Book Keeping Materials

Trading Account:
Learning Objectives:
1. 2. 3. 4.
Define and explain trading account. What are the items of a trading account. Prepare the format of trading account. What are advantages of trading accounting?
Definition and Explanation:

A trading account is an account which contains, " in summarized form, all the transactions, occurring, throughout the trading period, in commodities in which he deals" and which gives the gross trading result. In short, trading account is the account which is prepared to determine the gross profit or the gross loss of a trader.
Items of Trading Account:

The following items usually appear in the debit and credit sides of the trading account.
Debit Side Items:

1. The value of opening stocks of goods (i.e., the stock of goods with which the
business was started).
2. Net purchase made during the year (i.e., purchases less returns). 3. Direct expenses, if any.
Credit Side Items:

1. Total sales made during the period less the value of returns, i.e., net sales. 2. The value of closing stock of goods.
The difference between the two sides of the trading account represents either gross profit or gross loss. Thus if the credit side is heavier that would mean that the trader has earned gross profit i.e., the excess of selling price of the goods sold over their purchase price. If the debit side is heavier it would mean that the trader has suffered gross loss i.e., purchase price of goods exceeds the selling price. The balance of trading account which represents either gross profit or gross loss is transferred to profit and loss account.
Format of Trading Account (T or Account Form):

Trading Account For the year ending .......20......
Dr. To Opening stock To purchases Less Returns To Carriage inwards To Cartage To dock charges To Wages To Duty To Freight To Clearing charges To Etc. Etc., To Gross profit (Transferred to profit and loss account) ........ ......... ......... By Sales ......... Less returns ......... ........ By Closing stock ......... By Gross loss transferred ......... to profit and loss account ......... ......... ......... ......... ......... .........
Cr. ......... ......... .........
.........
Trading Accounts Items:

Now we shall discuss the items of trading account one by one.
Opening Stock:
In case of trading concerns it will consist of only finished goods or goods to be sold without alteration. In manufacturing concerns, the opening stock will consist of three parts (a). Stock of raw materials. (b). Stock of partly completed goods or work-in-progress. (c). Stock of finished goods. In case of new business there will be no opening stock.
Purchases:
This item includes both cash and credit purchases of goods bought with the object of sales.
Return Outwards or Purchases Returns:

It means the goods returned by a trader to his suppliers from out of his purchases. Return outwards reduce the purchases. It is shown by way of deduction from purchases in the trading account.
Discount on Purchases:
It is also shown by way of deduction from purchases in the trading account.
Sales:
This item includes total of both cash and credit sales of goods in which businessman deals in. It is credited to trading account.
Returns Inwards or Sales Returns:

It means goods returned to a trader by his customers from out of goods sold to them. It is shown by way of deduction from sales on the credit side, of the trading account.
Discount on Sales:
This account has always a debit balance and is shown by deduction from sales in the trading account.
Direct Expenses:
Direct expenses are those expenses which are incurred to convert raw-materials into finished goods or which may be regarded as a part of the cost of purchasing the goods. e.g., wages paid by a manufacturer to construct furniture out of raw wood, the expenses incurred to bring goods from the place of purchase to the business place of the trader etc. All the direct expenses are charged to the trading account. The items usually included in the direct expenses are:
1. Wages: This item usually signifies some hourly, daily or piecework remuneration 2. Manufacturing or Productive Wages: This item usually signifies the wages of
paid to laborers. It is direct expenditure and should be charged to trading account. factory workmen actually engaged in making or producing something. It is a direct charge on the cost of manufacturer. It is debited to manufacturing account or trading account. Carriage Inward: Carriage means conveyance charges of goods by land. Carriage inward are the conveyance expenses incurred to bring the goods purchased in the godown or shop. It is debited to trading account. In examination questions when the item only "carriage" is given and is not expressly stated to be inward or outward, it should be assumed to be inward and debited to trading account. The reason is that carriage on goods is usually paid by the purchaser. Cartage: The cartage charges on goods purchased are direct expenses and should be debited to trading account. Freight: Freight is the charge made for conveyance of goods by sea. Freight on goods purchased is charged to trading account. Customs Duty, Octroi Duty etc: When goods are purchased from a foreign country import duty will be payable. When goods are received from another city, the municipal corporation may charge octroi duty. All duties on goods purchased should be debited to trading account. Excise Duty: It is a tax levied by the government. If the duty is levied on production it will be treated as manufacturing expenses and debited to trading account.
3.
4. 5. 6.
7.
8. Stores Consumed: This item stores denote lubricating oil, tallow, grease, cotton
9. 10.
11.
and jute waste, etc., required for running the machinery of manufacturing concern. The amount of stores consumed is a direct expense and should be charged to trading account. Motive Power: This item includes, coke, gas, water or electric energy consumed in propelling the machinery. It is debited to manufacturing account in the absence of a manufacturing account, it is debited to trading account. Royalty: Royalty is an amount paid to a person for exploiting rights possessed by him it is usually paid to patentee, author, or landlord for the right to use his patent, copyright or land. If they are productive expenses, they are debited to manufacturing account; but in the absence of a manufacturing account, they are debited to trading account. Manufacturing Expense: All other expenses such as factory rent, factory insurance, factory repair etc., are direct expenses and should be charged to trading account.
Closing Stock and its Valuation:

Closing stock represents the value of goods lying unsold in the hands of a trader at the end of a trading period. The value of closing stock is ascertained by means of compilation of list of materials, stores and goods actually in possession at the close of the trading period. This work is known as taking the inventory. The inventory or lists of physical stock are then faired and valued. The total of the lists will be closing stock. The closing stock is valued at cost or market price whichever is lower. As this item materially affects the gross profit (or gross loss), it is essential that all possible care should be taken to calculate the closing stock at a proper value. The value of closing stock is taken into consideration only at the time of preparing the trading account and not before. The trial balance is prepared before the preparation of the trading account. Hence the closing stock does not appear in a trial balance. It is brought into account by means of a journal entry debiting stock account and crediting the trading account.
Closing Entries for Trading Account:

Closing entries are those which are passed at the end of each financial period for the purpose of transferring the various revenues items to the trading and profit and loss account and thus the nominal accounts are closed. I preparing a trading account, the opening stock, purchases, sales, returns both inwards and outwards, direct expenses and closing stock are transferred to it by means of journal entries as follows:
1. Trading Account
(Being the transfer of the latter accounts to the former.)
To Purchases Account To Returns Inwards Account To Direct Expenses Account (wages, carriage etc.)
2. Sales Account
Returns Outward Account
(Sales etc., transferred to trading account)
To Trading Account
3. Closing Stock Account
(Being to record closing stock)
To Trading Account
Advantages of Trading Account:

The advantages of the trading account are as follows:
1. A trader can find out the gross profit and thereby can ascertain the percentage of 2. 3. 4.
profit he has earned on the cost of goods sold. This percentage of gross profit may serve as his ready guide for the adjustment of future sale price. A trading account help a trader to compare his stock at open with that at the close. He can further find out whether the purchases he has made during the period of account have been judicious. Once can compare the figure of sales with similar figure of the previous year and can find out whether business is improving or declining. If the gross profit disclosed by the trading account is less than expected, an enquiry can be made into the cause responsible for the decline. And if the gross profit is more than was expected, steps can be taken to maintain it.
You may also be interested in other articles from "final accounts" chapter:
1. 2. 3. 4. 5. 6.
Trading Account Profit and Loss Account Difference Between Trading Account and Profit and Loss Account Balance Sheet Difference Between Trial Balance and Balance Sheet Examples of Trading and Profit and Loss Account and Balance Sheet
Read more at http://accounting4management.com/trading_account.htm#sqDPb3hl4beEOYih.99
Profit and Loss Account:

1. Define and explain profit and loss account. 2. Prepare the format of profit and loss account (account form and statement form). 3. Prepare closing journal entries profit and loss account.
Definition and Explanation:

Profit and loss account is the account whereby a trader determines the net result of his business transactions. It is the account which reveals the net profit (or net loss) of the trader. The profit and loss account is opened with gross profit transferred from the trading account (or with gross loss which will be debited to profit and loss account). After this all expenses and losses (which have not been dealt in the trading account) are transferred to the debit side of the profit and loss account. If there are any incomes or gains, these will be credited to the profit and loss account. The excess of the gain over the losses is called the net profit and that of the loss over the gain is called the net loss. The account is closed by transferring the net profit or loss to capital account of the trader.
Format of the Profit and Loss Account:

Profit and Loss Account For the year ended ..............
To To To To To To To To To To To To To To To To
Gross Loss Salaries Rent Rent and Rates Discount Allowed Commission Allowed Insurance Bank Charges Legal Charges Repairs Advertising Trade Expenses Office Expenses Bad Debts Traveling Expenses Etc., Etc.
xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx xxxx ex. xxxx xxxx xxxx xxxx
By By By By By By
Gross Profit Interest Received Discount Received Commission Received Other Receipts Etc., Etc.
xxxx xxxx xxxx xxxx xxxx xxxx
By Net Loss (transferred to capital account of the trader)
xxxx
To Net Profit (transferred to capital account of the trader)
xxxx
Closing Entries for Profit and Loss Account:

