legal structures of a business

8/8/2019 Legal Structures of a Business

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Final Accounts/AccountingFinalMeaningOccurring at or forming an end or termination

Conclusive in a process or progressionSynonymslast, concluding, finishing, closing, ending

Final Accounts/AccountingIn its simplest sense, final accounts/accounting should be understood as the accounting activity that iscarried on generally towards the end of a period called accounting period.

Basic Purpose of Accounting

The basic purpose of accounting is derivation of information. The double entry system of accountingenables an organisation to derive the information that it needs in relation to accounting elementscalled accountheads or ledger accounts. This double entry system of accounting, enables thecollection of all the information relating to an element (account) at a single place.

For exampleTo know the value of Furniture with the organisation a "Furniture a/c" is maintained.......To know the amount of expenditure incurred on account of salaries a "Salaries a/c" is maintained....

The organisation's informational need defines theelements in the accounting system of the organisation.The more the information needed by the organisationthe more the elements (accounting heads) that are to bemaintained by the organisations'.

Journal (Recording) Ledger (Posting) : RegularTasks

The place where the information relating to an element is collected/available is a Ledger. Eachaccounting element has a specific identity in the ledger and is known as a ledger account.

Every Ledger posting should have a journal support i.e.the information flows into the ledger from/through a

journal. There is no ledger without a journal.Recording the accounting transactions into the journaland posting them into the ledger form the core taskscarried on regularly in relation to the accountingprocess. However these are not the only tasks that existin relation to an accounting system/process.
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Tasks Involved in the accounting process

Including the tasks of recording the transactions andposting them into the ledger, these are the tasks thatwe generally come across and assume to be the tasksinvolved in accounting.

Creating a Proof of the TransactionWhenever a transaction takes place in an organisation, more so, in the case of transactionsrelevant to accounting, a proof is created in the form of either a voucher or a receipt or aninvoiceor any other document that gives the details relating to the transaction.

Strictly speaking, this task is not a part of the

accounting process. It is only a task which wouldenable the accomplishment of the accounting processor tasks. Actual Accounting Tasks RecordingThe first accounting task is "Preparing the Journal based on the proof of the transaction". This iscalled Recording the transaction.

PostingThe second accounting task is "Preparing the Ledger based on the information in the Journal".This is called Posting the Journal Entry into the Ledger.

Preparing a Trial BalancePreparing a trial balance is one other task that we come across in accounting. A trial balance is astatement of ledger account balancesas at a particular instance. It can be prepared at any

instance as and when needed. It is a statement and not a ledger account.

Purpose!!A Trial Balance is prepared to check the mathematical/arithmetic accuracy ofaccounting. This isthe main and most important purpose of preparation of the Trial Balance and nothing else.

However, since it is anyhow prepared for an importantpurpose, it is used for other purposes whereverpossible. Just because it is being used for otherpurposes (like in the preparation of final accounts), wecannot say that the trial balance is prepared for thoseother purposes. Trial Balance Not a part of the actual Accounting Process!!True, the trial balance enables the organisation to ensure the mathematical/arithmetic accuracyof accounting. However, preparation of a Trial Balance is not a necessity, unlike the Journal andthe Ledger.

The Ledger gives the information that we need and wecannot prepare a ledger without a journal (No JournalNo Ledger). But, we can think of the existence of theaccounting system and process without the trial

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balance.

Additional Information Needed by theOrganisation

Apart from the information relating to the various elements (ledger accounts) that anorganisation collects, there is other information that is needed by the organisation. In general, in

accounting we can identify two important pieces of information that the organisation needs.

The ledger accounts collect information relating toeach element. All the elements (account heads) areclassified into three types. Personal accounts (relating

to persons and organisations), Real accounts (relatingto tangible aspects) and Nominal accounts (relating toincomes/gains and expenses/losses). Profits made by the organisationAs and when an element is effected by a transaction, the ledger account is posted to with theinformation. This keeps on happening continuously. The information thus collected in the form ofledger accounts does not say anything about the profits made by the organisation.

The organisation periodically would be interested inknowing the amount of profit that it has made over theperiod. Involvement of a PeriodWhen it comes to thinking about profits there is a period involved in the thought. We think ofprofits made over a period and not at a particular instance.

For example, We think of Profits madeFrom 1st April to 31st April orDuring April or

During the 6 months ending 30th JuneFor the year from 1st April, 2005 to 31st March 2006.

Position of the OrganisationThe ledger accounts are periodically balanced to obtain the balances in the accounts.

The act of balancing is done at such periods as isneeded by the organisation. For example, where theorganisation needs the information relating to cash

balance daily, therefore Cash a/c is balanced daily. Assets and Liabilities indicate a persons PositionWhat is it that comes to our mind when we think of a persons position? It is the value of his/herproperty and the liabilities he/she has.

Even in accounting, in trying to ascertain the positionof a business entity, this is what we think of. Theposition of a business is indicated by the value of itsassets and liabilities.

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The organisation at times would be interested inknowing its position as at a particular point of time. Position at an instanceWhen it comes to thinking about the position there is an instance involved in the thought. We thinkof the position as at a point of time and not a period.

For example, We think of the positionAs on 24th June orAs at the end of a period i.e. on the last day of the period

How is the Additional Information obtained?


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The organisational accounting system provides information in the form of ledger accountsmaintained in the books of accounts. The additional information that is needed is obtained byderiving it from the information that is existing in these ledger accounts.

Information relating to ProfitsThe ledger accounts relating to the organisation are classified into three types. Personal, Realand Nominal.

Nominal AccountsNominal accounts are related to expenses, losses,incomesand gains.Since ascertaining profits or losses involves dealing with incomes, gains, expenses and losses wecan conclude that all the nominal accounts together would give us the information relating to the

profits or losses made by the organisation.

Trading and Profit and Loss AccountsTo derive the information relating to profits from these nominal accounts a ledger account byname "Trading and Profit & Loss a/c" is prepared.

Almost in all cases, we use two separate ledger accounts "Trading a/c" and"Profit and Loss a/c" to derive information relating to profits with a greaterdetail. [The more the information we need, the more the accounting headswe need to maintain].

Preparation of these ledger accounts requires us to think beyond just transferring theinformation in the nominal accounts into these accounts.

The Position of the organisationThe ledger accounts maintained within an organisational accounting system are classified intothree as Personal, Real and Nominal.

Real AccountsReal accounts are related to tangible aspects. In general we can identify that all asset accounts

are real accounts.

Personal AccountsPersonal accounts are related to persons and organisations. These are persons/organisation

which owe the organisation or to whom the organisation owes. In effect they either formcreditors (liabilities) or debtors (assets).Since all the nominal accounts have been dealt with in deriving the information relating to profitsand we are left with only the real and personal accounts which represent either assets or

liabilities we can conclude that all the real and personalaccountstogether give us theinformation relating to the position of the organisation.

Balance SheetTo derive the information relating to the position of the organisation from these real andpersonal accounts a statement by name "Balance Sheet" is prepared.

However preparing the Balance sheet need us to think a bit beyond just listing out theinformation relating to the personal and real accounts in the statement.

