Module - IV

6
ACCOUNTING RECORDS

Unit Structure
6.1 Introduction
6.2 Process of Transaction and Its Record Generation
6.3 What is an Account?
6.4 Final Accounts
6.5 Horizontal or Format of Trading & P&L A/C
6.6 Vertical Format of Balance Sheet

6.1 INTRODUCTION

Accounting involves a series of processes like measuringeconomic value of a

transaction, recording it and reporting it to various stake holders. Accounting
information is used by a varietyof users, like investors, creditors, workers,
management, and government.

Accounting can be divided into financial accounting, management accounting,

auditing, and tax accounting. Financial accounting focuses on the reporting of
an organization's financial information, including the preparation of financial
statements, to external users of the information, such as investors, regulators
and suppliers and management accounting focuses on the measurement,
analysis and reporting of information for internal use by management. The
recording of financial transactions, so that summaries of the financials may
be presented in financial reports,is known as bookkeeping, of which double-
entry bookkeeping is the most common system.
Accounting records means internal or external documentary evidence
maintained within the organisation to record the economic transaction which
has taken place. These are important sources of information and evidences
that are used to prepare the financial statements.
In book keeping and accountancy we will be recording only monetary
transactions.
Accounting records can take on many forms and include:
i. Invoices
ii. Vouchers
iii. Ledgers
 iv. Journals
v. Bank statements
vi. Contracts and agreements
vii. Verification statements
viii. Transportation receipts etc.

Vouchers are most important document in accounting records. Vouchers form

basis for recording any transaction. Account voucher is an accounting
document representing an internal intent to make a payment to an external
entity, such as a vendor or service provider. A voucher is produced usually
afterreceiving a vendor invoice, after the invoice is successfully matched to a
purchase order. A voucher will contain detailed information regarding the
payee, the monetary amount of the payment, a description of the transaction,
and more.

6.2 PROCESS OF TRANSACTION AND ITS RECORD

GENERATION

Let us see the entire process of accounting with the help of a chart

Economic transactions occurs

Vouchers are created

Transaction is recorded in primary books i.e.

Journal or subsidiary books

Transactions are posted in Ledger account

At the end of the year ledger accounts areclosed

and balances are found out

Using the closing balances of the ledger accounts

a trial balance is drawn as on last day of the
financial year

Closing Adjustment entries are recorded

Final accounts are drawn

Now let us discuss the entire procedure in the order of flow chart

1. Economic transactions occurs: In accounts we record only

those transaction which has some monetary value. Accountancy
is more of a historical record as it records whatever happens in
money terms. One should not get confused with non cash and
non-monetary transactions. A non cash transaction can be a
monetary transaction e.g providing depreciation on fixed assets, is
a non cash transaction but it is a monetary transaction as we know
the amount of depreciation in money terms.

2. Vouchers are created: Whenever any transaction takes placea

voucher is created depending upon the nature of transaction.
Vouchers may be of following types

1. Receipt voucher
2. Payment vouchers
3. Journal vouchers
4. Cash memo
5. Contra entry vouchers
6. Purchase and returns invoice vouchers
7. Sales and returns vouchers

A voucher complete in all respects forms basis for recording the transaction.
To be called a complete document it should be properly dated, amounted,
authorised and signed by the party.

Any documentary evidence supporting the entries recordedin the books of

accounts, establishing the arithmetic accuracy of the transaction, may also be
referred to as a voucher for example, a bill, invoice, receipt, salary and
wages sheet, memorandum of association, counterfoil of paying-in slip,
counterfoil of cheque book, or trust deed.

Normally the following types of vouchers are used:

(i) Receipt Voucher
(ii) Payment Voucher
(iii) Journal Voucher
(iv) Supporting Voucher

Let us discuss each of these:

( i ) Receipt Voucher:
A Receipt voucher is used to record cash or bank receipt.
Receipt vouchers are of two types which are as follows:

(a) Cash receipt voucher These vouchers are created

whenever any cash generation transaction occurs. E.g. sale of
scrap for cash.
 (b) Bank receipt voucher it indicates receipt of a cheque or
demand draft i.e. money is not received in the form of cash in hand,
instead, the money will be credited to the bank account of the
assesse.

