unit-7-final-accounts-i

Unit-7 Final Accounts I

In this unit you will learn about the basic framework of final accounts including their presentation in vertical form.

Give dosing entries for Trading and Profit and Loss Account?

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Learning Pundits Content Team

Written on Apr 16, 2019 4:12:35 PM

Trading Account

1) Purchases: This item refers to the goods purchased for the resale and includes both cash and credit purchases. The purchase of assets which are meant for permanent used in business such as machinery furniture, etc., are not included in the purchases, The amount taken to Trading Account will be the net amount of purchases (after deducting purchase returns/returns outwards.) If the proprietor has taken away some goods from the business for his personal use, the same should also be deducted from the total purchases.

2) Sales: It includes both cash and credit sales of goods and refers to the net amount of sales (after deducting sales returns-returns inwards). Sales of old furniture, car, machinery, etc. are not included in the sales. Similarly, sales of old newspapers etc. are also excluded from sales. Such items are shown as miscellaneous income in the Profit and Loss Account.

3) Wages: Wages are usually treated as a direct expense and so shown in the Trading Account. The difficulty arises when wages are clubbed with salaries (an indirect expense) and the Trial Balance includes a single amount for 'Wages and Salaries'. In such a situation, the amount may be shown in the Trading Account. It is based on the assumption that the item includes the salaries of the supervisory staff in the factory itself. But, if the item in the Trial Balance reads 'Salaries and Wages' it will be taken to the profit and Loss Account on the assumption that the item includes wages of the office staff only. It should be noted that wages paid in connection with the purchases of fixed assets or the construction of building should not be charged to Trading Account. They are to be included in the cost of the concerned fixed asset. There is another important aspect in relation to wages which must be classified. If a Manufacturing Account is prepared the wages paid to the factory labor is debited to Manufacturing.

4) Freight, Carriage and Cartage: When paid in connection with purchases of goods, they are shown in the Trading Account. Such freight and carriage are also termed as 'Freight Inwards' and 'Carriage Inwards' respectively. 'Freight Outwards' and 'Carriage Outwards' relate to sales and therefore taken to the debit of Profit and Loss Account.

5) Royalties: Royalties refer to the payments made for the use of copyright or a patent. The amount of royalty is generally based on the quantity produced. It is, therefore, treated as direct expense and charged to Trading Account. But if it is calculated on the basis of quantity sold as in case of books, it is shown in the Profit and Loss Account. Royalties are also paid to the Government for extraction of minerals such as coal, diamond, gold, etc. These are charged to the Profit and Loss Account of the mining companies, You will learn about the accounting of such royalties later under a separate course.

Profit and Loss Account

 

1) Rent, Rates and Taxes: These are charges levied by the municipal bodies on the house property. It is a common item of indirect expenses debited to the Profit and Loss Account.

2) Insurance: Generally, assets are insured to cover the risk of loss, say, by fire. Premium paid to the insurance company should be treated as a business expense. When assets such as factory building, factory machinery, etc. are insured, the insurance premium should be debited to Trading Account. If on thp other hand, the premium is paid for insurance of assets in the office building, office furniture, etc., it should be charged to Profit and Loss Account.

3) Bad Debts: Bad debts denote the amount which could-not be recovered from the debtors to whom the goods were sold on credit. It is a loss and so debited to the Profit and Loss Account

4) Depreciation: Depreciation means decrease in the, value of fixed asset due to normal wear and tear. You. know that every fixed asset such as machinery, furniture, vehicle, etc. depreciates in value on account of its constant use. Such reduction in their value is a loss to the business and so charged to the Profit and Loss Account. If, however, a Manufacturing Account is also prepared, depreciation on machinery and factory building is charged to the Manufacturing Amount, while depreciation on office building, office furniture, office equipment, etc. is the Profit and Loss Account.

5) Trade Expenses: This item represents various small expenses incurred in the business. They are also called General Expenses, Sundry or miscellaneous Expenses.

6) Packing: The cost of packing materials such as polythene bag, wrapping materials, etc. for delivery is a distributor/expense and hence charged to Profit and Lass Account. Where packing is essential to make the products fit for sale, the market as in the case of cigarettes, biscuits, medicines, oil, etc. it is called 'packaging9 and such expenditure is charged to the Trading Account.

7) Samples: Generally, samples of goods are distributed free of charge to increase sales. The cost of such samples should be treated as a selling expense and so debited to Profit and Loss Account.

8) Income Tax: It is the tax payable by a person in his income. In the case of a sole trading concern, the tax paid by the proprietor on the profits of the business is treated as a personal expense. Hence, it should be added to draw 6s: directly deducted from capital.



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