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Ryan BarnesContact | Author Bio

Budgeting has negative connotations, but it can do wonders for your overall financial picture and it takes very little effort to create and maintain a budget. Think of a budget as simply a tool for organizing cash flows. You are, in essence, a CEO on a smaller scale who is taking steps to ensure your company's (or family's) cash flow is monitored each month. In this article, we'll cover five of the most commonly asked questions with regards to budgeting, and show you how it really is possible to save money, pay off debt and still enjoy life. 1. How much should I set aside for investments? When deciding how much you should put aside to save or invest, there are many factors to consider, including your age, disposable income and liquidity needs.

Your age will help determine not only your asset allocation (younger investors should have higher equity allocations than older ones) but also how much money should be put toward future goals like buying a home or retirement. For example, because younger individuals have lower wages, investors in their 20s or 30s can generally afford to put away smaller amounts than an investor in their 50s with little retirement assets. (For age-specific information, see Retirement Savings Tips For 18To 24-Year-Olds, Tips For 25- To 34-Year-Olds, Tips For 35- To 44-Year-Olds, Tips For 45- To 54-Year-Olds, Tips For 55To 64-Year-Olds and Tips For 65-Year-Olds And Over.)

Disposable income is independent of all your costs that need to be paid out in order to survive. You can spend it on toys or stash it away in savings. The amount of disposable income you have will determine how much fun you can have now, and how much fun you can plan for later in life. (Keep reading about this in Increase Your Disposable Income.)

Liquidity means how fast you can convert your assets to cash. Your level of liquidity will generally determine what kind of interest rates you will receive or how fast you will be able to access your own money. If you were to place your money in accounts that will tax you for taking money out, or will only let you take money out after a large length of time, then you would have a very illiquid financial stance. The amount of personal liquidity that you maintain is up to you, and should be decided before you begin to invest.

Some good ways to begin saving for your future include employer-sponsored retirement accounts (e.g. 401(k)s) that allow you to use pre-tax dollars to fund your account. Many employers even offer to match up to a certain percentage of your annual income. If possible, you should always look to pay into these accounts the maximum that is matched by the company. The employer match is basically free money, and the ability to fund with pre-tax income earns you a free return even before considering any investment returns. Once an employer-sponsored plan has been maximized, any extra money that you can afford to put toward investments should go into fully funding an individual retirement account (IRA) for the current year. Retirement accounts for you or a spouse provide tax-free appreciation of your invested assets, a crucial component of long-term growth found in these key retirement funds. (To learn more about saving for retirement, see Invest On A Shoestring Budget, Retirement Planning Basics, and Weave Your Own Retirement Safety Net.) While there is no magic dollar amount that defines how much should be saved or invested, 10% of your net income is a desirable target (but starting at 5% is still admirable). It is essential that any money set aside for investing should be free and clear of any monthly or

annual expenses. It should also only be considered if you have a "cushion account" of emergency funds that can be accessed quickly, such as in a savings account or Treasury bill. (To find out more about these emergency funds, check out Build Yourself An Emergency Fund and Are You Living Too Close To The Edge?) 2. How much should I allocate to debts like credit cards or car loans? Some of our debt, such as car financing, comes with specific repayment schedules, but rolling debt instruments like credit cards can generally be paid off according to one's personal ability to pay. The ruling maxim here is this - don't allocate money to taxable investment accounts if you have existing credit card balances. Most credit cards charge between 5% and 30% interest annually, which sometimes outpaces what the average investor can expect to earn from stocks, bonds or funds. It's much better to pay the credit cards off first and then begin budgeting some money for taxable investment accounts. Doing so will allow you to save on escalating interest expenses. (To read more about credit cards, see Understanding Credit Card Interest, Expert Tips For Cutting Credit Card Debt and Take Control Of Your Credit Cards.) Some fixed-period loans will allow for overpayment, while others will not. You should evaluate the interest rate being paid to determine if paying a fixed debt off early is the right path. If you have existing credit card debt, chances are that this is costing you more in interest than an auto loan for example. In this case, you should still target paying off the credit card debt first. Some creditors will give you different payment options if you simply contact them by mail or by phone. You may find that you can have your monthly payment increased (as long as you can afford to!) or otherwise adjusted to fit your budget. You'll also want to make sure there are no prepayment penalties for retiring a specific debt early, as these could negate any savings you get on interest costs. If you have too many cards, or don't know which to pay off first, consider getting a consolidation loan to pay off all your other cards and debts and make one manageable payment each month. If you go this consolidation route remember, it is a must that you stop using your credit cards or stop yourself from attaining new loans until after you've paid off this consolidation loan. (For more on consolidation, see Different Needs, Different Loans and Digging Out Of Personal Debt.) 3. Should I overpay on my mortgage (if allowed)? Your mortgage is often the cheapest source of debt you have (assuming that it is a conventional mortgage and not subprime), but it could still make sense to overpay on your monthly payments. First and foremost, all of the higher interest debt that can be settled should be done so first, before considering this option. It is also advisable to have an emergency fund of two to three month's net income before deciding to overpay. Basically, any money that is considered for overpayment should be money that would otherwise go into a savings or an investment account, meaning that all other budget categories are fully funded for the time being. While it is possible to earn more on an investment than would be saved in mortgage interest, it does expose you to the increased risk of market fluctuations. Many people would rather pay a couple of hundred extra dollars per month towards their (typically) largest source of debt than subject a small investment account to possible losses in the markets. The more favorable your interest rate is on your mortgage, the more the scales tip in the favor of keeping the extra money to invest instead. On the other hand, mortgage payments are generally tax-deductible; depending on your overall tax picture the extra deductions could save you more money year to year, making it worthwhile to overpay. You should consult an accountant or Certified Financial Planner (CFP) if your tax picture has a lot of moving parts year to year. (To read more about paying off your mortgage early, see Be Mortgage-Free Faster, Understanding the Mortgage Payment Structure or our Subprime Mortgage Meltdown feature.) 4. How should I maintain and update my budget? In the first few months, it's essential to review account statements regularly and see exactly how much was spent on various expenses. These aggregate figures should be compared to the amount set up in your budget and any adjustments should be made to reflect the reality of your life. This is the best and easiest way for your budget to remain relevant in your financial life. Inevitably you will come across "one time" expenses that you may wish to add up over the course of a year rather than per month. For example, let's say your refrigerator goes on the fritz and it costs $400 to make repairs. While this is a legitimate household maintenance expense, it wouldn't be accurate to add $400 to a section of your budget for household expenses or upkeep. It would be better to add up all of these sporadic expenses to arrive at an annual figure for "home maintenance" or similar category in your budget. Remember, however, if you find that you've budgeted too harshly and have left little room for fun, you will not stick to this budget. If you find that you are covering bills, decreasing debt, filling your emergency fund and savings accounts, but just can't stand missing out on the latest movies or parties with friends, then you should re-evaluate your budget to reflect your new goals. If you don't keep your budget current to your needs, wants and future goals, you simply will abandon it for present pleasures. It's not rocket science, and you can have both. 5. Why do I always seem to have expenses or wants that don't fit into my budget?

