. 1,20,000 + Rs. 30,000) Rs. 20,000
= Rs. 1,30,000
Sales value of the stock used within the organisation = Cost + 25% of Cost
= Rs. 20,000 + 25% of Rs. 20,000
= Rs. 20,000 + Rs. 5,000
= Rs. 25,000
Trading a/c
Particulars
To Purchases
To Direct Exp.
To Gross Profit
Amount
Amount
(in Rs)
(in Rs)
Cr
Particulars
Amount
Amount
(in Rs)
(in Rs)
1,20,000 By Sales
30,000 By Stock used
5,000 By Closing Stock
1,55,000
25,000
1,30,000
1,55,000
There is no commercial activity (no sales), there is no scope for earning profits. But the Trading a/c reveals a Gross
Profit of Rs. 5,000 which is on account of the stock used up internally being recorded at sales value.
Such profit generation is inappropriate for the reason that in using up stock within the organisation, the organisation
is not conducting a transaction with an outside party.
Thus to avoid profit generation in such cases, the stocks so used are to be valued at cost.
Dr
Trading a/c
Particulars
Amount
Amount
(in Rs)
(in Rs)
To Purchases
To Direct Exp.
To Gross Profit
Cr
Particulars
Amount
Amount
(in Rs)
(in Rs)
1,20,000 By Sales
30,000 By Stock used
Nil By Closing Stock
1,50,000
20,000
1,30,000
1,50,000
The Trading a/c would reveal no profit when the stock used up internally is valued at cost.
ii.
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses Closing Stock
iii.
Gross Profit = Sales (Opening Stock + Purchases + Direct Expenses Closing Stock) [From (i) and (ii)]
= Sales Opening Stock Purchases Direct Expenses + Closing Stock
iv.
Closing Stock = Opening Stock + Purchases + Direct Expenses + Gross Profit Sales [From (iii)]
To use this relation to obtain the value of closing stock, we need the information relating to Gross Profit. All other
information in this relation is readily available from the accounting records.
Gross Profit
Ratio
Ratio : Percentage
Ratio is a comparison between two numerical quantities of the same kind.
Ratio between two quantities is expressed in the form a : b
or
a
b
To Sales
Gross Profit Ratio =
Gross Profit
Net Sales
Gross Profit
Net Sales
100
Gross Profit
Cost of Goods Sold
100
Gross Profit
Cost of Goods Sold
xy
x (1 y)
y
(1 y)
y
(1 y)
0.25
(1 0.25)
0.25
0.75
1
3
= 0.33
Gross Profit (as a % to Cost) = Gross Profit Ratio (to Cost) 100
= 0.33 100
= 33
1
3
100
m
100
Show/Hide
(1 y)
m
100
(1
100
100
m
100
100 m
100
100
m
100
100 m
100 m
25
100 25
25
=
=
100
3
= 33
y=
100
75
1
3
1
a
y
(1 y)
1
a
(1
1
=
a
a1
a
=
=
1
a
a
a1
1
a1
1
4
100
100
100 m
100
a=4
100
100
a1
1
41
1
Gross Profit (as a % to Cost) = Gross Profit Ratio (to Cost) 100
1
100
= 33
Gross Profit
Net Sales
pq
p (1 + q)
q
(1 + q)
q
(1 + q)
0.2
(1 + 0.2)
0.2
1.2
1
6
Gross Profit (as a % to Sales) = Gross Profit Ratio (to Cost) 100
=
1
6
= 16
100
2
3
q
(1 + q)
100
n
100
Show/Hide
n
100
100
(1 +
100
n
=
100
100
100 + n
100
=
=
100
100
100 + n
100
100
100 + n
=
=
=
n
100 + n
20
100 + 20
20
120
1
6
q=
1
b
q
(1 + q)
1
b
(1 +
1
=
b
b+1
b
=
=
1
b
b
b+1
1
b+1
1
b+1
1
5
b=5
100
100
100
= 16 2/3%
1
100
=
=
1
5+1
1
6
100
= 16
20
As a % of Sales 16
25 33
2
3
20
50
25
33
66
1
3
2
3
40
100
50
One Scale
As a % of Cost
0.2
0.25 0.333
0.25
0.5
0.666
0.333
0.4
0.5
Inverse
As a % of Cost
As a % of Sales
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
so as to give the sales details relating to each product with a distinct Gross Profit %. This would involve a lot of work
and would be impractical, more so where there are a large number of products being dealt with.