The following usual entries are passed at the end of each trading period.
1. Transferring all expenses or losses:

(This entry will close the expenses accounts)
Profit and loss account To Each of the various expenses or losses
2. Transferring all items of gains etc:
Various nominal accounts (representing gains) To Profit and loss account

(This entry will close all the remaining nominal accounts)
3. Transferring net gain to capital account:

Profit and loss account To Capital account
(This entry closes the P & L account)
4. Transferring net loss to capital account:

Capital account To Profit and loss account
(This entry closes the P & L account)
Profit and Loss Account in Statement Form/Income Statement:

Trading and profit and loss account/income statement may be prepared either in account form (T form) or in report form (statement form). Trading and profit and loss account in both the forms give the same information. The account or T form is traditional and is used widely but in recent years many business houses prefer to present the profit and loss account/income statement in the report form.
Format of Profit and Loss Account/Income Statement in Statement Form:

Trading and Profit and Loss Account/Income Statement For the year ended 31st December, 199-----
Income From Sales: Sales Less: Sales returns Sales discount Net Sales Cost of Goods Sold: Merchandise is stock on 1st January Purchases Less: Purchases returns Net purchases Cost of goods available for sale Less merchandise in stock on 31st December Cost of goods sold GROSS PROFIT Operating Expenses: Selling Expenses: Sales salaries Advertising expenses Insurance expense - selling
--------------------------
-----------------------------------------
----------------
Store supplies expenses Sundry selling expenses Total selling expenses General Expenses: Office salaries Taxes Insurance expenses general Office supplies expenses Sundry general expenses Total general expenses Total operating expenses Net profit from operations Other Income: Rent income Other Expenses: Interest expenses
-----------------------------------------------------------------------
NET PROFIT
------
Explanation of Certain Items of Income Statement:

Income from sales: The total of all charges to customers for goods sold, both for cash and on credit, is reported in this section. Sales returns and allowances and sales discounts are deducted from the gross amount to yield net sales. Cost of Goods Sold: Cost of goods sold refers to the cost price of goods which have been sold during a given period of time. In order to calculate the cost of goods sold we should deduct from the total cost of goods purchased the cost of goods at the end of the year. This can be explained with the help of following formula/equation:
(Opening stock + Cost of goods purchased) - Closing stock = Cost of goods sold Gross Profit: The excess of the net income from sales over the cost of goods sold is also called gross profit on sales, trading profit or gross margin. It is as gross because all other expenses for the period must be deducted from it to obtain the net profit or net income of the business. Operating Expenses: The operating expenses also called operating costs of a business may be classified under any desired number of headings and sub-headings. In small retail business it is usually satisfactory to classify operating expenses as selling or general.
1. Expenses that are incurred directly in connection with the sale of goods are known as
selling expenses. selling expenses include salaries or the salesmen, store supplies used, depreciation of the store equipment, and advertising.
2. Expenses incurred in the general administration of the business are known as
administrative expenses or general expenses. Examples of general expenses are office salaries, depreciation of equipment, and office supplied used.
Net Profit from Operations: The excess of gross profit on sales over total operating expenses is called net profit or net profit from operations. If operating expenses should exceed gross profit, the excess is designated as net loss or net loss from operations. Other Income: Minor sources of income are classified as other income or non-operating income. In a merchandising business this category often include income from interest, rent, dividends and gains from the sale of fixed assets. Other Expenses: Expenses that cannot be associated definitely with the operations are identified as other expenses or non-operating expenses. Interest expense that results from financing activities and losses incurred in the disposal of fixed assets are examples of items reported in this section. The two categories of non-operating items, other income and other expenses, are offset against each other on the profit and loss account. If the total of other income exceeds the total other expenses, the excess is added to net profit from operations; if the reverse is true, the difference is subtracted from net profit from operations. Net Profit: The final figure on the profit and loss account is labeled as net profit (or net loss) or net profit carried to balance sheet. It is the net increase in capital from profit making activities.
1. 2. 3. 4. 5. 6.
Read more at http://accounting4management.com/profit_and_loss_account.htm#p1rvTHU6qXKklxTH.99
Difference Between Trading Account and Profit and Loss Account:

1. What is the difference between account and profit and loss account?
The main difference between trading account and profit and loss account is that the gross profit or loss which is derived from the trading account shows the trend of the business and the profit and loss account reflects on the management of the business the final outcomes of the concern. Trading account deals with the cost price of the goods. All the expenses directly connected with the buying of goods are entered in it. It is credited with the sale proceeds of the goods. Profit and loss account deals with the expenses indirectly connected with the goods (expenses with the selling of the goods.)
1. 2. 3. 4. 5. 6.
Read more at http://accounting4management.com/difference_between_trading_and_profit_and_loss_account.h tm#1yZFuRiY7IXUFPdS.99
Distinction/Difference Between Trial Balance and Balance Sheet:

1. What is the difference between trial balance and balance sheet?
The following are the points of distinction/difference between trial balance and balance sheet: Trial Balance It is a list of balance extracted from the ledger accounts It contains the balance of all accounts real, nominal and personal. It is prepared before the preparation of trading and profit and loss account. Balance Sheet It is a statement of assets and liabilities It contains the balance of only those accounts which represents assets and liabilities. It is prepared after the preparation of trading and profit and loss account.
It does not contain the value of the closing It contains the value of closing stock, stock of goods. which appears on the assets side. Expenses due but not paid and incomes Expenses due but not paid appear on the due but not received do not appear in the liability side and income due but not trial balance received appear on the asset side of the balance sheet.
1. 2. 3. 4. 5. 6.
Read more at http://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htm# bci1mvVozlsCSUO2.99
Distinction/Difference Between Trial Balance and Balance Sheet:

1. What is the difference between trial balance and balance sheet?

The following are the points of distinction/difference between trial balance and balance sheet: Trial Balance It is a list of balance extracted from the ledger accounts It contains the balance of all accounts real, nominal and personal. It is prepared before the preparation of trading and profit and loss account. Balance Sheet It is a statement of assets and liabilities It contains the balance of only those accounts which represents assets and liabilities. It is prepared after the preparation of trading and profit and loss account.
It does not contain the value of the closing It contains the value of closing stock, stock of goods. which appears on the assets side. Expenses due but not paid and incomes Expenses due but not paid appear on the due but not received do not appear in the liability side and income due but not trial balance received appear on the asset side of the balance sheet.
1. 2. 3. 4. 5. 6.
Read more at http://accounting4management.com/difference_between_trial_balance_and_balance_sheet.htm# TlSf0sUG4wYBMbER.99
Examples of Trading and Profit and Loss Account and Balance Sheet:
1. Prepare trading and profit and loss account and balance sheet.
Example 1:
From the following balances extracted from the books of X & Co., prepare a trading and profit and loss account and balance sheet on 31st December, 1991. $ 11,000 4,500 39,000 2,800 700 30,000 800 800 700 450 1,300 $ 500 200 1,000 500 4,750 1,100 1,450 60,000 3,000 19,650 17,900
Stock on 1st January Bills receivables Purchases Wages Insurance Sundry debtors Carriage inwards Commission (Dr.) Interest on capital Stationary Returns inwards
Returns outwards Trade expenses Office fixtures Cash in hand Cash at bank Tent and taxes Carriage outwards Sales Bills payable Creditors Capital
The stock on 21st December, 1991 was valued at $25,000.
Solution:
X & Co. Trading and Profit and Loss Account For the year ended 31st December, 1991 To Opening stock To Purchases Less returns o/w 39,000 500 38,500 To Carriage inwards To Wages To Gross profit c/d 800 2,800 30,600 83,700 To Stationary 450 11,000
|By
Sales Less | returns i/w

