ZeePedia Add to Favourites   |   Contact us


Financial Accounting

<<< Previous Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account Next >>>
 
img
Financial Accounting (Mgt-101)
VU
Lesson-8
LEARNING OBJECTIVE
After studying this chapter, you will be able to:
o  Draw up Profit & Loss account from the information given in trial balance.
o  Differentiate the term, Receipt & Payment, Income & Expenditure and Profit & Loss
account.
FINANCIAL STATEMENTS
 Different reports generated from the books of accounts to provide information to the relevant
persons.
 Every business is carried out to make profit. If it is not run successfully, it will sustain loss. The
calculation of such profit & loss is probably the most important objective of the accounting function.
Such information is acquired from "Financial Statements".
 Financial Statements are the end product of the whole accounting process. These show us the
profitability of the business concern and the financial position of the entity at a specified date.
 The most commonly used Financial Statements are `profit & loss account' `balance sheet' & `cash
flow statement'.
Income and Expenditure Vs Profit and Loss
Income and Expenditure Account ­ is used for Non-Profit Organizations like Trusts, NGOs.
Profit and Loss Account ­ is used for Commercial organizations like limited companies.
PROFIT & LOSS ACCOUNT
Profit & Loss account is an account that summarizes the profitability of the organization for a
specific accounting period.
Profit & Loss account has two parts:
o  In the first part, Gross Profit is calculated.
o  Gross profit is the excess of sales over cost of goods sold in an accounting period.
o  In trading concern, cost of goods sold is the cost of goods consumed plus any other charge
paid in bringing the goods in salable condition. For example, if business purchased certain
items for resale purpose and any expense is paid in respect of carriage or bringing the goods
in store (transportation charges). These will also be grouped under the heading of `cost of
goods sold' and will become part of its price.
o  In manufacturing concern, cost of goods sold comprises of purchase of raw material plus
wages paid to staff employed for converting this raw material into finished goods plus any
other expense in this connection.
o  In the 2nd part, Net Profit is calculated.
o  Net Profit is what is left of the gross profit after deducting all other expenses of the
organization in a specific time period.
How to prepare Profit & Loss account
 One way is to write down all the Debit and Credit entries of Income and Expense accounts in the
Profit and Loss Account. But it is not sensible to do so.
 The other way is that we calculate the net balance or we can say Closing Balance of each income and
expense account. Then we note all the credit balances on the credit side and all the debit balances on
the debit of profit and loss account.
 If the net balance of profit and loss is Credit (credit side is greater than debit side) it is Profit and if
the net balance is Debit (Debit side is greater than credit side) it is a loss.
28
img
Financial Accounting (Mgt-101)
VU
Income, expenditure, profit and loss
Income is the value of goods and services earned from the operation of the business. It includes
both cash & credit. For example, if a business entity deals in garments. What it earns from the sale of
garments, is its income. If somebody is rendering services, what he earned from rendering services is
his income.
Expenses are the resources and the efforts made to earn the income, translated in monetary terms.
It includes both expenses, i.e., paid and to be paid (payable). Consider the above mentioned example,
if any sum is spent in running the garments business effectively or in provision of services, is termed
as expense.
Profit is the excess of income over expenses in a specified accounting period.
Profit= Income-expenses
In the above mentioned example, if the business or the services provider earn Rs. 100,000 & their
expenses are Rs. 75,000. Their profit will be Rs. 25,000 (100,000-75,000).
Loss is the excess of expenses over income in a specified period of time. In the above example, if
their expenses are Rs. 100,000 & their income is Rs. 75,000. Their loss will be Rs. 25,000.
RULES OF DEBIT & CREDIT
Increase in expense is Debit (Dr.)
Decrease in expense is credit (Cr.)
Increase in income is credit (Cr.)
Decrease in income is Debit (Dr.)
Classification of expenses
It has already been mentioned that a separate account is opened for each type of expense. Therefore,
in large business concerns, there may be a large number of accounts in organization's books.
As profit & loss account is a summarized record of the profitability of the organization. So, similar
accounts should be grouped for reporting purposes.
The most commonly used groupings of expenses are:
o  COST OF GOODS SOLD
o  ADMINISTRATION EXPENSES
o  SELLING EXPENSES
o  FINANCIAL EXPENSES
Cost of goods sold is the cost incurred in purchasing or manufacturing the product, which an
organization is selling plus any other expense incurred in bringing the product in salable condition.
Cost of goods sold contain the following heads of accounts:
o  Purchase of raw material/goods