Stock Value
There is no specific ledger account in financial accounting that would give us the information relating to the value of
closing stock ready hand.
The value of closing stock is available ready hand only if inventory records are being maintained that too from the
inventory records.
The value of Closing Stock is ascertained by Physical Verification of Stock on the last day of the
accounting period and its valuation at Cost or Market Price (Net Realisable Value) whichever is
lesser
This is the most common method for valuing the closing stock.
The information relating to the value of closing stock is not regularly required by the organisation. It is however
required at the end of the accounting period for the purpose of evaluation of the Cost of Goods Sold.
Convention of
Conservatism
Net Realisable Value of Stock
For the purpose of Valuation of closing Stock, Market Price implies Net Realisable Value/Rate and not the Selling
Price.
Net Realisable Value of stock is the net sale realisation excluding all the expenses directly and exclusively relatable to
the sale (Sale commission, Brokerage etc) from the Sale Realisation.
Therefore, in trying to ascertain the Market Price to be used for valuation, care should be taken to ensure that such
expenses are deducted from the sales price to ascertain the net realisable value of stock.
Convention of Conservatism
By the Convention of Conservatism we take into consideration all those
expenses and losses of which we are aware, even if they relate to the
subsequent accounting periods.
The act of valuing closing stock at cost or market price is based on the "Convention of Conservatism".
Dr
Trading a/c
Particulars
To
To
To
To
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
(in Rs)
20,000
2,48,000
54,000
94,000
4,16,000
f
i
n
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l
,
a
c
c
o
u
n
t
s
,
f
i
n
a
n
c
i
Cr
Particulars
By Sales
By Closing Stock
Amount
(in Rs)
3,80,000
36,000
4,16,000
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Batch N :: 600 units valued at Rs. 36/unit with a total value of Rs. 21,600
Batch M :: 600 units valued at Rs. 24/unit with a total value of Rs. 14,400
Total 1,200 units with a total value of Rs. 36,000
Value here implies cost + direct expenses
The sales of all stocks are made through a dealer who would charge a commission of 10% of the sale
proceeds.
600
units [Batch N]
i. Cost = Rs. 36/unit.
ii. Market Price = Rs. 50/unit.
600
units [Batch M]
i. Cost = Rs. 24/unit.
ii. Market Price = Rs. 25/unit.
units [Batch N]
600
units [Batch M]
Value of Closing stock if valued at cost = Rs. 14,400 (600 units Rs. 24/unit)
The Closing Stock should be valued therefore at Rs. 35,100 (Rs. 21,600 + 13,500).
Trading a/c
If value of Closing Stock is taken based on the Convention of Conservatism, the Trading a/c would be
Dr
Trading a/c
Particulars
To
To
To
To
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
93,100
Cr
By Sales
By Closing Stock
4,15,100
Amount
(in Rs)
3,80,000
35,100
4,15,100
The Gross profit has gone down by Rs. 900 since closing stock is considered at a lesser value.
Role of Convention of
Conservatism
The convention of conservatism asks us to take into consideration all those expenses and losses relating to the
subsequent periods of which we are aware.
Future Losses
Where the Net realisable value of stock is less than its cost, the organisation may incur a loss.
In the above case, the organisation may have to incur a loss of Rs. 900 [Rs. 14,400 (cost) Rs. 13,500 (net
realisable value)].
When?
This loss would have to be borne by the organisation if it sells the stock at the net realisable rate.
Since it is the end of the accounting period, such a sale at such a price, if at all it takes place, would be in the
subsequent accounting period.
Thus, the organisation may have to incur this loss in the future.
Note
The value of Opening and Closing stocks relating to a particular accounting period do not mean the same. They are
two indicated by distinct ledger accounts - Opening stock by "Opening Stock a/c" which is a nominal account and
Closing stock by "Closing Stock a/c" which is a Real account.
They may or may not have the same values.
Recording
The value of closing stock is not available ready hand in the books of accounts. It is specifically ascertained at the
end of the accounting period by physical verification of stock and its valuation at cost or market price whichever is
lower.
Thus, by recording the journal entry for Closing Stock, we are in effect bringing the value of Closing Stock into
books.