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Debtors (Assets) and Creditors(Liabilities)

AssetsReal accounts and Personal accounts are capable of being called assets. Any element (account) thatis capable of being liquidated (that is capable of being converted to cash by giving it away)

indicates an asset. Machinery, Furniture, Cash, etc are real accounts that can be called assets.

Debtors represent AssetsDebtors represent the persons and organisation who owe to the organisation. They would clear

their dues by paying out either in cash or in some other form. Thus Debtors get liquidated and assuch can be called assets.

LiabilitiesAll elements representing liabilities are Personal accounts. An element that is capable of beingcleared by paying out indicates a liability.

Creditors represent LiabilitiesCreditors represent the persons and organisation to whom the organisation owes. The organisationwould clear its due by paying them either in cash or in some other form. Thus creditors are clearedby paying out and as such can be called liabilities.

When is the information relating to profits & positioncollected/derived


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Information needs vary from organisation to organisation. Even the information relating toprofits and position would also be derived for such periods and on such dates respectivelydepending on the organisations need or this information.

Period for which profits are ascertained

The information relating to profits is something that is needed by the organisation periodically.

For what period do we try to ascertain profits. Do we think of profits made every day or over aweek or over a month or over a six month period or over a year? This is dependent on theinformation needs of the organisation.Though theoretically it is possible to derive this information's for any time period, conventionallyit is derived for a year. That is in most cases, information relating to profits is derived over ayear. We think of profits made over a year.

Day on which position is ascertainedThe information relating to the position may be needed by the organisation at many points oftime. Theoretically this is also capable of being derived at any point of time we need it.

However, conventionally it is derived at a point which indicates the end of the period for whichthe profits are ascertained. Say if we think of profits made for the period from 1st April 2005 to31st March 2006, we think of deriving the position as on 31st March 2006.

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AccountingPeriod

Accounting Period is that period for which the organisation ascertains the profit or loss. If theorganisation is trying to ascertain the profits made over a year, then the accounting period is a

year. If it is trying to ascertain the profits made over a six months period, then the accountingperiod is six-months.There are two aspects relating to an accounting period. The length of the period as well as thebeing/end dates of the period. These can be ascertained from the way the accounting period isstated.For example, where the accounting period of an organisation is stated as

From 1st July to 31st December,This implies that the length of the accounting period is 6 months.One year and starts on 1st January every year.This implies that the accounting period is from 1st January to 31st December and is one year long.

What Accounting Period to Follow?What accounting period an organisation follows is dependent on the informational as well asstatutory needs of the organisation. The most common period followed all over the world is a period

of 1 year which starts from either 1st January or 1st April.

Statutory RequirementsThe need of the organisation to comply with the various laws that it has to adhere to would alsoinfluence the decision relating to the accounting period.Say in India, the IncomeTax Act, needs organisations to calculate and present their businessprofits for the period from 1st April to the following 31st March. Therefore, the organisations wouldfollow the same accounting period so that their accounting would serve their informational needs aswell as enable them to easily present the information that has to be presented to theIncome TaxDepartment.

Ascertaining the how much of Profit/Loss

Profit = Total (Incomes + Gains) Total (Expenses + Losses)Using this relation, a positive profit figure indicates a profit and a negative profit figure indicates aloss.

Math of Ascertainment of Profit/LossNominal accounts are related to incomes/gains and expenses/losses. Thus the information relatingto the aspects that would define the profit or loss made by the organisation is contained in theNominal accounts.

Nominal Accounts with Debit balancesThose ledger accounts which have a debit balance in them represent expenses or lossesThe total (sum) of balances in all the nominal (ledger) accounts with a debit balance indicates thetotal (expense + losses).

Nominal Accounts with Credit balancesThose ledger accounts which have a credit balance in them represent incomes or gains.The total (sum) of balances in all the nominal (ledger) accounts with a credit balance indicates the

total (incomes + gains).If the total of (expense + losses) and (incomes + gains) are set off, we would be able to arrive atthe profit or loss made.

Thus the relation to ascertain the profit or loss can be written as

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Profit = Sum of balances in Nominal accounts with a CreditBalance Sum of balances in Nominal accounts with a Debit Balance .

final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,a

djustments

Preparation of Trading and Profit and Lossaccount (a/c)

The "Trading and Profit & Loss a/c" is a ledger account. Like all ledger accounts, the postings in thisledger account also flow from the journal. "No Journal No Ledger".

Transactions making up the Trading and Profit & Loss a/cThe transactions relating to the journal entries that would go into the "Trading and Profit & Lossa/c" are not ones that are take place in the ordinary course of business. These are transactions thatare specifically meant to create this "Trading and Profit & Loss a/c".Consider the above formula for ascertaining the profit or loss,

Profit = Sum of balances in Nominal accounts with a Credit Balance Sum of balances in Nominal accounts with a Debit Balance .

For Ascertaining the sum of balances in Nominal Accounts with aDebit BalanceThis is done by transferring the balances in the nominal accounts with a debit balance, to anaccount by name "Trading and Profit & Loss a/c".

Transferring a debit balance from oneaccount to a second results in thesecond account being debited and the first account being credited.

Therefore the Journal Entry would be

Journal in the books of M/s __ for the period from ____ to _____

DateV/RNo.

ParticularsL/F

DebitAmount(inRs)

Credit Amount(in Rs)

March 31st Trading and Profit & Loss a/cTo Nominal a/c [with a

debit balance]

Dr

xxxx xxxx

[For the debit balances in thenominal accounts transferred tothe "Trading and Profit & Lossa/c" for the purpose ofascertaining the profits on the

last day of the accountingperiod ]

For Ascertaining the sum of balances in Nominal Accounts with aCredit BalanceThis is done by transferring the balances in the nominal accounts with a credit balanceto anaccount by name "Trading and Profit & Loss a/c".

Transferring a credit balance from one account to a second results in the
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a/c

Since the "Trading and Profit & Loss a/c" is prepared by transferring the ledger account balancesinall the nominal accounts in the books of accounts it is appropriate to consider it to be a nominal

account.

Any Ledger account prepared to ascertain the profits or losses out of a set oftransactions is a nominal account. Thus, "Trading and Profit & Loss a/c" is anominal account.

final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments

When are the entriesrecorded?

Accounting period is the period for which we wish to ascertain the profits or losses. The "Tradingand Profit & Loss a/c" is prepared at the end of the accounting period.Say if the accounting period is a year from 1st April 2005 to 31st March 2006, the journal entry fortransferring the amounts to the "Trading and Profit & Loss a/c" is recorded at the end of theaccounting period i.e. on 31st March 2006.

What happens to the Nominala/c's?

To ascertain the profits, we transfer the balances in the Nominal accounts (with debit balances as

well as credit balances) to the "Trading and Profit & Loss a/c", thus creating that ledger account. Nil BalanceWhen the total balance in a nominal account is transferred to the "Trading and Profit & Loss a/c",its balance becomes Nil.

Dr Rent Paid a/c Cr

Date ParticularsJ/F

Amount(in Rs)

Date ParticularsJ/F

Amount(in Rs)

01/04/05

01/05/05

..