Contents of Receipt/Credit Voucher:

The following information are usually available from a receipt/creditvoucher:

(a) Names and address of the parties;
(b) Date of preparing the voucher;
(c) Voucher Number;
(d) Amount of the transaction;
(e) Heads of account;
(f) Signature of the person who is preparing the voucher;
(g) Authorized Signatory;
(h) Narrations, i.e., short description of the transaction, and
(i) Number of Supporting Voucher.

ii). Payment/debit Voucher:

A payment voucher is just the opposite of a receipt voucher. In the above,
cash/ bank was debited, while in this case, cash or bank will be credited. In
the above case, there was an inflow of funds, while in this case, there is an
outflow of funds. A Payment voucher is used to record a payment of cash
or cheque. Payment vouchersare also of two types which are:

(a) Cash Payment voucher it denotes payment of cash

(b) Bank Payment voucher it indicates payment by cheque or
demand draft i.e. money is not paid in the form of cash in hand,
instead, the money will be debited from the bank account of the
assesse
Contents of payment/debit Vouchers:

The following information are normally available from a debit voucher:

(a) Names and Addresses of the Party (b) Date of voucher;

(c) Voucher Sr. Number; (d) Amount or value of the transaction; (e) Heads of
Account; (f) Signature of the person who is preparing the voucher; (g)
Authorized signatory; (h) Narration i.e., short description of the transaction
and (i) Number of supportingVouchers.

The format of a Debit Voucher is presented:

( If the amount of transaction exceeds Rs. 500 a revenue stamp valued Re 1.

should be affixed.)

iii) Journal Voucher:

These vouchers are used for non-cash transactions, they are basically used
as a documentary evidence. e.g., Goods sold on credit. In such cases, the
cash or the bank account of the assesseis unaffected. In the case of Goods
sold on credit, the Voucherwould debit the Debtor to whom the goods are
sold on credit, while sales on credit account would be credited further.
 iv) Supporting documents vouchers:
These vouchers are the documentary evidence of transactions that have
happened. For example, you can attach the bill of an expense along with the
original voucher just to further support the primary voucher. Petrol Bills
attached with the conveyance vouchers are a good example of Supporting
Vouchers. Supporting Vouchers are the documentary evidence of business
transactions which have happened.

They are of two types:

(i) External Supporting Vouchers; and
(ii) Internal Supporting Vouchers.
(i) External Supporting Vouchers:

These vouchers are prepared by the third parties who are associated with the
firm.

For example:(a) Debit Note Received; (b) Credit Note Received;

(c) Cash Memo Received from the Sellers, etc.

The format of a Supporting Voucher is presented:

(ii) Internal Supporting Vouchers:

These vouchers are prepared by the internal staff on behalfof firm which
are accepted by the third parties for the transaction so happened.
For example:
(a) Counterfoil-of Challan for payment of income tax to a bank;
(b) Counterfoil of pay-in-slip when money is deposited into bank,
etc.

3. Transaction is recorded in primary books i.e. Journal books:

There are two sets of books maintained in any organisation viz.
primary set of books and secondary set of books. Primary set of books
is the one where initial transaction is recorded. It is the first
instance of the recording of any economic transaction it includes
journal and subsidiary books.

In order to record journal entries, one needs to have knowledgeabout

following basics of accounting

6.3 WHAT IS AN ACCOUNT?

ACCOUNT: An account is a record of all transaction under one room relating

to a particular person, income, expense, property etc.

Types of accounts:
There are three type of accounts in accounting:

A] Personal account: Ashok, Anil, Dena Bank, Abcd ltd, prepaid or

outstanding incomes or expenses. Personal accounts consist of
all those accounts which are related to a person, business, firm etc.
There are also subtypes of personal account:
I] Natural Personal Any person like Peter Account, Ram account etc.
II] Artificial Personal: Any company or group of people like Microsoft
account, Hindustan Petroleum account etc.
III] Representative Personal this type of Personal a/c represents
owner like. Capital a/c, drawings a/c etc.