Credit :
There are three possible variations in the account to be credited for recording the value of closing stock.
i.
Trading a/c
ii.
iii.
Purchases a/c
The ledger account to be credited is dependent on which account is used to reflect the value of cost of goods sold as
well as the time of recording the entry.
Particulars
Amount
Opening Stock
Amount
20,000
2,48,000
b) Direct Expenses
54,000
3,02,000
3,22,000
36,000
14,000
50,000
2,72,000
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
Cr
Particulars
(in Rs)
Amount
(in Rs)
20,000
2,48,000
54,000
3,22,000
3,22,000
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
(in Rs)
20,000
2,48,000
54,000
Cr
Particulars
3,22,000
To Cost of Goods Sold b/d
Amount
(in Rs)
2,86,000
36,000
3,22,000
2,86,000
Journal/Ledger
The Journal entry for recording the value of closing stock in such a case would be
Journal in the books of M/s ___ for the period from ____ to ____
Date
V/R
No.
Particulars
Credit
Amount
(in Rs)
31st Dec
Dr
36,000
36,000
Dr
To Trading a/c
Amount
Particulars
(in Rs)
36,000
Cr
By Bal c/d
36,000
Dr
(in Rs)
36,000
36,000
Trading a/c
Particulars
To
To
To
To
Amount
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
(in Rs)
20,000
2,48,000
54,000
94,000
Cr
Particulars
By Sales
By Closing Stock
4,16,000
Amount
(in Rs)
3,80,000
36,000
4,16,000
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
Dr
To Opening Stock
To Purchases
To Direct Expenses
Amount
(in Rs)
Particulars
Cr
Amount
(in Rs)
20,000
2,48,000
54,000
3,22,000
3,22,000
Dr
To Opening Stock
To Purchases
To Direct Expenses
Amount
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
Cr
(in Rs)
2,86,000
36,000
3,22,000
3,22,000
Journal/Ledger
The Journal entry for recording the value of closing stock in the books would be
Journal in the books of M/s ___ for the period from ____ to ____
Date
V/R
No.
31st Dec
Particulars
L/F
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
36,000
36,000
Dr
To Opening Stock
To Purchases
To Direct Expenses
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
3,22,000
Cr
Amount
(in Rs)
2,86,000
36,000
3,22,000
The balance in the "Goods Consumed a/c" represents the cost of goods sold and is transferred to the "Trading a/c" to
ascertain the Gross Profit.
Dr
Trading a/c
Particulars
To Goods Consumed
To Gross Profit
Amount
Particulars
(in Rs)
2,86,000
94,000
Cr
By Sales
3,80,000
Amount
(in Rs)
3,80,000
3,80,000
Where the direct expenses have been transferred to the Trading a/c instead of the Goods Consumed a/c, the
balancing figure in Goods Consumed a/c does not represent cost of goods sold.
Dr
To Opening Stock
To Purchases
Amount
Particulars
(in Rs)
20,000
2,48,000
2,68,000
Cr
Amount
(in Rs)
2,32,000
36,000
2,68,000
Cost of Goods Sold implies the total value of goods sold which includes both cost of the goods (represented by
purchases a/c balance) and direct expenses related to the goods.
Since Direct Expenses have not been debited to Goods Consumed a/c, the balancing figure represents the value of
goods sold excluding direct expenses thereon.
Dr
Trading a/c
Particulars
To Direct Expenses
To Goods Consumed
To Gross Profit
Amount
Particulars
(in Rs)
54,000
2,32,000
94,000
Cr
By Sales
Amount
(in Rs)
3,80,000
3,80,000
3,80,000
Exception
Recording Closing Stock through Goods Consumed a/c would be rational if its value does not include any part of the
direct expenses incurred during the current period which have been debited to the Trading a/c.
Dr
To Purchases
To Direct Expenses
Amount
(in Rs)
2,48,000
54,000
3,12,000
Particulars
Cr
Amount
(in Rs)
2,66,000
36,000
3,12,000
The balance in the Goods Consumed a/c transferred to the Trading a/c represents the value of goods that have been
Dr
Trading a/c
Particulars
To Opening Stock
To Goods Consumed
To Gross Profit
Amount
Amount
Particulars
(in Rs)
20,000
2,66,000
94,000
Cr
(in Rs)
By Sales
3,80,000
3,80,000
3,80,000
Exception
Recording Closing Stock through Goods Consumed a/c would be rational closing stock includes only that stock which
has been purchased during the current accounting period.