|
60,000 1,300 58,700 25,000
By Closing | stock
| | | | | | |By
83,700 Gross 30,600
profit b/d To Rent and rates To Carriage outwards To Insurance To Trade expenses To Commission To Interest on capital To Net profit transferred to capital a/c 1,100 1,450 700 200 800 700 25,200
| | | | | | | | |
30,600
| |
30,600
X & Co. Balance Sheet As at 31st December, 1991 Liabilities Creditors Bills payable Capital Add Net profit $ 19,650 3,000 17,900 25,200 43,100
| |
Assets Cash in hand | Cash at bank | Sundry debtors | Bill receivable | Stock | Office equipment
| | |
$ 500 4,750 30,000 4,500 25,000 1,000 65,750
65,750
Example 2:
The following trial balance was taken from the books of Habib-ur-Rehman on December 31, 19 .... Cash Sundry debtors Bill receivable Opening stock Building Furniture and fittings Investment (Temporary) Plant and Machinery Bills payable Sundry creditors Habib's capital 13,000 10,000 8,500 45,000 50,000 10,000 5,000 15,500 9,000 20,000 78,200
Habib's drawings Sales Sales discount Purchases Freight in Purchase discount Sales salary expenses Advertising expenses Miscellaneous sales expenses Office salary expenses Misc. general expenses Interest income Interest expenses
1,000 100,000 400 30,000 1,000 500 5,000 4,000 500 8,000 1,000 1,000 800 2,08,700 2,08,700
Closing stock on December 31, 19 ... was $10,000 Required: Prepare income statement/trading and profit and loss account and balance sheet from the above trial balance in report form.
Solution:
Habib-ur-Rehman Income Statement/Profit and Loss Account For the year ended December 31, 19..... Gross sales Less: Sales discount Net Sales Cost of Goods Sold: Opening stock Purchases Add: Freight in 45,000 30,000 1,000 31,000 500 30,500 75,500 10,000 65,500 100,000 400 99,600
Less purchase discount Net purchases Cost of goods available fort sale Less closing stock Cost of goods sold
Gross profit Operating Expenses: Selling Expenses: Sales salary expenses Advertising expenses Misc. selling expenses General Expense: Office salaries expenses Misc. general expenses
34,100
5,000 4,000 500 9,500 8,000 1,000 9,000
Total operating expenses Net profit from operations Other Expenses and Incomes: Interest income Interest expenses Net increase Net income
18,500 15,600
1,000 800 200 15,800
Habib-ur-Rehman Balance Sheet As at December 31, 19..... ASSETS Current Assets: Cash Sundry debtors Bills receivable Stock on Dec. 31, 19 .. Investment Total Current Assets Fixed Assets: Buildings Plant and Machinery Furniture and fittings Total Fixed Assets
13,000 10,000 8,500 10,000 5,000 46,500 50,000 15,500 10,000 75,500
Total Assets
122,000
LIABILITIES: Current Liabilities: Sundry creditors Bills payable Total Current Liabilities Fixed Liabilities: Habib's capital Net income for the year
20,000 9,000 29,000 78,200 15,800 94,000 1,000 93,000
Less: Drawings
Total Liabilities and Capital
122,000
1. 2. 3. 4. 5. 6.
Read more at http://accounting4management.com/examples_of_trading_and_profit_and_loss_account_and_ba lance_sheet.htm#lPwOktlXbDCR061B.99
Trading and Profit And Loss Account

Posted: July 3, 2011 in Basics Accounting Skills Tags: cost of goods sold, expenses, gains, gross profit, net purchases, net sales, revenues, turnover
Trading and Profit and Loss Account* This will be a complete briefing on this topic, it might gets harder to digest for people who doesnt quite understand Principles of Accounting.
Trading and Profit and Loss Account is opened up by business nature of sole-proprietorship, partnership, company and manufacturing company.
Purposes of Trading and Profit and Loss Account 1) To calculate the profits or losses of a business. 2) To prepare reports for stakeholders, *stakeholders are people who are interested in your business, it could be creditors or investors. 3) To calculate tax required by government policies.
Understand Gross Profit
Understand what is Gross Profit! Students doesnt know what is the meaning of gross profit, they only know its profit! Its the same thing as knowing nothing. GROSS PROFIT is profit resulting from your sales over cost of goods sold.
Imagine you yourself selling one DVD movie to one customer at $4. This is your sale, $4. The cost of your empty DVD disc is $0.50. This is your cost of goods sold. * Students tend to be confused with the term goods. Goods are a term used to refer to a lot of things, and in this case, it means lots of empty DVDs. But for illustration purposes. I only used one DVD as an example.
Go back to the definition of Gross Profit, We can rewrite it as
Gross Profit = Sales Cost of Goods Sold = 4 0.50 = 3.50
Understand Cost of Goods Sold
Now, I wonder if you had realized that the phrase cost of goods sold does seems tricky.
Cost of Goods Sold can be further broken down into its part, Opening Stock + Purchases Closing Stock = Cost of Goods Sold
You can skip the explanation if you want, but for some reason, I think learning it can actually enforce your memory. There are cases where students sometimes couldnt recall memory due to last minute revising. And this will be the time you apply your understanding.
At the beginning of the year, you have 200 empty DVDs at hand. And during the year, you have purchased 400 empty DVDs. At the end of the year, you are left with 100 empty DVDs. Assume the price of Empty DVDs at $0.50.
If you really concentrate on the word Cost Of Goods Sold, you will see that it means the original cost of empty DVDs that have been sold. Now, this 100 empty DVDs left are unsold. Therefore, there are not included in the calculation of Cost of Goods Sold.
If you go back to the definition of Cost of Goods Sold, you will see the relation of subtracting closing stock.
Now, back to Opening Stock and Purchases. Why do we have to add it up?
Imagine your shop is selling DVDs, if you doesnt buy empty DVDs, how can you sell your final DVDs to customer? Now if you already have 200 empty DVDs at hand, you need to buy more in order to sell enough for your customers. This is the reason why Opening Stock needs to add up with Purchases.
By combining all of this explanation, therefore we arrived at the same formula given earlier of:
Cost Of Goods Sold = Opening Stock + Purchases Closing Stock
Now we are all done, this is how we can start to draw Trading Account.
Trading Account
Trading Account was simply a calculation of Gross Profit. You will get to see it later. But for now, just know this,
Gross Profit = Sales Cost of Goods Sold Gross Profit = Sales (Opening Stock + Purchases Closing Stock)
In Trading Account, different countries used different formats to draw such account, either a vertical or horizontal Trading Account. Now, students always think that Trading Account was easy, but for some reasons, failure to draw the format correctly will give you a wrong answer at the end, and for this reason, I wanted students to UNDERSTAND every single terms.
Points to remember: 1) Mark is awarded to title. 2) Use Net Sales instead of Sales* 3) Use Net Purchase instead of Purchase* *If applicable, I will further explain it later on.
Now, my notes intend to prepare students for O Level Examination, and for this reason, my notes will be complete to that standard. Trading Account wouldnt be that simple in Cambridge Examination.
Net Sales / Turnover
Sales needs to be net, that is to say, after any deduction on sales. Say for example, you have been selling 400 DVDs to customers, they are bound to be some customers which would come after you claiming bad DVDs. And in this case, say 30 DVDs were returned to you. This is called Sales Return or Return Inward. You need to memorize both of the terms. Assuming the selling price was at $4. Now we try to compute the Net Sales.
Net Sales / Turnover = Sales Sales Return / Return Inwards Net Sales = (400 30) x 4 = 370 x 4
In exam, sales return was sometimes used instead of return inwards,or otherwise. Therefore, it is important to remember their terms.
Net Purchases
Just like Net Sales, Net Purchases were simply any addition or deduction made to the original purchases. In this case, imagine you purchase 600 empty DVDs. The cost of this purchases may include cost of insurance, freight cost or transportation cost or carriage inwards, purchase return or return outwards and etc. As long as anything that you paid in order to get that 600 DVDs into your shop, you add it. Whilst anything you return back to your suppliers, you deduct it from your original purchases.
Net Purchases = Purchases + Any Cost That You Paid Return Inward * The reason that I put any cost that you paid is because there are too much additions that can be done, students should remember the general rule of anything that you paid to get the DVDs into your shop.
Profit And Loss Account
To simply show you what is inside Profit And Loss Account,
Net Profit = Gross Profit + Revenues/Gain Expenses = A positive amount is called Net Profit = A negative amount is called Net Loss In most examination, the answers will always be Net Profit. Unless you are in A Level, then a loss is also possible.
Revenues/Gains
Revenues or Gains are any amount of money that profits a business. For instance, discount received from purchasing the empty DVDs.
Position on Vertical format, below Gross Profit, above Expenses. Position on Horizontal format, Credit side.
Expenses
Expenses are any amount that do not profits a business but are necessary to keep the business operating. Example of expenses include rent, wages, salaries, electricity, depreciation, discount allowed and etc.
Position on Vertical Format, below Revenues, above Net Profit. Position on Horizontal Format, Debit side.
Combining Trading and Profit and Loss Account Horizontal Format
(Name of the Owner or Corporate Name) Horizontal Style Trading and Profit and Loss Account for the year ended 31 December XXXX $ Opening Stock (+) Purchases (-)Return Outwards XXX (XXX) XXX XXX Sales (-) Return Inwards $ XXX (XXX)
XXX (-) Closing Stock Cost Of Goods Sold Gross Profit c/d (XXX) XXX XXX XXX (-) Expenses Wages Lighting Rent General Expenses Carriage Outwards Net profit XXX XXX XXX XXX XXX (XXX) XXX XXX Gross Profit b/d (+) Gains/Revenues Discount received XXX XXX XXX
Combining Trading and Profit and Loss Account Vertical Format
Will re-update this soon.
Correction of Errors not affected by Trial Balance