One reason why some people stop using a budget is because there are many expenses that don't seem to have a place in their budget. This is partly to be expected, and is easy to fix. Any good budget will have a "miscellaneous" category for all disparate expenses that come up in a given month or year. A target budget for miscellaneous expenses can be made by simply looking over purchases made over a few months time and calculating a simple average. What came up that had to be fixed, bought or borrowed? Would you be able to include those surprises in any of your other categories? If not, then add these miscellaneous costs to your budget to cover for the rest of the year. The point is to decide which costs are fixed (not negotiable and must be paid each month) versus variable (which fluctuate depending on the month or your mood). Your rent, for example is fixed. Your gym membership, however fixed the rate is, can still be cut if you choose to quit, and is therefore variable. Once you figure out if the cost is fixed or variable, you've won half the battle to budgeting.Read more: http://www.investopedia.com/articles/pf/07/budget-qs.asp#ixzz1ehPG4IR2

1. Organisations need for additional information 2. Making up Final Accounts :: To derive the additional information needed 3. Preparing Trading and Profit & Loss a/c :: To derive information relating to profits 4. Preparing Trading and Profit & Loss a/c :: Illustration. 5. Preparing the Balance Sheet To Derive Information relating to Position :: Illustration 6. Need for a Seperate "Trading a/c" and "Profit & Loss a/c" 7. Transfer of Net Profit to "Capital a/c" or "Profit & Loss Appropriation a/c" 8. Using Trial Balance in the Preparation of Final Accounts 9. What are Adjustments? Dealing with them in preparing Final Accounts 10. Trading Account Ascertaining Cost of Goods Sold. 11. Trading Account Closing Stocks, Opening Stocks Valuation. 12. Trading Account Recording Closing Stock and Opening Stock. 13. Trading Account Purchase Returns and Sales Returns. 14. Bases/Systems of Accounting Cash, Mercantile, Hybrid. 15. Converting the Basis/System of Accounting Cash to Mercantile ... 16. Finding Profits of a period under a Basis given profits under the other17. 18. More Topics Under Construction. 19.

Adjustments

1. 2. 3. 4. 5. 6. 7. 8.

Expenditure Outstanding and Prepaid Incomes Receivable and Prereceived Drawings of Goods/Stock Used up by owners Personally Goods/Stock used in the building up or construction of an asset Goods/Stock used for Advertisement Purposes Valuation of Normal/Abnormal Losses Abnormal Loss :: Accounting Treatment & Adjustments Normal Loss :: Accounting Treatment & Adjustments

9. 10. More Topics Under Construction. 11.

Final Accounting :: Need for Additional Information

Final Accounts/Accounting

Final

Meaning1. 2. Occurring at or forming an end or termination Conclusive in a process or progression last, concluding, finishing, closing, ending

Synonymso

Final Accounts/AccountingIn its simplest sense, final accounts/accounting should be understood as the accounting activity that is carried 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 accounting enables an organisation to derive the information that it needs in relation to accounting elements called account heads or ledger accounts. This double entry system of accounting, enables the collection of all the information relating to an element (account) at a single place. For example

To 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 the elements in the accounting system of the organisation. The more the information needed by the organisation the more the elements (accounting heads) that are to be maintained by the organisations'.

Journal (Recording) Ledger (Posting) : Regular Tasks

The place where the information relating to an element is collected/available is a Ledger. Each accounting 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 journal and posting them into the ledger form the core tasks carried on regularly in relation to the accounting process. However these are not the only tasks that exist in relation to an accounting system/process.

Tasks Involved in the accounting process

Including the tasks of recording the transactions and posting them into the ledger, these are the tasks that we generally come across and assume to be the tasks involved in accounting. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments

Creating a Proof of the Transaction

Whenever a transaction takes place in an organisation, more so, in the case of transactions relevant to accounting, a proof is created in the form of either a voucher or a receipt or an invoice or 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 would enable the accomplishment of the accounting process or tasks.

Actual Accounting Tasks RecordingThe first accounting task is "Preparing the Journal based on the proof of the transaction". This is called 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 a statement of ledger account balances as 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 of accounting. This is the main and most important purpose of preparation of the Trial Balance and nothing else. However, since it is anyhow prepared for an important purpose, it is used for other purposes wherever possible. Just because it is being used for other purposes (like in the preparation of final accounts), we cannot say that the trial balance is prepared for those other purposes.

Trial Balance Not a part of the actual Accounting Process!!True, the trial balance enables the organisation to ensure the mathematical/arithmetic accuracy of accounting. However, preparation of a Trial Balance is not a necessity, unlike the Journal and the Ledger. The Ledger gives the information that we need and we cannot prepare a ledger without a journal (No Journal No Ledger). But, we can think of the existence of the accounting system and process without the trial balance.

Additional Information Needed by the Organisation

Apart from the information relating to the various elements (ledger accounts) that an organisation 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. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments The ledger accounts collect information relating to each element. All the elements (account heads) are classified into three types. Personal accounts (relating to persons and organisations), Real accounts (relating to tangible aspects) and Nominal accounts (relating to incomes/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 the information. This

keeps on happening continuously. The information thus collected in the form of ledger accounts does not say anything about the profits made by the organisation. The organisation periodically would be interested in knowing the amount of profit that it has made over the period.

Involvement of a PeriodWhen it comes to thinking about profits there is a period involved in the thought. We think of profits made over a period and not at a particular instance. For example, We think of Profits made

From 1st April to 31st April or During April or During the 6 months ending 30th June For 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 is needed by the organisation. For example, where the organisation 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/her property 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 a business is indicated by the value of its assets and liabilities. The organisation at times would be interested in knowing 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 think of the position as at a point of time and not a period. For example, We think of the position

As on 24th June or As at the end of a period i.e. on the last day of the period

How is the Additional Information obtained?

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

Information relating to Profits

The ledger accounts relating to the organisation are classified into three types. Personal, Real and Nominal.

Nominal AccountsNominal accounts are related to expenses, losses, incomes and gains. Since ascertaining profits or losses involves dealing with incomes, gains, expenses and losses we can conclude that all the nominal accounts together would give us the information relating to the profits or losses made by the organisation. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments

Trading and Profit and Loss AccountsTo derive the information relating to profits from these nominal accounts a ledger account by name "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 greater detail. [The more the information we need, the more the accounting heads we need to maintain].

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

The Position of the organisationThe ledger accounts maintained within an organisational accounting system are classified into three 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 form creditors (liabilities) or debtors (assets). Since all the nominal accounts have been dealt with in deriving the information relating to profits and we are left with only the real and personal accounts which represent either assets or liabilities we can conclude that all the real and personal accounts together give us the information relating to the position of the organisation.