This would be the case where the quantity of closing stock is less than the quantity purchased during the current
period and stock is being used up on FIFO basis.
Closing stock is physically relatable to the stock that has been purchased during the current period.
[This would be the case where FIFO method is adopted for physical usage of stock]
There are no direct expenses in relation to the stock purchased during the current period
(Or)
The value of closing stock does not include the direct expenses incurred during the current period
Journal/Ledger
The Journal entry for recording the value of closing stock in the books would be
Journal in the books of M/s ___ for the period from ____ to ____
Date
V/R
No.
31st Dec
Particulars
Closing Stock a/c
L/F
Dr
Debit Amount
(in Rs)
36,000
Credit
Amount
(in Rs)
To Purchases a/c
36,000
Dr
Purchases a/c
Date
1st31st
Particulars
To Cash/Bank/Crs
J/F
Amount
(in Rs)
2,48,000
Cr
Date
Particulars
Amount
J/F
(in Rs)
36,000
2,12,000
2,48,000
Dr
Trading a/c
Particulars
To
To
To
To
2,48,000
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
Particulars
(in Rs)
20,000
2,12,000
54,000
94,000
Cr
By Sales
3,80,000
Amount
(in Rs)
3,80,000
3,80,000
Conventional use
Technically we can credit the value of closing stock to Purchases a/c only when the above conditions are satisfied.
The use of "Trading a/c" or "Goods Consumed a/c" for crediting the value of closing stock, is possible only if the
journal entry for brining the value of closing stock into books is being recorded at the time of preparation of final
accounts.
Where we are recording the value of closing stock in the accounting books before the preparation of final accounts, it
is a convention that we credit "Purchases a/c" (on account of the absence of "Trading a/c" or "Goods Consumed a/c"
for use).
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
Closing Entry
The journal entry for closing the books of accounts during an accounting period
Journal in the books of M/s ___ for the period from ____ to ____
Date
V/R
No.
31st Dec
Particulars
L/F
Creditors a/c
Bank Loan a/c
Profit & Loss Appropriation a/c
Capital a/c
To Closing Stock a/c
To Cash a/c
To Debtors a/c
To Furniture a/c
Dr
Dr
Dr
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
48,000
63,000
54,000
1,00,000
36,000
42,000
1,26,000
61,000
Amount
Capital
Profit & Loss Appropriation
Creditors
Bank Loan
1,00,000
54,000
48,000
63,000
Assets
Cash
Closing Stock
Debtors
Furniture
2,65,000
Amount
42,000
36,000
1,26,000
61,000
2,65,000
Amount
Capital
Profit & Loss Appropriation
Creditors
Bank Loan
1,00,000
54,000
48,000
63,000
2,65,000
Assets
Cash
Closing Stock
Debtors
Furniture
Amount
42,000
36,000
1,26,000
61,000
2,65,000
Opening Entry
The opening entry is based on the opening balance sheet.
Journal in the books of M/s ___ for the period from ____ to ____
Date
V/R
No.
31st Dec
Particulars
Cash a/c
Opening Stock a/c
Debtors a/c
Furniture a/c
To Capital a/c
To Profit & Loss Appropriation a/c
To Bank Loan a/c
To Creditors a/c
L/F
Dr
Dr
Dr
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
42,000
36,000
1,26,000
61,000
1,00,000
54,000
63,000
48,000
Where the closing stock is recorded by crediting its value to the Trading a/c
Entry
Dr. Closing Stock a/c
Cr. Trading a/c
Effect
1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet
2. (+) Show the Value of Closing Stock on the Credit side of Trading a/c
Where the closing stock is recorded by crediting its value to Purchases a/c
Entry
Dr. Closing Stock a/c
Effect
1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet
2. () Deduct the Value of Closing Stock from Purchases on the Debit side of
Trading a/c
Entry
Effect
1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet
2. (+) Show the Value of Closing Stock on the Credit side Goods Consumed a/c
This assumption is generally avoided, where the value of closing stock has to be dealt with as an
adjustment.