..01/03/06

To Cash a/cTo Cash a/c

....To Cash a/c

8,0008,000

....8,000

sub-total 96,000 sub-total 96,000

31/03/0

6

By Trdg and P/L

a/c 96,000
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Total 96,000 Total 96,000

Closing the Nominal Account at the end of the accounting periodThe act of transferring the balance in a nominal account to the Trading and Profit and Loss Accountand thereby making its balance Nil is identified as Closing the Nominal Account at the end of theaccounting period.

All the nominal accounts are closed at the end of the accounting period bytransfer to the "Trading and Profit and Loss Account.

How do Nominal a/c's appear in every accounting period if theyare closedThe nominal accounts are closed at the end of the accounting period. But we see the same nominalaccounts being used in accounting in all the accounting periods. Say, the "Rent Paid a/c" wouldappear in the accounting books in all the accounting periods.This is for the reason that all the nominal accounts are closed at the end of the accounting periodand are opened afresh at the beginning of the next accounting period for being used in thataccounting period.

Therefore, the "Rent Paid a/c" appearing in the books in a particular accounting period is differentfrom the "Rent Paid a/c" appearing in the same books in any other accounting period.

All the nominal accounts are opened anew at the beginning of the accounting

period.

Illustration Problem

To get an understanding and feel of the process of final accounting, let us go through an example ofan organisations accounting consisting of a few transactions during an accounting period.

Following are the transactions relating to M/s Trinity Foods, over an accounting period from 1stJune 2005 to 30th June 2006.Started business with Capital Rs. 1,00,000Paid into Bank Rs. 10,000

Bought Furniture and paid cash Rs. 25,000Bought goods for cash Rs. 50,000Bought goods from Ram on Credit Rs. 15,000Sold a part of the goods for Rs. 75,000 and paid the proceeds into bank directlySold the remaining goods on credit for Rs. 50,000 to RahimPaid Salaries and Wages Rs. 5,000

Paid rent by cheque Rs. 8,000

Illustration Solution [Journal andLedger]
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Journal Entries Hide/Show

Journal in the books of M/s Trinity Foods for the period from 1st June 2005to 30th June 2005

DateV/RNo.

ParticularsL/F

DebitAmount(inRs)


1st to 30th Cash a/cTo Capital a/c

Dr

1,00,000

1,00,000

[For the amount brought in bythe proprietor towards his capitalcontribution.]

1st to 30th Bank a/cTo Cash a/c

Dr

10,000

10,000

[For the amount paid into bank.]

1st to 30th Furniture a/cTo Cash a/c

Dr

25,000

25,000

[For the amount paid towardspurchase of Furniture.]

1st to 30th Purchases a/c

To Cash a/c

D

r

50,

000 50,000

[For the amount paid towardspurchase of goods/stock.]

1st to 30th Purchases a/cTo Ram a/c

Dr

15,000

15,000

[For the value of goods boughtfrom Ram on credit.]

1st to 30th Bank a/cTo Sales a/c

Dr

75,00

0

75,000

[For the sales made for cash andthe proceeds paid into bankdirectly.]

1st to 30th Rahim a/cTo Sales a/c

Dr

50,00 50,000
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0[For the value of goods sold oncredit to Rahim.]

1st to 30th Salaries and Wages a/cTo Cash a/c

Dr

5,000 5,000

[For the amount paid in cashtowards salaries and wages.]

1st to 30th Rent Paid a/cTo Bank a/c

Dr

8,000 8,000

[For the amount paid towardsrent by cheque.]

Ledger Accounts Hide/Show

Dr Cash a/c Cr

Date Particulars J/FAmount(in Rs)


1st-30th To Capital a/c 1,00,000 1st-30th"""

30/06/05

By Bank a/cBy Furniture a/cBy Purchasesa/cBy Sal. & Wages

a/c

By Balance c/d

10,00025,00050,0005,000

10,000

Total 1,00,000 Total 1,00,000

30/06/05 To Balance b/d 10,000

Dr Capital a/c Cr



30/06/05 To Bal c/d 1,00,000 01/06/05 By Cash a/c 1,00,000

Total 1,00,000 Total 1,00,000

30/06/05 By Balance b/d 1,00,000

Dr Bank a/c Cr


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1st-30th To Cash a/c

To Sales a/c

10,000

75,000

1st-30th

30/06/05

By Rent Paid a/c

By Bal c/d

8,000

77,000


30/06/05 To Balance b/d 77,000

Dr Furniture a/c Cr



1st-30th To Cashl a/c 25,000 30/06/05 By Bal c/d 25,000


30/06/05 To Balance b/d 25,000

Dr Purchases a/c Cr



1st-30th"

To Cash a/cTo Ram a/c

50,00015,000

30/06/05 By Bal c/d 65,000


30/06/05 To Balance b/d 65,000

Dr Ram a/c Cr



30/06/05 To Bal c/d 15,000 1st-30th By Purchasesa/c

15,000


30/06/05 By Balance b/d 15,000


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Dr Sales a/c Cr



30/06/05 To Bal c/d

1,25,000 1st-30th"

By Bank a/cBy Rahim a/c

75,00050,000

Total 1,25,000 Total 1,25,000

30/06/05 By Balance b/d 1,25,000

Dr Rahim a/c Cr

Date Particulars J/FAmount

(in Rs)


(in Rs)

1st-30th To Sales a/c 50,000 30/06/05 By Bal c/d 50,000


30/06/05 To Balance b/d 50,000

Dr Salaries and Wages a/c Cr


(in Rs)


(in Rs)

1st-30th To Cash a/c 5,000 30/06/05 By Bal c/d 5,000


30/06/05 To Balance b/d 5,000

Dr Rent Paid a/c Cr


(in Rs)


(in Rs)

1st-30th To Bank a/c 8,000 30/06/05 By Bal c/d 8,000


30/06/05 To Balance b/d 8,000


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Illustration Solution [TrialBalance]

The trial balance is nothing but a statement of ledger account balances as on a particular instance.

Trial Balance of M/s Trinity Foods" as on 30th June 2005

ParticularsL/F

DebitAmount(inRs)


Cash a/cCapital a/cBank a/cFurniture a/cPurchases a/cRam a/cSales a/cRahim a/cSalaries and Wages a/c

Rent Paid a/c

10,000

77,00025,00

065,00

0

50,0005,0008,000

1,00,000

15,0001,25,000

Total 2,40,000

2,40,000

Preparing Trading and Profit and Loss Account :Journal & Ledger


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Consider the above Trial Balance. There are a total of 4 nominal accounts with either debit or creditbalances.Purchases a/c [Debit Balance]Sales a/c [Credit Balance]Salaries and Wages a/c [Debit Balance]

Rent Paid a/c [Debit Balance]To ascertain the profit or loss made by the organisation, the balance in these accounts should betransferred to the "Trading and Profit & Loss a/c". The journal entries for these transfers would be:

Journal Entries Hide/Show


DateV/RNo.