B] Real account: Real accounts consist of all those accounts which

are related to assets. For example: Plant and Machinery account,
Stock account, Furniture & Fixture, cash etc.
C] Nominal account: Nominal accounts consist of all those
accounts which are related to expenses, losses, Income and
Gains.For example: Rent account, wages account, printing &
stationary etc.

Golden rules of accounting

There are three golden rules in accounting to record journal entries.Each of
these rules is associated with separate account.

Personal accounts
"Debit the Receiver, Credit the Giver"

Real accounts
"Debit what Comes In, Credit what Goes out"
Nominal accounts
"Debit all Expenses and Losses, Credit all Income and Gains"

How to record a journal entry

First understand the format of a journal
A journal has five vertical columns
JOURNAL
DEBIT CREDIT
DATE PARTICULARS L. F. Rs. Rs.

1.4.2-16 Account to be debited A/c Dr xxx

To Account to be credited xxx
(Being..narrate the
transaction)

Date column records date of the transaction

Particulars column records the two effects of a given transaction, by using

at least two ledger accounts, one of which will be debited and other one
credited.

Below these two accounts we write brief description of transaction in

brackets prefixing the word called as narration.

L.F. column records ledger folio or page number where that account is
opened in a leger book.

Debit (Amount) and Credit (Amount) columns records amountagainst each

ledger account.

Steps to record a journal entry

1. Identify which accounts are involved
2. Identify types of accounts
3. Apply golden rules according to the type of account to determine
which account will be Debited and which account will be Credited.

Example: You are writing in the books of Ganesh

Transaction : Cash received from Jagdish Rs5,000,
for this transaction we will pass journal entry by using above mentioned

1 Identify which accounts are involved : a) Cash b) Jagdish

2 Identify types of accounts:
a) Cash : real account
b) Jagdish: personal account
3 Apply golden rules according to the type of account to determine
which account will be Debited and which account will be Credited.
a) Cash : real account so: Debit what comes in
b) Jagdish: personal account : credit the giver
Therefore Cash A/c will be debited and Jagdish A/c will be credited The
entry will be as follows
Cash a/c ----------------------------- Dr 5,000
To Jagdish a/c ------------------------- Cr 5,000
(Being cash received from Jagdish)

Example : Journalise the following transactions:

2016 Rs.
April. 1 Started business with cash 50,000
April. 3 Deposited cash into Bank 40,000
April. 5 Sold goods to Ganesh 22,000
April. 9 Goods returned by Ganesh 2,000
April. 11 Goods purchased from Kishore 30,500
April. 15 Goods returned to Kishore 1,500
April. 18 Bought Furniture & Fixture for office use by 9,000
April. 22 cheque 1,000
April. 22 Purchased goods for cash 50
April. 30 Paid carriage 500
Paid interest on loan

Solution: Journal
Date Particulars L.F Dr.(Rs.) Cr. (Rs.)
.
2012
April. 1 Cash A/c 50,000
To Capital A/c 50,000
(Being the business started with cash)
April 3 40,000
Bank A/c
To Cash A/c 40,000
(Being the amount deposited into the bank)
April 5
Ganesh
22,000
To sales A/c
22,000
(Being the goods sold to Ganesh)
April 9
Sales Returns A/c To 2,000
Ganesh 2,000
April 11 (Being the goods returned by Ganesh)
Purchases A/c 30,500
To Kishore 30,500
April 15 (Being the goods purchased from Kishore)
1,500
Kishore
1,500
To purchases Return a/c
(Being the goods returned to Kishore)
April 18
 Furniture & Fixture a/c
To bank a/c 9,000
April 22 (Being the Furniture & Fixture bought andpaid 9,000
by cheque)
Purchases A/c 1,000
April 26 1,000
To cash a/c
(Being the goods purchased against cash)
April 30 Carriage a/c TO 50
cash a/c 50
(Being the carriage paid)
500
Interest on Loan A/c
500
To Cash A/c
(Being the payment of interest on Loan)