Balance SheetTo derive the information relating to the position of the organisation from these real and personal accounts a statement by name "Balance Sheet" is prepared. However preparing the Balance sheet need us to think a bit beyond just listing out the information relating to the personal and real accounts in the statement.

Debtors (Assets) and Creditors (Liabilities)

AssetsReal accounts and Personal accounts are capable of being called assets. Any element (account) that is 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 AssetsDDebtors 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 as such can be called assets.

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

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

When is the information relating to profits & position collected/derived

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

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

Period for which profits are ascertainedThe 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 a week or over a month or over a six month period or over a year? This is dependent on the information needs of the organisation. Though theoretically it is possible to derive this information's for any time period, conventionally it is derived for a year. That is in most cases, information relating to profits is derived over a year. 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 of time. 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 which the profits are ascertained. Say if we think of profits made for the period from 1st April 2005 to 31st March 2006, we think of deriving the position as on 31st March 2006.

Accounting Period

Accounting Period is that period for which the organisation ascertains the profit or loss. If the organisation 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 accounting period is six-months.

There are two aspects relating to an accounting period. The length of the period as well as the being/end dates of the period. These can be ascertained from the way the accounting period is stated. 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 as statutory 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 also influence the decision relating to the accounting period. Say in India, the Income Tax Act, needs organisations to calculate and present their business profits for the period from 1st April to the following 31st March. Therefore, the organisations would follow the same accounting period so that their accounting would serve their informational needs as well as enable them to easily present the information that has to be presented to the Income Tax Department.

Preparation of Trading and Profit and Loss account (a/c)

The "Trading and Profit & Loss a/c" is a ledger account. Like all ledger accounts, the postings in this ledger 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 & Loss a/c" are not ones that are take place in the ordinary course of business. These are transactions that are 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 a Debit BalanceThis is done by transferring the balances in the nominal accounts with a debit balance, to an account by name "Trading and Profit & Loss a/c". Transferring a debit balance from one account to a second results in the second account being debited and the first account being credited.

Therefore the Journal Entry would be

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

Date

V/R No.

Particulars

L/F

Debit Amount Credit Amount (in Rs) (in Rs)

March 31st

Trading and Profit & Loss a/c To Nominal a/c [with a debit balance]

Dr

xxxx xxxx

[For the debit balances in the nominal accounts transferred to the "Trading and Profit & Loss a/c" for the purpose of ascertaining the profits on the last day of the accounting period ]

For Ascertaining the sum of balances in Nominal Accounts with a Credit BalanceThis is done by transferring the balances in the nominal accounts with a credit balance to an account by name "Trading and Profit & Loss a/c". Transferring a credit balance from one account to a second results in the second account being credited and the first account being debited.

Therefore the Journal Entry would be

Journal in the books of M/s __ for the period from ____ to _____V/R No. Debit Amount Credit Amount (in Rs) (in Rs)

Date

Particulars

L/F

March 31st

Nominal a/c [with a credit balance] To Trading and Profit & Loss a/c

Dr

xxxx xxxx

[For the credit balances in the nominal accounts transferred on the last day of the accounting period to the "Trading and Profit & Loss a/c" for the purpose of ascertaining the profits.]

Trading and Profit and Loss Account (a/c)Thus the "Trading and Profit & Loss a/c" would appear as follows

Dr

Trading and Profit & Loss a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

31/03/06

To Nominal a/c 1 [Dr]

xxx 31/03/06

By Nominal a/c 1 [Cr]

xxx

31/03/06 31/03/06 31/03/06 31/03/06

To Nominal a/c 2 [Dr] To Nominal a/c 3 [Dr] ... ...sub-total

xxx xxx xx xxx 3,24,000

31/03/06 31/03/06 31/03/06 31/03/06

By Nominal a/c 2 [Cr] ... ...

xxx xxx xxx xxx 5,80,000

sub-total

31/03/06

To Bal (Profit)Total

2,56,000 5,80,000Total

5,80,000

Thus the "Trading and Profit & Loss a/c", is nothing but a consolidated account formed by transferring the balances in the nominal accounts.

Nature of Trading and Profit & Loss a/c

Since the "Trading and Profit & Loss a/c" is prepared by transferring the ledger account balances in all 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 of transactions is a nominal account. Thus, "Trading and Profit & Loss a/c" is a nominal account.

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

When are the entries recorded?

Accounting period is the period for which we wish to ascertain the profits or losses. The "Trading and 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 for transferring the amounts to the "Trading and Profit & Loss a/c" is recorded at the end of the accounting period i.e. on 31st March 2006.

What happens to the Nominal a/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.

DrDate Particulars J/F

Rent Paid a/cAmount Date Particulars J/F Amount

Cr

(in Rs)

(in Rs)

01/04/05 01/05/05 .. .. 01/03/06

To Cash a/c To Cash a/c .. .. To Cash a/csub-total

8,000 8,000 .. .. 8,000 96,000 31/03/06sub-total

96,000 96,000 96,000

By Trdg and P/L a/cTotal

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 Account and thereby making its balance Nil is identified as Closing the Nominal Account at the end of the accounting period. All the nominal accounts are closed at the end of the accounting period by transfer to the "Trading and Profit and Loss Account.

How do Nominal a/c's appear in every accounting period if they are closedThe nominal accounts are closed at the end of the accounting period. But we see the same nominal accounts being used in accounting in all the accounting periods. Say, the "Rent Paid a/c" would appear 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 period and are opened afresh at the beginning of the next accounting period for being used in that accounting period. Therefore, the "Rent Paid a/c" appearing in the books in a particular accounting period is different from 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 of an 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 1st June 2005 to 30th June 2006.

Started business with Capital Rs. 1,00,000 Paid into Bank Rs. 10,000 Bought Furniture and paid cash Rs. 25,000 Bought goods for cash Rs. 50,000

Bought goods from Ram on Credit Rs. 15,000 Sold a part of the goods for Rs. 75,000 and paid the proceeds into bank directly Sold the remaining goods on credit for Rs. 50,000 to Rahim Paid Salaries and Wages Rs. 5,000 Paid rent by cheque Rs. 8,000

Illustration Solution [Journal and Ledger]

Journal Entries

Hide/Show

Journal in the books of M/s Trinity Foods for the period from 1st June 2005 to 30th June 2005V/R No. Debit Amount (in Rs) Credit Amount (in Rs)

Date

Particulars

L/F

1st to 30th

Cash a/c To Capital a/c

Dr

1,00,000 1,00,000

[For the amount brought in by the proprietor towards his capital contribution.] 1st to 30th Bank a/c To Cash a/c [For the amount paid into bank.] 1st to 30th Furniture a/c To Cash a/c [For the amount paid towards purchase of Furniture.] 1st to 30th Purchases a/c To Cash a/c [For the amount paid towards purchase of goods/stock.] 1st to 30th Purchases a/c To Ram a/c Dr 15,000 15,000 Dr 50,000 50,000 Dr 25,000 25,000 Dr 10,000 10,000

