Trial Balance FinalAccounts Concepts

Trial Balance What? Why?
When?
What is a Trial Balance
The Trial Balance is a statement of ledger account balances as on a particular instance.
Trial Balance of M/s Wearall Textlies as on 31st March 2006

Particulars
L/F
Debit
Amount
(in Rs)
Opening Stock
Textile Purchases
Wages
Octroi
63,650
22,56,000
3,25,000
1,78,200
Salaries
Rent
Printing and Stationery
Advertisements
Cash
Office Building
Capital
Bank
Motor Vehicles
Sundry Creditors
Sales
P/L Appropriation
Sundry Debtors
Machinery
1,04,000
1,26,000
74,650
86,000
26,000
4,23,450
Total
Credit
Amount
(in Rs)
2,50,000
1,19,000
2,10,000
1,80,000
36,86,000
6,52,950
2,08,000
5,69,000
47,68,950
47,68,950
Why is a Trial Balance prepared?

The trial balance is prepared to check/ensure the arithmetical accuracy of accounting. Though not a conclusive proof,
the agreement of the trial balance is a prima facie evidence of the absence of mathematical errors.
This is the most important purpose for which the trial balance is prepared.
Isn't Trial Balance made for enabling preparation of Final Accounts?

No, not at all.
Preparation of Trial Balance is not an act that forms a part of the activities involved in the regular accounting cycle.
Since Final Accounting can be completed without the preparation of the Trial Balance, we can say that enabling the
preparation of final accounts is not the purpose of the trial balance.
final,accounts,financial,accounting,trading,profit,loss,account,balance,sheet,trial,balance,work,sheet,adjustments
When is a Trial Balance prepared?

The trial balance is generally prepared at a time when all the ledger accounts are balanced like at the end of the
accounting period.
Theoretically, the trial balance can be prepared as and when needed.

The practical difficulty in preparing the trial balance as and when needed is the requirement of the balances of all the
ledger accounts within the organisational accounting system. Different ledger accounts are balanced at different time
intervals based on the information needs of the organisation. Say in a typical organisation Cash a/c is balanced daily,
Expenses, Creditor and Debtor accounts are balanced on a monthly basis, Asset accounts are balanced annually etc.
The ledger account balances relating to all ledger accounts would not be available ready hand at any given instance.
Year ending is one such instance when the balances are derived.
Computerised Accounting
In mechanised (computerised) accounting systems, trial balance is a statement that can be automatically derived as
and when needed.
Accounting Cycle Absence of Preparation of Trial

Balance
Preparation of a trial balance is not an act which forms a part of the activities involved in the accounting cycle.
The Accounting Cycle (activities involved)
Begins with opening the books of accounts for an accounting period by recording the opening entry;
Journal in the books of M/s Amonaya Metals for the period from 1st January 2007 to ____
Date
V/R
No.
1st January
Particulars
Assets a/c
To Liabilities a/c
To Capital a/c
L/F
Dr
Debit Amount Credit Amount

(in Rs)
(in Rs)
[For bringing the balances in the various ledger

accounts at the end of the previous accounting
period into books.]
This is the journal entry that supports the posting To Balance b/d and By Balance b/d in the various ledger
accounts.
Recording the various transactions all through out the accounting period;
Balancing the ledgers as and when needed and finally at the end of the accounting period;
Recording the transactions for making up the final accounts
1.
Making the Trading a/c
2.
Closing the Trading a/c by transferring the balance in it to Profit & Loss a/c
3.
Making the Profit and Loss a/c
4.
Closing the Profit and Loss a/c by transferring the balance in it to Capital a/c (or Profit and Loss
Appropriation a/c)
Preparing the Balance sheet (A statement of balances in all the ledger accounts that remain after making up
and closing the Trading and Profit & Loss a/c.)
The accounting cycle ends with recording the closing entry for closing the books of accounts.
Journal in the books of M/s Amonaya Metals for the period from 1st Jan to 31st Dec 2007
Date
V/R
No.
31st December
Particulars
Liabilities a/c
Capital a/c
To Assets a/c
L/F
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
[For carrying the balances in the various

ledger accounts at the end of the accounting
period to the subsequent accounting period.]
This is the journal entry that supports the posting To Balance c/d and By Balance c/d in the various ledger
accounts.
Final Accounting : Use of

Journal/Ledger
Final Accounting deals with all the ledger account balances at the end of the accounting period in one way or the
other.
All the Nominal accounts that represent direct expenses and direct incomes are closed by transfer to the
Trading a/c.
For this at least two journal entries are recorded.
The Trading a/c is closed by transferring its balance to the Profit and Loss a/c.
For this a journal entry is recorded.
All the Nominal accounts that represent indirect expenses, losses and indirect Incomes are closed by
transfer to the Profit and Loss a/c.
For this at least two journal entries are recorded.
The Profit & Loss a/c is closed by transferring its balance to either the Capital a/c or Profit & Loss
Appropriation a/c.
For this a journal entry is recorded.
All the remaining accounts are listed out in the Balance Sheet.
A closing entry is recorded in relation to this, though it is not directly related to preparing the balance sheet.
If the Final Accounting is to be done in a systematic manner, then all the journal entries mentioned above are to be
recorded and all the ledger accounts that are affected by those transactions are to be posted to and updated. That
would result in the making up of the Trading a/c and Profit and Loss a/c. The balance sheet is prepared by drawing
up a statement of ledger account balances carried forward through the closing entry.
Final Accounting : Use of Trial Balance : Avoiding

Journal/Ledger
In manual accounting, the Trading a/c, Profit & Loss a/c and the Balance Sheets can also be prepared using the
information in the Trial Balance avoiding the act of journalising the transactions involved in final accounting.
This is done by showing each item in the ledger accounts (Trading, P/L a/c) or the statement (Balance Sheet) where
it would be ultimately appearing had the actual procedure been adopted. This would have the same affect as
recording the journal and posting into the ledger.
Example
The balance in the Carriage Inwards a/c (direct expenditure) is transferred to the Trading a/c by recording a Journal
entry. By this, the Carriage Inwards a/c would get closed (its balance becomes zero) and the Trading a/c would get
debited with that balance. In preparing the Trading a/c the balance in the Carriage Inwards a/c can be ascertained
from the Trial Balance and shown on the debit side of Trading a/c.
Reduction of Work involved in Manual Accounting

Since not recording the related journal entries makes no difference as far as final accounting is concerned, in almost
all cases in manual accounting, the process of recording the journal entries required for final accounting and
updating the ledger is bypassed to reduce the burden of the work involved.
Information in Trial Balance To be dealt with only

once
In making up final accounts using the information in the Trial Balance, we should ensure that each item of
information (representing a ledger account balance) should be dealt with only once.
In final accounting each piece of information can appear either on the debit or credit sides of the Trading a/c or
"Profit & Loss a/c" or on the assets or liabilities side of the "Balance Sheet".
Each item from the Trial Balance should be dealt with only once in Final Accounting.
Interpreting the items in the Trial Balance

A statement for interpretation of the various ledger account balances in the above trial balance
Trial Balance of M/s Wearall Textlies as on 31/03/06 Statement of Analysis

Account
Opening Stock
Textile Purchases
Wages
Octroi
Salaries
Rent
Advertisements
Cash
Office Building
Capital
Bank
Description
Direct Expenses
Direct Expenses
Direct Expenses
Direct Expenses
Indirect
Expenses
Indirect
Expenses
Indirect
Expenses
Indirect
Expenses
Account
Type
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Real
Real
Personal
Personal
Balance
Nature
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Credit
Debit
Where
Trading
a/c
Trading
a/c
Trading
a/c
Trading
a/c
P/L a/c
P/L a/c
P/L a/c
P/L a/c
Which
Side
Amount
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Assets
Assets
Liabilities
Assets
63,650
22,56,000
3,25,000
1,78,200
1,04,000
1,26,000
74,650
86,000
26,000
4,23,450
2,50,000
1,19,000
Motor Vehicles
Sundry Creditors
Sales
P/L Appropriation
Sundry Debtors
Machinery
Asset
Asset
Liability
Liability/Asset
Asset
Liability
Direct Incomes
Accumulatd
Profit
Asset
Asset
Real
Personal
Nominal
Spl.
Nominal
Personal
Real
Debit
Credit
Credit
Credit
Debit
Debit
B/S
B/S
B/S
B/S
B/S
B/S
Trading
a/c
B/S
B/S
B/S
Assets
Liabilities
Credit
Liabilities
Assets
Assets
2,10,000
1,80,000
36,86,000
6,52,950
2,08,000
5,69,000
Making up the Final Accounts

Final Accounting using the information in a Trial Balance involves nothing more than putting the right items in the
right places i.e. on the appropriate side of Trading a/c, Profit and Loss a/c or the Balance Sheet.
Dr
Trading and Profit & Loss a/c [For the year ending 31/03/06]
Particulars
To
To
To
To
To
Opening Stock
Textile Purchases
Wages
Octroi
Gross Profit
Amount
Particulars
(in Rs)
63,650
22,56,000
3,25,000
1,78,200
8,63,150
By Sales
36,86,000
To
To
To
To
To
Salaries
Rent
Advertisements
Net Profit
1,04,000
1,26,000
74,650
86,000
4,72,500
Cr
Amount
(in Rs)
36,86,000
36,86,000
By Gross Profit
8,63,150
8,63,150
8,63,150
Balance Sheet of M/s Wearall Textlies as on 31st March 2006

Liabilities
Amount
Assets
Amount
Capital
2,50,000
Sundry Creditors
1,80,000
P/L Appropriation
11,25,450
[6,52,950 + 4,72,500]
Cash
Bank
Office Building
Motor Vehicles
Sundry Debtors
Machinery
26,000
4,23,450
1,19,000
2,10,000
2,08,000
5,69,000
15,55,450
15,55,450
Care in dealing with Profit and Loss Appropriation a/c (or