1,57,550 1,57,550
Total

4. Transactions are posted in Ledger account: Secondary set

of books includes ledger accounts. Now let us see format of a
ledger account.
Dr. LEDGER ACCOUNT Cr.
DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS J.F. AMOUNT

To Account By Account debited

1.4.16 credited in Journal xxx 5.4.16 in Journal Xxx
against this against this
ledger a/c ledger a/c

The process of transferring the information contained in a Journalto a

Ledger is called Posting.

i. Posting of debited item in a Journal Entry: The steps to be

followed are :

Identify in the ledger the account to be debited. Then enter the date of the
side of the account. Then write
the name of the account which has been credited in the respective entry in
the column on the debit side of the account as (name of
account Then record the page number of the Journal where the
entry exists in the Journal folio (J.F.) column. Then rnter the relevant amount
in the column on the debit side.
 ii. Posting credit item in a journal entry: The steps to be followed
are :
Identify in the ledger the amount to be credited then Enter the date of the
column on the credit side of the account. Then write
the name of the account which has been debited in the respective entry in the
on the credit side of the account of account
the entry exists
in the Journal folio (J.F.) column. Then enterthe relevant amount in the
column on the credit side.

Thus every transaction has two effects viz debit and credit. Ina journal entry
theses are either debited or credited. One should always remember that total
of debit should always match the total of credit.

Consider the simple Journal entry to illustrate the above:

On April 16, 2014 Motor car Purchased for cash Rs. 12000

April 16 Motor car A/c Rs. 12,000

To cash Rs. 12,000
(Being the Motor car purchased)

An amount of Rs. 12,000 will be debited to the Motor car account and credited
to cash account. The manner will be: in the Motor car account in the
column we shall write to cash a/c . In the account of cash will
accounts will, thus appear as under.:

Motor car A/c

Dr. Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs.
April 16 To Cash 12,000
A/c

Cash a/c
Dr Cr.
Date Particulars J.F. Rs. Date Particulars J.F. Rs
April 16 By Motor car A/c 12,000

Example 2: Received Rs.14,000 in full settlement of a debt of Rs.15,000 from

Ram on Aug 8, 2014.
SULUTION - Journal Entry
Rs. Rs.
Cash A/c Dr. 14,000
Discount allowed A/c Dr 1,000
To Anant 15,000
(Cash received and
discount allowed)

Ledger A/c
Cash A/c
Dr Cr
Date Particulars L.F Rs. Date Particulars L.F Rs.
2014
Aug.8 To Anant 14,000

Discount Allowed A/c

Dr Cr
Date Particulars L.F Rs. Date Particulars L.F Rs.
2014
10
Aug.8 To Anant 00

Account
Dr Cr
Date Particulars L.F Rs. Date Particulars L.F Rs.
2014
Aug. 8 By cash A/c 14,000
By Discount 1,000
Allowed A/c

5. At the end of the year ledger accounts are closed and

balances are found out

Dr. LEDGER ACCOUNT Cr.

DATE PARTICULARS J.F. AMOUNT DATE PARTICULARS J.F. AMOUNT

1.4.16 To abc Account Xxx 5.4.16 By opq account Xxx

Xxx To xyz Account Xxx xxx By rst Account xxx

Xxx To Balance c/d Xxx

Xxxx xxxx
Using the closing balances of the ledger accounts a trial balance is
drawn as on last day of the financial year : A trial balance is a list of all the
general ledger accounts of a business.This list will contain the name of
ledger account and the balance of that ledger. Each nominal ledger account
will hold either a debit balance or a credit balance. The debit balance values
will be listed in the debit column of the trial balance and the credit value
balance will be listed in the credit column. A trial balance always tallies. Ledger
A/Cs which shows a debit balance is put on the Debit side of the trial
balance.

on the Credit side of the Trial

Balance. Accounts which show no balance i.e. whose Debit and Credit totals
are equal are not entered in Trial Balance.
Then the two sides of the Trial Balance are totaled. If they are equal it is
assumed that there are no arithmetical error in the posting and balancing of
Ledger A/cs.