[For the value of goods bought from Ram on credit.] 1st to 30th Bank a/c To Sales a/c Dr 75,000 75,000

[For the sales made for cash and the proceeds

paid into bank directly.] 1st to 30th Rahim a/c To Sales a/c [For the value of goods sold on credit to Rahim.] 1st to 30th Salaries and Wages a/c To Cash a/c Dr 5,000 5,000 Dr 50,000 50,000

[For the amount paid in cash towards salaries and wages.] 1st to 30th Rent Paid a/c To Bank a/c [For the amount paid towards rent by cheque.] Dr 8,000 8,000

Ledger Accounts Hide/ShowDr Cash a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th

To Capital a/c

1,00,000 1st-30th " " "

By Bank a/c By Furniture a/c By Purchases a/c 30/06/05 By Sal. & Wages a/c By Balance c/d

10,000 25,000 50,000 5,000 10,000

Total

1,00,000

Total

1,00,000

30/06/05

To Balance b/d

10,000

Dr

Capital a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

30/06/05 To Bal c/dTotal

1,00,000 01/06/05 By Cash a/c 1,00,000Total

1,00,000 1,00,000

30/06/05

By Balance b/d

1,00,000

Dr

Bank a/cAmount (in Rs)

CrAmount (in Rs)

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th

To Cash a/c To Sales a/c

10,000 1st-30th By Rent Paid 75,000 a/c 30/06/05 By Bal c/d 85,000 77,000Total

8,000 77,000

Total

85,000

30/06/05 To Balance b/d

Dr

Furniture a/cAmount (in Rs)

CrAmount (in Rs)

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th

To Cashl a/cTotal

25,000 25,000 25,000

30/06/05 By Bal c/dTotal

25,000 25,000

30/06/05 To Balance b/d

Dr

Purchases a/cAmount (in Rs)

CrAmount (in Rs)

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th "

To Cash a/c To Ram a/cTotal

50,000 30/06/05 By Bal c/d 15,000 65,000 65,000Total

65,000

65,000

30/06/05 To Balance b/d

Dr

Ram a/cAmount (in Rs)

CrAmount (in Rs)

Date

Particulars

J/F

Date

Particulars

J/F

30/06/05 To Bal c/d

15,000

1st-30th

By Purchases a/cTotal

15,000

Total

15,000

15,000 15,000

30/06/05 By Balance b/d

Dr

Sales a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

30/06/05 To Bal c/d

1,25,000 1st-30th " 1,25,000

By Bank a/c By Rahim a/cTotal

75,000 50,000 1,25,000

Total

30/06/05

By Balance b/d

1,25,000

Dr

Rahim a/cAmount (in Rs)

CrAmount (in Rs)

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th

To Sales a/cTotal

50,000 50,000 50,000

30/06/05 By Bal c/dTotal

50,000 50,000

30/06/05 To Balance b/d

Dr

Salaries and Wages a/cAmount (in Rs)

CrAmount (in Rs)

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th

To Cash a/cTotal

5,000 5,000 5,000

30/06/05 By Bal c/dTotal

5,000 5,000

30/06/05 To Balance b/d

Dr

Rent Paid a/cAmount (in Rs)

CrAmount (in Rs)

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th

To Bank a/cTotal

8,000 8,000 8,000

30/06/05 By Bal c/dTotal

8,000 8,000

30/06/05 To Balance b/d

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

Illustration Solution [Trial Balance]

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 Debit Amount (in Rs)10,000 1,00,000 77,000 25,000 65,000 15,000 1,25,000

Particulars

L/F

Credit Amount (in Rs)

Cash a/c Capital a/c Bank a/c Furniture a/c Purchases a/c Ram a/c Sales a/c Rahim a/c Salaries and Wages a/c Rent Paid a/c

50,000 5,000 8,000

Total

2,40,000

2,40,000

Preparing Trading and Profit and Loss Account : Journal & Ledger

Consider the above Trial Balance. There are a total of 4 nominal accounts with either debit or credit balances.

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 be transferred to the "Trading and Profit & Loss a/c". The journal entries for these transfers would be:

Journal Entries

Hide/Show

Journal in the books of M/s Trinity Foods for the period from 1st June 2005 to 30th June 2005V/R No. Debit Amount (in Rs) Credit Amount (in Rs)

Date

Particulars

L/F

June 30th

Trading and Profit & Loss a/c To Purchases a/c To Salaries & Wages a/c To Rent Paid a/c

Dr

78,000 65,000 5,000 8,000

[For the transfer of debit balances in nominal accounts at the end of the accounting period to

the Trading and Profit & Loss a/c for the purpose of ascertaining profits.] June 30th Sales a/c To Trading and Profit & Loss a/c Dr 1,25,000 1,25,000

[For the transfer of credit balances in nominal accounts at the end of the accounting period to the Trading and Profit & Loss a/c for the purpose of ascertaining profits.]

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

Dr

Trading and Profit & Loss a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

30/06/05 " "

To Purchases a/c To Salaries & Wages a/c To Rent Paid a/csub-total

65,000 30/06/05 5,000 8,000 78,000

By Sales a/c

1,25,000

sub-total

1,25,000

30/06/05

To Bal (Profit)Total

47,000 1,25,000Total

1,25,000

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

Other Ledger Accounts AffectedDr

Hide/Show

Purchases a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th "

To Cash a/c To Ram a/cTotal

50,000 30/06/05 15,000 65,000

By Bal c/d

65,000

Total

65,000 65,000 65,000

30/06/05

To Balance b/dTotal

65,000 30/06/05 65,000

By Trdg. P/L a/cTotal

Dr

Sales a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

30/06/05

To Bal c/d

1,25,000 1st-30th " 1,25,000

By Bank a/c By Rahim a/cTotal

75,000 50,000 1,25,000

Total

To Trdg, & P/L a/c

Total

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

1,25,000 1,25,000

Dr

Salaries and Wages a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th

To Cash a/cTotal

5,000 5,000

30/06/05

By Bal c/dTotal

5,000 5,000

30/06/05

To Balance b/dTotal

5,000 30/06/05 5,000

By Trdg. P/L a/cTotal

5,000 5,000

Dr

Rent Paid a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

1st-30th

To Bank a/cTotal

8,000 8,000

30/06/05

By Bal c/dTotal

8,000 8,000

30/06/05

To Balance b/dTotal

8,000 30/06/05 8,000

By Trdg. P/L a/cTotal

8,000 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 accounting period 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 opened anew. Thus these accounts pertaining to the current accounting period are independent of the nominal accounts

with the same name in any other accounting period. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments

Trial Balance Redrawn/Remade

The trial balance is a list of ledger account balances at an instance when it is drawn. If we consider the instance after having prepared the "Trading and Profit & Loss a/c", we do not find a balance in any 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 a profit 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 the nominal account "Trading and Profit & Loss a/c".

