Receipts and Payments Account

According to J. R. Batliboi, "A Receipt and Payment Account is summary of actual cash receipts and payments extracted form the cash book covering a particular period."

From the above definition, it can be concluded that receipts and payments account is summary of cash transactions. It is prepared on the basis of cash book. It also records the banking transactions. It starts with opening balance of cash and bank. All the cash or cheque receipts are entered on the debit side where as all incomes through cash or cheques are credited. It ends with closing balance. It records all the cash transactions whether they relate to current, past or coming year and whether they are of capital or revenue nature. However, it fails to record the outstanding amount of incomes and expenditure. It is generally prepared to find out the closing balance of cash. Receipts and Payments is the basis of preparing Income and Expenditure Account.

Features of Receipts and Payments Accounts:

1. It is a summary of cash book where the cash and bank transactions are grouped, classified and analyzed under suitable heading.
2. It begins with opening balance and ends with closing balance of cash and bank.
3. All the cash and cheque receipts are recorded on the debit side where all cash and cheques payments are recorded on the credit side.
4. It does not records non-cash items like depreciation, outstanding expenses and incomes, prepaid expenses etc. Only actual receipts and payments are entered.
5. All the cash receipts and payments relating to current, past and coming years are entered in it.
6. All the cash receipts and payments whether they are capital or revenue nature, are recorded in it.

Limitations of Receipts and Payments Account:

1. It does not show profit and loss of the organization.
2. It does not disclose the positions of assets and liabilities other than cash and bank.
3. It fails to distinguish between capital and revenue payment and receipts.
4. It does not follow "accrual concept" of accounting as a result it does not show the outstanding incomes and expenses, prepaid expenses, depreciation or appreciation of fixed assets etc.

Accounting Procedures of Non-Trading concern

Like trading organization, non-trading concerns also maintain some usual books of account like, journal, ledger cash books, trial balance etc. However, it is difficult to keep full set of books by a small organization. Therefore, most of the non-trading organization, prepare cash book only before the preparations of final accounts. These organizations have to prepare the final accounts more or less similar to that of trading organization by following double entry book keeping systems to answer on the following three points.

1. What is the summary of the cash transactions of particulars period?
2. Is the income of the year sufficient to meet the expenditures?
3. What is the financial position of the organization?
   

The final accounts of non-trading concerns are as follows:

• Receipts and Payments Account.
• Income and Expenditure Account.
• Balance Sheet.

Non-Trading Concern

Non-trading concerns are also called as non-trading institutions or organizations which are established for rendering services to the society or its members. Their aim is not to earn profit but to promote and to provide the recreational facilities in the field of sports, are and culture, education, health etc.

Examples of non-trading concerns are:

• Educational institutions as colleges, schools.
• Clubs as Lion Club.
• Societies as Red Cross Society.
• Charitable hospitals.
• Unions as trade union, labour unions.
• Libraries, hostels.
• Associations etc.

Features of Non-trading organization;

1. The main aim of such organization is not to earn profit but to render services to the society or its members.
2. Non-trading organization may have excess of income over expenditures (surplus) but they are not distributable among the members; the surplus (profit) is used for the strengthening the organizational goal.
3. Most of the transactions are dealt with cash rather than credit.
4. The main sources of income of such organizations may be subscription from members, donation from general public, grants from other government etc.
5. They do not prepare Trading and Profit and Loss Account.

Provision for Discount on Debtors

Discount is allowed to debtors if they make quick and prompt payment. At the end of the accounting year, there may be certain debtors to be allowed discount which is an expected loss. to meet such discount, a provision is created form the profit of current year which is called provision for discount on debtors.

Note: New provisions for discount on debtor is to be calculated on the good debtors because discount is allowed to good debtor but not to bad and doubtful debts.

Provision for Bad and Doubtful Debts

Doubtful debt denotes the amount of debtors which may not be recoverable. It is an expected loss. To meet such loss, some amount set aside as provisions which is called provision for doubtful debts. It is calculated a fixed percentage of sundry debtors. While posting it, provision for bad or doubtful debt is shown on the debit of profit and loss account and also shown as a deduction from debtor on the assets side of the balance sheet.