Normally at the year end or whenever a businessman is interestedin knowing

the position of various A/C s, the accounts are balanced. Various steps for
this purpose are

(1) Debit and Credit sides of each A/c are totaled.

(2) The difference between the two sides is written on the side
which is shorter so as to make their totals equal.
(3) The words i.e. the balance carried down and
written against the amount of difference.
(4) In the next period, the balance is brought down on the other
side by writing the words
(5) If the Debit side exceeds the Credit Side the difference is a
Debit Balance whereas.
(6) If the Credit side exceeds the Debit side the difference is a
Credit Balance.

Objectives or Functions of Trial Balance

It helps in ascertaining the arithmetical accuracy of ledger
accounts.
Helps in locating errors.
Provides the summary of Ledger A/cs.Helps in
the preparation of Final A/cs.
 6. Closing Adjustment entries are recorded Closing entries are
journal entries made at the end of an accounting period to
transfer temporary accounts to permanent accounts. adjusting
entries are journal entries usually made at the end of an
accounting period to allocate income and expenditure to theperiod
in which they actually occurred. The revenue recognition principle
is the basis of making adjusting entries that pertain to unearned
and accrued revenues under accrual-basis accounting. Eg
Charging depreciation, providing for outstanding incomes and
expenses etc.

Treatment of items of Adjustment outside the Trial Balance

Adjustment Effects

Closing Stock Trading A/c Credit Side and Asset Side of

balance sheet.

Outstanding Added with concerned item in trading or profita

expenses loss a/c and liabilities side of BALANCE SHEET
as a current liability.

Prepaid expenses Less from concerned item in trading or profit and

loss a/c and assets side of BALANCE SHEET as
a current assets.

Accrued Income Add with concerned income in P&L and Assets

(income earned but side of BALANCE SHEET as a current assets
not received)

Income received in Less from concerned item in P&L and Liabilities

advance Side of BALANCE SHEET as current liabilities.
 Depreciation Dr. side of P&L A/C & Deduct from concerned
assets.

Bad Debts Dr. side of P&L A/C & Deduct from debtors in
Balance sheet.

Provision for Dr. side of P&L A/C & Deduct from debtors
doubtful debts

Provision for Dr. side of P&L A/C & Deduct from debtors
discount on debtors

7. Final accounts are drawn

From the derived trial balance an accountant can prepare final accounts for
the year for which information is available.

Format of final accounts differ from organisation to organisation. Let us see

format of final accounts for some trading commercial organisations.

An organisation can adopt either horizontal or vertical format, but vertical

format is compulsory for joint stock companies.

6.4 FINAL ACCOUNTS

Trading Account
Trading account is prepared to know the gross profit or gross loss arising or
incurred as a result of the trading activities of a business. In other worlds, in
case of a manufacturing concern a Manufacturing A/c is prepared to show the
result of manufacturing activity,trading account indicates buying and selling of
goods. 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. On the contrary, if the purchases, and direct expenses exceed
the sales, the difference is called gross loss. The purpose of preparing the
Trading Account is to find out the Gross Profit or Gross Loss of a concern
during a particular period. The following equations are highly useful for
determination of Gross Need and Importance of Trading Account
Preparation of Trading Account serves the following objectives:
1. It provides information about Gross Profit and Gross Loss: It
informs of the gross profit or gross loss as a result of buying
and selling the goods during the year. The percentage of
can be
calculated and compared with those of the previous years.
Thus, it provides data for comparison, analysis and planning
for a future period.
 2. It provides information about the direct expenses: All the
expenses incurred on the purchase and manufacturing of
goods are recorded in the trading account in a summarised
form. Percentage of such expenses on sales can be calculated
and compared with those of the previous years. In this way it
enables the management to control and rationalise the
expenses.