Capital a/c)
The balance in the "Profit & Loss Appropriation a/c" as shown in the Trial Balance represents the balance carried
forward from the previous accounting period (i.e. year ending 31st March 2005).
The Profit and Loss a/c relating to the current period is closed by transfer its balance to the "Profit & Loss
Appropriation a/c"
Dr
Profit and Loss Appropriation a/c

Date
Particulars
31/03/06 To Bal c/d
Total
J/F
Amount
Date
(in Rs)
11,25,450
Cr
Particulars
J/F
31/03/06 By Bal b/d

31/03/06 By Net Profit
Total
11,25,450
01/04/06 By Balance b/d
Amount
(in Rs)
6,52,950
4,72,500
11,25,450
11,25,450
Therefore, while showing the information (balance) relating to the Profit & Loss Appropriation a/c in the Balance
sheet, care should be taken to make appropriate adjustment to the balance on account of the transfer of balance
from the Profit and Loss a/c.
The balance that appears in the balance sheet is not the one that appears in the trial balance, but the one that takes
into consideration the adjustment on account of current periods profit or loss also.
If the balance in Profit and Loss a/c is transferred to the Capital a/c, then such a care should be taken with regard to
the Capital a/c balance.
Trial Balance used in Final Accounting : When

Prepared?
The Trial Balance is a statement of ledger account balances as on a particular date (instance).
Final Accounting is done towards the end of the accounting period.
The trial balance that we consider in the preparation of final accounts is the one that is prepared towards the end of
the accounting period i.e. on the last day of the accounting period.
Transactions after the Trial Balance

Date
There might be a number of accounting transactions which might not have been taken into consideration by the time
the Trial Balance has been prepared.
Some of the reasons for the presence of such transactions are
Transactions which do not occur in the normal course of business

There are a number of transactions relating to the business which do not occur in the normal course of business.
These transactions unless deliberately recorded do not get into the books of accounts.
Examples for such transactions

i. Stock taken away by the proprietor for personal use
ii. Abnormal loss of stock
Transactions which have to be recorded only towards the end

There are a number of transactions relating to the business which have to be recorded only at the end of the
accounting period. If the trial balance has been prepared before all such transactions into consideration have been
taken into consideration, then they stay unrecorded in the books of accounts.
i. Depreciation on Assets
ii. Expenses - Outstanding/Prepaid
iii. Incomes - Outstanding/Pre-received
Transactions relating to Error Rectifications

The agreement of a Trial Balance is not a conclusive proof of absence of errors in accounting. Even in case where the
trial balance agrees, there may still be errors existing in the books of accounts.
These errors if identified subsequent to the preparation of the Trial Balance, need to be rectified which needs journal
entries to be passed for rectification.
What are
Adjustments?
The transactions which have not yet been journalised, appended to the trial balance are what we call adjustments.
Thus we can say that Adjustments are transactions relating to the business which have not been journalised by the
end of the accounting period.
Illustration
Trial Balance of M/s Azaya Traders" as on 30th June 2006.
Particulars
Opening Stock
Purchases
Salaries
Wages
Carriage Inwards
Trading Charges
Carriage Outwards
Rent received
Cash
Capital
Bank (Overdraft)
Comission
Creditors
L/F
Debit
Amount
(in Rs)
Credit
Amount
(in Rs)
86,000
11,36,000
1,53,000
18,000
26,900
64,000
52,500
1,78,300
62,500
3,44,700
37,980
42,780
2,68,000
Sales
Debtors
Machinery
Total
15,48,700
2,56,000
4,80,000
23,77,680
23,77,680
Adjustments
The following additional information is available
1. A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in
the books.
2. Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.
The additional information presented after the trial balance contains information relating to accounting transactions,
which are to be identified from the wordings.
Why are they called Adjustments? Why not Additional

Transactions?
Since adjustments are also transactions relating to the business, we need to bring them into the accounting books by
journalising them.
The trial balance is used for final accounting, so as to eliminate a lot of physical work (in manual accounting) in the
form of recording transactions for making up final accounts, posting them into respective ledger accounts, balancing
of ledger accounts effected by these transactions.
Therefore even for the purpose of bringing the transactions represented by the adjustments into books a method has
been designed which would not require us to record these transaction, post them and balance the ledger accounts
affected. This method incorporates the effect of the transactions into the final accounts without having to go through
the regular process of recording, posting, balancing etc.
Accounting for the Transactions

Recording the transactions represented by adjustments normally would result in the existing balance in the affected
ledger accounts to either increase or decrease.
Transaction
Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.
This represents an error of principle whereby an expenditure that was to be debited in a particular account has been
debited to another account.
To bring the effect of this transaction into books, the journal entry to rectify this error has to be recorded.
Journal/Ledger
Hide/Show
Journal in the books of M/s Azaya Traders for the year ending 30th June 2006
Date
V/R
No.
30/06/06
Particulars
L/F
Wages a/c
To Salaries a/c
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
2,00,000
2,00,000
[For the transfer of wages erroneously

treated as salaries from the "salaries a/c" to
the "Wages a/c".]
Dr
Salaries a/c
Date
Particulars
30/06/06 To Bal b/d
J/F
Amount
(in Rs)
1,53,000
Date
Cr
Particulars
30/06/06 By Wages
30/06/06 Bal c/d
J/F
1,53,000
01/07/06 To Balance b/d
Dr
Amount
(in Rs)
43,000
1,10,000
1,53,000
1,10,000
Wages a/c
Date
Particulars
30/06/06 To Salaries a/c
J/F
Amount
(in Rs)
43,000
Date
Cr
Particulars
30/06/06 By Bal c/d
43,000
J/F
Amount
(in Rs)
43,000
43,000
43,000
The Method of Adjustment

This method involves identification of the effect and making mathematical adjustments in the figures that we
consider in final accounting (i.e. at the time of showing them in the Trading a/c or Profit & Loss a/c or the Balance
Sheet.).
Effect of the Transaction

The effect of the journal entry to be recorded in the above case can be analysed as
A. () From Salaries on the debit side of P/L a/c

The Salaries a/c which already has a debit balance is credited which will result in a decrease in the
existing debit balance.
To bring the effect of this transaction, the amount involved in the transaction (Rs. 43,000) is deducted
from the Salaries a/c balance (Rs. 1,53,000) shown on the debit side of the "Profit & Loss a/c".
B. (+) To Wages on the debit side of Trading a/c

The Wages a/c which already has a debit balance is debited resulting in an increase in the existing
debit balance.
To bring the effect of this transaction, the amount involved in the transaction (Rs. 43,000) is added to
the Wages a/c balance (Rs. 18,000) shown on the debit side of the "Trading a/c".
These are the adjustments to be made to bring the affect of the above transaction into the books of accounts.
Why call them Adjustment? Why not Additional Transactions?

Since the affect of these transactions is incorporated by mathematical adjustments, they are called Adjustments
rather than just Additional Transactions.
To make the Adjustment Know the Journal

Entry
Adjustments are transactions relating to business which have not yet been journalised.
Therefore, to make the adjustments one should have an idea of the journal entry related to the transaction indicated
by the adjustment.
If we know the Journal entry, we can identify the effect of the same on the ledger accounts and thus be able to
identify the adjustments to be made.
The adjustments are made at the time of making up the final accounts within the three parts that make up the final
accounting, i.e. the "Trading a/c", "Profit & Loss a/c" and the "Balance Sheet".
Illustration
Problem
Draw up the final accounts from the following trial balance and the additional information that follows it.
Trial Balance of M/s Azaya Traders" as on 30th June 2006.

Particulars
Opening Stock
Purchases
Salaries
Wages
Carriage Inwards
Trading Charges
Carriage Outwards
Rent received
Cash
Capital
Bank (Overdraft)
Comission
Creditors
Sales
Debtors
Machinery
L/F
Debit
Amount
(in Rs)
Credit
Amount
(in Rs)
86,000
11,36,000
1,53,000
18,000
26,900
64,000
52,500
1,78,300
62,500
3,44,700
37,980
42,780
2,68,000
15,48,700
2,56,000
4,80,000
Total
23,77,680
23,77,680
The following additional information is available

1.
A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the
books.
2.
Illustration Working
Notes
An analysis of the various ledger accounts in the trial balance would enable us to decide what to be done with each
item in the trial balance.
Trial Balance of M/s Azaya Traders as on 30/06/06 Statement of Analysis