Trading a/c
L/F
Total
Debit
Amount
(in Rs)
Credit
Amount
(in Rs)
20,000
2,48,000
36,000
36,000
xxx
Where Closing Stock a/c and Trading a/c appear in Trial Balance
xxx
Trading a/c does not appear, but Purchases a/c appears in the Trial Balance
Trial Balance of M/s ___ " as on 30th June 2005
Particulars
L/F
Debit
Amount
(in Rs)
Credit
Amount
(in Rs)
20,000
2,12,000
36,000
Total
xxx
xxx
Where Closing Stock a/c and Purchases a/c appear in Trial Balance
Dr. Closing Stock a/c
Cr. Purchases a/c
Both Trading a/c and "Purchases a/c" do not appear in the Trial Balance
Trial Balance of M/s ___ " as on 30th June 2005
Particulars
L/F
Debit
Amount
(in Rs)
Goods Consumed
Total
Credit
Amount
(in Rs)
2,32,000
36,000
xxx
xxx
Where Purchases a/c and Trading a/c do not appear in the Trial Balance and
Where Closing Stock a/c and Goods Consumed a/c appear in Trial Balance
Dr. Closing Stock a/c
The entry used for recording the value of closing stock.
Cr. Goods Consumed a/c
SET OFF Setting off of ledger accounts is clubbing two accounts with opposite balances. In
setting off ledger account balances, we close the account with the lower balance by transferring
it to the account with a higher balance.
Journal/Ledger
Show/Hide
Journal in the books of M/s __ for the period from ____ to _____
Date
V/R
No.
March 31st
Particulars
L/F
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
80,000
80,000
Dr
To Purchases a/c
Amount
Particulars
(in Rs)
80,000
Amount
(in Rs)
By
By
80,000
Dr
Cr
80,000
Purchases a/c
Particulars
To
To
Amount
Cr
Particulars
(in Rs)
5,80,000
Amount
(in Rs)
80,000
5,00,000
5,80,000
The balance remaining in the Sales a/c would thus represent net sales. While closing the Sales account at the end of
the accounting period, this balance is transferred to the Trading a/c
Journal/Ledger
Show/Hide
Journal in the books of M/s __ for the period from ____ to _____
Date
V/R
No.
March 31st
Particulars
L/F
Sales a/c
To Sales Returns a/c
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
72,500
72,500
Dr
Amount
Particulars
(in Rs)
To
To
Cr
By Sales a/c
(in Rs)
72,500
72,500
Dr
Amount
72,500
Sales a/c
Particulars
Amount
Particulars
(in Rs)
72,500
7,51,500
Cr
By
By
Amount
(in Rs)
8,24,000
8,24,000
Dr
Trading a/c
Particulars
To
To
To
To
To
To
Opening Stock
Purchases
Wages
Octroi
Carriage Inwards
Gross Profit
Amount
(in Rs)
40,000
5,00,000
45,000
32,000
15,000
2,40,500
8,27,500
Cr
Particulars
By Sales
Closing Stock
Amount
(in Rs)
7,51,500
76,000
8,27,500
The Purchase Returns a/c and the Sales Returns a/c being nominal accounts are closed at the end of the accounting
period by transfer to the Trading a/c (instead of to the Purchases a/c and Sales a/c respectively).
The Purchase Returns a/c carries a credit balance and the "Sales Returns a/c" carries a credit balance.
Journal
The journal entries for closing these accounts by transfer to the trading account would be
Journal in the books of M/s __ for the period from ____ to _____
Date
V/R
No.
March 31st
Particulars
L/F
Dr
Debit Amount
(in Rs)
80,000
72,500
Credit
Amount
(in Rs)
80,000
Trading a/c
To Sales Returns a/c
Dr
72,500
Dr
Trading a/c
Particulars
To
To
To
To
To
To
To
Opening Stock
Purchases
Sales Returns
Wages
Octroi
Carriage Inwards
Gross Profit
Amount
(in Rs)
40,000
5,80,000
72,500
45,000
32,000
15,000
2,40,500
9,80,000
Cr
Particulars
By Sales
By Purchase Returns
Closing Stock
Amount
(in Rs)
8,24,000
80,000
76,000
9,80,000
We cannot derive the information relating to Net Purchases and Net Sales by just Posting the entries to the Trading
a/c.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
Net Purchases
Posting (showing) an amount on the credit side of an account is an equivalent of deducting the
amount from an item on the debit side.