ParticularsL/F

DebitAmount(inRs)


June 30th Trading and Profit & Loss a/cTo Purchases a/c

To Salaries & Wages a/cTo Rent Paid a/c

Dr

78,00

0

65,000

5,0008,000

[For the transfer of debitbalances in nominal accounts at

the end of the accounting periodto the Trading and Profit & Lossa/c for the purpose ofascertaining profits.]

June 30th Sales a/cTo Trading and Profit &

Loss a/c

Dr

1,25,0

00

1,25,000

[For the transfer ofcredit

balancesin nominal accounts atthe end of the accounting periodto the Tradingand Profit & Lossa/c for the purpose ofascertaining profits.]

Trading and Profit & Loss a/cThe "Trading and Profit & Loss a/c" would be

Dr Trading and Profit & Loss a/c Cr

Date ParticularsJ/F

Amount(in Rs)

Date ParticularsJ/F

Amount(in Rs)

30/06/05"

"

To Purchasesa/cTo Salaries &

Wages a/cTo Rent Paid a/c

65,0005,0008,000

30/06/05

By Sales a/c 1,25,000
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sub-total 78,000 sub-total 1,25,000

30/06/05

To Bal (Profit) 47,000

Total 1,25,000 Total 1,25,000

Since the credit side total is greater, the account has a credit balance. Since a credit balance in anominal account indicates a gain, we can say that there is a profit.

Other Ledger Accounts Affected Hide/Show

Dr Purchases a/c Cr



1st-30th"

To Cash a/cTo Ram a/c

50,00015,000

30/06/05 By Bal c/d 65,000


30/06/05 To Balance b/d 65,000 30/06/05 By Trdg. P/L a/c 65,000


Dr Sales a/c Cr



30/06/05 To Bal c/d

1,25,000 1st-30th"

By Bank a/cBy Rahim a/c

75,00050,000

Total 1,25,000 Total 1,25,000

To Trdg, &P/L a/c

1,25,000 30/06/05By Balanceb/d

1,25,000

Total 1,25,000 Total 1,25,000

Dr Salaries and Wages a/c Cr

Date Particulars J/F Amount Date Particulars J/F Amount


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(in Rs) (in Rs)

1st-30th To Cash a/c 5,000 30/06/05 By Bal c/d 5,000




Dr Rent Paid a/c Cr



1st-30th To Bank a/c 8,000 30/06/05 By Bal c/d 8,000




The balance in these nominal accounts becomes zero after the balances are transferred to the

"Trading and Profit & Loss a/c". Thus, nominal accounts are closed at the end of the accountingperiod by transfer to the "Trading and Profit & Loss a/c".

In the subsequent accounting period, if the same nominal account heads are used, they are openedanew. Thus these accounts pertaining to the current accounting period are independent of thenominal accounts with the same name in any other accounting period.


Trial BalanceRedrawn/Remade

The trial balance is a list of ledger account balances at an instance when it is drawn. If we considerthe instance after having prepared the "Trading and Profit & Loss a/c", we do not find a balance inany nominal account. All the nominal accounts are closed by transfer to the "Trading and Profit &Loss a/c", thereby leaving a nil balance in all of them.

The "Trading and Profit & Loss a/c" is also a nominal account and has a credit balance if there is aprofit and a debit balance if there is a loss. If we make a trial balance after having prepared the"Trading and Profit & Loss a/c" we will find only real and personal accounts in it apart from thenominal account "Trading and Profit & Loss a/c".


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Trial Balance of M/s Trinity Foods" as on 30th June 2005[After closing Nominal accounts]

ParticularsL/F

De

bitAmount(inRs)


Cash a/cCapital a/c

Bank a/cFurniture a/cRam a/cRahim a/cTrading and Profit & Loss a/c

10,00

0

77,00025,

000

50,000

1,00,000

15,000

47,000

Total 1,62,000

1,62,000

What indicates the Position of an Organisation

What is it that comes to our mind when we think of a person's position? It is the value of his/herproperty and the liabilities he/she has.Even in accounting, in trying to ascertain the position of a business entity, this is what we think of.The position of an organisation is indicated by the value of the assets and liabilities held by theorganisation.

Information relating to the Assets andLiabilities

The information relating to the assets and liabilities of an organisation is available in the Real andPersonal Accounts.

Real Accounts
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Real accounts are related to tangible aspects. In general we can identify that all asset accounts arereal accounts.

Personal AccountsPersonal accounts are related to persons and organisations. These are persons/organisation whichowe the organisation or to whom the organisation owes. In effect they either form creditors(liabilities) or debtors (assets).Since all the nominal accounts have been dealt with in deriving the information relating to profitsand we are left with only the real and personal accounts which represent either assets or liabilitieswe can conclude that all the real and personal accounts together give us the information relating to

the position of the organisation.

Where to obtain the information relating to assets and liabilitiesThe value of the assets and liabilities of an organisation is revealed by the balances in the real andpersonal accounts.Therefore, if we need the information relating to the assets and liabilities, we just need to collectthe ledger account balances relating to real and personal accounts in the books of accounts.

Utility of Trial BalanceThe Trial balance is a statement that gives the ledger account balances as at a particular point oftime. Therefore, we can find the balances in those accounts which are capable of being identified asassets and liabilities from the trial balance.Thus, if there is a Trial Balance, it would provide the information relating to the assets and liabilitiesas on the date of the trial balance ready hand.


When does the organisation need the informationrelating to its position?

The organisation may need this information at many points of time during the course of the conduct

of the business.Theoretically, the information may be derived as and when needed by collecting the ledger accountbalances relating to the real and personal accounts, but is conventionally derived at a point whichindicates the end of the accounting period (i.e. the period for which the profits are ascertained).Say if the organisation ascertains the profits made for the period from 1st April 2005 to 31st March2006, it would ascertain the position as on 31st March 2006.The ending day for an accounting period would be the beginning day for the subsequent accountingperiod and as such the information relating to the position of the organisation as on the last day ofa particular accounting period would be the information relating to its position as on the first day ofthe subsequent accounting period. Thus we can say that the information relating to position isderived in relation to the opening and closing days of the accounting periods.

Ascertainment of the Position vs Ascertainment ofProfits

Practically, in deriving the information relating to the correct position of the organisation, there area number of aspects to be taken care of. It is not as simple as collecting the ledgeraccount balancesof the real and personal accounts as and when we intend to ascertain the position.For example, the information relating to profits is also necessary to arrive at the position of anorganisation. We know that profits increase capital and loss decreases capital. Capital is a liability.Therefore, the balance in capital account cannot be used to reflect the correct position of thebusiness unless the profits or losses (up to that point of time) are adjusted in the capital account.

And for this the profits till that point of time are to be ascertained.This should explain the reason why the ascertainment of the position generally goes along with theascertainment of the profits of the business.
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Balance Sheet Statement for Presenting theinformation relating to Position

The information relating to the position of an organisation is presented in the form of a statementtitled "Balance Sheet".

Format of the Balance SheetThe "Balance Sheet" is a statement and is made in a "T" format. It has two sides named the"Assets" side and the "Liabilities" side put side by side. The Liabilities side is placed to the left andthe assets side to the right.