Trial Balance of M/s Trinity Foods" as on 30th June 2005 [After closing Nominal accounts] Debit Amount (in Rs)10,000 1,00,000 77,000 25,000 50,000 15,000 47,000

Particulars

L/F

Credit Amount (in Rs)

Cash a/c Capital a/c Bank a/c Furniture a/c Ram a/c Rahim a/c Trading and Profit & Loss a/c

TotalAuthor Credit : The Edifier

1,62,000

1,62,000

... Continued Page 5

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/her property 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 the organisation.

Information relating to the Assets and Liabilities

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

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 form creditors (liabilities) or debtors (assets). Since all the nominal accounts have been dealt with in deriving the information relating to profits and we are left with only the real and personal accounts which represent either assets or liabilities we 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 and personal accounts. Therefore, if we need the information relating to the assets and liabilities, we just need to collect the 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 of time. Therefore, we can find the balances in those accounts which are capable of being identified as assets and liabilities from the trial balance. Thus, if there is a Trial Balance, it would provide the information relating to the assets and liabilities as on the date of the trial balance ready hand. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments

When does the organisation need the information relating 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 account balances relating to the real and personal accounts, but is conventionally derived at a point which indicates 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 March 2006, 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 accounting period and as such the information relating to the position of the organisation as on the last day of a particular accounting period would be the information relating to its position as on the first day of the subsequent accounting period. Thus we can say that the information relating to position is derived in relation to the opening and closing days of the accounting periods.

Ascertainment of the Position vs Ascertainment of Profits

Practically, in deriving the information relating to the correct position of the organisation, there are a number of aspects to be taken care of. It is not as simple as collecting the ledger account balances of 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 an organisation. 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 the business 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 the ascertainment of the profits of the business.

Balance Sheet Statement for Presenting the information relating to Position

The information relating to the position of an organisation is presented in the form of a statement titled "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 and the assets side to the right.

Balance Sheet of M/s Trinity Foods as on 30th June 2005 Liabilities Amount Assets Amount Total Total

Preparation of the Balance SheetIn its simplest form this statement is nothing but a statement of ledger account balances remaining after ascertainment of the profits of the organisation, arranged in a such a way that all the ledger accounts with a debit balance on the assets side and all the ledger accounts with a credit balance on the liabilities side. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments

Illustration Preparation of Balance Sheet

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

Trial Balance of M/s Trinity Foods" as on 30th June 2005 (after closing Nominal accounts) Debit Amount (in Rs)10,000 1,00,000 77,000 25,000 50,000 15,000 47,000

Particulars

L/F

Credit Amount (in Rs)

Cash Capital Bank Furniture Ram Rahim Trading and Profit & Loss

Total

1,62,000

1,62,000

NoteAfter getting accustomed to accounting we avoid using the word a/c in the Ledger accounts, Trial Balance, 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 left after having ascertained the profits) in an order. One simple rule of arrangement is "The accounts with 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 additional information.] The Balance Sheet drawn from the above Trial Balance would be:

Balance Sheet of M/s Trinity Foods as on 30th June 2005 LiabilitiesCapital Ram Trading & Profit/Loss

Amount

Assets

Amount10,000 77,000 25,0000 50,000 1,62,000

1,00,000 Cash 15,000 Bank 47,0000 Furniture Rahim 1,62,000

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. We are 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 nominal accounts to it. This amounts to setting off all the debit balances and the credit balances to obtain the profit/loss made. Thus the "Trading and Profit & Loss a/c" gives us the information relating to the 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 the organisation gives us the information relating to the overall profit or loss made by the organisation.

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

Account HeadPurchases Salaries Rent Interest Sales

20022,00,000 15,000 12,000 80,000 3,00,000

20032,40,000 18,000 18,000 96,000 3,60,000

20043,25,000 28,000 24,000 1,35,000 4,87,500

20054,00,000 32,000 30,000 1,65,000 6,00,000

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

Account Head Incomes:Sales Total

2002

2003

2004

2005

3,00,000 3,00,000 2,00,000 15,000 12,000 80,000 3,07,000 7,000

3,60,000 3,60,000 2,40,000 18,000 18,000 96,000 3,72,000 12,000

4,87,500 4,87,500 3,25,000 28,000 24,000 1,35,000 5,12,000 24,500

6,00,000 6,00,000 4,00,000 32,000 30,000 1,65,000 6,27,000 27,000

Expenses:Purchases Salaries Rent Interest Total

Profit/Loss:Income Expenditure

The profits ascertained through this method indicate a growing loss over the years. If, the organisation should take a decision to whether to continue with the business or not, it has to opt for moving 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 Loss account would be

Dr

Trading and Profit & Loss a/c (for the year 2003)Amount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

31/12/03 " "

To To To To

Purchases Salaries Rent InterestTotal

2,40,000 31/12/03 18,000 18,000 96,000 3,72,000

By Sales a/c By Bal (Loss)

3,60,000 12,000

Total

3,72,000

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

Limitations of the Combined Account Remedy

The combined Trading and Profit and Loss Account gives an overall comprehensive view of the profits 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 getting damaged 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 not on 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 be directly related to the business operations, any decisions made based on that figure may be detrimental to the organisation.

Remedy : Segregating Trading and Profit & Loss accountsTo arrive at a profit/loss figure that would take into consideration only the basic business operations, the nominal accounts that are considered in the process of preparation of the "Trading and 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 remaining accounts 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 the information we need, the more the accounting heads we need to maintain.

Breaking the Combined Trading and Profit & Loss account 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 and in 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 Direct Incomes:Sales Total

2002

2003

2004

2005

3,00,000 3,00,000 2,00,000 2,00,000 1,00,000 18,000 12,000 80,000 1,07,000 7,000

3,60,000 3,60,000 2,40,000 2,40,000 1,20,000 18,000 18,000 96,000 1,32,000 12,000

4,87,500 4,87,500 3,25,000 3,25,000 1,62,500 28,000 24,000 1,35,000 1,87,000 24,500

6,00,000 6,00,000 4,00,000 4,00,000 2,00,000 32,000 30,000 1,65,000 2,27,000 27,000

Direct Expenses:Purchases Total

Core Profit:Direct Income Direct Exp.

Indirect Expenses:Salaries Rent Interest Total

Overall Profit:Core Profit Indirect Expenses.