Provisions

Provision refers to the setting aside of certain amount  to meet some contingencies which may be expected but not yet incurred. In other words, provision usually means any amount written of or retained by way of providing depreciation, renewal or diminution in the value of assets. It is a charge to the profit and loss account. Some examples of provision are as:

1. Provision for bad and doubtful debt.
2. Provision for discount on debtors.
3. Provision for taxation.
4. Provision for depreciation.
5. Provision for repairs and renewals etc.

Provisions are either shown as deductions from assets in the balance sheet or on the liability side of balance sheet. When provision is no longer required, it is treated as a profit.

Features:

1. Provisions are made for expected contingencies.
2. It is a charge to the profit and loss account.
3. They are always made for a specific purpose.

Importance:

1. To ascertain the true net profit or loss.
2. To know the true financial position of the business.
3. To cover the loss in value of assets.

Secret Reserves

Secret reserve is created to strengthen the financial position of the firm without disclosing reserves to the public. They are not shown in the balance sheet. Such reserves are usually maintained by banks, insurance companies etc. Generally, it is created by showing lower profit than what actual is. It may be done in any of the following ways:

1. By undervaluing the closing stock.
2. By providing excessive depreciation.
3. By overvaluing liabilities.
4. By making excessive provisions or losses.

Advantages:

1. It helps to strengthen the financial position of business.
2. It helps to meet the exceptional losses.

Disadvantages:

1. Profit shown by the financial statement is not accurate.
2. True financial position of the business can not be disclosed.

Reserve for Redemption of Liabilities

The firm requires to manage big amount to redeem long term liabilities like debentures. Thus, a reserve is created out of profit for the redemption of liabilities which is called reserve for redemption of liabilities.

Advantages:

1. Loan can be repaid in specific date which increases the creditability of the business.
2. It helps to avoid the financial crises of repaying liabilities.

Disadvantages:

1. It reduces the amount of divisible profit of shareholders.

Dividend Equilization Fund

It is created for maintaining equal dividend over years. In other words, sometime a company may not have sufficient profit to distribute as dividend. At that time, the company can utilize such fund.

Advantages:

1. It helps to distribute same rate of dividend even there is loss in the business.
2. Due to the uniformity of dividend over years, the market value of shares does not fluctuate abnormally.

Disadvantages:

1. Creation of dividend equilization fund reduces the amount of divisible profit.
2. Small organization having poor financial position may not be able to create such fund. 
   

Research and Development Fund

This fund is also created out of profit. It is a specific  reserve which is created to meet heavy expenditures of research and development of new product in the market. In this perfect competition business world, all most all the businesses require to spend for research of new product.

Advantages:

1. It helps to research and develop the new product.
2. It helps to earn good profit due to the invention of new and better product in the market.

Disadvantages:

1. It reduces the divisible profits of the shareholders.
2. Small organization having poor financial position may not be able to create such fund.

Sinking Fund

Sinking fund is a specific reserve set aside for redemption of a long term debt or the replacement of a wasting assets. The distinct feature of sinking fund is that the amount of it is invested in outside securities to earn the interest. The investment is collected before the use of specific purpose.

Advantages of sinking fund:

• There will be no problem of collecting funds for the purchases of new assets.
• Sinking fund is also created to repay the long term loan, therefore company will not face the problem of managing fund from outsiders.
• It can be invested in outside securities which will increase sum of reserve.

Disadvantages of sinking fund:

• A big amount of divisible profit is utilized for sinking fund.
• The fund may not fulfill its purpose if the invested amount has not been collected in time.

Revenue Reserve

Revenue reserve are created out of revenue profit. Revenue profits refer to the profit that is earned by operating the business. Profit on sales of goods, discount received etc. are revenue profits. There are two types of revenue reserves:

1. General Reserve
2. Specific Reserve

General Reserve:

A general reserve is also known as "Free Reserve" which is created only when there is a  profit or when the management desires to create. This reserve is created by setting aside a prat of the profits in order to strengthen the general financial position of the business. The aim of creating such reserve is not a specific purposes.