Posted: December 16, 2012 in Accounting Topic Tags: compensating error, complete reversal entry, error of commission, error of omission, error of original entry, error of principle, trial balance
0
Accounting is based on double-entry rule; a debit entry will result in another corresponding credit entry and a credit entry will result in another corresponding debit entry. So, a trial balance will tend to balance. But trial balance do not always give you the correct balances. And there are also circumstances where the trial balance is balanced but are incorrect. Its getting pretty confused here, you just need to note that when trial balance balanced, it doesnt necessary mean that the trial balance is correct.
If you think you need to revise back on Trial Balance, click here.
There are six of them:
1) Error of Omission As the name implies, this means that a transaction or event has been completely left out from the books. Follow the Debit PEDARI rule and the Credit SCROLG rule to re-correct the error.
2) Error of Commission This error means that posting is done to the wrong account of the same category. Here, the category can be Debtors and Creditors. This error occur when you are supposed to post to a debtor name Carol, but due to a lot of debtors with similar names, say Caroline, then you could have posted in to Caroline account instead of Carol account.
3) Error of Principle This error means that posting is done to a different category of account. So the PEDARI is consider to be different category, and so does SCROLG. So instead of posting to an expenses account, some could have mistakenly posted in assets account. In addition to debit side, when it comes to SCROLG, some could have mistakenly posted in revenues instead of gains. An emphasis here is that most often the mistakes apply to only expenses and assets and gains and revenues. The reason why I have made an emphasis here is that the errors most likely come from mistakenly treated expenses as assets and gains as revenues or the reverse.
4) Error of Original Entry This error means that a wrong amount has been initially recorded in the book of original entry and subsequently posted to the ledger accounts. This error is just as simple as the name implies.
5) Compensating Errors This error means that the debit side of an account is compensated by another error of the same/equal amount on the credit side in another account.
6) Error of Complete Reversal Entry As the name implies, this means that the debit and credit entry recorded for a particular transaction are reversed. The transactions are incorrect but because the amount is the same or equal at both sides, the trial balance still balanced.
1st JAN: This post is till ongoing.
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Balance Sheet
Posted: July 3, 2011 in Basics Accounting Skills Tags: assets, liabilities
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Balance Sheet
Balance Sheet was simply the result of accounting equation.
Assets = Capital + Liabilities
In Balance Sheet, The accounting equation was shown in this manners Assets = Liabilities + Capital Or Assets Liabilities = Capital
Whichever method that your teacher taught you, you can see that it is derived from the accounting equation.
There are again two formats in the Balance Sheet, whichever your teacher taught you to use. Horizontal and vertical.
There are several things that you will need to know if you didnt really know how to open up Balance Sheet, otherwise you can skip this.
Assets
There are two headings under assets, Fixed Assets and Current Assets.
Fixed Assets are usually long life, are used in the business and are not for resale purposes. Examples, land and buildings, fixtures and fittings, machinery and motor vehicles. Generally, those that can last long are first in the list of fixed assets, followed by those that do not last long.
Current Assets are easily convertible to cash such as cash in hand, cash at bank, stock and debtors.
Liabilities
There are also two heading under liabilities, Current Liabilities and Long term Liabilities.
Current Liabilities payments that need to be made to creditors within a one year time period Long term Liabilities payments that need to be made to creditors within more than one year period
Horizontal Format
(Name of the Shop) Horizontal Style (Balance Sheet as at 31st December 20XX) Fixed Assets Furniture and Fittings Office Equipment $ $ XXX XXX Owners Equity Capital (+) Net Profit or (-) Net Loss Current Assets Stock Debtors Bank Cash XXX XXX XXX XXX XXX XXX XXX Current Liabilities Creditors XXX (-) Drawings $ XXX XXX (XXX) (XXX) XXX $
Vertical Format
(Name of the Shop) Vertical Style (Balance Sheet as at 31st December 20XX) $ $
Fixed Assets Furniture and Fittings Office Equipment XXX XXX XXX Current Assets Stock Debtors Bank Cash XXX XXX XXX XXX XXX
Less: Current Liabilities Creditors (XXX) XXX
Owners Equity Capital Add: Net Profit or Less: Net Loss XXX XXX XXX Less Drawings (XXX) XXX
Trading and Profit And Loss Account

Posted: July 3, 2011 in Basics Accounting Skills Tags: cost of goods sold, expenses, gains, gross profit, net purchases, net sales, revenues, turnover
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Trading and Profit and Loss Account* This will be a complete briefing on this topic, it might gets harder to digest for people who doesnt quite understand Principles of Accounting.
Trading and Profit and Loss Account is opened up by business nature of sole-proprietorship, partnership, company and manufacturing company.
Purposes of Trading and Profit and Loss Account 1) To calculate the profits or losses of a business. 2) To prepare reports for stakeholders, *stakeholders are people who are interested in your business, it could be creditors or investors. 3) To calculate tax required by government policies.
Understand Gross Profit
Understand what is Gross Profit! Students doesnt know what is the meaning of gross profit, they only know its profit! Its the same thing as knowing nothing. GROSS PROFIT is profit resulting from your sales over cost of goods sold.
Imagine you yourself selling one DVD movie to one customer at $4. This is your sale, $4. The cost of your empty DVD disc is $0.50. This is your cost of goods sold. * Students tend to be confused with the term goods. Goods are a term used to refer to a lot of things, and in this case, it means lots of empty DVDs. But for illustration purposes. I only used one DVD as an example.
Go back to the definition of Gross Profit, We can rewrite it as Gross Profit = Sales Cost of Goods Sold = 4 0.50 = 3.50
Understand Cost of Goods Sold
Now, I wonder if you had realized that the phrase cost of goods sold does seems tricky.
Cost of Goods Sold can be further broken down into its part, Opening Stock + Purchases Closing Stock = Cost of Goods Sold
You can skip the explanation if you want, but for some reason, I think learning it can actually enforce your memory. There are cases where students sometimes couldnt recall memory due to last minute revising. And this will be the time you apply your understanding.
At the beginning of the year, you have 200 empty DVDs at hand. And during the year, you have purchased 400 empty DVDs. At the end of the year, you are left with 100 empty DVDs. Assume the price of Empty DVDs at $0.50.
If you really concentrate on the word Cost Of Goods Sold, you will see that it means the original cost of empty DVDs that have been sold. Now, this 100 empty DVDs left are unsold. Therefore, there are not included in the calculation of Cost of Goods Sold.
If you go back to the definition of Cost of Goods Sold, you will see the relation of subtracting closing stock.
Now, back to Opening Stock and Purchases. Why do we have to add it up?
Imagine your shop is selling DVDs, if you doesnt buy empty DVDs, how can you sell your final DVDs to customer? Now if you already have 200 empty DVDs at hand, you need to buy more in order to sell enough for your customers. This is the reason why Opening Stock needs to add up with Purchases.
By combining all of this explanation, therefore we arrived at the same formula given earlier of:
Cost Of Goods Sold = Opening Stock + Purchases Closing Stock
Now we are all done, this is how we can start to draw Trading Account.
Trading Account
Trading Account was simply a calculation of Gross Profit. You will get to see it later. But for now, just know this,
Gross Profit = Sales Cost of Goods Sold Gross Profit = Sales (Opening Stock + Purchases Closing Stock)
In Trading Account, different countries used different formats to draw such account, either a vertical or horizontal Trading Account. Now, students always think that Trading Account was easy, but for some reasons, failure to draw the format correctly will give you a wrong answer at the end, and for this reason, I wanted students to UNDERSTAND every single terms.
Points to remember: 1) Mark is awarded to title. 2) Use Net Sales instead of Sales* 3) Use Net Purchase instead of Purchase* *If applicable, I will further explain it later on.
Now, my notes intend to prepare students for O Level Examination, and for this reason, my notes will be complete to that standard. Trading Account wouldnt be that simple in Cambridge Examination.
Net Sales / Turnover
Sales needs to be net, that is to say, after any deduction on sales. Say for example, you have been selling 400 DVDs to customers, they are bound to be some customers which would come after you claiming bad DVDs. And in this case, say 30 DVDs were returned to you. This is called Sales Return or Return Inward. You need to memorize both of the terms. Assuming the selling price was at $4. Now we try to compute the Net Sales.
Net Sales / Turnover = Sales Sales Return / Return Inwards Net Sales = (400 30) x 4 = 370 x 4
In exam, sales return was sometimes used instead of return inwards,or otherwise. Therefore, it is important to remember their terms.
Net Purchases
Just like Net Sales, Net Purchases were simply any addition or deduction made to the original purchases. In this case, imagine you purchase 600 empty DVDs. The cost of this purchases may include cost of insurance, freight cost or transportation cost or carriage inwards, purchase return or return outwards and etc. As long as anything that you paid in order to get that 600 DVDs into your shop, you add it. Whilst anything you return back to your suppliers, you deduct it from your original purchases.
Net Purchases = Purchases + Any Cost That You Paid Return Inward * The reason that I put any cost that you paid is because there are too much additions that can be done, students should remember the general rule of anything that you paid to get the DVDs into your shop.
Profit And Loss Account
To simply show you what is inside Profit And Loss Account,
Net Profit = Gross Profit + Revenues/Gain Expenses = A positive amount is called Net Profit = A negative amount is called Net Loss In most examination, the answers will always be Net Profit. Unless you are in A Level, then a loss is also possible.
Revenues/Gains
Revenues or Gains are any amount of money that profits a business. For instance, discount received from purchasing the empty DVDs.
Position on Vertical format, below Gross Profit, above Expenses. Position on Horizontal format, Credit side.
Expenses
Expenses are any amount that do not profits a business but are necessary to keep the business operating. Example of expenses include rent, wages, salaries, electricity, depreciation, discount allowed and etc.
Position on Vertical Format, below Revenues, above Net Profit. Position on Horizontal Format, Debit side.
Combining Trading and Profit and Loss Account Horizontal Format
(Name of the Owner or Corporate Name) Horizontal Style Trading and Profit and Loss Account for the year ended 31 December XXXX $ Opening Stock (+) Purchases (-)Return Outwards XXX (XXX) XXX XXX (-) Closing Stock Cost Of Goods Sold Gross Profit c/d (XXX) XXX XXX XXX (-) Expenses Wages Lighting Rent General Expenses XXX XXX XXX XXX Gross Profit b/d (+) Gains/Revenues Discount received XXX XXX XXX XXX Sales (-) Return Inwards $ XXX (XXX)
Carriage Outwards Net profit
XXX
(XXX) XXX XXX
Combining Trading and Profit and Loss Account Vertical Format
Will re-update this soon.
Trial Balance
Posted: July 3, 2011 in Basics Accounting Skills
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Trial Balance (All format will be posted in a later date, I am still on my way to finish up notes.)
Trial Balance is best understood when you have an in depth understanding with Double Entry System.
In double entry system/method; - for every entry in the debit side there is a credit entry - for every entry in the credit side there is a debit entry
Assuming that in a month, a business starts drawing out its trial balance. No matter how many transactions that a business have, the trial balance will always balanced. I.e. Debit side = Credit side.
Students were confused on where to put different transactions into which side. Well, I am going to tell you right now, which most textbooks didnt told you. As a general rule:
Debit Side, remember PEDARI - P for Purchases - E for Expenses - D for Debtors - A for Assets - RI for Return Inwards
Credit Side, remember SCROLG - S for Sales - C for Creditors - RO for Return Outwards - L for Liabilities - G for Gains
All thanks to my secondary school teacher that makes this the most useful information in my whole accounting education.
Format of Trial Balance
Trial Balance as on 31 December 20XX Dr $$$ Purchases Expenses Debtors Assets Return Inwards Sales Creditors Return Outwards Liabilities Gains/ Revenues Total XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX Cr $$$
I will reexplained some of this as we moved on, as for now just remember the rule. And note that, this is a general rule. Students should know which transactions to be posted into the relevant categories.
ARCHIVE FOR THE ACCOUNTING TOPIC CATEGORY
Correction of Errors not affected by Trial Balance

