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Wednesday, March 31, 2010

Items in Debit side of Trading Account

1. Opening Stock: Closing stock of the previous year becomes the opening stock of the current year which is available on the opening day of new accounting period. However, there will no opening stock in case of newly opened business. It is available in the trial balance that must be debited to the trading account. Opening stock may include the raw materials, work-in-progress as well as finished goods.

2. Purchases and Purchases Returns: Purchases of raw materials or resale goods made during the year are debited to trading account. Both cash and credit purchases are taken into consideration. Purchase returns are deducted from purchases to find out the figure of net purchases.

3. Purchase expenses: All the expenses that are incurred to bring the goods or materials upto warehouses are purchase expenses that are debited to trading account. Carriage inward, cartage, freight inwards, dock charges, clearing charges etc. are some purchase expenses.

4. Manufacturing Expenses: All the expenses relating to the manufacture of goods are manufacturing expenses which are debited trading account. Wages payable to workers engaged in the production of goods and the factory expenses incurred in the operation of factory like, factory lighting, heating, insurance, rent, power, coal, fuel, gas, water etc are examples of manufacturing expenses.

Need or Importance of Trading Account

Some of the objectives of preparing Trading account are as follows:
  1. To determine the cost of production which helps to calculate the gross profit or loss of trading activities.
  2. To assemble all the direct expenses of bringing the goods in saleable condition.
  3. To ascertain the performance of different years of business through the gross profit ratio which is calculated by dividing the gross profit by sales.
  4. To help to calculate the ratio of cost of goods sold to sales which is helpful in the fixation of price of the products.

Trading Account

Trading account is the first part of the final accounts which is prepared to calculate the gross profit or loss of buying, manufacturing and selling of trading goods for a certain period. Gross profit if the difference between sales and cost of goods sold. If the amount of sales of goods is higher than the cost of goods sold, there is a gross profit. Reversibly, if sales figure is smaller the difference is gross loss. In the words of J.R. Batliboi, "The trading account shows the results of buying and selling of goods therefore, it does not include any items of operating expenses but transactions in goods are included."

Preparation of Final Accounts

The final accounts include trading account, profit and loss account and balance sheet. They are prepared normally with the help of trial balance. Sometime, ledger balances and additional information may be given. While preparing final accounts, we need to mind the relation of trial balance with final account.
  1. Debit items of trial balance generally appear either on the debit side of trading or profit and loss account or on the assets side of the balance sheet.
  2. Credit items of trial balance generally appear either on the credit side of the trading or profit and loss account or on the liability side of the balance sheet.

Introduction to Final Accounts

After the completion of preparing Trial Balance, Final Accounts are prepared to ascertain the net result i.e. profit or loss and the financial position of the business. In other words, a business can find out the profit or loss made by the business through the final accounts. They are prepared at the close of the accounting period with the help of trial balance. It is the final step of accounting circle which includes:
  1. Trading Account.
  2. Profit and Loss Account.
  3. Balance Sheet.
In case of manufacturing concern, a separate manufacturing account must be prepared before preparing trading account. Final accounts are prepared mainly for following two objectives.
  1. To ascertain the net result i.e. profit or loss made by the business firm during the accounting period.
  2. To know the financial position of the business i.e. assets and liabilities of the business as on given date.
The net result of the business operation is disclosed by the profit and loss account and the financial position of the business is shown by the balance sheet.

Generally used Terms in Accounting

Journal Entry, Ledger, Trial Balance, Trading Account, Manufacturing Account, Profit and Loss Account, Gross Profit or Loss, Net Profit or Loss, Profit and Loss Appropriation Account, Balance Sheet, Current Assets, Fixed Assets, Fictitious Assets, Investment, Current Liabilities, Permanent Liabilities, Marshalling of Assets and Liabilities, Liquidity, Permanency, Final Account, Closing Stock, Outstanding Expenses, Prepaid, Depreciation, Bad Debts, Provision for Bad Debts, Provision for Discount, Drawing, Accrued Income, Interest on Capital, Interest on Drawing etc........

Thursday, March 18, 2010

Revenue Loss

Revenue losses are those losses which are occurred during the normal course of business activities. They are shown on the debit side of Profit and Loss Account. The some example of revenue losses are as follows:
  • Loss on sale of trading goods.
  • Loss on leakage or theft of goods.
  • Loss on goods lost by fire etc.

Capital Loss

Capital losses are those losses which are incurred at the sale of fixed assets. It also consists the losses on raising capital. Such losses are shown on asset side in the balance sheet. The some example of capital losses may be as follows:
  • Loss on sale of machinery at lower price than its book value.
  • Loss or discount on issue of shares.
  • Loss or discount on issue of debentures.