o  Wages paid to employees for manufacturing of goods
o  Any tax/freight is paid on purchases
o  Any expense incurred on carriage/transportation of purchased items.
Administrative expenses are the expenses incurred in running a business effectively. Main
components of this group are:
o  Payment of utility bills
o  Payment of rent
o  Salaries of employees
o  General office expenses
o  Repair & maintenance of office equipment & vehicles.
29
img
Financial Accounting (Mgt-101)
VU
Selling expenses are the expenses incurred directly in connection with the sale of goods. This head
contains:
o  Transportation/carriage of goods sold
o  Tax/freight paid on sale
If the expense head `salaries' includes salaries of sales staff. It will be excluded from salaries & appear
under the heading of `selling expenses'.
Financial expenses are the interest paid on bank loan & charges deducted by bank on entity's bank
accounts. It includes:
o  Mark up on loan
o  Bank charges
Receipt & Payment Account
A receipt & payment account is the summarized record of actual cash receipts and actual cash
payment of the organization for a given period of time. This is a report that provides cash movement
during the reported period. In other words, it can be defined as the summarized record of the cash
book for a specific period.
Receipt & Payment vs. Profit & Loss Account
Receipt & payment account is the summarized record of actual cash receipts and actual cash payment
during the period while profit & loss account also includes Receivable and Payable.
Income & expenditure Vs. Profit & Loss Account
These are two similar terms. Only difference between these two terms is that income & expenditure
account is prepared for non profit oriented organizations, e.g. Trusts, N.G.O's, whereas profit & loss
account is prepared in profit oriented organizations, e.g. Limited companies, Partnership firms etc.
In case of Income and Expenditure Surplus/Deficit is to be find and in case of Profit and loss
account profit or loss is to be find.
30
img
Financial Accounting (Mgt-101)
VU
A sample of Profit and Loss Account
Gross
Name of the Entity
profit and
Profit and Loss Account
Net profit
for the period Ending ----
DEBIT
CREDIT
Gross
PARTICULARS
AMOUNT
PARTICULARS
AMOUNT
profit
=
Rs.
Rs.
Income  ­
Cost of sale
60000
income
100000
cost
of
Gross profit c/d
40000
sales
(Income ­ cost of sales)
= 100000-
Total
100000
Total
100000
60000
Admin expenses
15000
Gross profit b/d
40000
Selling expenses
5000
= Rs.40000
Financial expenses
5000
Net profit
=
Gross
Net profit (Gross profit ­
profit
­
expenses)
Expenses
Total
40000
Total
40000
= 40000 ­ 15000 ­ 5000 - 5000
=Rs.15000
A sample of Income Statement
Name of the Entity
Income statement
For the period Ending ----
PARTICULARS
AMOUNT
AMOUNT
Rs.
Rs
Income/Sales/Revenue
100000
Less: Cost of sales
(60000)
Gross profit
40000
Less: Administration expenses
15000
Selling expenses
5000
Financial expenses
5000
(25000)
Net profit
15000
Recognizing Income and Expenditure
Income ­ should be recognized / recorded at the time when goods are sold or services are rendered.
Expenses ­ should be recognized / recorded when benefit relating to that expense has been drawn.
31
Table of Contents:
  1. Introduction to Financial Accounting
  2. Basic Concepts of Business: capital, profit, budget
  3. Cash Accounting and Accrual Accounting
  4. Business entity, Single and double entry book-keeping, Debit and Credit
  5. Rules of Debit and Credit for Assets, Liabilities, Income and Expenses
  6. flow of transactions, books of accounts, General Ledger balance
  7. Cash book and bank book, Accounting Period, Trial Balance and its limitations
  8. Profit & Loss account from trial balance, Receipt & Payment, Income & Expenditure and Profit & Loss account
  9. Assets and Liabilities, Balance Sheet from trial balance
  10. Sample Transactions of a Company
  11. Sample Accounts of a Company
  12. THE ACCOUNTING EQUATION
  13. types of vouchers, Carrying forward the balance of an account
  14. ILLUSTRATIONS: Ccarrying Forward of Balances
  15. Opening Stock, Closing Stock
  16. COST OF GOODS SOLD STATEMENT
  17. DEPRECIATION
  18. GROUPINGS OF FIXED ASSETS
  19. CAPITAL WORK IN PROGRESS 1
  20. CAPITAL WORK IN PROGRESS 2
  21. REVALUATION OF FIXED ASSETS
  22. Banking transactions, Bank reconciliation statements
  23. RECAP
  24. Accounting Examples with Solutions
  25. RECORDING OF PROVISION FOR BAD DEBTS
  26. SUBSIDIARY BOOKS
  27. A PERSON IS BOTH DEBTOR AND CREDITOR
  28. RECTIFICATION OF ERROR
  29. STANDARD FORMAT OF PROFIT & LOSS ACCOUNT
  30. STANDARD FORMAT OF BALANCE SHEET
  31. DIFFERENT BUSINESS ENTITIES: Commercial, Non-commercial organizations
  32. SOLE PROPRIETORSHIP
  33. Financial Statements Of Manufacturing Concern
  34. Financial Statements of Partnership firms
  35. INTEREST ON CAPITAL AND DRAWINGS
  36. DISADVANTAGES OF A PARTNERSHIP FIRM
  37. SHARE CAPITAL
  38. STATEMENT OF CHANGES IN EQUITY
  39. Financial Statements of Limited Companies
  40. Financial Statements of Limited Companies
  41. CASH FLOW STATEMENT 1
  42. CASH FLOW STATEMENT 2
  43. FINANCIAL STATEMENTS OF LISTED, QUOTED COMPANIES
  44. FINANCIAL STATEMENTS OF LISTED COMPANIES
  45. FINANCIAL STATEMENTS OF LISTED COMPANIES