Posted: December 16, 2012 in Accounting Topic Tags: compensating error, complete reversal entry, error of commission, error of omission, error of original entry, error of principle, trial balance
Accounting is based on double-entry rule; a debit entry will result in another corresponding credit entry and a credit entry will result in another corresponding debit entry. So, a trial balance will tend to balance. But trial balance do not always give you the correct balances. And there are also circumstances where the trial balance is balanced but are incorrect. Its getting pretty confused here, you just need to note that when trial balance balanced, it doesnt necessary mean that the trial balance is correct.
If you think you need to revise back on Trial Balance, click here.
There are six of them:
1) Error of Omission As the name implies, this means that a transaction or event has been completely left out from the books. Follow the Debit PEDARI rule and the Credit SCROLG rule to re-correct the error.
2) Error of Commission This error means that posting is done to the wrong account of the same category. Here, the category can be Debtors and Creditors. This error occur when you are supposed to post to a debtor name Carol, but due to a lot of debtors with similar names, say Caroline, then you could have posted in to Caroline account instead of Carol account.
3) Error of Principle This error means that posting is done to a different category of account. So the PEDARI is consider to be different category, and so does SCROLG. So instead of posting to an expenses account, some could have mistakenly posted in assets account. In addition to debit side, when it comes to SCROLG, some could have mistakenly posted in revenues instead of gains. An emphasis here is that most often the mistakes apply to only expenses and assets and gains and revenues. The reason why I have made an emphasis here is that the errors most likely come from mistakenly treated expenses as assets and gains as revenues or the reverse.
4) Error of Original Entry This error means that a wrong amount has been initially recorded in the book of original entry and subsequently posted to the ledger accounts. This error is just as simple as the name implies.
5) Compensating Errors This error means that the debit side of an account is compensated by another error of the same/equal amount on the credit side in another account.
6) Error of Complete Reversal Entry As the name implies, this means that the debit and credit entry recorded for a particular transaction are reversed. The transactions are incorrect but because the amount is the same or equal at both sides, the trial balance still balanced.
1st JAN: This post is till ongoing.
Control Accounts
Posted: November 26, 2012 in Accounting Topic Tags: creditors control account, debtors control account
In real business operations, paying on cash may not be the only option of purchasing goods. Often, customers (debtors) purchased from you on credit. And you, as the owner, purchased goods from suppliers (creditors) on credit. So, recording numerous numbers of customers and suppliers on credit (throughout one year period) could create a lot of errors. One way to ensure arithmetic accuracy is to do control accounts by bringing multiple debtors/creditors in a year to the control accounts (like a summary throughout the year).
Control accounts are a type of accounting control which is used mainly in manual accounting systems. Control accounts are similar to trial ledger to check for arithmetical accuracy of the accounts, just that control accounts are more detailed in nature and only governs one activities at a time, such as the creditors and debtors amounts.
Please take note that sales ledger control account is also known as debtors control account and purchases ledger control account is the same as creditors control account. Both names should be familiarized because all the names are often used during examination. It is not hard to understand the meaning behind each name, you sale your products/services to a debtors and hence the name sales ledger control account
and debtors control account. Likewise, you purchase your products from creditors and hence the name purchase ledger control account and creditors control account.
It should be noted that the following are not included in control accounts,
1) Bad debts recovered
2) Cash sales
3) Cash purchases
4) Increase in provision for doubtful debts
These four items do not affect debtors and creditors account.
Format for Debtors Control Account
Not being able to memorize this format could put you in trouble. A simple way to understand this format is to assume the normal debtor account. A normal debtor account will have a debit entry, representing an increase in the debtor account. An a credit entry represents a decrease in the debtor account. A short summary is represented below.
Format for Creditors Control Account
So the same thing goes with understanding this format, anything that will increase the creditors account will have to be credited, and anything that will decrease the creditors account will have to be debited.
Contra Entry
If you recall that there is a contra entry for cash and bank account; this application is similar to control accounts. Contra entry occurs when you have a creditor that is a debtor at the same time. So, a supplier or (a creditor) will supply you with goods on credit and at the same time purchasing goods (now acting as a debtor) from you on credit. Contra amount is given most of the time.
Depreciation Disposal Account

Posted: July 27, 2012 in Accounting Topic
Disposal is generally simple to do, I have not seen students facing much difficulty in a straight forward question. Disposal account is opened upon the sale of an asset, because we have to delete the item from our accounts.
Some important points to take note in this topic:
1) The asset values at its original cost or historical cost.
2) Accumulated depreciation of the asset will have to be disposed of.
3) There is a cash transaction involved for the disposal of the asset (i.e. you sold your asset for cash or trade-in.)
4) There will be a profit or loss arising from such disposal. (No gain no loss could also be possible but rarely occurs.)
5) (*Optional) You will need to charge the profit or loss from disposal to the Profit & Loss Account.
The T-accounts and explanation are shown below:
As an example, if a motor vehicle was purchased at the start of the year at $50,000, and then disposed off at the end of the second year at a disposal value of $35,000. In this case, lets assume that the depreciation was accumulated to $10,000 (straight line method, $5,000 per year).
Motor Vehicle A/C 1-Jan Cash 50,000 31-Dec Motor Vehicle disposals 50,000
You are disposing of an asset worth $50,000
Here, students often confused why credit a $ 50,000 motor vehicle account. The reason was obvious, the vehicle that you will throw away is originally worth $50,000. Most students tend to write down the disposal value of $35,000 which is wrong > Imagine that your motor vehicle was gone and that your motor vehicle account still has a balance carried down of $15,000 ($50,000-$35,000), this is unexplainable (a gone vehicle with a worthiness of $15,000?). Therefore, any assets sold should be reduced with its original cost.
Provision of Depreciation: Motor Vehicle
31-Dec
Motor Vehicle disposals
10,000
31-Dec
Balance c/d
10,000
Because we are supposed to close of all accounts related to the motor vehicle that we brought, all relevant accounts should be closed. If you note that the words Motor Vehicle disposals appear in the accounts of Motor Vehicle and Provision for depreciation. This signals another account that will be used to close all relevant accounts. (Take note that the account for provision of depreciation is kinda simplified, it only shows accumulated depreciation for second year.)
Important Information: In this example, the asset was purchased at 1st January and sold at the end of the year of the second year 31st December, so it has to be fully depreciated for two years. For A Level students, most often, you will need to pay attention to the date and the month of the purchase and accounts for the depreciation accordingly to the months used during the financial year. However, you should also note if there is any additional information given on the companys depreciation policy. The depreciation policy is to be given highest priority.
Motor Vehicle Disposals A/C 31-Dec Motor Vehicle 50,000 31-Dec Provision for depreciation Cash Loss on disposal 10,000 35,000 5,000
Motor Vehicle Disposals account will be the final account. Those that I have embolded means it were transferred from the first two accounts that we closed. The cash will be amount that we received or the amount that the motor vehicle was disposed off. Since every account has to be balanced, there will be shortage of amount in the credit side of the disposal account by $ 5,000. This is a loss on disposal. Cant picture why? Here, the motor vehicle is worth $50k originally and at the end of the second year, the motor vehicle should worth $40k (after depreciation). And because you sold it for $35k, you are losing the $5,000.
You will also need to note that the reverse of loss on disposal will be on the debit side (profit on disposal).
If the question requires you to open up profit and loss account, then you should! If you are unsure, just note that Loss is an expense, it falls at debit entry in the profit and loss account. Profit is a gain, it falls at credit entry in the
profit and loss account. Or you could use double entry rule, the loss on disposal is credit side, so it will falls on the debit side of profit and loss account, and vice versa.
Depreciation Accounts Based