Balance Sheet of M/s Trinity Foods as on 30th June 2005

LiabilitiesAmount

Assets

Amount

TotalTotal

Preparation of the Balance SheetIn its simplest form this statement is nothing but a statement of ledger account balances remainingafter ascertainment of the profits of the organisation, arranged in a such a way that all the ledgeraccounts with a debit balance on the assets side and all the ledger accounts with a credit balance onthe liabilities side.

final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,a

djustments

Illustration Preparation of BalanceSheet

Consider the Trial Balance after having ascertained the profits (from the illustration relating toascertainment of profits)

Trial Balance of M/s Trinity Foods" as on 30th June 2005(after closing Nominal accounts)

Particulars L/F

DebitAmount(inRs

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)

CashCapitalBank

FurnitureRamRahimTrading and Profit & Loss

10,000

77,00025,000

50,

000

1,00,000

15,000

47,000

Total 1,62,0

00

1,62,000

NoteAfter getting accustomed to accounting we avoid using the word a/c in the Ledger accounts, TrialBalance, Balance Sheet and other places where we do not find it essential, just to make the

statements and the ledger accounts look more appealing.

Preparation of the Balance SheetThe Balance sheet is obtained by arranging the figures in the trial balance (ledger accounts leftafter having ascertained the profits) in an order. One simple rule of arrangement is "The accountswith debit balances on the assets side and the accounts with credit balances on the liabilities side".[As you move forward you will notice that we violate this rule at times to derive additionalinformation.]The Balance Sheet drawn from the above Trial Balance would be:

Balance Sheet of M/s Trinity Foods as on 30th June 2005

LiabilitiesAmount

Assets

Amount

CapitalRamTrading& Profit/Loss

1,00,00015,000

47,0000

CashBankFurnitureRahim

10,00

077,000

25,000050,
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000

1,62,000

1,

62,00

0

Be conscious of the fact that the Balance Sheet is just a statement and not a ledger account.We are not transferring the balances in the real and personal accounts into the balance sheet. Weare only showing them here.

Combined Trading and Profit and Loss Account (a/c)

The "Trading and Profit & Loss a/c" is prepared by transferring the balances in all the nominalaccounts to it. This amounts to setting off all thedebit balances and the credit balances to obtainthe profit/loss made. Thus the "Trading and Profit & Loss a/c" gives us the information relating tothe profits available after setting off all expenses/losses with all incomes/gains.

Information obtained from the Trading and Profit and Loss a/cThe "Trading and Profit & Loss a/c" that is prepared to ascertain the profits or losses made by theorganisation gives us the information relating to the overall profit or loss made by the organisation.

Illustrative ExplanationThe following is the information relating to the Nominalaccounts in an organisation for fouraccounting periods (calendar year being its accounting period)

Account Head 2002 2003 2004 2005

PurchasesSalariesRentInterestSales

2,00,00015,00012,00080,000

3,00,000

2,40,00018,00018,00096,0003,60,000

3,25,00028,00024,0001,35,0004,87,500

4,00,00032,00030,0001,65,0006,00,000

If we are making a single "Trading and Profit & Loss a/c" the profits/losses made by theorganisation would be:

Account Head 2002 2003 2004 2005

Incomes:Sales

TotalExpenses:

PurchasesSalariesRentInterestTotal

Profit/Loss:Income Expenditure

3,00,000

3,00,000

2,00,00015,00012,00080,0003,07,000

7,000

3,60,000

3,60,000

2,40,00018,00018,00096,0003,72,000

12,000

4,87,500

4,87,500

3,25,00028,00024,0001,35,0005,12,000

24,500

6,00,000

6,00,000

4,00,00032,00030,0001,65,0006,27,000

27,000
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The profits ascertained through this method indicate a growing loss over the years. If, theorganisation should take a decision to whether to continue with the business or not, it has to opt formoving out of the business.

Combined Trading and Profit & Loss a/cThe same information pertaining to a particular year presented in the Trading and Profit and Lossaccount would be

Dr Trading and Profit & Loss a/c (for the year 2003) Cr

Date ParticularsJ/F

Amount(in Rs)

Date ParticularsJ/F

Amount(in Rs)

31/12/03""

To PurchasesTo SalariesTo RentTo Interest

2,40,00018,00018,00096,000

31/12/03

By Sales a/c

By Bal (Loss)

3,60,000

12,000

Total 3,72,000 Total 3,72,000


Limitations of the Combined Account Remedy

The combined Trading and Profit and Loss Account gives an overall comprehensive view of theprofits or losses.

Profits influenced by Events not related to OperationsThe expenses/losses that are to be borne by the organisation may not be directly related to its

operations.For example, where the organisation has incurred a loss on account one of its vehicles gettingdamaged because of an accident, it has to absorb this loss as it is related to the organisation. This

loss is also considered in ascertaining the overall profit or loss made by the organisation.But, this loss is not directly related to the business operations of the organisation. This loss is noton account of conducting the business in the normal course, but an abnormal one.

Information used in Decision MakingProfits/Losses are figures based on which a number of business decisions are taken.Since, the overall profit/loss is a figure that is influenced by a number of factors which may not bedirectly related to the business operations, any decisions made based on that figure may bedetrimental to the organisation.

Remedy : Segregating Trading and Profit & Loss accountsTo arrive at a profit/loss figure that would take into consideration only the basic businessoperations, the nominal accounts that are considered in the process of preparation of the "Tradingand Profit &Loss a/c" are grouped into two.

The first set of accounts are related to a ledger account by name "Trading a/c" and the remainingaccounts are related to another ledger account by name "Profit and Loss a/c".

The basic purpose of accounting is derivation of information and the more theinformation we need, the more the accounting heads we need to maintain.


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Breaking the Combined Trading and Profit & Lossaccount into two Accounts

The same information relating to profits is broken down into two and derived at two different

stages. At the first stage, the profit from the core operations relating to the business is derived andin the next stage the overall profits are derived.

Segregating the InformationThe information in the above statement giving the overall profit, segregated into two

Account Head 2002 2003 2004 2005

Direct Incomes:SalesTotal

Direct Expenses:Purchases

Total

Core Profit:

Direct Income DirectExp.

Indirect Expenses:Salaries

RentInterestTotal

Overall Profit:Core Profit Indirect

Expenses.

3,00,0003,00,000

2,00,0002,00,000

1,00,000

18,00012,000

80,0001,07,000

7,000

3,60,0003,60,000

2,40,0002,40,000

1,20,000

18,00018,000

96,0001,32,000

12,000

4,87,5004,87,500

3,25,0003,25,000

1,62,500

28,00024,000

1,35,0001,87,000

24,500

6,00,0006,00,000

4,00,0004,00,000

2,00,000

32,00030,000

1,65,0002,27,000

27,000

If we look at the remade statement, we will be able to identify that the organisation is conducting abusiness which is generating reasonably good amount of profits (50% oncost or around 33% onsales). The turnover has been increasing, the core profit has been increasing, but the organisationis ultimately making an overall loss.The segregation of information also indicates that the business is good enough to be conducted, but

the indirect expenses are a reason for the loss being made by the organisation. This should makethe organisation think as to the real reason for the loss being made and take corrective steps oractions if possible.The organisation would be able to arrive at such conclusions only if the information is presented a

manner so as to reveal the basic/core profit and the overall profit figures separately.