• To meet unknown future losses.
• To expand the business as additional working capital.
• To equalize rate of dividend over years in case of joint stock company.
• To strengthen the financial position of the business.

Specific Reserve:

These reserves are created for specific or definite purposes. It must be created even there is loss. Generally, the followings are some purposes of creating specific reserves.

• To equalize  the dividend over years - Dividend Equalization Reserve.
• To meet the repayment of debentures - Debenture Redemption Reserve.
• To provide funds for the replacement of assets - Reserve for Replacement of Assets.

Types of Reserves

1. Capital Reserve
2. Revenue Reserve

1. Capital Reserve:

Capital reserves are those reserves, which are not created out of operating profit. In other words, these reserves are created out of capital profits. Profit on sale or revaluation on fixed assets is capital profit, which are generally not available for distribution among the shareholders of the company. The following are some examples of capital profits, which are the sources of creating capital profits which are the sources of creating capital reserves.

• Profit on sale of revaluation of fixed assets.
• Profit on repayment of debentures.
• Profit earned through the issue of shares at premium.
• Profit earned through forfeiture and re-issue of shares.
• Profit on the purchase of running business etc.

Utilization of Capital Reserves:

• To meet future capital losses
• To issue as fully paid bonus shares
• To strengthen the financial position of the business.

Reserve

The term 'reserve' denotes something kept for future use. In accounting sense, it denotes the amount set aside out of profit for the purpose of strengthening the financial position of the business. It is created for meeting unknown liability or loss in the future. Thus, it is not an expenses or loss in real sense.

According to William Pickles,"Reserves mean the amounts set aside out of profits and other surpluses, which are not earmarked in any way to meet any particular liability, known to exist on the date of the balance sheet".

Features of Reserves:

1. It is created for meeting unknown liability or losses.
2. It is created out of net profits.
3. It is not created compulsorily.
4. It is a part of undistributed profit, so it is shown in balance sheet until is is used.

Objectives of Reserves:

• It works as an additional capital for the expansion of business through internal resources.
• It strengthens the financial position of business.
• It helps to meet any unknown liabilities, looses or contingencies in the future.
• It provides funds for the repayment of debentures, preference share capital.
• It helps to equalize in the rate of dividend in case of company.

Factors affecting the amount of Depreciation

a) Original cost of the assets: Original cost includes the purchase price of the asset plus freight and installation expenses. Depreciation is charged on cost of asset so, it is found as:

Cost of Asset = Purchase price + Freight (Transportation expenses) + Installation (erection) expenses

b) Estimated working life of the asset: All the fixed assets have their working life which can be estimated but not predetermined. After this period, the assets will be worthless or scrap. The working life of asset plays vital role in the determination of depreciable amount.

c) Scrap value: Scrap value is also called as salvage or residual or terminal value which means to the value that will be realized by selling the asset after the expiry of the estimated working life. Such amount must be deducted in cost of assets in the calculation of depreciation.

Objectives for providing depreciation

1. For the replacement of assets: The fund equal to the amount of the depreciation is created which will remain in the firm. After the expiry of the life of asset, the same fund can be utilized to replace the new asset.
2. For the determination of true profit or loss: Depreciation is also an expense like repair and maintenance which must be included in profit and loss account to ascertain the correct profit or loss of a business for the year.
3. For the presentation of assets in the balance sheet at their proper value: Depreciation must be charged to each fixed asset for the true and fair presentation of assets in the balance sheet. The depreciation is deducted from the cost or book value of assets each year.
4. For the determination of correct cost of production: Correct cost of production can not be ascertained if the depreciation is not charged to the fixed assets. Thus, it is necessary to include amount of depreciation in the calculation of cost of each product.
   