Account
Description
Opening Stock
Purchases
Salaries
Wages
Carriage Inwards
Trading Charges
Carriage Outwards
Rent received
Cash
Capital
Bank (Overdraft)
Comission
Creditors
Sales
Debtors
Machinery
Direct Expenses
Direct Expenses
Indirect
Expenses
Direct Expenses
Direct Expenses
Indirect
Expenses
Indirect
Expenses
Indirect Incomes
Asset
Liability
Liability
Indirect Expense
Liability
Direct Incomes
Asset
Asset
Account
Type
Balance
Nature
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Nominal
Real
Personal
Personal
Nominal
Personal
Nominal
Personal
Real
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Credit
Debit
Credit
Credit
Debit
Credit
Credit
Debit
Debit
Where
Trading
a/c
Trading
a/c
P/L a/c
Trading
a/c
Trading
a/c
P/L a/c
P/L a/c
P/L a/c
B/S
B/S
B/S
P/L a/c
B/S
B/S
B/SB/S
What
Side
Amount
Debit
Debit
Debit
Debit
Debit
Debit
Debit
Credit
Assets
Liabilities
Liabilities
Debit
Liabilities
Credit
Assets
Assets
86,000
11,36,000
1,53,000
18,000
26,900
64,000
52,500
1,78,300
62,500
3,44,700
37,980
42,780
2,68,000
15,48,700
2,56,000
4,80,000
An analysis of the additional transactions would enable us to identify what is to be done to incorporate their effect in
accounting.
1.
A Machine purchased on credit from M/s Ramsay Machine Tools for Rs. 2,00,000 is not yet recorded in the
books.
Entry
Dr. Machinery a/c
Cr. Ramsay Machine Tools a/c
2.
Detailed Explanation Hide/Show
Effect
1. (+) To Machinery a/c on the Assets side of the Balance Sheet
2. (+) To Ramsay Machine Tools a/c on the Liabilities side of the Balance
Sheet
Journal in the books of M/s Azaya Traders for the year ending 30th June 2006
Date
V/R
No.
30/06/06
Particulars
L/F
Machinery a/c
To M/s Ramsay Machine Tools a/c
Dr
Credit
Amount
(in Rs)
Debit Amount
(in Rs)
2,00,000
2,00,000
[For the value of machine purchased on

credit.]
Dr
Machinery a/c
Date
Particulars
30/06/06 To Bal b/d

To Ramsay
Machine Tools
J/F
Amount
Date
(in Rs)
4,80,000
2,00,000
Cr
Particulars
30/06/06 By Bal c/d
J/F
6,80,000
Dr
Particulars
30/06/06 To Bal c/d
6,80,000
6,80,000
6,80,000
J/F
Amount
Date
(in Rs)
2,00,000
Cr
Particulars
30/06/06 By Machine a/c
J/F
2,00,000
Amount
(in Rs)
2,00,000
2,00,000
2,00,000
Entry
Dr. Wages a/c
Cr. Salaries a/c
4.
(in Rs)
Ramsay Machine Tools a/c

Date
3.
Amount
Effect
1. (+) To Wages a/c on the Debit side of the Trading a/c
2. () From Salaries a/c on the Debit side of the Profit and Loss a/c
Detailed Explanation Above
Illustration
Solution
Making up the final accounts would involve nothing more than putting the items from the trial balance in the right
places i.e. in either the "Trading a/c" or "Profit and Loss a/c" or the "Balance Sheet" and making subsequent
adjustments.
Dr
Trading and Profit & Loss a/c of M/s Azaya Traders for the year ending 30/06/06
Particulars
To Opening Stock
To Purchases
Amount
Amount
(in Rs)
(in Rs)
Particulars
86,000 By Sales
11,36,000
Amount
Amount
(in Rs)
(in Rs)
Cr
15,48,700
To Wages
(+) Salary (Tr)
18,000
43,000
To Carriage Inwards
To Gross Profit
61,000
26,900
2,38,800
15,48,700
To Salaries
() Tr. to Wages
1,53,000
43,000
To Trading Charges
Carriage Outwards
To Comission
To Net Profit
15,48,700
By Gross Profit
1,10,000 By Rent Received
64,000
52,500
42,780
1,47,820
2,38,800
1,78,300
4,17,100
4,17,100
Balance Sheet of M/s Azaya Traders as on 30th June 2006

Liabilities
Capital
(+) Net Profit
Bank (Overdraft)
Creditors
(+) Due to M/s Ramsay
Amount
3,44,700
1,47,820
2,68,000
2,00,000
Amount
Assets
Cash
4,92,520 Debtors
37,980 Machinery
(+) New Machine
Amount
Amount
62,500
2,56,000
4,80,000
2,00,000
6,80,000
4,68,000
9,98,500
9,98,500
The effect of the additional transactions (adjustments) are incorporated into the accounts by mathematical
adjustments wherever needed.
Adjustments to be Dealt with at least

Twice
Dual Entity Concept
Every transaction relating to business has its effect on two elements.
Adjustments are transactions relating to the business which are yet to be journalised. We call them adjustments for
the reason that they are dealt with by making mathematical adjustments to the figures of ledger account balances
instead of passing the regular journal entries.
Therefore, in making mathematical adjustments we have to ensure that we are adjusting the two elements that are
affected by the transaction.
Each item from the adjustments should be dealt with at least twice in Final Accounting.
Where an item appears in the trial balance it is to be dealt with only once and where an adjustment is being dealt
with it is to be dealt with at two or more places depending on the number of elements effected by the transaction.
Adjusting more than two accounts

In most of the cases, the journal entry for recording the transaction given as adjustments is a simple entry involving
two accounts (one being debited and the other being credited). However, in some cases, a complex entry involving
more than two elements (accounts) is needed to record the additional transactions. In such cases more than two
accounts may have to be adjusted.
Valuation of Assets Direct

Expenses
Asset Valuation Principle
The value of an asset includes all the expenses incurred before bringing the asset into usable condition.
Direct Expenditure
In financial accounting, we use the term Direct Expense in relation to assets.
Any expenditure that goes into the value of an asset is identified as Direct Expenditure for that asset.
Assets Treatment of Direct Expenses

All the expenses incurred in relation to an asset before bringing the asset into usable condition would form direct
expenses for the asset
All the direct expenses in relation to an asset are to be made part of the value of the asset i.e. are to be capitalised.
Example
If a machine is purchased at Delhi and brought to Tenali for use, then all the expenses incurred before bringing the
machine into working mode (usable condition) like transportation charges from Delhi to Tenali, Unloading Charges at
Tenali, Installation Charges etc., should be considered to be part of the value of the machine.
These expenses should not be debited to the respective expenditure accounts, but should be debited to the
Machinery a/c. The Machinery a/c balance which indicates the value of the asset would be the sum of the cost of the
machine, the transportation charges, unloading charges, installations charges, etc..
Is Stock an
Asset?
Dual nature of Stock
Purchases : During the Accounting Period
Whenever we purchase stock/goods we debit the Purchases a/c (Nominal account). This implies that we treat the
amount spent on purchasing stock as an expenditure.
Such a treatment is adopted all throughout the year.
Asset : At the end of the Accounting Period

At the end of the accounting period, while preparing the final accounts we treat stock an asset and show it in the
Balance Sheet on the assets side.
Thus we can say that stock has dual nature. All throughout the year the amount spent on it is expenditure and only
for the moment the balance sheet is prepared it is an asset.
Valuation of Stock Based on the Principle for Valuation of Assets

Since Stock is an asset, its valuation should also be made based on the principle for valuation of assets.
The value of stock should include all the expenses incurred before bringing stock into usable condition.
Usable Condition for Stock Being ready for Sale

Considering the Stock used in sale, the usable condition for stock would mean getting it ready for sale i.e. it being
finally set up in the show case or sale area.
Value of Stock
All the expenses incurred on the stock till it is placed in the sales area would form direct expenses for the stock and
should be treated as a part of the value of stock.
In situations where it would be difficult/impossible to collect all the expenses in detail, this idea is modified to mean
the expenses incurred before that stage till which point it would be convenient to collect information.
Direct Expenses for Stock used in Trading

Business
In relation to a trading business, the stock used for sale would be an asset.
The usable condition for that stock would be, it being placed ready for sale in the showroom.
Therefore, the direct expenses in relation to this stock would be all the expenses incurred before placing it in the
show room or any other relevant place ready for sale.
Conventionally, expenses like Wages, Carriage Inwards (carriage on purchases), Octroi, Excise, Duties etc., Stock
purchased, etc. are treated as direct expenses apart from the actual cost of the goods purchased which is revealed
by the "Purchases a/c".
It is not a rule that only these form direct expenses. Any expenditure that would have been incurred in relation to
stock before it is made ready for sale would form direct expenditure for the stock.
Cost of Goods
Sold
Cost of Goods Sold = Value of the Goods Sold
The cost of goods sold is a term used to indicate the value of the goods sold.
This value is needed to identify the amount of basic/core (gross) profit made by the organisation
Gross Profit = Sales Cost of Goods Sold

Illustrative Explanation
Consider the following data relating to an organisation.
1.
Opening Stock at the beginning of the accounting period, Rs. 20,000.
2.
Purchases of goods/stock during the accounting period : Rs. 2,48,000.
3.
Direct expenses incurred :Rs. 54,000.
4.
Unsold stock at the end of the accounting period valued at Rs. 36,000.
5.
Value of Stock used for other purposes Rs. 14,000.
Particulars
Amount
Opening Stock
(+) a) Purchases (Cost Value)

b) Direct Expenses
20,000
2,48,000
54,000
Total Value of Goods

() a) Closing Stock (Value)
b) Stock Unused for Trading
Amount
3,02,000
3,22,000
36,000
14,000
Cost of Goods Sold
50,000
2,72,000
The formula for calculating the value of Cost of Goods Sold based on the above calculations can be written as
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses

Closing Stock Stock Unused for trading
Stock Unused for Trading
Stock with the organisation may have been used for purposes other than trading. The value of such stock unused for
trading purposes has to be deducted from the total value of stock so as to arrive at the value of cost of goods sold.
Some such instances
Goods being taken away by the proprietor for personal purposes;

Stock used in building up an asset;
Stock used for advertisement purposes;
Normal loss of stock;
Abnormal loss of stock;
Stock used up for other types of businesses (like consignments, branches, joint ventures etc)
Do we need Cost of Goods Sold to find Gross

Profit
By definition Gross Profit = Sales Cost of Goods Sold (1)
To obtain the value of gross profit we need the figures of cost of goods sold and sales.
Bypassing finding Cost of Goods Sold

Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses Closing Stock Stock Unused for trading
Substituting this in (1) we get,
Gross Profit =
Sales (Opening Stock + Purchases + Direct Expenses Closing Stock Stock Unused for
trading)
= Sales Opening Stock Purchases Direct Expenses + Closing Stock + Stock Unused for trading
=
(Sales + Closing Stock + Stock Unused for trading) (Opening Stock + Purchases + Direct
Expenses)
Thus we do not specifically need to calculate the value of cost of goods sold for finding gross profit, only its affect is
to be brought into account.
Such an ascertainment of Gross Profit is done in the Trading and Profit and Loss account.
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
(in Rs)
Cr
Particulars
Amount
(in Rs)
By Sales
By Stock Unused
By Closing Stock
"Purchases a/c" is a nominal account with a debit balance and is a direct expenditure (for stock).
Since Purchases a/c is closed by transfer to the Trading a/c, it appears on the debit side of Trading a/c.
Transferring a debit balance from one account to a second results in the second
account being debited and the first account being credited.
Thus, all the accounts representing the figures that are added to purchases appear on the debit side
"Sales a/c" is a nominal account with a credit balance and is a direct income.
Since Sales a/c is closed by transfer to the Trading a/c, it appears on the credit side of Trading a/c.
Transferring a credit balance from one account to a second results in the second
account being credited and the first account being debited.
Thus, all the accounts representing the figures that are added to sales appear on the credit side
Finding Cost of Goods Sold in such cases

Cost of goods sold is a figure that is not straight away available in the books of accounts used in financial accounting.
That figure can be obtained either from the "Trading a/c" or by preparing a separate ledger account to specific
account which gives the information relating to the cost of goods sold.
Ascertaining Cost of Goods Sold from Trading

a/c
Each ledger account serves one or more informational needs of the organisation. The Trading a/c gives the
information relating to the Gross Profit made by the organisation. It can also be used to derive the information
relating to the "Cost of Goods Sold".
Ascertaining Cost of Goods Sold

Cost of Goods Sold = (Opening Stock + Purchases + Direct Expenses) (Closing Stock + Stock Unused for trading)
The "Trading a/c" with this information posted to it would be
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
sub-total
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
Cr
By Closing Stock
By Stock Unused
sub-total
3,22,000
Amount
(in Rs)
36,000
14,000
50,000
The trading account before crediting sales would have a greater total on the debit side and thus has a debit balance.
That debit balance represents the cost of goods sold.
Thus, to ascertain the cost of goods sold, we need to balance the "Trading a/c" without crediting sales.
The Sales a/c can be subsequently transferred to the Trading a/c to ascertain the Gross Profit.
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
Cr
By Closing Stock
By Goods Unused
By Cost of Goods Sold c/d
3,22,000
To Cost of Goods Sold b/d
To Gross Profit
2,72,000
1,08,000
Amount
(in Rs)
36,000
14,000
2,72,000
3,22,000
By Sales
3,80,000
3,80,000
3,80,000
If such a two stage Trading a/c is prepared, we would be able to ascertain the Cost of Goods Sold as well as Gross
Profit from the Trading a/c itself.
Ascertaining Cost of Goods Sold by Mathematical Calculations

The Trading a/c is generally prepared only as a single stage account as follows
Dr
Trading a/c
Particulars
To
To
To
To
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
(in Rs)
20,000
2,48,000
54,000
1,08,000
Cr
Particulars
By Sales
By Goods Unused
By Closing Stock
4,30,000
Amount
(in Rs)
3,80,000
14,000
36,000
4,30,000
To obtain the value of cost of goods sold from this we use the definition for gross profit.
Cost of Goods Sold = Sales Gross Profit [Since Gross Profit = Sales Cost of Goods Sold]
= Rs. 3,80,000 Rs. 1,08,000
= Rs. 2,72,000
Finding Cost of Goods Sold using Goods Consumed

a/c
The value of Cost of Goods Sold can also be obtained specifically, by maintaining a separate account for the purpose.
This may be named "Goods Consumed a/c" (any other indicative name may be used).
The basic purpose of accounting is derivation of information and the more
the information we need, the more the accounting heads we need to
maintain.
The Goods Consumed a/c is nothing but the first part of the trading account where it was balanced twice.
Dr
Goods Consumed a/c

Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
By Goods Unused
By Closing Stock
By Trading a/c
3,22,000
Cr
Amount
(in Rs)
14,000
36,000
2,72,000
3,22,000
The balance in the Goods Consumed a/c represents Cost of Goods sold. This account is closed by transferring the
balance to the Trading a/c.
Dr
Trading a/c
Particulars
To Goods Consumed
To Gross Profit
Amount
Particulars
(in Rs)
2,72,000
1,08,000
3,80,000
Cr
By Sales
Amount
(in Rs)
3,80,000
3,80,000
Cost of Goods Consumed

If the balances in the ledger accounts representing direct expenses are not transferred to the "Goods Consumed a/c"
but are transferred to the "Trading a/c", then the balance from the "Goods Consumed a/c" cannot be called cost of
goods sold (value of goods sold).
It just represents the cost of goods consumed. To obtain the cost of goods sold from this, the direct expenses have
to be added to this.
Goods used within the Organisation have to be valued at

Cost
The stock that is used within the organisation (stock drawn by the proprietor for own purposes, stock used for
building an asset, stock used for advertisement purposes, etc.,) have to be valued at cost.
This is for the reason that if such usages are recorded at a value which includes an element of profit, the transaction
when recorded would generate a profit, which would amount to making a profit out of a transaction with oneself.
Principle of Mutuality One cannot make a profit out of a transaction with oneself
Illustrative Explanation
Consider the following data relating to an organisation which started its operations on 28th December 2006:
Opening Stock :: Nil;

Purchases :: Rs. 1,20,000;
Direct Expenses :: Rs. 30,000
Sales :: Nil
Stock used by the organisation internally Rs. 20,000 (Valued at Cost).
Generally Sales are made by adding 25% profit to cost
Closing Stock :: ?
The accounting period ends on 31st December 2006.
Value of Closing Stock with the Organisation = Total Value of Stock Value of Stock used up internally
= Purchases + Direct Expenses Rs. 20,000
= (Rs. 1,20,000 + Rs. 30,000) Rs. 20,000
= Rs. 1,30,000
Sales value of the stock used within the organisation = Cost + 25% of Cost
= Rs. 20,000 + 25% of Rs. 20,000
= Rs. 20,000 + Rs. 5,000
= Rs. 25,000
Stock used up internally recorded at Sales Value

Dr
Trading a/c
Particulars
To Purchases
To Direct Exp.
To Gross Profit
Amount
Amount
(in Rs)
(in Rs)
Cr
Particulars
Amount
Amount
(in Rs)
(in Rs)
1,20,000 By Sales
30,000 By Stock used
5,000 By Closing Stock
1,55,000
25,000
1,30,000
1,55,000
There is no commercial activity (no sales), there is no scope for earning profits. But the Trading a/c reveals a Gross
Profit of Rs. 5,000 which is on account of the stock used up internally being recorded at sales value.
Such profit generation is inappropriate for the reason that in using up stock within the organisation, the organisation
is not conducting a transaction with an outside party.
Thus to avoid profit generation in such cases, the stocks so used are to be valued at cost.
Stock used up internally recorded at Cost
Dr
Trading a/c
Particulars
Amount
Amount
(in Rs)
(in Rs)
To Purchases
To Direct Exp.
To Gross Profit
Cr
Particulars
Amount
Amount
(in Rs)
(in Rs)
1,20,000 By Sales
30,000 By Stock used
Nil By Closing Stock
1,50,000
20,000
1,30,000
1,50,000
The Trading a/c would reveal no profit when the stock used up internally is valued at cost.
Finding Value of Closing Stock from

Sales
We may be able to ascertain what is left out if we know what has been sold. This logic may be applied in finding the
value of closing stock. However, to know this, we need to ascertain the value of cost of goods sold.
i.
ii.
Cost of Goods Sold = Opening Stock + Purchases + Direct Expenses Closing Stock
iii.
Gross Profit = Sales (Opening Stock + Purchases + Direct Expenses Closing Stock) [From (i) and (ii)]
= Sales Opening Stock Purchases Direct Expenses + Closing Stock
iv.
Closing Stock = Opening Stock + Purchases + Direct Expenses + Gross Profit Sales [From (iii)]
To use this relation to obtain the value of closing stock, we need the information relating to Gross Profit. All other
information in this relation is readily available from the accounting records.
Gross Profit
Ratio
Ratio : Percentage
Ratio is a comparison between two numerical quantities of the same kind.
Ratio between two quantities is expressed in the form a : b
or
a
b
, where "a" and "b" do not have a common factor.
Percentage = Ratio 100
Gross Profit Ratio

Gross Profit Ratio is the ratio of Gross Profit to Net Sales Value or Cost of Goods Sold.
To Sales
Gross Profit Ratio =
Gross Profit
Net Sales
Gross Profit as a % of Sales =
Gross Profit
Net Sales
100
(Or)= Gross Profit Ratio (to Sales) 100
To Cost of Goods Sold

Gross Profit
Gross Profit Ratio =
Cost of Goods Sold
Gross Profit as a % of Cost of Goods Sold =
Gross Profit
Cost of Goods Sold
100
(Or)= Gross Profit Ratio (to Cost) 100
Inter-Relationship between the two Ratios

The Gross Profit Ratio (to Sales) and Gross Profit Ratio (to Cost of Goods Sold) are interrelated and one can be
obtained if the other is known.
Finding GP Ratio (to Cost) when GP Ratio (to Sales) is known

Gross Profit = Sales Gross Profit Ratio (to Sales)
=xy
= xy
Cost of Goods Sold = Sales Gross Profit
= x xy
= x (1 y)
Gross Profit Ratio (to Cost) =
=
=
Gross Profit
Cost of Goods Sold
xy
x (1 y)
y
(1 y)
Given Gross Profit Ratio (to Sales) is 0.25 y = 0.25

Therefore, Gross Profit Ratio (to Cost) =
=
=
=
y
(1 y)
0.25
(1 0.25)
0.25
0.75
1
3
= 0.33
Gross Profit (as a % to Cost) = Gross Profit Ratio (to Cost) 100
= 0.33 100
= 33
1
3
Let the data on 100 scale be represented by 'm'. y =