Trading and Profit & LossAccounts
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Almost in all cases, there are two ledger accounts used in the exercise of ascertaining the profitsmade by the organisation, (1) "Trading a/c" and (2) "Profit & Loss a/c". The information containedin the combined "Trading and Profit & Loss a/c" is spread over the two accounts.

Journal Entries Preparation of "Trading a/c", "P/L a/c" Hide/ShowThe journal entries relating to the preparation of separate "Trading a/c" and "Profit and Loss a/c"

would thus be as follows:

Journal in the books of M/s ___ for the period from ____ to ____

DateV/RNo.

ParticularsL/F

DebitAmount(inRs)


31st Dec Trading a/cTo Direct Expenses a/c

Dr

xxxx xxxx

[For the transfer of debit balancesin the direct expenses accounts tothe Trading a/c.]

31st Dec Direct Incomes a/cTo Trading a/c

Dr

xxxx xxxx

[For the transfer of creditbalances in the direct incomesaccounts to the Trading a/c.]

31st Dec Trading a/cTo Profit and Loss a/c

Dr

xxxx xxxx

[For the transfer of Gross Profit tothe Profit and Loss a/c.]

31st Dec Profit and Loss a/cTo Trading a/c

Dr

xxxx xxxx

[For the transfer of Gross Loss tothe Profit and Loss a/c.]

31st Dec Profit and Loss a/cTo Indirect

Expenses/Losses a/c

Dr

xxxx xxxx

[For the transfer of debit balancesin the indirect expenses accountsand accounts indicative of lossesto the Profit and Loss a/c.]

31st Dec Indirect Incomes/Gains a/cTo Profit and Loss a/c

Dr

xxxx xxxx
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[For the transfer ofcreditbalances in the indirect incomesaccounts and accounts indicativeof gains to the Profit and Lossa/c.]

The two ledger accounts would therefore be

Dr Trading a/c [For the year 2003] Cr

ParticularsAmount(in Rs)


To PurchasesTo Gross Profit

2,40,0001,20,000


3,60,000 3,60,000

Dr Profit & Loss a/c [For the year 2003] Cr



To SalariesTo RentTo Interest

18,00018,00096,000

By Gross ProfitBy Net Loss

1,20,00012,000

1,32,000 1,32,00

The Trading and Profit and Loss accounts are generally shown together to indicate the flow of

information from one to another.Dr Trading and Profit and Loss a/c [For the year 2003] Cr



To Purchases

To Gross Profit

2,40,000

1,20,000


3,60,000 3,60,000

To Salaries

To RentTo Interest

18,000

18,00096,000

By Gross Profit

By Net Loss

1,20,000

12,000

1,32,000 1,32,00

NoteThough the heading used here seems to indicate that it is a single account, it is in effect twodifferent accounts.
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Trading Account : Gross Profit Profit & LossAccount : Net Profit

Trading a/c : Gross ProfitThe profit that is indicated as the Core/Basic Profit is what is called Gross Profit and thatinformation is provided by the "Trading a/c".

The "Trading a/c" is prepared to ascertain the Core (Gross) Profit relating to the business. It isdebited with the Direct Expenses and Credited with Direct Incomes, i.e. the balances of all thenominal accounts representing Direct expenses and Direct Incomes are transferred to the Tradinga/c.

Gross ProfitThe profit/loss revealed by the "Trading a/c" is called "Gross" Profit/Loss.The "Gross" Profit/Loss is transferred from the "Trading a/c" to the "Profit and Loss a/c" to enablethe ascertainment of the overall profit/loss.

Profit and Loss a/c : Net ProfitThe profit that is indicated as the overall profit is what is called Net Profit and that information isprovided by the "Profit and Loss a/c".

The "Profit and Loss a/c" is prepared to ascertain the Overall (Net) Profit relating to the business.This account is created by transferring the Gross Profit/Loss from the "Trading a/c". It is alsodebited with the Indirect Expenses and losses and Credited with Indirect Incomes i.e. the balancesof all the nominal accounts representing Indirect expenses, losses and Indirect Incomes aretransferred to the "Profit and Loss a/c".

Net ProfitThe profit/loss revealed by the "Profit and Loss a/c" is called "Net" Profit/Loss.The "Net" Profit/Loss is transferredto the "Capital a/c" or the "Profit and Loss Appropriation a/c",thereby closing the "Profit and Loss a/c".

Nature of Trading Account & Profit and LossAccount

Nominal AccountsThe "Trading a/c" and "Profit and Loss a/c" are ledger accounts derived by breaking up theinformation in the "Trading and Profit & Loss a/c" i.e. these accounts together replace the "Tradingand Profit & Loss a/c". Since the "Trading and Profit & Loss a/c" is a nominal account, these twoaccounts are also nominal accounts.

Any ledger account made to ascertain the profits or lossesmade out of a set of transactions is a nominal account.

Balances in Trading a/c, Profit and Loss a/c

All the nominal accounts are closed at the end of the accounting period bytransfer to either the Trading a/c or the Profit and Loss a/c as the case maybe.
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Balance in Trading a/cThe "Trading a/c" is a nominal account. It is closed at the end of the accounting period bytransferring its balance (Gross profit/loss) to the "Profit and Loss a/c".Thus the trading account can be placed on par with any other nominal account.

Balance in Profit and Loss a/cThe Profit and Loss a/c is a nominal account. It is closed at the end of the accounting period bytransferring its balance to either the Capital a/c or the Profit and Loss Appropriation a/c (orRetained Earnings a/c).The "Trading a/c" and "Profit and Loss a/c" relating to a particular accounting period areindependent of similar accounts relating to any other accounting period.

Transfer of Profit and Loss a/c balance : ToCapital a/c

Influence of Profits on Capital

Profits (including losses which can be understood as negative profits) are the returns for the riskthat Capital takes in business. Profits increase capital and losses decrease capital.

Transfer to Capital a/cThe net profit belongs to the ownership of the business which is represented by the Capital account.Therefore, the net profits or losses are ultimately transferred to the Capital account.The Profit and Loss a/c is closed by transferring the balance to either the "Capital a/c".

Transfer of Profit and Loss a/c balance : To Profit andLoss Appropriation a/c

At the time of starting the business, the owner invests certain amount as his capital contribution forthe business either in the form of cash or any other assets.As time goes by, the organisation would be making profits or losses over the various accountingperiods that it passes through.When profits or losses are transferred to the Capital account, the balance in that account increaseswhen there are profits and decreases when there are losses. Thus, the capital account balance is afigure that gets altered by the amounts of profits and losses made over the years.

Distinct InformationIf the organisation intends to have the information relating to the contribution made by the ownerstowards capital as well as the addition/shortage of capital that has accumulated in the business onaccount of the profits/losses made by over the years (through its operations) separately, it wouldtransfer the profits or losses to a separate account by name "Profit and Loss appropriation a/c" or"Retained Earnings a/c" instead of to the "Capital a/c".