Causes of Depreciation

1. Wears and Tears: The value of an asset declines due to its constant use in the business. Generally, fixed assets are depreciated due to wear and tears which means reduction in the efficiency and value of an asset caused from vibration, friction, accident, movement, erosion etc.
2. Innovation: Due to the development of science and technology, the new and improved automatic machines may be invented. Such invention reduces in the value of old and existing machinery.
3. Expiry of Time: The value of some assets like patent right, copy-right, lease hold property etc. decrease with the passage of time. The right of such assets is predetermined for certain duration. After its expiry, there is no value even it is not used.
4. Exhaustion: The value of some assets like mines and quarries go on declining with the continuous use.
5. Fall in market price: Another reason of depreciation is permanent fall in the price of an asset. The value of asset reduces as the market price of an asset continuously goes on declining.

Depreciation

The non-trading fixed assets of a business like land, building, machinery, furniture etc. may be get depreciated in value due to various reasons. In other words, the value of such assets reduces each year due to use. Such gradual ad permanent reduction in the value of the assets due to wear and tear or from any other causes is called Depreciation. The word depreciation is derived from a Latin work 'Depretium' which is composed of two words 'De' and 'Pretium', where 'De' denotes decrease and 'Pretium' denotes price. Thus, the word depreciation means decrease in the price. It indicates a fail in the value of an asset which is a loss or an expense for a business and shown in the debit side of profit and loss account. It must be deducted from the respective assets in the balance sheet.

According to J.R. Batliboi,"Depreciation means permanent decline in the value of assets due to wear and tear or from any other cause."

According to R.G. Williams,"Depreciation may be dfined as a gradual deterioration in value of assets due to use."

Additional notes while prepaing Final Accounts

1. Any reserves or fund account given in the in the trial balance should be shown in the balance sheet only.
2. Any transfer to Employees Provident Fund and other Staff Welfare Fund like pension fund should be debited to P/L account as a charge to profit rather than an appropriation and shown in the balance sheet as "Provision".
3. Declaration of dividend at a certain percentage should be calculated on the paid up capital.
4. Premium paid on redemption of preference share should be written off against the existing share premium account. In its absence, the profit and loss account should be debited.
5. Investment should be shown at cost price.
6. Interest on investment should be calculated on face value of investment.
7. No dividend is paid on calls in advance and call-in-arrears.
8. In case of the transfer of amount from reserve or funds to P/: appropriation account i.e., withdrawl of reserve, should be shown in credit side of P/L Appropriation Account.
9. In case of preference and equity shares, only proposal to pay dividend on preference shares is made before making any proposal for equity dividend.
10. Provision for tax of current year may be shown in P/L Appropriation Account.
11. Tax paid in the current year represents either tax paid of previous year or advance (prepaid) tax paid of current year.
12. Finished goods must always be valued at the lowest of the cost, or replacement or market price. However, raw materials and stores are valued at cost price.
13. Domestic and household expenses of proprietor as rent for the dwelling house, drawing etc, are not debited to the profit and loss account and they should be debited to the capital account.
14. Income tax paid by the proprietor on his income is also his private expense and should not be debited to the profit and loss account and should be debited to capital account. (The treatment is different in case of the final account of company).
    

List of Important Adjustments

1. Outstanding Expenses
2. Prepaid Expenses
3. Accrued Income
4. Advance Income
5. Closing Stock
6. Depreciation on Fixed Assets
7. Interest on Capital
8. Interest on Drawing
9. Bad Debts
10. Provision for Bad Debts
11. Provision for Discount on Debtors
12. Provision for Discount on Creditors
13. Goods Lost by Accident
14. Drawing in Goods
15. Goods used in Business
16. Interest on Loan
17. Commission Payable to Managers
18. Taxation
    

Adjustment in Final Accounts

Those transactions given mostly outside the trial balance like expenses paid in advance, income received in advance, income accrued but not received, bad debts, provisions for bad debts, depreciation on assets etc. may be unrecorded; such transactions are called adjustments. They have to be adjusted before the preparation of final accounts for true and real determination of profit and to present the true picture of financial position of the firm.