Thus the Purchase Returns a/c balance instead of being shown on the credit side is deducted from Purchases a/c
balance on the debit side of the Trading a/c, thereby giving the figure of Net Purchases in the Trading a/c itself.
Net Sales
Posting (showing) an amount on the debit side of an account is an equivalent of deducting the
amount from an item on the credit side.
Thus, the Sales Returns a/c balance instead of being shown on the debit side would be deducted from Sales a/c on
the credit side of the Trading a/c, thereby giving us the figure of Net Sales in the Trading account itself.
Trading a/c
Particulars
To Opening Stock
To Purchases
() Pur. Returns
To
To
To
To
Wages
Octroi
Carriage Inwards
Gross Profit
Amount
Amount
(in Rs)
(in Rs)
5,80,000
80,000
Cr
Particulars
40,000 By Sales
() Sales Returns
5,00,000 Closing Stock
45,000
32,000
15,000
2,40,500
8,27,500
Amount
Amount
(in Rs)
(in Rs)
8,24,000
72,500
7,51,500
76,000
8,27,500
Revenue
Income, turnover, revenue are terms used synonymously to mean the amount of money that an organisation
receives from its activities like sale of products, providing services to customers etc. Depending on the nature of the
organisation and the type of activity it is involved in the revenue streams are varied
Sale or Products, Providing Services are the activities most common to business organisations. Taxes, Duties, Fees
etc are the major sources of revenue for Governments. Donations, Grants, Subscriptions, etc are some of the
sources of revenue for non-profit organisations.
The terms Revenue and Sales or Turnover are interchangeably used. This makes sense only when sales are
Revenue would be meaningful only when it is expressed in relation to a period. Say the revenue is Rs. 5
crores is would not make much sense unless we express the period involved.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
Saying the revenue for the last month is Rs. 5 Crores does sound meaningful.
Revenue Recognition
Revenues are
realized when goods and services are exchanged for cash or receivables (debtors).
realizable when assets received in exchange for goods and services are readily convertible to cash or
receivables (debtors).
Recognising revenue implies the act that would make the organisation consider that they have earned the revenue
involved in the transaction. Based on when the revenue is recognised there are two
types of accounting systems (1) Cash Basis of Accounting and (2) Accrual Basis or final,accounts,financial,account
Mercantile System of Accounting
ing,trading,profit,loss,account,
balance,sheet,trial,balance,wor
1.Cash Basis Accounting
k,sheet,adjustments
Under cash basis accounting revenues are recognized and earned only when cash is received irrespective
of when and how the services were performed or goods delivered.
To put it in different terms, the cash basis of accounting asks you to take into consideration all those
incomes/gains that have been received in cash or other assets and expenses/losses that have been paid
out in cash or other assets during the accounting period in consideration.
From Cash Basis to Accrual/Mercantile Basis would require the following information to be brought into the
books of accounts.
From Mercantile/Accrual Basis to Mercantile Basis would require the following information to be written off
from the books of accounts.
final,accounts,financial,account
ing,trading,profit,loss,account,
balance,sheet,trial,balance,wor
k,sheet,adjustments
Separate ledger accounts may be used for each distinct expenditure (like outstanding salaries a/c, Rent
payable a/c, Interest unpaid a/c etc.) or a single account may be used in place of all these (like
outstanding expenses a/c or creditors for expenses a/c).
indicative of a creditor, it carries a credit balance and has to be shown on the liabilities side of the balance
sheet.
The creditors for expenses are cleared in the subsequent periods by paying them out.
Journal Entries
Hide/Show
Journal in the books of M/s _____ for the period from _____ to _____
Date
V/R
No.
31/12/05
Particulars
L/F
Dr
Credit
Amount
(in Rs)
Debit Amount
(in Rs)
26,000
16,400
11,100
5,200
26,000
Dr
16,400
Dr
11,100
Dr
5,200
Ledger Accounts
Hide/Show
Dr
Particulars
J/F
Amount
(in Rs)
26,000
Date
Cr
Particulars
31/12/05 By P/L
Adjustment.
J/F
26,000
(in Rs)
26,000
26,000
Dr
Amount
26,000
Particulars
J/F
Amount
(in Rs)
16,400
Date
Cr
Particulars
J/F
16,400
Dr
J/F
(in Rs)
16,400
16,400
Date
Amount
16,400
Amount
(in Rs)
Date
Cr
Particulars
J/F
Amount
(in Rs)
11,100
31/12/05 By P/L
Adjustment.
