Accountancy Lecture Notes

Jul 13, 2024

Accountancy Lecture: Preparing Trading and Profit & Loss Account, and Balance Sheet

Overview

  • Objective: Understand how to prepare Trading Account, Profit and Loss Account, and Balance Sheet.
  • Approach: Explanation through a challenging example.

Trading and Profit & Loss Account Format

  • Heading: Includes the period, e.g., “Trading and Profit & Loss Account for the year ended 31st March, 2016.”
  • Structure: T-format with columns for Particulars and Amount.
  • Sections: Divided into Trading Account and Profit and Loss Account.

Trading Account Details

Debit Side

  • Opening Stock: Starting inventory.
  • Purchases: Gross Purchases less personal withdrawals (drawings) and non-business purchases (e.g., furniture).
  • Wages: Direct wages related to production.
  • Other Direct Expenses: E.g., Carriage Inwards.
  • 'To' prefix for all accounts on this side.

Credit Side

  • Sales: Total sales revenue.
  • Closing Stock: Ending inventory (also recorded as an asset).
  • 'By' prefix for all accounts on this side.

Balancing

  • Gross Profit/Loss: Deduce by balancing debit and credit sides. If credit is greater, it is Gross Profit; else, Gross Loss.

Profit and Loss Account

  • Starting Point: Begins with the result of Trading Account (Gross Profit/Loss).
  • Debit Side: Records Indirect Expenses (e.g., Carriage Outwards, General Expenses, Salary, etc.).
  • Credit Side: Records Indirect Incomes.

Indirect Expenses Examples

  • Carriage Outwards
  • General Expenses
  • Discount
  • Printing and Stationery
  • Advertisement
  • Insurance (less prepaid amounts)
  • Salesmen's Commission (including outstanding)
  • Postage and Telephone
  • Salaries (including outstanding)
  • Rates and Taxes
  • Bad Debts (including provisions)
  • Depreciation for Furniture and Motor Car

Balancing

  • Net Profit/Loss: Determined by comparing total debit and credit sides. Net Profit if credit > debit and vice versa.

Balance Sheet

  • Format: T-format with Liabilities on left and Assets on right.
  • Heading: Balance Sheet as on a specific date.

Liabilities

  • Capital: Including adjustments (Net Profit added, Drawings subtracted).
  • Sundry Creditors
  • Outstanding Expenses: E.g., Salesmen's Commission, Salaries Outstanding.

Assets

  • Sundry Debtors: Less Bad Debts and Provision for Doubtful Debts.
  • Motor Car: Initial value less Depreciation.
  • Furniture and Fittings: Initial value plus purchases less Depreciation.
  • Inventories: Closing Stock.
  • Others: Bank, Cash, Prepaid Insurance etc.

Final Check

  • Ensure total of Liabilities equals total of Assets.

Key Concepts

  • Direct vs Indirect Expenses: Direct related to production, Indirect are not.
  • Adjustments: Ensuring all income and expenses of the current period are accounted for.
  • Depreciation: Systematic reduction in the value of tangible assets.
  • Provisions: Future potential losses accounted as current period expenses.
  • Prepaid/Outstanding: Prepaid expenses are current assets, outstanding expenses are liabilities.

Conclusion

  • Practice: Important to work through exercises to understand all adjustments and treatments.
  • Resources: Further videos and detailed breakdowns available for complex topics.

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