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For depreciation, started opening accounts are the weakness for most students. I see through them! And I cant emphasize enough how you will need a good basic (if you want to improve, read the first few topics of any accounting textbook) to be really able to grasp opening accounts easily! So the double entry rule is the most basic skill (for the fact that the trial balance and balance sheet will have to be balanced were all thanks to double entry rule!)
I will start explaining from the start (you can skip if you want to), I hope this explanation will implant a seed into your memory!
Example:
On 1 January 2012, a business brought a motor vehicle for $ 40,000. The motor vehicle was depreciated at $5,000 per annum using the Straight Line Method.
Cash or Bank account.
Cash A/C 1-Jan Motor Vehicle 50,000
Money was used to purchase motor vehicle, cash paid out, credit transaction.
Fixed Assets account.
Motor Vehicle A/C
1-Jan
Cash
50,000
Motor Vehicle received, debit transaction.
Deciding the journal entries for Depreciation and Provision for Depreciation can be somewhat tricky.
If you could memorize the journal entries real hard, this will be it
Date 1-Jan
Particulars Depreciation of Motor Vehicle Provision for Depreciation of Motor Vehicle
Debit 5,000
Credit
5,000
But if you think you cant memorize, I will explain it more thoroughly.
First, if you remember that all expenses will falls in the debit side. Check the trial balance to confirm.
Second, the word depreciation means expense, and therefore, it lies in the debit entry. See the journal entry above and refer to the definition previously posted on depreciation.
Third, the double entry account. If you refer to the motor vehicle account earlier, you will know that depreciation will reduce the amount of your fixed assets, and this is opened in another account named Provision for Depreciation. The Motor Vehicle account is not to be reduced because you will need to show the original cost of the asset at the Balance Sheet, and a separate amount to show the total amount of depreciation charged towards the assets.
So the general format for depreciation account,
Depreciation A/C Provision for Depreciation XXX Profit and Loss XXX
and provision for depreciation account,
Provision for Depreciation A/C
First year depreciation.

Balance c/d XXX Depreciation XXX
Second year depreciation.

Balance c/d XXX Balance b/d Depreciation XXX XXX XXX XXX
Whilst in the final account, profit and loss account
Profit and Loss Account for the year ended (vertical format) Expenses: Depreciation of fixed assets (FROM DEPRECIATION A/C) XXX
and balance sheet,
Balance Sheet as at (vertical format) Fixed Assets: Motor Vehicle (FROM PROV of DEPRECIATION A/C) Cost XXX Agg Depr (XXX) NBV XXX XXX
Next post will be on disposal account.
Depreciation Calculation Based

Posted: July 16, 2012 in Accounting Topic Tags: reducing balance method, revaluation method, straight line method
Updated on 18th July 2012 on the meaning of depreciation and provision for depreciation.
This topic requires students to memorize the formula to calculate with each method of depreciation. It should be noted that depreciation only applies to assets (for business purposes only and not for resale) and anything purchased for resale should never be included for depreciation (most often used to trick A level students.)
1) Straight line method (also called fixed installment method)
(Cost Estimated Disposal Value) / Number of Expected Years of Use
Example:
If a motor vehicle was purchased for $25,000 and the estimated disposal value is $5,000, and the number of useful life is 4 years, then,
Depreciation = (25,000 5,000) / 4 = $ 5,000 per year.
Therefore, this assets will have to be depreciated for 4 years at $ 5,000 per year (fixed) before this asset will be disposed off.
2) Reducing Balance Method (also called diminishing balance method)
The general formula is presumed to be = Net Book Value x Fixed Percentage Given
*Important terms have to be remembered, failure to understand this usually caused students proceeding to A level having the same difficulty.
Cost means Original Price of an Asset.
Provision for depreciation is the total depreciation used to reduce the amount of fixed assets in the balance sheet.
Depreciation is a one year expense which is brought forward to the profit and loss account.
Net Book Value means value after depreciation.
Example:
Assume the same motor vehicle at $25,000. The depreciation is to be charged at 10%.
1st year depreciation will be = $ 25,000 x 0.10 = $2,500
2nd year depreciation will be = $ (25,000 2,500) x 0.10 = $2,250
3rd year depreciation will be = $ (25,000 2,500 2,250) x 0.10 = $2,025
and so on The first year uses Cost x Percentage only, while the second year and consecutive years use NBV x Percentage.
3) For A level student, Revaluation method (often used in manufacturing account to depreciate loose tools*)
Revaluation = Opening balance + Purchases Closing balance
The most easiest depreciation method, but most students failed to recall the formula or are unknown of this method.
Example:
If the opening balance of a loose tools account amounted to $2,000 and during the year, the business purchased $500 worth of loose tools and at the end of the year, the loose tools accounted to $1,500.
Depreciation = OB + P CB = $2,000 + $ 500 $1,500 = $ 1,000.
*Loose tools are a part of machinery (spare parts) which can include things such as nails, tools and etc that is easily lost. There are considered to be a part of the fixed assets and so depreciation applies (to account for loose tools lost or stolen).
Depreciation Theory Based

Posted: January 10, 2012 in Accounting Topic Tags: matching principle
Most students also faced problem with this topic. This topic needs a good English vocabulary to start with, otherwise, students tend not to be able to understand it well enough.
Depreciation means the systematic allocation of the cost of a depreciable asset to expense over the assets useful life. Simply saying, imagine a mobile phone that you have purchased a year ago. Your mobile phone during this one year period could have undergo wear and tear, fashion outdated, physical damage and etc. So the next time when you are trying to sell this mobile phone, you need to lower the price because of the damages that your mobile phones have already undergo. Lets say your original mobile phone costs you $600, after a year of using, you sell it for $400. Now, the $200 difference is the depreciation. Note that depreciation is an EXPENSES. This applies to most limited lifetime assets. Students tend to be confused on what will depreciate. Strictly speaking, anything that you think will grow old will depreciate. But, there are circumstances when you dont depreciate asset, asset such as land and investment are those that might not depreciate (you can think of those as something that last forever).
Students should note that in a business settings, depreciation is not calculated this way. Students should also note that depreciation rationale lies in the concept of Matching Principle. There are legit ways of calculating depreciation through
1) Straight Line Method
2) Reducing Balance Method or Diminishing Method
3) Revaluation Method (Applicable for A Level students, usually appears in Manufacturing Account)
The next post will teach you how to calculate depreciation.
Increase and Decrease in Provision of Doubtful Debts

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Increase in Provision of Doubtful Debts
This sub-topic was exceptionally hard to most students. Well, I agree, it takes me three years to understand this subtopic, and I will try to explain it in the most easy way for you guys to learn.
The previous post was concerning any business just starting to open up an provision account, therefore, there is no need to worry about an increase or decrease in provision for doubtful debts. However, in any subsequent years, students need to take note of three possible outcomes
1) Increase in provision of doubtful debts 2) No changes in provision of doubtful debts 3) Decrease in provision of doubtful debts
Say during the last year, the debtors was totaled at $2,000.
Scenario 1: During this year, the debtors totaled at $3,000. If you remember the step one in the previous post, we need to calculate the provision of doubtful debts. In this case,
$3000 x 5% = $150
Now, compare this $150 with previous year of $100. There is an increase in provision for doubtful debts at $50.
Because the amounts of debts have increased, more bad debts will be expected in the future.
Okay, if it blurs you, imagine your friend borrowed ten dollar from you. You expected your friend to pay you back $8 dollars, the other $2, you gave up asking for it. Now, what if your friend borrowed $100 from you. You could have expect your friend to only pay you $80! Can you see the difference now? The bigger the amount you lend to your friend, the higher the amount will goes to expecting bad debts (in this case, $20.) Can you also see that the increase in provision was $18?
An increase in provision for doubtful debts was an extra expenses. (Imagine that $18 of your irrecoverable, isnt that an expense?)
Credit Provision for Doubtful Debts Account.
Debit Profit and Loss Account.
In the Balance Sheet, include the provision for doubtful debts for the year, which is $150.
Decrease in Provision of Doubtful Debts
Scenario 2: The amount of debtors for the year totaled to $1000. The provision for doubtful debts as calculated will be $50. Note, we are comparing with the $100 previous year, not with $150.
You can see that this year provision for doubtful debts have decreased by $50 (100-50.) This decrease was a gain for the business.
Blurred? Imagine your friend originally owe you $100, and you expect $20 as bad debts. Now that your friend paid you $50. You will expect that $10 will become bad debts and the other $10 was gone! STOP and relax, can you see that the $10 (that is gone) becomes an imaginary gain because you are not losing that $10!
A reduction in provision for doubtful debts is a profit to the business.
Debit Provision for Doubtful Debts Account.
Credit Profit and Loss Account.
In the Balance Sheet, include the current amount of the year.
No changes in Provision for Doubtful Debts
Will update soon.
Provision for Doubtful Debts