11,100
11,100
31/12/05 By Balance b/d
Dr
11,100
11,100
Particulars
J/F
Amount
Date
(in Rs)
5,200
Cr
Particulars
J/F
5,200
31/12/05 To Balance b/d
Dr
Amount
(in Rs)
5,200
5,200
5,200
Particulars
J/F
Amount
Date
(in Rs)
26,000
11,100
Particulars
Cr
J/F
37,100
Amount
(in Rs)
16,400
5,200
15,500
37,100
The overall gain or loss revealed by the "P/L Adjustment a/c" is written off to the "P/L Appropriation a/c"
or the "Capital a/c", depending on where the accumulated profits of the previous periods have been
transferred.
These would bring in all the adjustments needed for the various accruals, outstandings and prepaids that
have not been taken into consideration in the previous periods on account of not having received the cash
relating to the same.
To convert the accounting system from accrual/mercantile basis to cash basis from a particular point of
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
time, one needs to identify the accounts of the nature as described above and write them off from the
books of accounts, which would take care of the adjustments to be made in the books for the
incomes/expenses relating to the past periods. From thereon, the incomes and expenses have to be
recorded on cash basis.
The ledger accounts to be written off from the books of accounts are personal accounts and are an
equivalent of either debtors or creditors. Writing off the ledger accounts equivalent to debtors would
amount to writing off an existing asset in the books, which would result in a loss. Writing off the ledger
accounts equivalent to creditors would amount to writing off an existing liability in the books, which would
result in a gain. A ledger account by name "Profit and Loss Adjustment a/c" is used to record these losses
or gains.
Journal Entries
Hide/Show
Journal in the books of M/s _____ for the period from _____ to _____
Date
V/R
No.
31/12/05
Particulars
L/F
Dr
Credit
Amount
(in Rs)
Debit Amount
(in Rs)
31,650
18,700
13,650
8,750
31,650
Dr
18,700
Dr
13,650
Dr
8,750
Ledger Accounts
Hide/Show
Dr
Particulars
31/12/05 To P/L
Adjustment.
J/F
Amount
(in Rs)
31,650
Date
Cr
Particulars
J/F
31,650
Dr
(in Rs)
31,650
31,650
Particulars
J/F
Amount
(in Rs)
18,700
Date
Cr
Particulars
31/12/05 By P/L
Adjustment
18,700
Dr
Amount
J/F
Amount
(in Rs)
18,700
18,700
Cr
Date
Particulars
31/12/05 To P/L
Adjustment.
J/F
Amount
(in Rs)
13,650
Date
Particulars
J/F
13,650
Dr
(in Rs)
13,650
13,650
Particulars
J/F
Amount
(in Rs)
8,750
Date
Cr
Particulars
J/F
8,750
Dr
Amount
(in Rs)
8,750
8,750
Particulars
J/F
Amount
(in Rs)
18,700
8,750
17,850
Date
Particulars
45,300
Amount
Cr
J/F
Amount
(in Rs)
31,650
13,650
45,300
The overall gain or loss revealed by the "P/L Adjustment a/c" is written off to the "P/L Appropriation a/c" or
the "Capital a/c", depending on where the accumulated profits of the previous periods have been
transferred.
These would bring in all the adjustments needed for the various accruals, outstandings and prepaids that
have been taken into consideration in the previous periods on account of not having received the cash
relating to the same.
Income/Profits
The profits relating to a particular accounting period are revealed by the "Profit & Loss a/c" relating to that period.
The profits are derived by transferring the ledger account balances in the nominal accounts to the "Trading a/" or
"Profit & Loss a/c" as the case may be.
The basis of accounting followed i.e. cash basis or mercantile basis would decide the amount of incomes/expenses in
relation to the accounting period. Since the figure of profit is dependent on the incomes/expenses, we can say that
the figure of profit would vary depending on the method of accounting being followed by the organisation.
We know that the information relating to outstanding expenses, expenses paid in advance, pre-received incomes,
outstanding incomes receivable is to be dealt with in changing the accounting system from Cash to Mercantile or vice
versa from a particular point of time. The same accounts are to be dealt with in finding the income under one system
given the income under the other system of accounting. Moreover, we should understand that these accounts are to
be dealt along with the respective income/expenses accounts and not in isolation.
