What is profit and loss account and balance sheet
First we have proved the arithmetical accuracy of ledger by means of trial balance and now we proved to ascertain our final accounts i.e Profit and loss account and balance sheet.
In order to determine the profit and loss of a business and its financial position final accounts at the end of period are prepared, the term final accounts means statements which are finally prepared to show the profit earned or loss suffered by the business at the end of the period concerned.
In order to know the profit and loss earned by a business firm income statement or trading and profit and loss account is prepared .this statement is preparing a balance sheet of the business. This statement is also called “position statement or the statement of financial condition”
Trading and profit and loss account:
As the name indicates it self, it is made up of two accounts.
Trading account & profit and loss account.
Trading and profit and loss account also called income statement. It may be prepared either in account from(T form) or in report form (statement form).
The account or T form is traditional and s used widely but in recent years ay business houses prefer to present the profit loss account/income statement in the report form.
Trading Account:
The trading account contains transaction occurring throughout the trading period and which gives the gross trading result. We can say trading account is the account which prepared to determine the gross profit or the gross loss of a trader.
On Debit Side of Trading account:
- The value of opening stock of goods
- Net purchases made during the year(less returns)
- Direct expenses.
On Credit Side of Trading account:
- Total sales made during the period (less returns).
- The value of closing stock of goods.
Trading Account
| To opening stockTo purchases _)less returnsTo carriage inwardTo wages To freight
To gross profit Transfer to profit and loss a/c |
………………
……. …….
……. |
By salesLess sales returns By closing stockGross lossTransfer to profit and loss a/c |
…….…….……. |
Profit and Loss Account:
Profit and loss account is the account whereby a trader determines the net profit or loss of his business.
The profit and loss account is opened with gross profit transferred from the trading account. After this all expenses and loses are recorded if there are any incomes or gains there will be credit to the profit and loss account. The account is closed by transferring this net profit or loss to the capital account of the trader.
Profit and loss account
| To gross loss Salaries RentRent & ratesDiscount allowed Commission allow Insurance Bank charges Legal charges Advertisement Trade expenses Bad debts To Net profit (transferred to balance sheet)
|
………………………………
……… …….. …….. …….. ……… ……… ……… ……… |
By Gross profit Interest received Discount received Commission receivedOther receipts
By Net loss (transferred to balance sheet) |
…….…….…….…….
……. |
Balance Sheet:
A balance sheet is a statement drawn up at the end of trading period. All the Assets and liabilities of a business arranged in the customary order to exhibit the true and correct state of affairs of the concern as on a given date.
A balance sheet is prepared from a trial balance after the balance of nominal account are transferred either to the trading account or to the profit and loss account .the remaining balance of personal real accounts represent either assets or liabilities at the closing date. These assets and liabilities are shown in the balance sheet in a classified form the assets being shown on the right hand side and the liabilities on the left hand side.
| Liabilities | Rs. | Assets | Rs. |
| Authorized Capital: Issued capital Paid Up capital Subscribed capital Liabilities: Fixed Liabilities: Long term Loans Debentures Total Fixed Liabilities
Current Liabilities: Creditors Bills Payables Bank Overdraft Total Current Liabilities
|
……..
………
………. |
Fixed Assets: Furniture Building Plant & machineryLand Total Fixed Assets
Current Assets: Cash in hand Cash at bank Debtors Investment Bill receivable Stock in trade Total Current Assets |
………
……… |
| Total | Total |
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