Gross Profit Ratio (as a % of Cost) =
100
m
100
Show/Hide
(1 y)
m
100
(1
100
100
m
100
100 m
100
100
m
100
100 m
100 m
25
100 25
25
=
=
100
3
= 33
y=
100
75
1
3
1
a
y
(1 y)
1
a
(1
1
=
a
a1
a
=
=
1
a
a
a1
1
a1
Given Gross Profit Ratio (to Sales) =
1
4
100
100
Therefore, Gross Profit as a % of Cost =
Let the data be represented by
100 m
100
a=4
100
100
a1
1
41
1
Gross Profit (as a % to Cost) = Gross Profit Ratio (to Cost) 100
1
100
= 33
Finding GP Ratio (to Sales) when GP Ratio (to Cost) is known

Gross Profit = Cost of Goods Sold Gross Profit (to Cost of Goods Sold)
=pq
= pq
Sales = Cost of Goods Sold + Gross Profit
= p + pq
= p (1 + q)
Gross Profit Ratio (to Sales) =
=
=
Gross Profit
Net Sales
pq
p (1 + q)
q
(1 + q)
Therefore, Gross Profit Ratio (to Sales) =

=
=
=
q
(1 + q)
0.2
(1 + 0.2)
0.2
1.2
1
6
Gross Profit (as a % to Sales) = Gross Profit Ratio (to Cost) 100
=
1
6
= 16
100
2
3
Let the data on 100 scale be represented by 'n'. q =
Gross Profit as a % of Sales =
q
(1 + q)
100
n
100
Show/Hide
n
100
100
(1 +
100
n
=
100
100
100 + n
100
=
=
100
100
100 + n
100
100
100 + n
Therefore, Gross Profit as a percentage of Saes =
=
=
=
n
100 + n
20
100 + 20
20
120
1
6
Let the data be represented by
q=
1
b
q
(1 + q)
1
b
(1 +
1
=
b
b+1
b
=
=
1
b
b
b+1
1
b+1
Given Gross Profit Ratio (to Sales) is

1
b+1
1
5
b=5
100
100
100
= 16 2/3%
1
100
=
=
1
5+1
1
6
Gross Profit Ratio (as a % to Sales) = Ratio 100

1
100
= 16
Frequently used conversions

Hundred Scale
As a % of Cost
20
As a % of Sales 16
25 33
2
3
20
50
25
33
66
1
3
2
3
40
100
50
One Scale
As a % of Cost
0.2
0.25 0.333
As a % of Sales 0.166 0.20
0.25
0.5
0.666
0.333
0.4
0.5
Inverse
As a % of Cost
As a % of Sales
Gross Profit is generally NonUniform

The gross profit earned by an organsation is in almost all cases not a figure that can be easily derived (without the
availability of the value of closing stock). Deriving the value of closing stock would be far easier than deriving the
value of gross profit made (based on sales).
Variety of Products being Sold

The organisation may be selling a number of products with different selling prices and different rates of gross profits.
In such cases, if the gross profit figure is to be ascertained from the sales figure, sales records should be maintained
so as to give the sales details relating to each product with a distinct Gross Profit %. This would involve a lot of work
and would be impractical, more so where there are a large number of products being dealt with.
Variations in Sale Prices

The prices charged to customers are dependent on a number of factors like the market conditions, the immediate
competition existing in the market, the loyalty of the customers etc.
Depending on the market conditions, some times the prices may be varied instantaneously.
Depending on the customer to whom the product is being sold, the prices may be varied (a discount may be given to
loyal customers) etc.
In such a situations there would not be uniformity in the Gross profit percentage and it would be near to impossible
to ascertain the gross profit made using the sales figures.
Since using the figure of gross profit to ascertain the value of closing stock available in the organisation is not a
feasible idea, we look at other methods for finding out the value of closing stock.
How is the Value of Closing Stock

Ascertained?
Physical Stock
Closing stock is the stock/goods unsold at the end of the accounting period.
The details relating to the physical stock would be readily available with the organisation only if the inventory records
are being maintained by the organisation. In other cases the physical stock would have to be ascertained by stock
taking.
Stock Value
There is no specific ledger account in financial accounting that would give us the information relating to the value of
closing stock ready hand.
The value of closing stock is available ready hand only if inventory records are being maintained that too from the
inventory records.
The value of Closing Stock is ascertained by Physical Verification of Stock on the last day of the
accounting period and its valuation at Cost or Market Price (Net Realisable Value) whichever is
lesser
This is the most common method for valuing the closing stock.
The information relating to the value of closing stock is not regularly required by the organisation. It is however
required at the end of the accounting period for the purpose of evaluation of the Cost of Goods Sold.
Convention of
Conservatism
Net Realisable Value of Stock
For the purpose of Valuation of closing Stock, Market Price implies Net Realisable Value/Rate and not the Selling
Price.
Net Realisable Value of stock is the net sale realisation excluding all the expenses directly and exclusively relatable to
the sale (Sale commission, Brokerage etc) from the Sale Realisation.
Therefore, in trying to ascertain the Market Price to be used for valuation, care should be taken to ensure that such
expenses are deducted from the sales price to ascertain the net realisable value of stock.
Convention of Conservatism
By the Convention of Conservatism we take into consideration all those
expenses and losses of which we are aware, even if they relate to the
subsequent accounting periods.
The act of valuing closing stock at cost or market price is based on the "Convention of Conservatism".
Convention of Conservatism : Valuation of Closing Stock :

Illustration
Following is the "Trading a/c" relating to an organisation, wherein the Closing Stock has been recorded at cost.
Dr
Trading a/c
Particulars
To
To
To
To
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
(in Rs)
20,000
2,48,000
54,000
94,000
4,16,000
f
i
n
a
l
,
a
c
c
o
u
n
t
s
,
f
i
n
a
n
c
i
Cr
Particulars
By Sales
By Closing Stock
Amount
(in Rs)
3,80,000
36,000
4,16,000
a
l
,
a
c
c
o
u
n
t
i
n
g
,
t
r
a
d
i
n
g
,
p
r
o
f
i
t
,
l
o
s
s
,
a
c
c
o
u
n
t
,
b
a
l
a
n
c
e
,
s
h
e
e
t
,
t
r
i
a
l
,
b
a
l
a
n
c
e
,
w
o
r
k
,
s
h
e
e
t
,
a
d
j
u
s
t
m
e
n
t
s
Closing Stock details

The closing stock is made up of
Batch N :: 600 units valued at Rs. 36/unit with a total value of Rs. 21,600
Batch M :: 600 units valued at Rs. 24/unit with a total value of Rs. 14,400
Total 1,200 units with a total value of Rs. 36,000
Value here implies cost + direct expenses
The selling prices and the related expenses are
Batch N :: Rs. 50/unit

Batch M :: Rs. 50/unit [Regular price]
Batch M :: Rs. 25/unit [Current price]
This stock represents an outdated model of the product and the present market conditions would enable
the stock to be sold only at a price of Rs. 25 per unit.
The sales of all stocks are made through a dealer who would charge a commission of 10% of the sale
proceeds.
Cost and Net Realisable Values of Closing Stock

From the available data, Closing stock can be valued at two different rates. Cost and Market Price (Net Realisable
Rate).
600
units [Batch N]
i. Cost = Rs. 36/unit.
ii. Market Price = Rs. 50/unit.
iii. Expenses directly relatable to sale = Rs. 5/unit

(10% of selling price = Rs. 50/unit 10%).
iv. Net Realisable Value = Rs. 45/unit
[Market Price (Rs. 50/unit) Expenses relatable to sale (Rs. 5/unit)]
600
units [Batch M]
i. Cost = Rs. 24/unit.
ii. Market Price = Rs. 25/unit.
iii. Expenses directly relatable to sale = Rs. 2.50/unit

(10% of selling price = Rs. 25/unit 10%).
iv. Net Realisable Value = Rs. 22.50/unit
[Market Price (Rs. 25/unit) Expenses relatable to sale (Rs. 2.50/unit)].
Valuation of Closing Stock based on Convention of Conservatism

600
units [Batch N]
Cost = Rs. 36/unit. Net Realisable Rate = Rs. 45/unit.

Since Cost < Net Realisable Value, the goods are to be valued at cost.
Value of 600 units is Rs. 21,600 (600 units Rs. 36/unit)
600
units [Batch M]
Cost = Rs. 24/unit. Net Realisable Rate = Rs. 22.50/unit.

Since Net Realisable Value < Cost, the goods are to be valued at the net realisable value.
Value of 600 units is Rs. 13,500 (600 units Rs. 22.50/unit)
Value of Closing stock if valued at cost = Rs. 14,400 (600 units Rs. 24/unit)
The Closing Stock should be valued therefore at Rs. 35,100 (Rs. 21,600 + 13,500).
Trading a/c
If value of Closing Stock is taken based on the Convention of Conservatism, the Trading a/c would be
Dr
Trading a/c
Particulars
To
To
To
To
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
93,100
Cr
By Sales
By Closing Stock
4,15,100
Amount
(in Rs)
3,80,000
35,100
4,15,100
The Gross profit has gone down by Rs. 900 since closing stock is considered at a lesser value.
Role of Convention of
Conservatism
The convention of conservatism asks us to take into consideration all those expenses and losses relating to the
subsequent periods of which we are aware.
Future Losses
Where the Net realisable value of stock is less than its cost, the organisation may incur a loss.
In the above case, the organisation may have to incur a loss of Rs. 900 [Rs. 14,400 (cost) Rs. 13,500 (net
realisable value)].
When?
This loss would have to be borne by the organisation if it sells the stock at the net realisable rate.
Since it is the end of the accounting period, such a sale at such a price, if at all it takes place, would be in the
subsequent accounting period.
Thus, the organisation may have to incur this loss in the future.
Is the loss for sure?