An adjustment has two sides effect i.e., may be recorded in Trading and Profit and Loss Account or in Trading and Balance Sheet or in Profit and Loss Account and Balance Sheet or on both sides of Balance Sheet.

Marshalling of Assets and Liabilities

The arrangement of assets and liabilities in the balance sheet is known as marshalling of assets and liabilities. The marshalling of assets and liabilities can be done either in order of liquidity or in order of permanency.

In order of liquidity, liquid assets and current liabilities are shown first in the balance sheet. But in order of permanency, those assets and liabilities which are permanent nature are shown first.

Notes on preparing Balance Sheet

• All the real and personal accounts having debit balances (given in debit side of trial balances) should be shown on the asset side of balance sheet.
• All the real and personal accounts having credit balances (given in credit side of trial balances) should be shown on the liability side of balance sheet.
  

Liability side of Balance Sheet

Capital:

It is the amount of money invested by the businessman into the business. Net profit earned increases the amount of capital whereas net loss and drawing decrease the capital.

Long term liabilities:
Those liabilities which are spend after long period say after 5 or 10 years are called long term liabilities. Examples of such liabilities are:

• Bank loan
• Debentures
• Bonds
• Mortgage

Current liabilities:
These liabilities are to be repaid within a short period usually within an accounting year such as;

• Creditors
• Bills payable
• Bank overdraft
• Outstanding expenses
• Provision for dividend and taxation
• Advance income
• Short term loan.
  

Fictitious Assets

Such assets are nominal in nature and do not have real value. They are either the past accumulated losses or expenses incurred once in the life of a business. Some examples are,

• Preliminary expenses
• Discount or loss on issue of shares and debentures
• Deferred revenue expenditure e.g. advertisement expenses
• Brokerage and share underwriting commission
• Debit balance of profit and loss account.
  

Current Assets

Those assets which can be converted into cash through the normal course of business within a short time ordinarily in an accounting year. Some examples are:

• Cash in hand
• Cash at bank
• Bills receivables
• Debtors
• Closing stock
• Prepaid expenses
• Short term investment
• Accrued income etc.
  

Fixed assets

Those assets which are of a relatively permanent nature used in operation of business. They are for earning income but not for resale like;

• Land and building
• Plant and machinery
• Furniture and fixture
• Lease holds and freehold
• Motor vehicles
• Goodwill
• Patent
• Trademark etc.

Importance of Balance Sheet

1. It shows the financial position of the organization for a certain period by showing details about capital, assets and liabilities.
2. It helps to test the liquidity position of the organization by providing necessary infomation for the calculation of liquidity ratios.
3. It also helps to know solvency position i.e., long term loan paying ability of a firm.
4. It shows capital structure i.e. the position of owner's capital, shareholder's capital and borrowed capital of a firm.
   

Balance Sheet

Balance sheet is also known as the statement of assets and liabilities, which shows the financial position of the organization at a given date of accounting period. It is the last part of final accounts to be prepared with the help of trial balance after the preparation of profit and loss account.

According to Freeman,"A balance sheet is an item wise list of assets, liabilities and proprietorship of a business at a certain date."

Features of Balance Sheet:

1. It shows the financial position of the business on a particular date.
   
2. It gives the knowledge of assets and liabilities.
3. It is a statement but not an account like trading and profit and loss account.
4. Total figure of assets side is always equal to the total figure of liability side.

Items of credit side of Profit and Loss Account

1. Gross profit transferred from trading account.
2. Various incomes: Discount received, commission received, rent received, interest received, bad debt recovered, commission received etc.

After entering all the expenses and incomes in the debit and credit side of profit and loss account respectively, net profit is found on the debit side of profit and loss account if credit total figure is greater than debit total. But it will be net loss if the debit total is heavier than the credit total.