3. Comparison of closing stock with those of the previous years:

closing stock has to be valued and recorded in a trading
account. This stock can be compared with the closing stock
of the previous years and if the stock shows an increasing
trend, the reasons may be inquired into.

4. It provides safety against possible losses: If the ratio of gross

profit has decreased in comparison to the preceding year, the
businessman can take effective measures to safeguard
himself against future losses. For example, he may increase
the sale price of his gods or may proceed to analyse and
control the direct expenses.

6.4 (a) Preparation of Trading Account

Trading Account is a Nominal Account and all expenses which relate to either
purchase or manufacturing of goods are written on the Debit side of the
Trading Account.

Item written on the Debit side of the Trading Account:

1. Opening Stock: The stock of goods remaining unsold at the

end of the previous year is termed as the opening stock of the current
year. In other words, the closing stock of the last year becomes the
opening stock of the current year. Opening Stock will include the
following:
I. Opening Stock of Raw Material.
II. Opening Stock of Semi-finished goods, and
III Opening Stock of Finished goods.

2. Purchases and Purchases Returns: Goods which have been

bought for resale are termed as Purchases and goods which are
returned to suppliers are termed as purchase returns or returns
outwards. Purchase Account will be given on the debit side of thetrial
balance and Purchase Return Account on the credit side of the trial
balance. Purchase returns will be shown as a deduction from
Purchases on the debit side of the trading account. Purchases include
cash as well as credit purchases.

3. Direct Expenses: All expenses incurred in purchasing the goods,

bringing them to the godown and manufacture of goods are called
direct expenses. Direct expenses include the following:
 I. Wages: Wages are paid to workers who are directly engaged in
the loading, unloading and production of goods and as such are
debited to the trading account. It should be noted that:

(i) If the item and is given in the question it will

is given it will be shown on the profit & loss account.

(ii) If wages are paid for bringing a new machine or for its installation
it will be added to the cost of the machine and hence will not be shown
in the trading account.

II. Carriage or Carriage Inwards or Freight: These expenses should

be debited to trading account because these are generally paid for
bringing the goods to the factory or place of business. However, if any
carriage or freight is paid on bringing an asset, the amount should be
added to the asset account and must not be debited to trading
account.

III. Manufacturing Expenses: All expenses incurred in the

manufacture of goods are shown on the debit side of the trading
account such as Coal, Gas, Fuel, Water, Power, Factory Rent,
Factory Lighting etc.

Items written on the Credit Side of the Trading Account:

1. Sales and Sales Returns: Both Cash and Credit sales will be
included in sales. The sales account will be a credit balance whereas,
the sales return account or returns inwards account willbe a debit
balance. Sales return will be deducted out of Sales onthe credit
side of the trading account.

2. Closing Stock: The goods remaining unsold at the end of the

year is known as Closing Stock. It is valued at cost price or market
price whichever is less. It includes the closing stock of raw material,
Closing Stock of semi-finished goods and Closing Stock of finished
goods.
Normally, the Closing Stock is given outside the Trail Balance. This is so
because its valuation is made after the accounts have been closed. It is
incorporated in the books by means of the following entry:
Closing Stock
A/c Dr.
To Trading A/c
(Closing Stock transferred to Trading A/c)

When the above entry is passed, the Closing Stock Accountis opened. On
the one hand, it will be posted to the credit side ofthe trading account and
on the other hand, will be shown on the
Assets side of the Balance Sheet, in order to complete the double entry.
Sometimes, the Closing Stock is given inside the Trail Balance. This mean
that the entry to incorporate the closing stockin the books has already been
passed. It would imply that the Closing Stock must have been deducted out
of Purchases Account. Hence, in such a case, Closing Stock will not be shown
in the Trading Account but will appear on the Assets side of the Balance Sheet
only.