Adjusting Expenditure
Consider an expenditure like Salary. Within an accounting period, salary is expended as well as paid. The
amount of salary paid can be identified from the amount of cash paid or cheques issued towards salaries.
The amount of salary expended i.e. the expenditure on account of salary relating to the current
accounting period can be identified by making appropriate adjustments for outstanding and prepaid
salaries both at the beginning and ending of the accounting period.
Date
Particulars
J/F
Amount
(in Rs)
15,425
2,48,000
45,300
Date
Particulars
J/F
3,08,725
01/01/06 To Bal b/d
23,750
Dr
Amount
(in Rs)
18,200
2,66,775
23,750
3,08,725
45,300
Expenditure a/c
Date
Particulars
J/F
Amount
(in Rs)
Date
Cr
Particulars
J/F
3,08,725
(in Rs)
18,200
3,08,725
01/01/06 By Bal b/d
Dr
Amount
45,300
Expenditure a/c
Date
Particulars
J/F
Amount
(in Rs)
Date
Cr
Particulars
Amount
(in Rs)
15,425
31/12/05 By Bal c/d
3,08,725
J/F
23,750
3,08,725
23,750
Adjusting Incomes
Consider an income like Interest. Within an accounting period, interest is earned as well as received in
cash. The amount of interest received can be identified from the amount of cash/cheques received
towards interest. The amount of interest earned i.e. the income on account of salary relating to the
current accounting period can be identified by making appropriate adjustments for outstanding and prereceived interest both at the beginning and ending of the accounting period.
This represents the amount of income that has been outstanding and still receivable at the
beginning of the accounting period.
This would be cleared by realising the amount in the current period. Therefore, the cash received
in the current period towards the income is assumed to include this outstanding amount also
(unless there is an indication to the contrary).
Thus to find the income relating to the current period only, this amount has to be deducted from
the Cash received towards the income during the current period.
Particulars
Cash Received during the Current Period
(+) Opening Income Pre-received
Closing Income Receivable
Amount
Amount
1,32,500
8,125
5,245
6,850
3,750
13,370
1,45,870
10,600
1,35,270
The
adjustment
relating
to
the
incomes
can
be
summarised
as
follows:
Cash
Received
+
Opening
Income
Pre-received
Opening
Income
Receivable
+ Closing Income Receivable Closing Income Pre-received = Income.
Using the above relation, either the cash received (which would be the income to be considered in cash
basis accounting) or the income pertaining to the current period (which would be the income to be
Hide/Show
Particulars
J/F
Amount
(in Rs)
8,125
3,750
Date
Cr
Particulars
J/F
11,875
(in Rs)
8,125
3,750
11,875
Dr
Amount
3,750
Particulars
J/F
Amount
(in Rs)
6,850
5,245
Date
Cr
Particulars
J/F
12,095
01/01/06 To Balance b/d
Dr
Amount
(in Rs)
6,850
5,245
12,095
5,245
Income a/c
Date
Particulars
J/F
Amount
(in Rs)
6,850
1,35,270
3,750
Date
Cr
Particulars
J/F
1,45,870
Dr
Amount
(in Rs)
8,125
1,32,500
5,245
1,45,870
Income a/c
Date
Particulars
J/F
Amount
(in Rs)
6,850
1,35,270
3,750
Date
Cr
Particulars
J/F
1,45,870
Dr
Amount
(in Rs)
8,125
1,32,500
5,245
1,45,870
Income a/c
Date
Particulars
J/F
Amount
(in Rs)
Date
Cr
Particulars
J/F
Amount
(in Rs)
6,850
31/12/05 By Bal c/d
5,245
Dr
5,245
Income a/c
Date
Particulars
J/F
Amount
(in Rs)
Date
Cr
Particulars
J/F
Amount
(in Rs)
8,125
3,750
3,750
Amount
2,48,000
18,200
8,125
23,750
5,245
15,425
6,850
45,300
3,750
Amount
55,320
3,03,320
49,775
2,53,545
Particulars
Amount
Amount
2,53,545
15,425
6,850
45,300
3,750
18,200
8,125
23,750
5,245
49,775
3,03,320
55,320
2,48,000