If we look at the remade statement, we will be able to identify that the organisation is conducting a business which is generating reasonably good amount of profits (50% on cost or around 33% on sales). The turnover has been increasing, the core profit has been increasing, but the organisation is 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 make the organisation think as to the real reason for the loss being made and take corrective steps or actions 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. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adj ustments

Trading and Profit & Loss Accounts

Almost in all cases, there are two ledger accounts used in the exercise of ascertaining the profits made by the organisation, (1) "Trading a/c" and (2) "Profit & Loss a/c". The information contained in 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/Show

The 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 ____V/R No. Debit Amount Credit Amount (in Rs) (in Rs)

Date

Particulars

L/F

31st Dec

Trading a/c

Dr

xxxx

To Direct Expenses a/c [For the transfer of debit balances in the direct expenses accounts to the Trading a/c.] 31st Dec Direct Incomes a/c To Trading a/c [For the transfer of credit balances in the direct incomes accounts to the Trading a/c.] 31st Dec Trading a/c To Profit and Loss a/c Dr Dr

xxxx

xxxx xxxx

xxxx xxxx

[For the transfer of Gross Profit to the Profit and Loss a/c.] 31st Dec Profit and Loss a/c To Trading a/c Dr xxxx xxxx

[For the transfer of Gross Loss to the Profit and Loss a/c.] 31st Dec Profit and Loss a/c To Indirect Expenses/Losses a/c Dr xxxx xxxx

[For the transfer of debit balances in the indirect expenses accounts and accounts indicative of losses to the Profit and Loss a/c.] 31st Dec Indirect Incomes/Gains a/c To Profit and Loss a/c Dr xxxx xxxx

[For the transfer of credit balances in the indirect incomes accounts and accounts indicative of gains to the Profit and Loss a/c.]

The two ledger accounts would therefore be

Dr

Trading a/c [For the year 2003]Amount (in Rs) Amount (in Rs)

Cr

Particulars

Particulars

To Purchases To Gross Profit

2,40,000 By Sales a/c 1,20,000

3,60,000

3,60,000

3,60,000

Dr

Profit & Loss a/c [For the year 2003]Amount (in Rs) Amount (in Rs)

Cr

Particulars

Particulars

To Salaries To Rent To Interest

18,000 By Gross Profit 18,000 By Net Loss 96,000 1,32,000

1,20,000 12,000

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]Amount (in Rs) Amount (in Rs)

Cr

Particulars

Particulars

To Purchases To Gross Profit

2,40,000 By Sales a/c 1,20,000 3,60,000

3,60,000

3,60,000 1,20,000 12,000

To Salaries To Rent To Interest

18,000 By Gross Profit 18,000 By Net Loss 96,000 1,32,000

1,32,00

NoteThough the heading used here seems to indicate that it is a single account, it is in effect two different accounts.

Trading Account : Gross Profit Profit & Loss Account : Net Profit

Trading a/c : Gross ProfitThe profit that is indicated as the Core/Basic Profit is what is called Gross Profit and that information is provided by the "Trading a/c". The "Trading a/c" is prepared to ascertain the Core (Gross) Profit relating to the business. It is debited with the Direct Expenses and Credited with Direct Incomes, i.e. the balances of all the nominal accounts representing Direct expenses and Direct Incomes are transferred to the Trading a/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 enable the

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 is provided 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 also debited with the Indirect Expenses and losses and Credited with Indirect Incomes i.e. the balances of all the nominal accounts representing Indirect expenses, losses and Indirect Incomes are transferred 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 transferred to 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 Loss Account

Nominal AccountsThe "Trading a/c" and "Profit and Loss a/c" are ledger accounts derived by breaking up the information in the "Trading and Profit & Loss a/c" i.e. these accounts together replace the "Trading and Profit & Loss a/c". Since the "Trading and Profit & Loss a/c" is a nominal account, these two accounts are also nominal accounts. Any ledger account made to ascertain the profits or losses made 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 by transfer to either the Trading a/c or the Profit and Loss a/c as the case may be.

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

Transfer of Profit and Loss a/c balance : To Capital a/c

Influence of Profits on CapitalProfits (including losses which can be understood as negative profits) are the returns for the risk that 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 and Loss Appropriation a/c

At the time of starting the business, the owner invests certain amount as his capital contribution for the 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 accounting periods that it passes through. When profits or losses are transferred to the Capital account, the balance in that account increases when there are profits and decreases when there are losses. Thus, the capital account balance is a figure 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 owners towards capital as well as the addition/shortage of capital that has accumulated in the business on account of the profits/losses made by over the years (through its operations) separately, it would transfer 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.

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

Transferring Profits Illustration : Trading a/c, Profit and Loss a/c

Consider the following ledger account balances relating to an accounting period

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs) Credit Amount (in Rs)

Particulars

L/F

Opening Stock a/c Purchases a/c Salaries a/c Rent a/c Wages a/c Carriage Inwards a/c Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Sales a/c Debtors a/c Machinery a/c Bank Loan a/c

20,000 1,20,000 25,000 18,500 47,000 12,400 24,600 44,000 1,84,000 75,000 37,300 3,32,000 62,900 1,76,000 72,100

Total

6,25,400

6,25,400

Dr

Trading a/c [of M/s Razmataz Chemicals for the period ending 31st December 2005]Amount (in Rs) Amount (in Rs)

Cr

Particulars

Particulars

To To To To To

Opening Stock Purchases Wages a/c Carriage Inwards a/c Gross Profit

20,000 By Sales a/c 1,20,000 47,000 12,400 1,32,600 3,32,000

3,32,000

3,32,000

Dr

Profit & Loss a/c [of M/s Razmataz Chemicals for the period ending 31st December 2005]Amount (in Rs) Amount (in Rs)

Cr

Particulars

Particulars

To Salaries To Rent To Net Profit

25,000 By Gross Profit 18,500 89,100 1,32,600

1,32,600

1,32,600

Transfer of Net Profit : To Capital 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 account being 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 2005V/R No. Debit Amount (in Rs) Credit Amount (in Rs)

Date

Particulars

L/F

1st to 30th

Profit and Loss a/c To Capital a/c

Dr

89,100 89,100

[For the transfer of the net profit to the capital account.]

LedgerDr Capital a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

30/06/05

To Bal c/d

2,73,100

__-31st 31/12/05

By bal b/d By Net ProfitTotal

1,84,000 89,100 2,73,100

Total

2,73,100 01/01/06

By Balance b/d

2,73,100

Trial Balance and Balance Sheet Trial Balance

Hide/Show

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

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)24,600 44,000 2,73,100 75,000 37,300 62,900

Particulars

L/F

Credit Amount (in Rs)

Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Machinery a/c

Bank Loan a/c

1,76,000

72,100

Total

3,82,500

3,82,500

Balance SheetBalance Sheet of M/s Razmataz Chemicals" as on 31-12-2005 LiabilitiesCapital Creditors Bank Loan

Amount

Assets

Amount24,600 75,000 44,000 62,900 1,76,000 3,82,500

2,73,100 Cash 37,300 Bank 72,100 Furniture Debtors Machinery 3,82,500

Transfer of Net Profit : To Profit and Loss Appropriation 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 account being 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

Journal in the books of M/s Trinity Foods for the period from 1st June 2005 to 30th June 2005V/R No. Debit Amount (in Rs) Credit Amount (in Rs)

Date

Particulars

L/F

1st to 30th

Profit and Loss a/c To Profit and Loss Appropriation a/c

Dr

47,000 47,000

[For the transfer of the net profit to the profit and loss appropriation account.]