6.4 (b) Profit And Loss Account

Trading account only discloses the gross profit earned as a result of buying
and selling of goods. However, a businessman has to incur a number of
expenses which are not taken to trading account. Hence, a businessman is
more interested in knowing the net profit earned or net loss incurred during
the year. As such, a Profit & Loss Account is prepared which contains all the
items of losses and gains pertaining to the accounting period. According to
gains and
losses are collected, in order to ascertain the excessgains over the losses or
vice-

Need and Importance of Profit & Loss A/c

1. To determine the Net Profit or Net Loss: A Trading Account
only discloses the Gross Profit earned as a result of trading activities,
whereas the Profit & Loss Account discloses the net profit (or net loss)
available to the proprietor and credited to his capital account.

2.
current year can be compared with that of the previous years. It
enables the businessman to know whether the business is being
conducted efficiently or no.

3. Control on Expenses: Profit & Loss Account helps in

comparing various expenses with the expenses of the previous year.
Also the percentage of each individual expenses to net profit is
calculated and compared with the similar ratio of previous years. Such
comparison will be helpful in taking concrete steps for controlling the
unnecessary expenses.

4. Helpful in the preparation of Balance Sheet: A Balance Sheet

can only be prepared after ascertaining the Net Profit through the
preparation of Profit and Loss Account.

Preparation of Profit and Loss Account

A Profit and Loss Account is started with the amount of gross profit or gross
loss brought down from the Trading Account. As such, all those expenses and
losses which have not been debited to the Trading Account are now debited
to Profit &
Loss Account. These expenses include administrative expenses, selling
expenses, distribution expenses etc. These are called
Profit and Loss Account is a Nominal Account and as such, all the expenses
and losses are shown on its debit side and all the incomes and gains are
shown on its credit side.

Items written on the Debit side of Profit & Loss Account

1. Gross Loss: If trading account discloses Gross Loss, it is shown
on the debit side first of all.
2. Office and Administrative Expenses: Such as salary of office
employees, office rent, lighting, postage, printing, legal charges,
audit fee etc.
3. Selling and Distribution Expenses: Such as advertisement
charges, commission, carriage outwards, bad-debts, packing
charges etc.
4. Miscellaneous Expenses: Such as interest on loan, interest on
capital, repair charges, depreciation, charity etc.

Items written on the Credit side of Profit & Loss Account

1. Gross Profit: the starting point of the Cr. side of Profit and Loss
Account is the gross profit brought down from the Trading
Account.

2. Other Incomes and Gains: All items of incomes and gains are
shown on the credit side of the Profit & Loss Account, such as
income from investments, rent received, discount received,
commission earned, interest received, dividend received etc.

If the credit side of the profit and loss account exceeds thatof debit side, the
difference is termed as net profit. On the other hand, the excess of the debit
side over the credit side is termed as net loss. Net profit is added to the capital
whereas net loss is deducted from the capital.
6.5 HORIZONTAL OR FORMAT OF TRADING &P&L A/C
E.g. Prepare Trading Account for the year ended 30st March, 2013from the
following balances.
Rs Rs.
Stock(1st April, 2012) 10,000 Purchases 1,00,000
Wages 5,000 Carriage Inwards 1,000
Sales 1,70,000 Returns Inward 5,000
Returns Outward 8,000 Sales Tax paid 20,000
Freight 500 Octroi duty 2,500

Closing stock as on 30st March, 2013 was valued at Rs. 20,000Also,

pass the Closing Entries.