The basic purpose of accounting is derivation of information and the more the

information we need, the more the accounting heads we need to maintain.

Transferring Profits Illustration : Trading a/c, Profitand Loss a/c
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Consider the following ledger account balancesrelating to an accounting period

Trial Balance of M/s Razmataz Chemicals" as on 31st December2005

ParticularsL/F

DebitAmount(inRs)


OpeningStocka/cPurchases a/c

Salaries a/cRent a/cWages a/cCarriage Inwards a/c

Cash a/cFurniture a/cCapital a/cBank a/cCreditorsa/cSales a/c

Debtors a/cMachinery a/cBank Loan a/c

20,00

01,20,000

25,00018,500

47,00012,400

24,60044,000

75,

000

62,90

0

1,76,000

1,84,000

37,3003,32,000

72,100

Total 6,25,400

6,25,400
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DrTrading a/c[of M/s Razmataz Chemicals for the period ending31st December 2005]

Cr

Particulars Amount(in Rs) Particulars Amount(in Rs)

To Opening StockTo PurchasesTo Wages a/cTo Carriage Inwardsa/cTo Gross Profit

20,0001,20,00047,00012,4001,32,600


3,32,000 3,32,000

Dr

Profit & Loss a/c

[of M/s Razmataz Chemicals for the period ending31st December 2005]

Cr



To SalariesTo RentTo Net Profit

25,00018,50089,100

By Gross Profit 1,32,600

1,32,600 1,32,600

Transfer of Net Profit : ToCapital a/c

The P/L a/c shows a credit balance when there are profits.Transferring a credit balance from one account to a second would result in the second accountbeing credited and the first account being debited.

JournalThe journal entry for transfer of the net profit from P/L a/c to the Capital a/c would therefore be

Journal in the books of M/s Razmataz Chemicals for the period from __ to

31st December 2005

DateV/RNo.

ParticularsL/F

DebitAmount(inRs)


1st to 30th Profit and Loss a/c D 89,


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To Capital a/c r

100

89,100

[For the transfer of the net profit

to the capital account.]

LedgerDr Capital a/c Cr

Date ParticularsJ/F

Amount(in Rs)

Date ParticularsJ/F

Amount(in Rs)

30/06/05

To Bal c/d 2,73,100 __-31st31/12/05

By bal b/dBy Net Profit

1,84,00089,100

Total 2,73,100 Total 2,73,100

01/01/06

By Balance b/d 2,73,100

Trial Balance and Balance Sheet Hide/Show

Trial BalanceThe "Trial Balance" redrawn after closing the "Profit and Loss a/c"


ParticularsL/F

Debit

Amount(inRs)


Cash a/cFurniture a/cCapital a/cBank a/cCreditors a/cDebtors a/c

Machinery a/cBank Loan a/c

24,60044,000

75,000

62,

9001,7

2,73,100

37,300

72,100


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6,000

Total 3,82,5

00

3,82,500

Balance Sheet

Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005

LiabilitiesAmount

Assets

Amount

CapitalCreditorsBank Loan

2,73,10037,30072,100

CashBankFurnitureDebtorsMachinery

24,60075,00044,00

062,

900

1,76,000

3,82,500

3,82,50

0

Transfer of Net Profit : To Profit and LossAppropriation a/c


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The P/L a/c shows a credit balance when there are profits.Transferring a credit balance from one account to a second would result in the second accountbeing credited and the first account being debited.

JournalThe journal entry for transfer of the net profit from P/L a/c to the "Profit and Loss Appropriation

a/c" would be


DateV/RNo.

ParticularsL/F

DebitAmount(inRs)


1st to 30th Profit and Loss a/c

To Profit and LossAppropriation a/c

D

r

47,

000

47,000

[For the transfer of the net profitto the profit and loss

appropriation account.]

Ledger

Dr Profit and Loss Appropriation a/c Cr

Date ParticularsJ/F

Amount(in Rs)

Date ParticularsJ/F

Amount(in Rs)

30/06/0

5

To Bal c/d 47,000 30/06/0

5

By Net Profit 47,000


30/06/05

By Balance b/d 47,000


Trial BalanceThe "Trial Balance" redrawn after closing the "Profit and Loss a/c" in this case would be


ParticularsL/F

DebitAmount



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(inRs)

Cash a/cFurniture a/cCapital a/cBank a/c

Creditors a/cDebtors a/cMachinery a/cBank Loan a/cProfit and Loss Appropriation a/c

24,60044,

000

75,000

62,9001,76,0

00

1,84,000

37,300

72,10089,100

Total 3,82,500

3,82,500

Balance Sheet


Liabilities

Amou

nt Assets

Am

ount

CapitalP & L AppropriationCreditorsBank Loan

1,84,00089,10037,30072,100


24,60075,0004

4,0

0062,90

01,


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76,000

3,82,500

3,82,500

Alternative


Liabilities

Amou

nt

Amo

unt Assets

Amo

unt

Amount

Capital

(Add:) P & LAppropriationCreditorsBank Loan

1,84,00089,100

2,73,10037,30072,100


24,60075,00044,00062,9001,76,000

3,82,500

3,82,500

The basic purpose of accounting is derivation of information. Where the organisation feels that inaddition to having the information relating to the Capital a/c and the accumulated profits separately,it also needs to know the total amount of capital available with it (including accumulations), the twoaccounts are clubbed and shown in the Balance Sheet.Since here both the accounts lie on the same side of the balance sheet, the two amounts are addedup.

Transferring Net Loss Trading a/c, Profit andLoss a/c

Consider the following ledger account balances relating to an organisations accounting


Particulars L/F

DebitA



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mount(inRs

)

Opening Stock a/cPurchases a/cSalaries a/cPostage & Stationary a/cWages a/cCarriage Outwards a/cRent & Insurance a/c

Cash a/cFurniture a/cCapital a/cBank a/cCreditors a/cSales a/c

Debtors a/cLand and Buildings a/cDebenture Loan a/c

50,0002,35,00048,

0008,50015,00

024,40018,25086,00024,000

61,

000

58,

6001,45,000

2,50,000

58,2502,63,400

2,02,100

Total 7,73,750

7,73,750

DrTrading a/c[of M/s Razmataz Chemicals for the period ending31st December 2005]

Cr




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To Opening Stock

To PurchasesTo Wages a/cTo Gross Profit

50,000

2,35,00015,000

By Sales

By Gross Loss

2,63,400

36,600

3,00,000

3,00,000

DrProfit & Loss a/c[of M/s Razmataz Chemicals for the period ending31st December 2005]

Cr



To Gross Loss

To SalariesTo Postage and

StationeryTo Carriage OutwardsTo Rent and Insurance

36,600

48,0008,500

24,40018,250

By Net Loss 1,35,750

1,35,750 1,35,750

Transfer of Net Loss : ToCapital a/c

The P/L a/c shows a debit balance when there are losses.Transferring a debit balance from one account to a second would result in the second account beingdebited and the first account being credited.