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Provisions for Doubtful Debts
The most basic idea that i can tell you guys on why provision was needed was all thanks to prudence concept. Accountant takes into consideration of all possible expenses incurred. In this case, the accountants take into consideration of bad debts that will occur in the future.
Here, you should be able to be differentiate that provision is more towards expecting bad debts while bad debts are those expected to become bad really becomes bad debts.
Try not to worry much at the moment, bear in mind that the estimated percentage that will go doubtful will be given.
For example at any year ending, the total amount of debtors totaled to $20,000. It is estimated that 5% of the debts will become bad debts. You will be required to draw a provision account.
First step, calculate what is the provision for doubtful debts.
$ 2000 x 5% = $ 100
Second, Provision for Doubtful Debts Account nature of entry is CREDIT side. So we credit Provision for Doubtful Debts Account.
Provision for Doubtful Debts A/C 20XX $ 20XX 31-Dec Profit and Loss a/c $ 100
Note that because there is no more new entry, we straight away write down (transferred to) Profit and Loss in the account.
Third, remember double entry system? Every CREDIT side, there will be a DEBIT side. So we will need to DEBIT Profit and Loss Account.
Profit and Loss A/C $ Less: Expenses Provision for doubtful debts 100 $
Lastly, we will need to amend the figure in the Balance Sheet account.
Balance Sheet $ Current Assets: Debtors (-) Prov. F. D. D. 2000 -100 1900 $ $
Then thats done!
Bad Debts
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Bad Debts
It would be easier if I break it down into three different sub-topic. It should be easier to understand if students work out the basics first.
PS: I will start to post out the working as soon as possible. It will be harder to understand without format all along.
Since most businesses do receive credit sales, this would means a lot of customers will be owing the business money. The business is therefore risking itself from customers that may never pay their debts (which is what we called as bad debts. Bad debts is an expense to the business, and is charged to the profit and loss account.
Whenever a debt become bad, 1) First, reduce the balance of the subsequent customers/ debtors by crediting it. 2) Opened up a bad debt account and debit it.
Note: Students need to total up the bad debts account before posting it to the profit and loss account.
What happened when bad debts are recovered? It is possible for customers to repay back their bad debts (maybe after they have gotten some money or so), when this happens, we reverse back the steps shown above to: 1) Debit debtor. 2) Credit bad debts account or credit bad debts recovered account. Choose either one, do not put both.
Note that now, we only return the customers or debtors back to their original in debt position. *It was a common
mistake for students to omit the later stage because they thought it was done but it wasnt.
1) Debit either cash / bank depending on how customers pay you. 2) Credit debtors account.
Capital and Revenue Expenditure

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Capital Expenditure
Capital Expenditure is made when business spends money to buy fixed assets or add value to an existing fixed assets.
In general terms, any costs acquired to bring fixed assets in actions are included as capital expenditure. Such actions should include, 1) acquiring fixed assets. 2) bringing them into the business or firm. 3) legal costs of buying buildings. 4) carriage inwards on machinery bought. 5) any other cost needed to get the fixed asset ready for use. (Business Accounting, Wood F and Sangster A)
Revenue Expenditure
Revenue Expenditure are paid to run the daily activities of the business.
PS: This topic should not be looked down as something that is not going to come out in the exam. This topic is complicated, and I will explain more later, when I have the time to add in more info.
Trading and Profit and Loss Accounts
Correction of Errors
Identify the name of the following errors NOT revealed by Trial Balance and correct the errors with a General Journal. 1. Equipment costing $3000 bought on credit not recorded at all in the books. 2. Goods sold to the Danielle $2000 is correctly entered in the bank account but posted wrongly to Daniel account. 3. Purchase of motor vehicle paid by cheque wrongly debited to Purchases account but credited in the bank account correctly. 4. $252 worth of goods taken for personal use are wrongly recorded as $225 in both accounts. 5. Both discount allowed and discount received account are understated by $100. 6. Owner contributed additional $10 000 into business credited to the business bank account and debited to the capital account.
Bookkeeping
From Wikipedia, the free encyclopedia
Jump to: navigation, search For the computer programming concept, see Bookkeeping code. Bookkeeping is to be understood in the context of a business. It is simply the recording of financial transactions. Transactions include purchases, sales, receipts and payments by an individual or organization. Bookkeeping is usually performed by a bookkeeper. Many individuals mistakenly consider bookkeeping and accounting to be the same thing. This confusion is understandable because the accounting process includes the bookkeeping function, but is just one part of the accounting process.[1] The accountant creates reports from the recorded financial transactions recorded by the bookkeeper and files forms with government agencies. There are some common methods of bookkeeping such as the single-entry bookkeeping system and the double-entry bookkeeping system. But while these systems may be seen as "real" bookkeeping, any process that involves the recording of financial transactions is a bookkeeping process. A bookkeeper (or book-keeper), also known as an accounting clerk or accounting technician, is a person who records the day-to-day financial transactions of an organization. A bookkeeper is usually responsible for writing the "daybooks". The daybooks consist of purchases, sales, receipts, and payments. The bookkeeper is responsible for ensuring all transactions are recorded in the correct day book - suppliers ledger, customer ledger and general ledger. The bookkeeper brings the books to the trial balance stage. An accountant may prepare the income statement and balance sheet using the trial balance and ledgers prepared by the bookkeeper.
Contents
[hide]

1 Process 2 Entry systems o 2.1 Single-entry system o 2.2 Double-entry system 3 Daybooks 4 Petty cash book 5 Journals 6 Ledgers 7 Abbreviations used in bookkeeping 8 Chart of accounts 9 Computerized bookkeeping 10 See also
11 Notes and references
[edit] Process
The bookkeeping process primarily records the financial effects of transactions only. The variation between manual and any electronic accounting system stems from the latency between the recording of the financial transaction and its posting in the relevant account. This delay, although absent in electronic accounting systems due to instantaneous posting into relevant accounts, is a basic charateristic of manual systems, thus giving rise to primary books of accounts such as Cash Book, Bank Book, Purchase Book, and Sales Book for manually recording the immediate effect of the financial transaction. In the normal course of business, a document is produced each time a transaction occurs. Sales and purchases usually have invoices or receipts. Deposit slips are produced when lodgements (deposits) are made to a bank account. Cheques are written to pay money out of the account. Bookkeeping involves, first of all, recording the details of all of these source documents into multi-column journals (also known as a books of first entry or daybooks). For example, all credit sales are recorded in the sales journal, all cash payments are recorded in the cash payments journal. Each column in a journal normally corresponds to an account. In the single entry system, each transaction is recorded only once. Most individuals who balance their cheque-book each month are using such a system, and most personal finance software follows this approach. After a certain period, typically a month, the columns in each journal are each totaled to give a summary for the period. Using the rules of double entry, these journal summaries are then transferred to their respective accounts in the ledger, or book of accounts. For example the entries in the Sales Journal are taken and a debit entry is made in each customer's account (showing that the customer now owes us money) and a credit entry might be made in the account for "Sale of class 2 widgets" (showing that this activity has generated revenue for us). This process of transferring summaries or individual transactions to the ledger is called posting. Once the posting process is complete, accounts kept using the "T" format undergo balancing, which is simply a process to arrive at the balance of the account. As a partial check that the posting process was done correctly, a working document called an unadjusted trial balance is created. In its simplest form, this is a three column list. The first column contains the names of those accounts in the ledger which have a non-zero balance. If an account has a debit balance, the balance amount is copied into column two (the debit column). If an account has a credit balance, the amount is copied into column three (the credit column). The debit column is then totalled and then the credit column is totalled. The two totals must agree this agreement is not by chance because under the double-entry rules, whenever there is a posting, the debits of the posting equal the credits of the posting. If the two totals do not agree, an error has been made either in the journals or during the posting process. The error must be located and rectified and the totals of debit column and credit column recalculated to check for agreement before any further processing can take place.
Once the accounts balance, the accountant makes a number of adjustments and changes the balance amounts of some of the accounts. These adjustments must still obey the double-entry rule. For example, the "inventory" account asset account might be changed to bring them into line with the actual numbers counted during a stock take. At the same time, the expense account associated with usage of inventory is adjusted by an equal and opposite amount. Other adjustments such as posting depreciation and prepayments are also done at this time. This results in a listing called the adjusted trial balance. It is the accounts in this list and their corresponding debit or credit balances that are used to prepare the financial statements. Finally financial statements are drawn from the trial balance, which may include:

the income statement, also known as the statement of financial results, profit and loss account, or P&L the balance sheet, also known as the statement of financial position the cash flow statement the statement of retained earnings, also known as the statement of total recognised gains and losses or statement of changes in equity
[edit] Entry systems