LedgerDr Profit and Loss Appropriation a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

30/06/05

To Bal c/d

47,000

30/06/05

By Net Profit

47,000

Total

47,000 30/06/05

Total

47,000 47,000

By Balance b/d

Trial Balance and Balance Sheet

Hide/Show

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)24,600 44,000 1,84,000 75,000 37,300 62,900 1,76,000 72,100 89,100

Particulars

L/F

Credit Amount (in Rs)

Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Machinery a/c Bank Loan a/c Profit and Loss Appropriation a/c

Total

3,82,500

3,82,500

Balance Sheet of M/s Razmataz Chemicals" as on 31-12-2005 LiabilitiesCapital P & L Appropriation Creditors Bank Loan

Amount1,84,000 89,100 37,300 72,100

AssetsCash Bank Furniture Debtors Machinery

Amount24,600 75,000 44,000 62,900 1,76,000 3,82,500

3,82,500

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

Amount Amount1,84,000 89,100

Assets

Amount Amount24,600 75,000 44,000 62,900 1,76,000 3,82,500

(Add:) P & LAppropriation Creditors Bank Loan

Cash 2,73,100 Bank 37,300 Furniture 72,100 Debtors Machinery 3,82,500

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

Consider the following ledger account balances relating to an organisations accounting

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)50,000 2,35,000 48,000 8,500 15,000 24,400 18,250 86,000 24,000 2,50,000 61,000 58,250 2,63,400 58,600 1,45,000 2,02,100

Particulars

L/F

Credit Amount (in Rs)

Opening Stock a/c Purchases a/c Salaries a/c Postage & Stationary a/c Wages a/c Carriage Outwards a/c Rent & Insurance a/c Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Sales a/c Debtors a/c Land and Buildings a/c Debenture Loan a/c

Total

7,73,750

7,73,750

Dr

Trading a/c [of M/s Razmataz Chemicals for the period ending 31st December 2005]Amount (in Rs) Amount (in Rs)

Cr

Particulars

Particulars

To To To To

Opening Stock Purchases Wages a/c Gross Profit

50,000 By Sales 2,35,000 15,000 By Gross Loss

2,63,400 36,600

3,00,000

3,00,000

Dr

Profit & Loss a/c [of M/s Razmataz Chemicals for the period ending 31st December 2005]Amount (in Rs) Amount (in Rs)

Cr

Particulars

Particulars

To To To To To

Gross Loss Salaries Postage and Stationery Carriage Outwards Rent and Insurance

36,600 By Net Loss 48,000 8,500 24,400 18,250 1,35,750

1,35,750

1,35,750

Transfer of Net Loss : To Capital 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 being debited 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 2005V/R No. Debit Amount (in Rs) Credit Amount (in Rs)

Date

Particulars

L/F

1st to 30th

Capital a/c To Profit and Loss a/c

Dr

1,35,750 1,35,750

[For the transfer of the net loss to the capital account.]

LedgerDr Capital a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

31/12/05 31/12/05

To Net Loss To Bal c/dTotal

1,35,750 31/12/05 1,14,250 2,50,000 01/07/05

By Balance b/d

2,50,000

Total

2,50,000 1,14,250

By Balance b/d

Trial Balance and Balance Sheet

Hide/Show

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

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)86,000 24,000 1,14,250 61,000 58,250 58,600 1,45,000 2,02,100

Particulars

L/F

Credit Amount (in Rs)

Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Land and Buildings a/c Debenture Loan a/c

Total

3,74,600

3,74,600

Balance SheetBalance Sheet of M/s Razmataz Chemicals" as on 31-12-2005 LiabilitiesCapital Creditors Debenture Loan

Amount

Assets

Amount86,000 61,000 24,000 58,600 1,45,000 3,74,600

1,14,250 Cash 58,250 Bank 2,02,100 Furniture Debtors Land and Buildings 3,74,600

Transfer of Net Loss : To Profit and Loss Appropriation 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 being debited 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 2005Date V/R Particulars L/F Debit Amount Credit Amount

No.

(in Rs)

(in Rs)

1st to 30th

Profit and Loss Appropriation a/c To Profit and Loss a/c

Dr

1,35,750 1,35,750

[For the transfer of the net loss to the profit and loss appropriation account.]

LedgerDr Profit and Loss Appropriation a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

31/12/05

To Net LossTotal

1,35,750 1,35,750

31/12/05

By Balance c/dTotal

1,35,750 1,35,750

30/06/05

To Balance b/d

1,35,750

Trial Balance and Balance Sheet Trial Balance

Hide/Show

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

Trial Balance of M/s Razmataz Chemicals" as on 31st December 2005 Debit Amount (in Rs)86,000 24,000 2,50,000 61,000 58,250 58,600 1,45,000 2,02,100 1,35,750

Particulars

L/F

Credit Amount (in Rs)

Cash a/c Furniture a/c Capital a/c Bank a/c Creditors a/c Debtors a/c Land and Buildings a/c Debenture Loan a/c Profit and Loss Appropriation a/c

Total

5,10,350

5,10,350

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

LiabilitiesCapital Creditors Debenture Loan

Amount

Assets

Amount86,000 61,000 24,000 58,600 1,45,000 1,35,750 5,10,350

2,50,000 Cash 58,250 Bank 2,02,100 Furniture Debtors Land and Buildings P & L Appropriation 5,10,350

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

Amount Amount2,50,000 1,35,750 Cash

Assets

Amount Amount86,000 61,000 24,000 58,600 1,45,000 3,74,600

(Less:) P & LAppropr. Creditors Debenture Loan

1,14,250 Bank 2,02,100 Furniture Debtors Land and Buildings 3,74,600

The basic purpose of accounting is derivation of information. Where the organisation feels that in addition 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 two accounts are clubbed and shown in the Balance Sheet. Since here both the accounts lie on different sides of the balance sheet, the two amounts are set off. Showing an item on a particular side and deducting the item from another item on the opposite side of the balance sheet would give the same effect.

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

Using the phrases Net Profit, Net Loss in Ledger Postings

If we post the Journal entry for transferring

The profit from the "Profit & Loss a/c" i. To Capital a/c The posting on a. b. ii. The 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/c The posting on a. b. The 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" i. To Capital a/c The posting on a. b. ii. The 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/c The posting on a. b. The 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 the posting 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 capital account

Journal in the books of M/s Razmataz Chemicals for the period from __ to 31st December 2005V/R No. Debit Amount (in Rs) Credit Amount (in Rs)

Date

Particulars

L/F

1st to 30th

Profit and Loss a/c To Capital a/c

Dr

89,100 89,100

This can be interpreted as

Transfer of Credit balance From Profit and Loss a/c To Capital a/c Transferring a credit balance from one account to a second would result in the second account being credited and the first account being debited.

Transfer of Debit balance From Capital a/c To Profit and Loss a/c Transferring a debit balance from one account to a second would result in the second account being debited and the first account being credited.