Items of debit side of Profit & Loss Account

1. Gross loss transferred from trading.
2. Office and administrative expenses: Office salaries, office rent, office lighting, printing and stationery, legal charges, general expenses, audit fees, insurance, postage etc.
3. Financial expenses: Interest on loan, discount allowed, bank charges, interest on capital etc.
4. Selling expenses: Salesman salaries and commission, advertising, brokerage commission, free samples, bad debts, traveling expenses etc.
5. Distribution expenses: Carriage outwards, warehouse expenses, warehouse rent and insurance, delivery van expenses, packing expenses etc.
6. Other items: Depreciation on fixed assets, provision for bad debts, repairs and renewable etc.
   

Profit and Loss Account

After the preparation of the Trading account, Profit and Loss Account is prepared. Profit and Loss account is taken as the second part of the final account. It is prepared to calculate the net profit or loss of the business made during a certain period. Profit and loss account contains all expenses or losses and incomes or gains that have not been dealt with while preparing the trading account.

According to Prof. Carter,''A profit and loss account is an account into which all gains and losses are collected, in order to ascertain the excess of gains over the losses or vice-versa.

Importance of Profit and Loss Account:
- It helps to determine the net profit or net loss made by a business during a year.
- It helps to determine the ratio between the indirect expenses and net profit.
- It is helpful to calculate the ratio between net profit and gross profit.

Items shown on the Credit side of Trading Account

1. Sales and sales return: Sales refers cash or credit sale of trading goods. It is credited to trading account. Sales return is deducted from the sales figure to get net sales. Sales of fixed assets are ignored.
2. Closing stock: It denotes the goods in hand with the firm at the end of the accounting period. Closing stock also may include raw material or work-in-progress or finish goods. Generally, closing stock is given outside the trial balance which must be shown on the credit side of trading account and on the asset side of balance sheet. However, it is entered only in credit side of trading account if it is given inside the trial balance. Closing stock is valued at cost or market price which ever is lower in case of both prices.

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........

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.

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.

Disposal of Suspense Account

There will be no balance left in suspense account if all the errors are located and rectified. Sometime, all the errors may not be rectified then, there will be still some balance in the suspense account which should be transferred to the balance sheet i.e. debit balance in asset side whereas credit balance in the liability side of balance sheet.

Suspense Account

Sometimes, trial balance does not agree due to some errors which have not been found yet. At the same time, if we are required to prepare final acounts as soon as possible, the trial balance is rectified temporally by writing amount in lighter side under the name of 'Suspense Account'. If the credit side is short, the suspense account will be credited and if the credit side is bigger, this account will be debited. The amount standing to the debit or credit of suspense account represents the net effect of one sided error.

One sided error

When one sided errors are located after the preparation of trial balance, they are rectified by passing journal entries. One account either debited or credited and another is suspense account either in debit or credit side. Suspense account is used to rectify only these errors which affect the trial balance. If the rectified account is debited in the entry suspense account will be credited to complete the double entry and vice versa.

Rectification of Errors

As error is a mistake and rectification denotes act of correcting the errors that have already committed in the books of accounts. In other words, rectification of error is a complex job of removing the effect of an error by replacing with correct situation which requires a sound knowledge of the fundamental principles of book-keeping and accounting. Whenever an error is found, it must be rectified because if the errors are not rectified, the profit, the profit or loss and financial position shown by final account will not be accurate.

Methods of Rectifying Errors:

Rectification of errors in the books of account by rubbing or cutting or tearing or putting ink or t-pex etc, reduces the authenticity of accounting records. They may be not be valid too. So, the appropriate methods rectifying errors must be applied. Generally errors are rectified by the following ways:

1. If an error is located in the subsidiary books before posting in ledgers wrong figure should be truck off and correct figure should be written above the wrong figure by drawing a straight line over the wrong figure.
2. If a wrong figure has been posted in ledger account, it also may be rectified by neatly crossing out the wrong figure by a single line and writing correct figure above the crossed figure.
3. If the errors are located after a long time (after closing of books of accounts), it must be rectified by passing journal entries.
   

Errors not Disclosed by a Trial Balance

It is important to note that the agreement of a trial balance does not prove that all the books of accounts are free of accounting errors in all cases. There may be some errors ever though two sides of a trial balance will agree. It means some errors as given are not disclosed by the trail balance.