The loss may have to be incurred in the future only if the stock has to be sold at Rs. 25 per unit (which gives a net
realisation of Rs. 22.50).
We may consider such a loss a certainty in cases where the stock is required to be sold at the lower price on account
of it becoming obsolete, losing demand etc.
Bu where the lower market rate is on account of normal market fluctuation and if the rates go up in the subsequent
period and the product can be sold at a higher price, this loss need not be incurred.
How is the loss

absorbed?
Based on the Convention of Conservatism, the loss though it may have to be incurred in the future period, is
absorbed in the current period itself, since its information is known.
This will be the case where the lower valuation is on account of conditions which are certain (obsolete goods,
demand going down etc).
Crediting a Nominal a/c implies gain

The value of closing stock is credited to the "Trading a/c". By the principle of credit in relation to nominal accounts
(Credit all Incomes and Gains), we can assume the value to indicate a gain.
Reducing the value of closing stock would therefore amount to reducing the credit made to the Trading a/c, which
would be reducing the gain. Debiting an amount is an equivalent of deducting the amount from the opposite side i.e.
the credit side. Therefore, reducing the gain is the same as taking in additional loss.
Therefore, the loss is absorbed by considering the value of closing stock at a lesser value i.e. the net realisable
value. [In the above example, by considering the closing stock at the lower value, the estimated loss of Rs. 900
relating to the subsequent accounting periods has been absorbed in the current period itself.]
Value of Closing Stock = Value of Opening Stock of the

Subsequent Period
The Closing Stock a/c relating to an accounting period and the Opening Stock a/c relating to the subsequent
accounting period represent the same account. Therefore, the value of the closing stock at the end of the accounting
period and the opening stock at the beginning of the subsequent accounting period are the same.
Closing Stock a/c

The "Closing Stock a/c" is a real account and is created at the last moment of the accounting period.
It represents Stock as an asset. The balance in the "Closing Stock a/c" is carried forward to the next accounting
periods.
Opening Stock a/c

The account that we name "Closing Stock a/c" is renamed "Opening Stock a/c" at the beginning of the next
accounting period while bringing the values of assets and liabilities into the books of accounts with the help of an
"Opening Entry".
This "Opening Stock a/c" is treated as an equivalent of a Nominal account.
Like other nominal accounts it is closed at the end of the accounting period. It is closed by transfer to the "Trading
a/c" since it goes into the value of cost of goods sold.
Note
The value of Opening and Closing stocks relating to a particular accounting period do not mean the same. They are
two indicated by distinct ledger accounts - Opening stock by "Opening Stock a/c" which is a nominal account and
Closing stock by "Closing Stock a/c" which is a Real account.
They may or may not have the same values.
Recording the Value of Closing

Stock
The valuation of closing stock and recording of the value of closing stock in the books are two different aspects.
After ascertaining the value of the closing stock, it is to be brought into the books of accounts.
The basic purpose of accounting is derivation of information and the more information we need
the more the accounting heads we need to maintain.
For each additional piece of information that we intend to derive from the books of accounts, we create and use an
additional ledger account.
Thus, to derive the information relating to Closing Stock we maintain a real account by name "Closing Stock a/c".
The "Closing Stock a/c" gives the information relating to the value of the stock (as an asset) unsold at the end of the
accounting period.
Recording
The value of closing stock is not available ready hand in the books of accounts. It is specifically ascertained at the
end of the accounting period by physical verification of stock and its valuation at cost or market price whichever is
lower.
Thus, by recording the journal entry for Closing Stock, we are in effect bringing the value of Closing Stock into
books.
Debit : Closing Stock a/c

Accounts representing assets are real accounts and show a debit balance. Since by recording the journal entry for
bringing the value of closing stock into books, we are creating an asset by name "Closing Stock a/c" we debit that
account.
[Closing Stock a/c Real a/c Debit what comes in.]
Credit :
There are three possible variations in the account to be credited for recording the value of closing stock.
i.
Trading a/c
ii.
Goods Consumed a/c
iii.
Purchases a/c
The ledger account to be credited is dependent on which account is used to reflect the value of cost of goods sold as
well as the time of recording the entry.
Recording Closing Stock Crediting Trading

a/c
Total value of goods = Opening Stock + Purchases + Direct Expenses.
Particulars
Amount
Opening Stock
Amount
20,000
(+) a) Purchases (Cost Value)
2,48,000
b) Direct Expenses
54,000
Total Value of Goods
3,02,000
3,22,000
() a) Closing Stock (Value)
36,000
b) Stock Unused for Trading
14,000
Cost of Goods Sold
50,000
2,72,000
Direct Incomes/Expenses transferred to Trading a/c

At the end of the accounting period, the balances (amounts) in all the ledger accounts which represent expenses
which go into the value of goods/stock (direct expenses), are closed by transfer to the "Trading a/c".
This would result in the "Trading a/c" being debited with the total value of goods/stock. Show/Hide
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
Cr
Particulars
(in Rs)
Amount
(in Rs)
20,000
2,48,000
54,000
3,22,000
3,22,000
Revealing/Reflecting Cost of Goods Sold

To reflect/reveal the cost of goods sold, the value of closing stock is to be deducted from the total value of goods.
Thus the value of closing stock has to be credited to the "Trading a/c" which has the total value of goods/stock
existing in it as a debit balance. Show/Hide
Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
(in Rs)
20,000
2,48,000
54,000
Cr
Particulars
By Cost of Goods Sold c/d

By Closing Stock
3,22,000
To Cost of Goods Sold b/d
Amount
(in Rs)
2,86,000
36,000
3,22,000
2,86,000
Journal/Ledger
The Journal entry for recording the value of closing stock in such a case would be
Journal in the books of M/s ___ for the period from ____ to ____
Date
V/R
No.
Particulars
L/F Debit Amount

(in Rs)
Credit
Amount
(in Rs)
31st Dec
Closing Stock a/c

To Trading a/c
Dr
36,000
36,000
[For recording the value of Closing Stock in

the books.]
Dr
Closing Stock a/c

Particulars
To Trading a/c
Amount
Particulars
(in Rs)
36,000
Cr
By Bal c/d
36,000
Dr
(in Rs)
36,000
36,000
Trading a/c
Particulars
To
To
To
To
Amount
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
(in Rs)
20,000
2,48,000
54,000
94,000
Cr
Particulars
By Sales
By Closing Stock
4,16,000
Amount
(in Rs)
3,80,000
36,000
4,16,000
Recording Closing Stock Crediting Goods Consumed

a/c
Where the organisation intends to specifically identify the cost of goods consumed, a separate ledger account by
name "Goods Consumed a/c" may be created and used for that purpose.
Direct Expenses transferred to Goods Consumed a/c

At the end of the accounting period, the balances (amounts) in all the ledger accounts which represent expenses
which go into the value of goods/stock (direct expenses), are closed by transfer to the "Goods Consumed a/c".
This would result in the "Goods Consumed a/c" being debited with the total value of goods/stock. Show/Hide
Dr
Goods Consumed a/c

Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
(in Rs)
Particulars
Cr
Amount
(in Rs)
20,000
2,48,000
54,000
3,22,000
3,22,000
Revealing/Reflecting Cost of Goods Sold

To reflect/reveal the cost of goods sold, the value of closing stock is to be deducted from the total value of goods.
Thus the value of closing stock has to be credited to the "Goods Consumed a/c" which has the total value of
goods/stock existing in it as a debit balance. Show/Hide
Dr
Goods Consumed a/c

Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
Cr
(in Rs)
By Trading a/c (?)

By Closing Stock
2,86,000
36,000
3,22,000
3,22,000
Journal/Ledger
The Journal entry for recording the value of closing stock in the books would be
Date
V/R
No.
31st Dec
Particulars
L/F
Closing Stock a/c

To Goods Consumed a/c
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
36,000
36,000

the books.]
Dr
Goods Consumed a/c

Particulars
To Opening Stock
To Purchases
To Direct Expenses
Amount
Particulars
(in Rs)
20,000
2,48,000
54,000
By Trading a/c (?)

By Closing Stock
3,22,000
Cr
Amount
(in Rs)
2,86,000
36,000
3,22,000
The balance in the "Goods Consumed a/c" represents the cost of goods sold and is transferred to the "Trading a/c" to
ascertain the Gross Profit.
Dr
Trading a/c
Particulars
To Goods Consumed
To Gross Profit
Amount
Particulars
(in Rs)
2,86,000
94,000
Cr
By Sales
3,80,000
Amount
(in Rs)
3,80,000
3,80,000
Balance in Goods Consumed a/c not representing Cost of

Goods Sold
The balancing figure in the "Goods Consumed a/c" transferred to the "Trading a/c" does not represent cost of goods
sold, in the following cases
Direct Expenses Transferred to Trading a/c
Where the direct expenses have been transferred to the Trading a/c instead of the Goods Consumed a/c, the
balancing figure in Goods Consumed a/c does not represent cost of goods sold.
Dr
Goods Consumed a/c

Particulars
To Opening Stock
To Purchases
Amount
Particulars
(in Rs)
20,000
2,48,000
By Trading a/c (?)

