Trading account and profit and loss account difference
The Profit and Loss Account is prepared to ascertain the net profit or net trading account and profit and loss account difference of the business. Items like indirect expenses related to sales, distribution, administration, finance etc. Gross Profit is transferred to Profit and Loss Account. Amount of Gross Profit depends on the valuation of stock. Increase in the value of stock will increase the gross profit. Similarly, reduction in the value of closing stock will reduce the gross profit.
Amount of Net Profit depends on the valuation of assets other than stock. For example, provision for doubtful debts, depreciation etc. Less Office and Administrative Expenses: Non - Operating Incomes: Balance Sheet As at March 31, The purpose is to establish the arithmetical accuracy of the books of account. It provides information as to the profitability and financial position of the firm.
It is essential to prepare the balance Sheet to complete the accounting process. Though desirable, it may be possible to dispense with its preparation. Only personal and real accounts appear in the Balance Sheet. In the Trial Balance all accounts must be written; no account can be left out. Normally, a closing stock does not figure in the Trial Balance. Normally, it is prepared only at the end of the trading period.
A Trial Balance is prepared normally every month, and whenever desired. A Balance Sheet cannot be prepared without making adjustments for outstanding and prepaid items and without taking into account all events and transactions of the year. A Trial Balance can be prepared at any stage, without even making adjustments.
Theory Base of Accounting. Recording of Transactions I. Trial Balance and Rectification of Errors. Depreciation, Provisions and Reserves. Financial Statements Final Accounts. Accounting and Trading account and profit and loss account difference Management System. Accounting System using Database Management System. Closing Entries in Respect of the Profit and Loss Account Entries that are to be recorded in the Journal for preparing the Trading and Profit and Loss Account, that is, for transferring the various accounts to these two accounts, are known as closing entries.
To complete the Profit and Loss Account, the under-mentioned three closing entries are necessary. For items to be debited to the Profit and Loss Account, this account is debited and the various accounts concerned are credited.
For example, salaries Account, Rent Account, Interest Account are closed by transferring their balances to the debit side of the Profit and Loss Account. The entry passed are: At this stage the Profit and loss Account shows net profit or net loss. Both are transferred to the capital account. In case of net profit, i. It does not include any income from other sources It may include income from other sources 5. It does not depend on the amount of net profit It depends on the amount of gross profit 6.
Similarly, reduction in the value of closing stock will reduce the gross profit Amount of Net Profit depends on the valuation of assets other than stock. Operating Profit and Net Profit Profit may be divided into two ie.
Gross profit is the excess of net sales revenue over cost of goods sold. Operating expenses includes office and administration expenses, selling and distribution expenses, cash discount allowed, interest on bills payable and other short term debts, bad debts and so on. Net Profit means the excess of revenue whether operating or non - operating over expenses and losses whether operating or non - operating.
In other words, net profit is arrived by deducting operating expenses from operating trading account and profit and loss account difference as well as non operating profit. Expenses which are incidental or indirect to the main operations of the business are called non-operating expenses. They include interest on loan, charities and donations, loss on sale of fixed assets, extraordinary losses due to theft, and loss by fire and so trading account and profit and loss account difference.
Similarly, non- operating income are added while computing the net profit. Non- operating incomes include, receipt of interest, rent, dividend, profit on sale trading account and profit and loss account difference fixed assets, etc.
Compute Operating Profit and Net Profit from the following particulars: A balance sheet is prepared from Real Accounts and Personal Accounts. In the words of Francis R. It shows the status of the business as at a given moment of time, in so far as accounting figures can show its status.
The purpose of preparing the Balance Sheet is to ascertain the financial position of a business ie. This is why the balance sheet has the heading: Balance Sheet as at As against the heading of Trading and Profit and Loss Trading account and profit and loss account difference which usually is for a year. Since even a single transaction will make a difference to some of the assets or liabilities, the Balance Sheet is true only at a particular point of time.
That is the significance of the words 'as trading account and profit and loss account difference. A Balance Sheet is prepared with a view to measure the true financial position of a business at a particular point of time. It is a device to show the financial position of a business in a systematic and standard form. It is a screen picture of the financial position of the business. Through it the position of the business, at a particular point of time, can be understood at a glance.
Just as a doctor will feel the pulse of a person and know whether he is enjoying good health or not, in the same manner by looking at the Balance Sheet trading account and profit and loss account difference can know whether the firm is solvent or not. If the assets exceed liabilities it is solvent; in the other case, it would be insolvent. It may serve as the basis for determining purchase consideration of the business. From the following information, prepare Balance Sheet. Cash in hand - Rs.
Characteristics The Balance Sheet has certain characteristics which trading account and profit and loss account difference be noted. It is prepared at a particular date, rather on the close of the day and not for a period. It is true only on that date and not later. The Balance Sheet shows the financial position of a business as a going concern. The Balance Sheet is not an account but only a statement of assets and liabilities.
On the left - hand side, the liabilities of the business are shown whereas on the right - hand side the assets of the business appear. The total of the asset side must be equal to the total of liabilities side. If this is not the case, there is certainly an error somewhere. Basis Balance Sheet Trial Balance 1. Purpose The purpose is to portray the financial position. Information about profits It provides information as to the profitability and financial position of the firm No such information is possible from the Trial Balance 3.
Necessity It is essential to prepare the balance Sheet to complete the accounting process Though desirable, it may be possible to dispense with its preparation 4. Headings The two sides are headed as assets trading account and profit and loss account difference liabilities The two columns are headed as debit and credit. Coverage Only personal and real accounts appear in the Balance Sheet In the Trial Balance all accounts must be written; no account can be left out 6. Period Normally, it is prepared only at the end of the trading period A Trial Balance is prepared normally every month, and whenever desired 8.
Adjustment A Balance Sheet cannot be prepared without making adjustments for outstanding and prepaid items and without taking into account all events and transactions of the year A Trial Balance can be prepared at any opzioni azioni borsa italiana, without even making adjustments.
Grouping and Marshalling Arrangement of Assets and Liabilities The assets and liabilities should be shown in a certain order in the Trading account and profit and loss account difference Sheet. Therefore, they should be arranged in certain groups and in a particular order. This is called 'Grouping' and 'Marshalling' of the Balance Sheet. Thus, 'Grouping' means putting items of a similar nature under a common heading.
The arrangement of assets and liabilities in a particular order in the Balance Sheet is called 'Marshalling'. Before we discuss the arrangement of assets and liabilities in the Balance Sheet, let us first understand what assets and liabilities mean. The team 'assets' denote the economic resources property of the business and includes all current and fixed assets. These are discussed subsequently. The term liabilities denote all claims against the assets of the business and include those of the outsiders creditors or those of the owners of the business.
Assets and liabilities are shown in the Balance Sheet either in the order of liquidity or in the order of permanence. In the order of liquidity - Liquidity means the facility with which the assets may be converted into cash; those assets which are most difficult to convert into cash are written last. Liabilities are to be shown first as short - term liabilities and then as long - term liabilities and last of all as capital.
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