1. Errors of omission: When two aspects debit or credit of a transaction are omitted to record in journal, then they are also not posted to ledger and trial balance. A trial balance is effected by the equal amount.
2. Errors of commission: When a transaction has been recorded but has been wrongly entered in the books of original entry or posted in the ledger, then it is called an error of commission. Such errors are the result of carelessness of accountants. Errors of commission committed by posting wrong amount of wrong side by totaling or balancing wrong amount in subsidiary books of ledger accounts by making wrong entry in journal or ledger etc. Example, if goods purchased $2010 from John is entered in purchase account as $1020 again John account will be credited by same amount. Both sides have been effected by equal amount so the trial balance shall agree.
3. Compensating errors: When an error committed previously has been neutralized by another error committed later on, such error is called compensating error. This type of error does not affect the trial balance.
   
4. Errors of principles: An error of principle is an error which violets the fundamentals of book-keeping. In other words, such errors are committed when fundamental principles of book-keeping and accountancy are not followed by the accounting staff wrong allocation of expenditure between capital and revenue excess or inadequate provision for depreciation, over or under valuation of stock, furniture purchases is recorded in purchase account etc. are errors of principles.
   

Errors Disclosed by a Trail Balance

The following errors are revealed by the trial balance showing disagreement.

1. Posting of wrong amount: Sometimes, wrong amount is posted in one of the two accounts. For example goods sold of $500 are correctly entered in credit side of sales account but it was debited in cash account as $550. There is a difference in amount of $50. As a result trial balance shows the disagreement.
2. Posting on the wrong side: When an item is by mistake posted on the wrong side of an account in the ledger, it would cause disagreement in the trial balance. Suppose, wages paid of $1500. In this case, wages account must be debited by $1500. But wages account was debited accurately however cash account was also debited instead of crediting it. It created the excess amount in debit side.
3. Wrong totaling of subsidiary books: When there is error in totaling of subsidiary books, that will cause disagreement of trial balance. Suppose sales book has been totaled $1000 instead of $1050.
4. Wrong totaling or balancing of ledger account: Sometimes, errors may be committed in writing totaling or balancing of ledger account the trial balance will disagree.
5. Ommission to post an amount into ledger: When an aspect of transaction is omitted to post in ledger account, the trial balance shows disagreement. For example, cash paid for interest $200. Interest account was debited by the same amount but it was omitted to credit in cash account.
6. Ommission to enter an amount in trial balance: If an amount is omitted to enter in trial balance while transferring from ledger balances, then the trial balance shows disagreement.
   

Types of Errors

Errors are committed knowing or unknowing which greatly affect the financial position of the particular organization. Generally there are two types of errors i.e. error of principles and clerical errors. Errors which are aroused when the fundamental principles of book-keeping and accountancy are not followed by the accountants called errors of principles. They may be committed either intentionally or unintentionally. Such errors are not disclosed by trail balance clerical errors are committed due to carelessness, negligence and frauds of accountants. Clerical errors can also be further divided into two i.e.

1. Errors Disclosed by a Trail Balance
2. Errors not Disclosed by a Trail Balance
   

Accounting Errors

An accounting errors refers to a mistake of books of account. In the course of recording transaction in books of account i.e. journal, subsidiary books, ledgers, many errors may be committed by the carelessness of accountants or account holders. However, some errors are committed by accountants or account holders intentionally are called fraud. Fraud is an intentionally committed to deceived some related stakeholders or for the benifits of personal or group.