By Closing Stock
2,68,000
Cr
Amount
(in Rs)
2,32,000
36,000
2,68,000
Cost of Goods Sold implies the total value of goods sold which includes both cost of the goods (represented by
purchases a/c balance) and direct expenses related to the goods.
Since Direct Expenses have not been debited to Goods Consumed a/c, the balancing figure represents the value of
goods sold excluding direct expenses thereon.
Dr
Trading a/c
Particulars
To Direct Expenses
To Goods Consumed
To Gross Profit
Amount
Particulars
(in Rs)
54,000
2,32,000
94,000
Cr
By Sales
Amount
(in Rs)
3,80,000
3,80,000
3,80,000
Recording Closing Stock

Valuation of closing stock is independent of the accounting treatment. Closing Stock can be credited to either the
Trading a/c or the Goods Consumed a/c.
The only precaution to be taken would be in interpreting the balancing figure value. It should not be considered as
Cost of Goods Sold.
However, in such cases, it would be more appropriate to record the value of closing stock through the Trading a/c
where the value includes both cost and direct expenses.
Exception
Recording Closing Stock through Goods Consumed a/c would be rational if its value does not include any part of the
direct expenses incurred during the current period which have been debited to the Trading a/c.
Opening Stock transferred to Trading a/c

Where the balance in "Opening Stock a/c" has been transferred to the Trading a/c instead of the Goods Consumed
a/c, the balancing figure in Goods Consumed a/c may not represent Cost of Goods Sold.
Dr
Goods Consumed a/c

Particulars
To Purchases
To Direct Expenses
Amount
(in Rs)
2,48,000
54,000
3,12,000
Particulars
By Trading a/c (?)

By Closing Stock
Cr
Amount
(in Rs)
2,66,000
36,000
3,12,000
The balance in the Goods Consumed a/c transferred to the Trading a/c represents the value of goods that have been
purchased and sold away during the current period.

This does not include the value of opening stock that might also have been sold away. Thus this balance, cannot be
called "cost of goods sold" though it represents value.
Dr
Trading a/c
Particulars
To Opening Stock
To Goods Consumed
To Gross Profit
Amount
Amount
Particulars
(in Rs)
20,000
2,66,000
94,000
Cr
(in Rs)
By Sales
3,80,000
3,80,000
3,80,000
Recording Closing Stock

Valuation of closing stock is independent of the accounting treatment. Closing Stock can be credited to either the
Trading a/c or the Goods Consumed a/c.
The only precaution to be taken would be in interpreting the balancing figure value. It should not be considered as
Cost of Goods Sold.
However, in such cases, it would be more appropriate to record the value of closing stock through the Trading a/c
where the total value is debited ultimately.
Exception
Recording Closing Stock through Goods Consumed a/c would be rational closing stock includes only that stock which
has been purchased during the current accounting period.
This would be the case where the quantity of closing stock is less than the quantity purchased during the current
period and stock is being used up on FIFO basis.
Recording Closing Stock Crediting Purchases

a/c
Where the following conditions exist, we can credit "Purchases a/c" with the value of closing stock.
Closing stock is physically relatable to the stock that has been purchased during the current period.
[This would be the case where FIFO method is adopted for physical usage of stock]
There are no direct expenses in relation to the stock purchased during the current period
(Or)
The value of closing stock does not include the direct expenses incurred during the current period
Journal/Ledger
The Journal entry for recording the value of closing stock in the books would be
Date
V/R
No.
31st Dec
Particulars
Closing Stock a/c
L/F
Dr
Debit Amount
(in Rs)
36,000
Credit
Amount
(in Rs)
To Purchases a/c
36,000

the books.]
Dr
Purchases a/c
Date
1st31st
Particulars
To Cash/Bank/Crs
J/F
Amount
(in Rs)
2,48,000
Cr
Date
Particulars
31/12/05 By Closing Stock

31/12/05 By Trading a/c
Amount
J/F
(in Rs)
36,000
2,12,000
2,48,000
Dr
Trading a/c
Particulars
To
To
To
To
2,48,000
Opening Stock
Purchases
Direct Expenses
Gross Profit
Amount
Particulars
(in Rs)
20,000
2,12,000
54,000
94,000
Cr
By Sales
3,80,000
Amount
(in Rs)
3,80,000
3,80,000
Conventional use
Technically we can credit the value of closing stock to Purchases a/c only when the above conditions are satisfied.
The use of "Trading a/c" or "Goods Consumed a/c" for crediting the value of closing stock, is possible only if the
journal entry for brining the value of closing stock into books is being recorded at the time of preparation of final
accounts.
Where we are recording the value of closing stock in the accounting books before the preparation of final accounts, it
is a convention that we credit "Purchases a/c" (on account of the absence of "Trading a/c" or "Goods Consumed a/c"
for use).
Closing Stock a/c : Opening Stock a/c

The "Closing Stock a/c" and the end of an accounting period and the "Opening Stock a/c" at the beginning of the
subsequent accounting period represent the same account.
At the End of an Accounting Period

The closing balances in all the ledger accounts are carried forward to the subsequent accounting periods.
Every ledger posting should have a journal support.
The journal entry that supports the carry forward of balances in ledger accounts is called the "Closing Entry".
Closing Entry
The journal entry for closing the books of accounts during an accounting period
Date
V/R
No.
31st Dec
Particulars
L/F
Creditors a/c
Bank Loan a/c
Profit & Loss Appropriation a/c
Capital a/c
To Closing Stock a/c
To Cash a/c
To Debtors a/c
To Furniture a/c
Dr
Dr
Dr
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
48,000
63,000
54,000
1,00,000
36,000
42,000
1,26,000
61,000
[For the balances in the ledger accounts

carried forward to the next accounting
period.]
Closing Balance Sheet

The closing Balance Sheet is a statement of balances that are carried forward to the subsequent accounting periods.
Balance Sheet of M/s ______ as on the Last Day

Liabilities
Amount
Capital
Profit & Loss Appropriation
Creditors
Bank Loan
1,00,000
54,000
48,000
63,000
Assets
Cash
Closing Stock
Debtors
Furniture
2,65,000
Amount
42,000
36,000
1,26,000
61,000
2,65,000
At the beginning of the Subsequent Accounting Period

The opening balances in all the ledger accounts are brought forward from the previous accounting periods. Every
ledger posting should have a journal support and the journal entry that supports the brining forward of balances in
ledger accounts is called the "Opening Entry".
Opening Balance Sheet

The opening balance sheet of an accounting period and the closing balance sheet of the previous period are the
same. This is something that is not specifically prepared.
Balance Sheet of M/s ______ as on the First Day

Liabilities
Amount
Capital
Profit & Loss Appropriation
Creditors
Bank Loan
1,00,000
54,000
48,000
63,000
2,65,000
Assets
Cash
Closing Stock
Debtors
Furniture
Amount
42,000
36,000
1,26,000
61,000
2,65,000
Opening Entry
The opening entry is based on the opening balance sheet.
Date
V/R
No.
31st Dec
Particulars
Cash a/c
Opening Stock a/c
Debtors a/c
Furniture a/c
To Capital a/c
To Profit & Loss Appropriation a/c
To Bank Loan a/c
To Creditors a/c
L/F
Dr
Dr
Dr
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
42,000
36,000
1,26,000
61,000
1,00,000
54,000
63,000
48,000
[For the opening balances in the various

ledger accounts brought forward into the
books of accounts from the previous
accounting period.]
Where the Opening Entry is being recorded, the phrase "Closing Stock" is replaced by the phrase "Opening Stock".
Closing Stock Adjustment during Final

Accounting
The value of closing stock is ascertained through physical verification of the stock and its valuation at cost or market
price whichever is lesser.
Thus recording the entries for brining in the value of closing stock into books may not be complete by the time trial
balance is drawn up.
If the value of closing stock is not available (or is not recorded) by the time of making up the trial balance at the end
of the accounting period, it would appear as a part of the transactions appended to the trial balance which are to be
adjusted.
Adjustment is bringing in the effect of the transactions through mathematical operations of addition and subtraction.
The adjustments to be made can be found out by ascertained the net effect of the journal entries to be recorded.
In adjusting the value of closing stock we consider the entry for recording the same to be the one where the Trading
a/c or Purchases a/c is credited.
Where the closing stock is recorded by crediting its value to the Trading a/c
Entry
Dr. Closing Stock a/c
Cr. Trading a/c
Effect
1. (+) Show the Value of Closing Stock on the Assets side of the Balance Sheet
2. (+) Show the Value of Closing Stock on the Credit side of Trading a/c
Where the closing stock is recorded by crediting its value to Purchases a/c
Entry
Effect
Cr. Purchases a/c
2. () Deduct the Value of Closing Stock from Purchases on the Debit side of
Trading a/c
Where the closing stock is recorded by crediting Goods Consumed a/c
Entry
Effect

Cr. Goods Consumed a/c
2. (+) Show the Value of Closing Stock on the Credit side Goods Consumed a/c
This assumption is generally avoided, where the value of closing stock has to be dealt with as an
adjustment.
Closing Stock in Trial Balance

Interpretation
Where "Closing Stock a/c" is present in the Trial Balance, it is an indication of the Journal entry for recording the
value of closing stock has already been recorded.
Dealing with Closing Stock a/c

The "Closing Stock a/c" represents an asset and is thus a Real account.
Since an item appearing in the "Trial Balance" has to be dealt with only once based on its nature, the Closing Stock
a/c appearing in the trial balance is shown on the assets side of the Balance Sheet.
The balance in all the real accounts is carried forward to the subsequent accounting periods. All such accounts whose
balances are carried forward to the subsequent accounting periods are listed in the Balance Sheet as at the end of
the accounting period. Thus all the real account balances are shown on the assets side of the balance sheet.
What was the Journal Entry used?