Revenue Profit

Revenue profit are those profit which is generated by the activities of day to day business operation since the main target of a business is to earn such revenue profits. Such profit is shown in Profit and Loss Account. The following are the some example of revenue profits:
  • Profit earned on the sale of trading goods.
  • Commission earned.
  • Income from investment.
  • Discount received etc.

Capital Profit

Capital profits are those profits which are earned by selling fixed assets or issuing shares or debentures. They should be transferred to capital reserve account, which appear in the balance sheet as liability. The some example of capital profits are as follows:
  • Income earned by selling fixed assets in more value than its book value.
  • Income earned by issuing shares or debentures at premium.
  • Income earned by forfeiting the shares.

Revenue Receipt

Revenue receipts are generated in the day to day operation of business. A big portion of revenue receipts is occupied by the amount obtained from the regular sales of trading goods or services. The following are the some example of revenue receipts:
  • Amount received from sale of trading goods.
  • Amount received from sale of services.
  • Interest received.
  • Commission, discount received.
  • Rent received etc.

Wednesday, March 17, 2010

Capital Receipts

Those receipts which are generated in the form of capital is called capital receipts. It denotes the amount received by a firm from the owner or from outsiders like creditors, debenture holders as a loan. It also includes the amount received from the sale of fixed assets.

Some examples of capital revenue are as follows:
  • Amount received by issuing shares and debentures.
  • Amount received from owner as additional capital or share capital.
  • Bank loan.
  • Loan from others financial institutions or persons.
  • Amount received by selling fixed assets.

Deferred Revenue Expenditure:

Deferred revenue expenditure is also called as capitalized expenditure. The benefits of some revenue expenditures may be consumed for several years which are called deferred revenue expenditure. Only a part of it is considered as revenue expenditure and debited to profit and loss account. The remaining amount is put as an asset in the balance sheet.

Some Deferred Revenue Expenditure are as follows:
  • Preliminary expenses.
  • Share underwriting commission.
  • Discount on issue of shares and debentures.
  • Cost of heavy advertisement.

Revenue Expenditure

Those expenditure which are done to operate the business are revenue expenditures. The benefit of such expenses is to utilized in an accounting period. Nature of revenue is repetitive and may incur so many time during the business life. The examples of revenue expenditures are as follows.

1. Expenditures incurred in the normal course of business:
  • Rent, wages, salaries, advertising, legal expense, taxes, insurance premium, fuel, water, lighting, heating, bank charges, telephone, postage, stationery etc.
  • Interest, commission, discount, depreciation, bad debts etc.
2. Expenditures incurred to purchase raw materials or resale goods:
  • Cost of trading (resale) goods.
  • Cost of raw material.
  • Consumable stores.
3. Expenditure incurred to maintain fixed assets for working condition:
  • Repairs and renewals of fixed assets.
  • Replacement of fixed assets.

Capital Expenditure

Capital expenditure is done to acquire the fixed assets. Such fixed assets is acquired for the benefits for more than one accounting year. These expenditure help to earn income, which are shown in the assets side of the balance sheet.

According to Kohler,"Capital Expenditure is an expenditure intended to benefit future periods, in contrast to a revenue expenditure, which benefits a current period, an addition to a capital asset. The term is generally restricted to expenditures that add fixed assets units or that have the effect of increasing the capacity, efficiency, life span or economy of operation of an existing fixed asset."

The some example of capital expenditures are as follows:
  1. Expenditure done for acquiring fixed assets:
  • Purchase of land building, plant and machinery.
  • Purchase of furniture and fixtures.
  • Purchase of trade marks, patents, goodwill, copyrights, patterns and designs.
2. Expenditures incurred for putting an old asset in working condition:
  • Cost of erection of plant and machinery.
  • Cost of repairing (huge amount) fixed assets.
  • Cost of installation of new assets.
3. Expenditure incurred on an existing asset in the improvement or extension of the business:
  • Addition of land, building, machinery etc.
  • Extension of existing fixed assets.
  • Cost of increasing capacity of fixed asset.
4. Expenditure spent on raising the capital:
  • Share underwriting commission.
  • Discount or loss on issue of shares or debentures.
5. Expenditures incurred for the establishment of an organization:
  • Registration fees.
  • Legal and consultancy fees.
  • Advertisement expenses.
6. Expenditure incurred for research, development and inventions.

Capital and Revenue

Capital and revenue are two important basic terms of accounting where the word "Capital" refers to the owner's investment in business in terms of money or its worth. It is invested either to acquire fixed assets or to operate the business smoothly. The term "Revenue" denotes the amount received from sale of goods or rendering of services.

Relating to these two terms, major concepts are as follows:
  1. Capital Expenditure and Revenue Expenditure.
  2. Capital Receipts and Revenue Receipts.
  3. Capital Profit and Revenue Profit.
  4. Capital Loss and Revenue Loss.

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