Two common bookkeeping systems used by businesses and other organizations are the singleentry bookkeeping system and the double-entry bookkeeping system. Single-entry bookkeeping uses only income and expense accounts, recorded primarily in a revenue and expense journal. Single-entry bookkeeping is adequate for many small businesses. Double-entry bookkeeping requires posting (recording) each transaction twice, using debits and credits.
[edit] Single-entry system

The primary bookkeeping record in single-entry bookkeeping is the cash book, which is similar to a checking (cheque) account register but allocates the income and expenses to various income and expense accounts. Separate account records are maintained for petty cash, accounts payable and receivable, and other relevant transactions such as inventory and travel expenses. These days, single entry bookkeeping can be done with DIY bookkeeping software to speed up manual calculations. Sample revenue and expense journal for single-entry bookkeeping[2] Offic Dat Descripti Reven Expen Sales Servic Invento Adver Freig e No. Sales Misc e on ue se Tax es ry t. ht Supp l 7/1 Balance 1,826.0 1,218. 150.0 835.00 98.00 510.00 295.00 245.00 83.50 61.50 3 forward 0 00 0 104 7/1 Printer450.00 450.00 1 3 Advert
104 2 104 3
ban k 104 4
flyers Wholesale 7/1 r 380.00 3 inventory 7/1 office 92.50 6 supplies 7/1 bank 1,232.0 7 deposit 0 Taxable sales Out-ofstate sales Resales Service sales 7/1 bank 23.40 9 charge 7/1 petty cash 100.00 9 3,058.0 1,880.9 TOTALS 0 0
380.00 92.50
400.00 32.00 165.00 370.00 265.00 23.40 100.0 0 150.0 176.0 184.9 675.00 695.00 0 0 0
2,153. 130.0 775.00 00 0
[edit] Double-entry system

Main article: double-entry bookkeeping system A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts.
[edit] Daybooks
A daybook is a descriptive and chronological (diary-like) record of day-to-day financial transactions also called a book of original entry. The daybook's details must be entered formally into journals to enable posting to ledgers. Daybooks include:

Sales daybook, for recording all the sales invoices. Sales credits daybook, for recording all the sales credit notes. Purchases daybook, for recording all the purchase invoices. Purchases credits daybook, for recording all the purchase credit notes. Cash daybook, usually known as the cash book, for recording all money received as well as money paid out. It may be split into two daybooks: receipts daybook for money received in, and payments daybook for money paid out.
General Journal daybook, for recording journals.
[edit] Petty cash book

A petty cash book is a record of small value purchases before they are later transferred to the ledger and final accounts, it is maintained by a petty or junior cashier. This type of cash book usually uses the imprest system: a certain amount of money is provided to the petty cashier by the senior cashier. This money is to cater for minor expenditures (hospitality, minor stationery, casual postage and so on) and is reimbursed periodically on satisfactory explanation of how it was spent.
[edit] Journals
Journals are recorded in the general journal daybook. A journal is a formal and chronological record of financial transactions before their values are accounted for in the general ledger as debits and credits. A company can maintain one journal for all transactions, or keep several journals based on similar activity (i.e. sales, cash receipts, revenue, etc.) making transactions easier to summarize and reference later. For every debit journal entry recorded there must be an equivalent credit journal entry to maintain a balanced accounting equation.[3]
[edit] Ledgers
A ledger is a record of accounts. These accounts are recorded separately showing their beginning/ending balance. A journal lists financial transactions in chronological order without showing their balance but showing how much is going to be charged in each account. A ledger takes each financial transactions from the journal and records them into the corresponding account for every transaction listed. The ledger also sums up the total of every account which is transferred into the balance sheet and income statement. There are 3 different kinds of ledgers that deal with book-keeping. Ledgers include:

Sales ledger, which deals mostly with the accounts receivable account. This ledger consists of the financial transactions made by customers to the business. Purchase ledger is a ledger that goes hand and hand with the Accounts Payable account. This is the purchasing transaction a company does. General ledger representing the original 5 main accounts: assets, liabilities, equity, income, and expenses
[edit] Abbreviations used in bookkeeping

A/C Account Acc Account A/R Accounts receivable A/P Accounts payable B/S Balance sheet
c/d Carried down b/d Brought down c/f Carried forward b/f Brought forward Dr Debit record Cr Credit record G/L General ledger; (or N/L nominal ledger) P&L Profit and loss; (or I/S income statement) P/R - Payroll PP&E Property, plant and equipment TB Trial Balance GST Goods and services tax VAT Value added tax CST Central sale tax TDS Tax deducted at source AMT Alternate minimum tax EBITDA Earnings before interest, taxes, depreciation and amortisation EBDTA Earnings before depreciation, taxes and amortisation EBT Earnings before taxes EAT Earnings after tax PAT Profit after tax PBT Profit before tax Depr Depreciation Dep Depreciation CPO Cash paid out
[edit] Chart of accounts

A chart of accounts is a list of the accounts codes that can be identified with numeric, alphabetical, or alphanumeric codes allowing the account to be located in the general ledger. The equity section of the chart of accounts is based on the fact that the legal structure of the entity is of a particular legal type. Possibilities include sole trader, partnership, trust and company.[4]
[edit] Computerized bookkeeping

Computerized bookkeeping removes many of the paper "books" that are used to record transactions and usually enforces double entry bookkeeping.
[edit] See also
Accountancy
[edit] Notes and references
1. ^ Weygandt, Kieso, Kimmel (2003). Financial Accounting. Susan Elbe. pp. 6. ISBN 0-47107241-9. 2. ^ Pinson, p.25. 3. ^ Haber, Jeffry (2004). Accounting Demystified. New York: AMACOM. p. 15. ISBN 0-81440790-0. 4. ^ Marsden,Stephen (2008). Australian Master Bookkeepers Guide. Sydney: CCH ISBN = 978-1921593-57-4
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Trading Account:

Definition and Explanation:

Items of Trading Account:

Debit Side Items:

Credit Side Items:

Format of Trading Account (T or Account Form):

Cr. ......... ......... .........

Trading Accounts Items:

Return Outwards or Purchases Returns:

It is also shown by way of deduction from purchases in the trading account.

Returns Inwards or Sales Returns:

Closing Stock and its Valuation:

Closing Entries for Trading Account:

(Being the transfer of the latter accounts to the former.)

Returns Outward Account

(Sales etc., transferred to trading account)

3. Closing Stock Account

(Being to record closing stock)

Advantages of Trading Account:

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Profit and Loss Account:

Definition and Explanation:

Format of the Profit and Loss Account:

xxxx xxxx xxxx xxxx xxxx xxxx

By Net Loss (transferred to capital account of the trader)

To Net Profit (transferred to capital account of the trader)

Closing Entries for Profit and Loss Account:

1. Transferring all expenses or losses:

Profit and loss account To Each of the various expenses or losses

2. Transferring all items of gains etc:

Various nominal accounts (representing gains) To Profit and loss account

3. Transferring net gain to capital account:

4. Transferring net loss to capital account:

Profit and Loss Account in Statement Form/Income Statement:

Format of Profit and Loss Account/Income Statement in Statement Form:

Explanation of Certain Items of Income Statement:

2. Expenses incurred in the general administration of the business are known as

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Difference Between Trading Account and Profit and Loss Account:

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Distinction/Difference Between Trial Balance and Balance Sheet:

1. What is the difference between trial balance and balance sheet?

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Distinction/Difference Between Trial Balance and Balance Sheet:

1. What is the difference between trial balance and balance sheet?

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The stock on 21st December, 1991 was valued at $25,000.

Sales Less | returns i/w

60,000 1,300 58,700 25,000

83,700 Gross 30,600

$ 500 4,750 30,000 4,500 25,000 1,000 65,750

5,000 4,000 500 9,500 8,000 1,000 9,000

1,000 800 200 15,800

20,000 9,000 29,000 78,200 15,800 94,000 1,000 93,000

Total Liabilities and Capital

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Trading and Profit And Loss Account

Understand Gross Profit

Go back to the definition of Gross Profit, We can rewrite it as

Gross Profit = Sales Cost of Goods Sold = 4 0.50 = 3.50

Understand Cost of Goods Sold

Cost Of Goods Sold = Opening Stock + Purchases Closing Stock

Net Sales / Turnover