Deriving Additional InformationThe basic purpose of accounting is derivation of information. The more the information 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, we create 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 the Capital 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.

Journal/Ledger Hide/ShowJournal in the books of M/s Razmataz Chemicals for the period from ___ to 31st December 2005V/R No. Debit Amount (in Rs) Credit Amount (in Rs)

Date

Particulars

L/F

1st to 30th

Profit and Loss a/c To Net Profit a/c [For the transfer of the net profit to the Net Profit account.]

Dr

47,000 47,000

1st to 30th

Net Profit a/c To Profit and Loss Appropriation a/c (Or) Capital a/c

Dr

89,100 89,100

[For the transfer of the net profit from the Net Profit account to the capital account or the profit and loss appropriation account.]

Dr

Net Profit a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

31/12/05

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

89,100

31/12/05

By Profit & Loss a/c

89,100

89,100

Total

89,100

The Profit and Loss a/c would straight away reveal the information that there is Net Profit and has been transferred. The Capital a/c or the Profit and Loss Appropriation a/c would reveal the information 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 the Capital 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 the Profit and Loss a/c and To Net Loss in the Capital or Profit and Loss Appropriation accounts.

Journal/Ledger Hide/ShowJournal in the books of M/s Razmataz Chemicals for the period from ___ to 31st December 2005V/R No. Debit Amount (in Rs) Credit Amount (in Rs)

Date

Particulars

L/F

1st to 30th

Net Loss a/c To Profit & Loss a/c [For the transfer of the net loss to the Net Loss account.]

Dr

1,35,750 1,35,750

1st to 30th

Profit and Loss Appropriation a/c To Net Loss a/c

Dr

1,35,750 1,35,750

[For the transfer of the net loss from the Net Loss account to the profit and loss appropriation account.]

Dr

Net Loss a/cAmount (in Rs) Amount (in Rs)

Cr

Date

Particulars

J/F

Date

Particulars

J/F

31/12/05

To Profit & Loss a/cTotal

1,35,750 1,35,750

31/12/05

By P/L Appropr. a/cTotal

1,35,750 1,35,750

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

Net Profit a/c, Net Loss a/c Control accounts

Control AccountsAccounts which are created and closed instantaneously and whose sole purpose is to enable the derivation of

greater information are called "Control Accounts". Use of Controlling accounts is a procedure that we adopt frequently in accounting.

Manual AccountingIn manual accounting, we just assume the presence of such accounts and use the useful phrases wherever needed. We do not record the journal entries relating to these and carry on posting as if we have recorded the journal.

Computerised AccountingIf you intend to make use of such a facility in computerised accounting, care should be taken to ensure that all the relevant controlling accounts are created and the required journal entries are passed.

Profit & Loss Appropriation a/c Special Nominal account

A Nominal AccountIf Profit & Loss Appropriation a/c is maintained, the Net profit or loss revealed by the Profit and Loss a/c in every accounting period is transferred to that account. Thus the accumulated balance in the Profit & Loss Appropriation a/c also indicates either a profit or loss which qualifies it to be called a nominal account. All the nominal accounts are closed at the end of the accounting period by transfer to either the Trading a/c or the Profit and Loss a/c as the case may be.

However, the Profit & Loss Appropriation a/c, though a nominal account is not closed. The balance in that account is carried over to the subsequent accounting periods just like balances in the case of Real or Personal accounts. With regard to this characteristic, the Profit & Loss Appropriation a/c is a special account.

Special Nominal AccountsNominal accounts which are not closed at the end of the accounting period and whose balances are carried forward from one accounting period to another as "Special Nominal accounts". Balances of these accounts, appear in the balance sheet along with the other Real and Personal account balances.

Trial Balance What? Why? When?

What is a Trial BalanceThe Trial Balance is a statement of ledger account balances as on a particular instance.

Trial Balance of M/s Wearall Textlies as on 31st March 2006 Debit Amount (in Rs)63,650

Particulars

L/F

Credit Amount (in Rs)

Opening Stock

Textile Purchases Wages Octroi Salaries Rent Printing and Stationery Advertisements Cash Office Building Capital Bank Motor Vehicles Sundry Creditors Sales P/L Appropriation Sundry Debtors Machinery

22,56,000 3,25,000 1,78,200 1,04,000 1,26,000 74,650 86,000 26,000 4,23,450 2,50,000 1,19,000 2,10,000 1,80,000 36,86,000 6,52,950 2,08,000 5,69,000

Total

47,68,950

47,68,950

Why is a Trial Balance prepared?The trial balance is prepared to check/ensure the arithmetical accuracy of accounting. Though not a conclusive proof, the agreement of the trial balance is a prima facie evidence of the absence of mathematical errors. This is the most important purpose for which the trial balance is prepared.

Isn't Trial Balance made for enabling preparation of Final Accounts?No, not at all. Preparation of Trial Balance is not an act that forms a part of the activities involved in the regular accounting cycle. Since Final Accounting can be completed without the preparation of the Trial Balance, we can say that enabling the preparation of final accounts is not the purpose of the trial balance. final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments

When is a Trial Balance prepared?The trial balance is generally prepared at a time when all the ledger accounts are balanced like at the end of the accounting period. Theoretically, the trial balance can be prepared as and when needed. The practical difficulty in preparing the trial balance as and when needed is the requirement of the balances of all the ledger accounts within the organisational accounting system. Different ledger accounts are balanced at different time intervals based on the information needs of the organisation. Say in a typical organisation Cash a/c is balanced daily, Expenses, Creditor and Debtor accounts are balanced on a monthly basis, Asset accounts are balanced annually etc. The ledger account balances relating to all ledger accounts would not be available ready hand at any given instance. Year ending is one such instance when the balances are derived.

Computerised AccountingIn mechanised (computerised) accounting systems, trial balance is a statement that can be automatically derived as and when needed.

Accounting Cycle Absence of Preparation of Trial Balance

Preparation of a trial balance is not an act which forms a part of the activities involved in the accounting cycle. The Accounting Cycle (activities involved)

Begins with opening the books of accounts for an accounting period by recording the opening entry;

Journal in the books of M/s Amonaya Metals for the period from 1st January 2007 to ____V/R No. Debit Amount (in Rs) Credit Amount (in Rs)

Date

Particulars

L/F

1st January

Assets a/c To Liabilities a/c To Capital a/c

Dr

[For bringing the balances in the various ledger accounts at the end of the previous accounting period into books.]

This is the journal entry that supports the posting To Balance b/d and By Balance b/d in the various ledger accounts. Recording the various transactions all through out the accounting period; Balancing the ledgers as and when needed and finally at the end of the accounting period; Recording the transactions for making up the final accounts 1. 2. 3. 4. Making the Trading a/c Closing the Trading a/c by transferring the balance in it to Profit & Loss a/c Making the Profit and Loss a/c Closing the Prof