Reasons for not agreeing trial balance:

The debit total of trial balance should be equal to credit total. Sometimes, they are not equal and it is assumed that there are some errors in books of account. Some of the reasons of errors may be as follows:

1. Trial balance will disagree if a transaction is posted in one side of an account and omitted to post it in the another side of another account.
2. If wrong amount is posted in ledger accounts, the trial balance will not agree.
3. When an amount is posted wring side say in debit side instead of credit side, the trial balance will not agree.
4. Sometime, a transaction may be posted twice in the ledger accounts. As a result, the total of a trial balance will not be equal.
5. Disagreement of a trial balance may be caused by the wrong totaling or balancing of ledger accounts.
6. While totaling the figure of subsidiary books there may arise some errors that will cause disagreement of trial balance.
7. Omission to post a ledger balance also causes the disagreement of a trial balance.
8. If there is wrong in totaling of trial balance, a trial balance will disagree.
9. Another cause of disagreement of a trial balance may be the error made in carrying forward the total from one page to another.
   

3. Mixed Method:

This is the combination of total and balance methods. Total and balance methods of preparing trial balance are performed in same sheet. The amount column is divided two for total and two for balance method.

2. Balance Method

Balance method of preparing trial balance is very common. It is prepared with the help of ledger balances. First of all, all ledger accounts are balanced at the end of the year. A balance is the difference between the two sides of an account. If the debit side of an account is bigger, then insert the difference on the credit side of the account but it is known as 'debit balance'. On the other hand, if credit side of an account is bigger, then insert the difference on the debit side of the account. It is known as 'credit balance'. Now, the debit balance shall be entered in the debit and credit balance in the credit column of trial balance. The total of both debit and credit side must be equal.

1. Total Method

Under this method, trial balance is prepared with the debit and credit totals of all the ledger accounts. First of all, totals of all ledger accounts are found. Later on, debit totals of ledger accounts are transferred to debit column of trial balance and credit totals are transferred to credit column of trial balance. After then, the sum of both debit and credit columns of trial balance are found. The grand total of both columns should be equal. This method of preparing trial balance is not popular because it does help on preparation of final accounts. Final accounts are prepared from the ledger balances but not from totals of debit and credit.

Methods of Preparation of Trial Balances:

A trial balance may be prepared under following three methods:

1. Total Method.
2. Balance Method.
3. Mixed Method.
   

Ruling of Trial Balance

Trial balance does not have any special format. It is simply a vertical presentation of ledger balance in the form of the table. Serial number, names of the ledger accounts, ledger folio, debit ledger balance and credit balance are kept on the trial balance.

Objectives of Trial Balance

1. To check arithmetical accuracy: Trial balance helps ot check the arithmetical accuracy. If the debit total of trial balance is equal to credit total, it proves that books of accounts are arithmetically accurate. However, disagreement of trial balance narrates us that there are some errors in the books of accounts.
2. To detect the errors: Disagreement of trial balance simply indicates that there are some acounting errors that must be detected and rectified before final accounts are perpared. Trial balance helps to detect some errors like woring totaling and balancing of ledger accounts, wrong side and amount posting, posting of wrong balance in trial balance etc. However, it is required to note that all the errors are not revealed or disclosed by trial balance.
3. To server as base for the preparation of final accounts: Final accounts are prepared on the basis of trial balance. A corect trial balance assures us to prepare the true final accounts. A trial balance itself is a summary of ledger balance where all the balances of all ledger accounts are available at one place. It facilitates the accountants to prepare final accounts.

Trial Balance

As per accounting process, financila transactions are firstly entered in primary book or journal and then they are posted to various concerned ledger accounts. Finally, they are transferred to final accounts. Before preparing final accounts, it is necessary to know that the books of accounts are accurate or not because a number of mistakes may have been committed while entering in primary books or posting them in ledgers. The "dual aspect" of book-keeping states that every transaction has two aspects i.e. debit and credit. Therefore, the debit balances of all the ledger accounts must be equal to credit balances. For this purpose, a statement is prepared at the end of a certain period, say monthly, half-yearly by taking debit and credit ledger balances which is called trial balance. It is prepared to check arithmetical accuracy of books of accounts. If the debit totla of trial balance is equal to credit total, it is assumed that there are no errors in the books of accounts. However, disagreement of the total of debit and credit side in the trial balance indicates that books of accounts are not maintained properly and errors have been committed. In other words, it is a statement rather than an account. It is prepared to test the accuracy for the preparation of final accounts.