JournalThe journal entry for transfer of the net loss from P/L a/c to the Capital a/c would be

Journal in the books of M/s _____ for the period ending 32st December 2005

DateV/RNo.

ParticularsL/F

DebitAmount(inRs)


1st to 30th Capital a/cTo Profit and Loss a/c Dr

1,35,750

1,35,750

[For the transfer of the net lossto the capital account.]

Ledger

Dr Capital a/c Cr


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Date ParticularsJ/F

Amount(in Rs)

Date ParticularsJ/F

Amount(in Rs)

31/12/0531/12/05

To Net LossTo Bal c/d

1,35,7501,14,250

31/12/05

By Balance b/d 2,50,000

Total 2,50,000 Total 2,50,000

01/07/0

5By Balance b/d 1,14,250




ParticularsL/F

DebitAmount(inRs)


Cash a/cFurniture a/cCapital a/c

Bank a/cCreditors a/cDebtors a/cLand and Buildings a/cDebenture Loan a/c

86,000

24,000

61,00

0

58,6001,4

5,000

1,14,250

58,250

2,02,100

Total 3,74,600

3,74,600

Balance Sheet


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LiabilitiesAmou

ntAssets

Am

ount

CapitalCreditorsDebenture Loan

1,14,25058,2502,02,

100

CashBankFurnitureDebtorsLand and

Buildings

86,000

61,0002

4,

00058,6001,45,00

0

3,74,

600

3,74,

600

Transfer of Net Loss : To Profit and LossAppropriation a/c


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The P/L a/c shows a debit balance when there are losses.Transferring a debit balance from one account to a second would result in the second account beingdebited and the first account being credited.

JournalThe journal entry for transfer of the net loss from P/L a/c to Profit and Loss Appropriation a/c

would be

Journal in the books of M/s _____ for the period ending 32st December 2005

DateV/RNo.

ParticularsL/F

DebitAmount(inRs)


1st to 30th Profit and Loss Appropriationa/c

To Profit and Loss a/c

Dr

1,35,7

50

1,35,750

[For the transfer of the net lossto the profit and lossappropriation account.]

Ledger

Dr Profit and Loss Appropriation a/c Cr

Date ParticularsJ/F

Amount(in Rs)

Date ParticularsJ/F

Amount(in Rs)

31/12/05

To Net Loss 1,35,750 31/12/05

By Balance c/d 1,35,750

Total 1,35,750 Total 1,35,750

30/06/05

To Balance b/d 1,35,750




ParticularsL/F

DebitAmount(in



46/222

Rs)

Cash a/c

Furniture a/cCapital a/cBank a/cCreditors a/c

Debtors a/cLand and Buildings a/cDebenture Loan a/cProfit and Loss Appropriation a/c

86,

00024,00

0

61,000

58,6001,45,000

1,35,750

2,50,000

58,250

2,02,100

Total 5,10,3

50

5,10,350

Balance Sheet


LiabilitiesAmount

AssetsAmount

CapitalCreditorsDebenture Loan

2,50,00058,2502,02,100

CashBankFurnitureDebtorsLand andBuildingsP & LAppropriation

86,00061,0002

4,00058,

60


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If we post the Journal entry for transferringThe profit from the "Profit & Loss a/c"To Capital a/cThe posting onThe debit side of Profit and Loss a/c should read "To Capital a/c"

The credit side of Capital a/c should read "By Profit and Loss a/c"To Profit and Loss Appropriation a/cThe posting onThe debit side of Profit and Loss a/c should read "To Profit and Loss Appropriation a/c"The credit side of Profit and Loss Appropriation a/c should read "By Profit and Loss a/c"The loss from the "Profit & Loss a/c"

To Capital a/cThe posting onThe credit side of Profit and Loss a/c should read "By Capital a/c"The debit side of Capital a/c should read "To Profit and Loss a/c"To Profit and Loss Appropriation a/cThe posting onThe credit side of Profit and Loss a/c should read "By Profit and Loss Appropriation a/c"The debit side of Profit and Loss Appropriation a/c should read "To Profit and Loss a/c"

Postings only indicate transfer of balancesThese postings only give us an idea that there is a transfer from the "Profit and Loss a/c" to the"Capital a/c" or "Profit & Loss Appropriation a/c". They do not indicate the reason (idea of why theposting is being made) for the transfer and the direction of transfer.Consider the journal entry for transfer of net profit from the profit and loss account to the capitalaccount

Journal in the books of M/s Razmataz Chemicals for the period from __ to31st December 2005

DateV/RNo.

ParticularsL/F

DebitAmount(inRs)


1st to 30th Profit and Loss a/cTo Capital a/c

Dr

89,10

0

89,100

This can be interpreted asTransfer ofCredit balanceFrom Profit and Loss a/c To Capital a/cTransferring a credit balance from one account to a second would result in the second accountbeing credited and the first account being debited.Transfer of Debit balance From Capital a/c To Profit and Loss a/cTransferring a debit balance from one account to a second would result in the second account beingdebited and the first account being credited.

Deriving Additional Information

The basic purpose of accounting is derivation of information. The more theinformation we need, the more the accounting heads we need to maintain.

Therefore, to give us the additional information relating to the reason and direction of transfer, wecreate and use additional ledger accounts by name "Net Profit a/c" and "Net Loss a/c".

To/By Net ProfitThe Net Profit from the Profit and Loss a/c is transferred to the Net Profit a/c and from there to theCapital a/c or the Profit and Loss Appropriation a/c.By using this additional account we can ensure that the postings would read To Net Profit in the

Profit and Loss account and By Net Profit in the Capital or Appropriation accounts.
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Journal/Ledger Hide/Show

Journal in the books of M/s Razmataz Chemicals for the period from ___ to31st December 2005

DateV/RNo.

ParticularsL/F

DebitAmount(inRs)


1st to 30th Profit and Loss a/cTo Net Profit a/c

Dr

47,000

47,000

[For the transfer of the net profitto the Net Profit account.]

1st to 30th Net Profit a/cTo Profit and Loss

Appropriation a/c(Or) Capital a/c

Dr

89,10

0

89,100

[For the transfer of the net profitfrom the Net Profit account tothe capital account or the profitand loss appropriation account.]

Dr Net Profit a/c Cr



31/12/05 To Capital a/c

(Or)To P/L Appropr.a/c

89,100 31/12/05 By Profit & Loss

a/c

89,100


The Profit and Loss a/c would straight away reveal the information that there is Net Profit and hasbeen transferred. The Capital a/c or the Profit and Loss Appropriation a/c would reveal theinformation that Net Profit has been received by transfer.

To/By Net LossThe Net Loss from the Profit and Loss a/c is transferred to the Net Loss a/c and from there to theCapital a/c or the Profit and Loss Appropriation a/c.By using this additional account we can ensure that the postings would read By Net Loss in theProfit and Loss a/c and To Net Loss in the Capital or Profit and Loss Appropriation accounts.

Journal/Ledger Hide/Show


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Journal in the books of M/s Razmataz Chemicals for the period from ___ to31st December 2005

Date V/RNo. Particulars L/F

DebitAmou

nt(inRs)


1st

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