Soluion: TRADING ACCOUNT

Dr. for the year ended 30st March, 2013 Cr.
Particulars Rs Particulars Rs
To opening stock 10,000 By Sales
To Purchases 1,70,000 1,60,000
1,00,000 90,000 Less : Sales tax
Less: Returns Outward 5,000 10000 20,000
10,000 1,000

To Wages 500 By Closing Stock

To Carriage Inwards 2,500
To freight 71,000
To Octroi Duty
To Profit and loss A/c 1,80,000 1,80,000
(Gross profit)

VERTICAL FORMAT OF REVENUE STATEMENT TRADING &

P&L A/C
HORIZONTAL OR FORMAT OF BALANCE SHEET
6.6 VERTICAL FORMAT OF BALANCE SHEET
FINAL ACCOUNTS AS PER REVISED SCHEDULE VI FORMATBALANCE
SHEET

Balance Sheet as at 31st March, 2011

Figures as Figures as at
at the end of the end of
Note
Particulars current previous
No
reporting reporting
period period

I. EQUITY AND LIABILITIES

(1) Shareholder's Funds

(a) Share Capital
(b) Reserves and Surplus
(c) Money received against share warrants
(2) Share application money pending
allotment

(3) Non-Current Liabilities

(a) Long-term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long term provisions

(4) Current Liabilities

(a) Short-term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short-term provisions
Total
II.Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work-in-progress
(iv) Intangible assets under development
(b) Non-current investments
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other non-current assets

(2) Current assets

(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents
(e) Short-term loans and advances
(f) Other current assets
Total
STATEMENT OF PROFIT AND LOSS

Profit and Loss statement for the year ended 31st March, 2011
Figures as at Figures as
the end of at the endof
Particulars Note No current previous
reporting reporting
period period

I. Revenue from operations

II. Other Income
III. Total Revenue (I +II)
IV. Expenses:
Cost of materials consumed
Purchase of Stock-in-Trade
Changes in inventories of finished goods,
work-in-progress and Stock-in-Trade
Employee benefit expense
Financial costs
Depreciation and amortization expense Other
expenses
Total Expenses

V. Profit before exceptional and

extraordinary items and tax (III - IV)

VI. Exceptional Items

VII. Profit before extraordinary items and

tax (V - VI)

VIII. Extraordinary Items

IX. Profit before tax (VII - VIII)

X. Tax expense:
(1) Current tax
(2) Deferred tax

XI. Profit(Loss) from the perid from

continuing operations (VII-VIII)

XII. Profit/(Loss) from discontinuing

operations

XIII. Tax expense of discounting

operations

XIV. Profit/(Loss) from Discontinuing

operations (XII - XIII)

XV. Profit/(Loss) for the period (XI + XIV)

SUMS FOR PRACTICE

Example : Journalize the following transactions:

2016 Rs.
May. 1 Ajay Started business with cash 50,000
May. 3 Deposited cash into Bank 40,000
May. 5 Sold goods to Ganesh 22,000
May. 9 Goods returned by Ganesh 2,000
May. 11 Goods purchased from Kishore 30,500
May. 15 Goods returned to Kishore 1,500
May. 18 Bought Furniture & Fixture for office 9,000
May. 22 use by cheque 1,000
May. 22 Purchased goods for cash 50
May. 30 Paid carriage 500
Paid interest on loan

Journal

Solution:

Date Particulars L.F. Dr.(Rs.) Cr. (Rs.)

2012 Cash A/c
May. 1 To Capital A/c 50,000
(Being the business started with cash) 50,000

May 3 Bank A/c 40,000

To Cash A/c 40,000
(Being the amount deposited into the bank)
May 5 Ganesh
To sales A/c 22,000
(Being the goods sold to Ganesh) 22,000
May 9 Sales Returns A/cTo
Ganesh 2,000
(Being the goods returned by Ganesh) 2,000
May 11
Purchases A/c
To Kishore 30,500
(Being the goods purchased from Kishore) 30,500

Kishore
May 15 1,500
To purchases Return a/c
1,500
(Being the goods returned to Kishore)
May 18 Furniture & Fixture a/c 9,000
To bank a/c 9,000
(Being the Furniture & Fixture bought and
paid by cheque)
 Purchases A/c To
May 22 cash a/c 1,000
(Being the goods purchased against cash) 1,000
Carriage a/c TO
May 26 50
cash a/c
(Being the carriage paid) 50

May 30 Interest on Loan A/c 500

To Cash A/c
500
(Being the payment of interest on Loan)

Total 1,57,550 1,57,550