The Journal entry used for recording the value can be identified/assumed depending on what ledger accounts are
present in the Trial Balance
Trading a/c appears in the Trial Balance

Trial Balance of M/s ___ " as on 30th June 2005
Particulars
Opening Stock a/c
Purchases a/c
Closing Stock a/c
Trading a/c
L/F
Total
Debit
Amount
(in Rs)
Credit
Amount
(in Rs)
20,000
2,48,000
36,000
36,000
xxx
Where Closing Stock a/c and Trading a/c appear in Trial Balance
xxx

Cr. Trading a/c
The entry used for recording the value of closing stock.
Trading a/c does not appear, but Purchases a/c appears in the Trial Balance
Particulars
L/F
Opening Stock a/c

Purchases a/c
Closing Stock a/c
Debit
Amount
(in Rs)
Credit
Amount
(in Rs)
20,000
2,12,000
36,000
Total
xxx
xxx
Where Closing Stock a/c and Purchases a/c appear in Trial Balance
Cr. Purchases a/c
Both Trading a/c and "Purchases a/c" do not appear in the Trial Balance
Particulars
L/F
Debit
Amount
(in Rs)
Goods Consumed
Closing Stock a/c
Total
Credit
Amount
(in Rs)
2,32,000
36,000
xxx
xxx
Where Purchases a/c and Trading a/c do not appear in the Trial Balance and
Where Closing Stock a/c and Goods Consumed a/c appear in Trial Balance
Cr. Goods Consumed a/c
Purchases and Sales Return

a/c's
Each ledger account provides one or more pieces of information. To enable derivation of additional information
relating to returns of goods/stock, we record the transactions relating to purchase returns as well as sales returns
using Purchase Returns a/c and Sales Returns a/c respectively.
Purchases Returns a/c

Purchase Returns a/c is a nominal account. It provides the information relating to the value of goods/stock returned
to the seller from whom the stock has been purchased.
Being a nominal account, this account is closed at the end of the accounting period.
Sales Returns a/c

Sales Returns a/c is a nominal account. It provides the information relating to the value of goods/stock returned by
the buyers to whom the stock has been sold.
Being a nominal account, this account is closed at the end of the accounting period.
Gross Purchases and Gross Sales

The Purchase Returns a/c and the Sales Returns a/c provide information relating to returns only.
Since returns are recorded separately using these accounts, the Purchases a/c and Sales a/c give the information
relating to the Gross Purchases and Gross Sales.
Need for information relating to Net Values

Along with the information relating to the returns and the gross values, the organisation needs the information
relating to the net values i.e. the net purchases and net sales made by it.
There are two methods adopted for deriving the information relating to Net Purchases and Net Sales.
By Setting off related Ledger account balances.

By Transferring the balance in the returns accounts to Trading a/c and making adjustments thereon.
This information is generally derived at the end of the accounting period. However, it can be derived as and when
needed, by deducting the balance in the returns account from the balance in the main account.
Finding Net Purchases/Sales by Setting off related Ledger

Account Balances
SET OFF Setting off of ledger accounts is clubbing two accounts with opposite balances. In
setting off ledger account balances, we close the account with the lower balance by transferring
it to the account with a higher balance.
Finding Net Purchases

The Purchases a/c carries a debit balance and the Purchase Returns a/c carries a credit balance. At the end of the
accounting period, the two accounts are set off i.e. the Purchase Returns a/c is closed by transfer to the Purchases
a/c.
Transfer of a credit balance from one account to a second would result in the second account
being credited and the first account being debited.
The balance remaining in the Purchases a/c would thus represent net purchases. While closing the purchases
account at the end of the accounting period, this balance is transferred to the Trading a/c
Journal/Ledger
Show/Hide
Journal in the books of M/s __ for the period from ____ to _____
Date
V/R
No.
March 31st
Particulars
L/F
Purchase Returns a/c

To Purchases a/c
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
80,000
80,000
[For transferring the balance in the purchase

returns account to the purchases account to
derive the net purchases]
Dr

Particulars
To Purchases a/c
Amount
Particulars
(in Rs)
80,000
Amount
(in Rs)
By
By
80,000
Dr
Cr
80,000
Purchases a/c
Particulars
To
To
Amount
Cr
Particulars
(in Rs)
5,80,000
By Purchase Returns a/c

By Trading a/c
Amount
(in Rs)
80,000
5,00,000
5,80,000
Finding Net Sales

The Sales a/c carries a credit balance and the Sales Returns a/c carries a debit balance. At the end of the accounting
period, the two accounts are set off i.e. the Sales Returns a/c is closed by transfer to the Sales a/c.
Transfer of a debit balance from one account to a second would result in the second account
being debited and the first account being credited.
The balance remaining in the Sales a/c would thus represent net sales. While closing the Sales account at the end of
the accounting period, this balance is transferred to the Trading a/c
Journal/Ledger
Show/Hide
Date
V/R
No.
March 31st
Particulars
L/F
Sales a/c
To Sales Returns a/c
Dr
Debit Amount
(in Rs)
Credit
Amount
(in Rs)
72,500
72,500
[For transferring the balance in the sales

returns account to the sales account to
derive the net sales]
Dr
Sales Returns a/c

Particulars
Amount
Particulars
(in Rs)
To
To
Cr
By Sales a/c
(in Rs)
72,500
72,500
Dr
Amount
72,500
Sales a/c
Particulars

To Trading a/c
Amount
Particulars
(in Rs)
72,500
7,51,500
Cr
By
By
Amount
(in Rs)
8,24,000
8,24,000
Information in Trading a/c

If this method is adopted for deriving the value of net purchases and sales, the Trading a/c would not display
information relating to returns and would contain postings as To Purchases a/c on the debit side and the By Sales a/c
on the credit side.
Dr
Trading a/c
Particulars
To
To
To
To
To
To
Opening Stock
Purchases
Wages
Octroi
Carriage Inwards
Gross Profit
Amount
(in Rs)
40,000
5,00,000
45,000
32,000
15,000
2,40,500
8,27,500
Cr
Particulars
By Sales
Closing Stock
Amount
(in Rs)
7,51,500
76,000
8,27,500
Transferring balances in Purchases/Sales Returns a/c to

Trading a/c
The Purchase Returns a/c and the Sales Returns a/c being nominal accounts are closed at the end of the accounting
period by transfer to the Trading a/c (instead of to the Purchases a/c and Sales a/c respectively).
The Purchase Returns a/c carries a credit balance and the "Sales Returns a/c" carries a credit balance.
Journal
The journal entries for closing these accounts by transfer to the trading account would be
Date
V/R
No.
March 31st
Particulars
L/F

To Trading a/c
Dr
Debit Amount
(in Rs)
80,000
72,500
Credit
Amount
(in Rs)
80,000
[For transferring the balance in the purchase

returns account at the end of the accounting
period to the trading account]
March 31st
Trading a/c
Dr
72,500
[For transferring the balance in the sales

returns account at the end of the accounting
period to the trading account]
Posting in Trading a/c

The "Trading a/c" with these journal entries posted:
Dr
Trading a/c
Particulars
To
To
To
To
To
To
To
Opening Stock
Purchases
Sales Returns
Wages
Octroi
Carriage Inwards
Gross Profit
Amount
(in Rs)
40,000
5,80,000
72,500
45,000
32,000
15,000
2,40,500
9,80,000
Cr
Particulars
By Sales
By Purchase Returns
Closing Stock
Amount
(in Rs)
8,24,000
80,000
76,000
9,80,000
We cannot derive the information relating to Net Purchases and Net Sales by just Posting the entries to the Trading
a/c.
Adjustment in Trading a/c : Information relating to Net

Purchases/Sales
Since the information relating to Net Purchases and Net Sales is not revealed by just transferring the balances in the
returns accounts to the Trading a/c we need to make adjustments to derive that information.
Net Purchases
Posting (showing) an amount on the credit side of an account is an equivalent of deducting the
amount from an item on the debit side.
Thus the Purchase Returns a/c balance instead of being shown on the credit side is deducted from Purchases a/c
balance on the debit side of the Trading a/c, thereby giving the figure of Net Purchases in the Trading a/c itself.
Net Sales
Posting (showing) an amount on the debit side of an account is an equivalent of deducting the
amount from an item on the credit side.
Thus, the Sales Returns a/c balance instead of being shown on the debit side would be deducted from Sales a/c on
the credit side of the Trading a/c, thereby giving us the figure of Net Sales in the Trading account itself.
Deriving from the Trading a/c

Dr
Trading a/c
Particulars
To Opening Stock
To Purchases
() Pur. Returns
To
To
To
To
Wages
Octroi
Carriage Inwards
Gross Profit
Amount
Amount
(in Rs)
(in Rs)
5,80,000
80,000
Cr
Particulars
40,000 By Sales
() Sales Returns
5,00,000 Closing Stock
45,000
32,000
15,000
2,40,500
8,27,500
Amount
Amount
(in Rs)
(in Rs)
8,24,000
72,500
7,51,500
76,000
8,27,500
Such an adjustment would not affect the figure of gross profit.
Revenue
Income, turnover, revenue are terms used synonymously to mean the amount of money that an organisation
receives from its activities like sale of products, providing services to customers etc. Depending on the nature of the
organisation and the type of activity it is involved in the revenue streams are varied
Sale or Products, Providing Services are the activities most common to business organisations. Taxes, Duties, Fees
etc are the major sources of revenue for Governments. Donations, Grants, Subscriptions, etc are some of the
sources of revenue for non-profit organisations.
The terms Revenue and Sales or Turnover are interchangeably used. This makes sense only when sales are
expressed in terms of value and not in terms of quantity.

Gross Revenue and Net Revenue are terms which are indicative of Gross Sales and Net Sales after setting
off sales returns
Revenue would be meaningful only when it is expressed in relation to a period. Say the revenue is Rs. 5
crores is would not make much sense unless we express the period involved.
Saying the revenue for the last month is Rs. 5 Crores does sound meaningful.
Top Line and Bottom Line

Revenue is often referred to as top line since it is the first item that we consider in preparing the income
statements or accounts. On the Credit Side of the Trading account we find sales generally towards the top
as the first or second item.
Similarly Net Profit (revenue left after deducting all expenses) is termed "Bottom Line". In the Profit and
Loss account, Net Profit/Loss is the last item that appears towards the end.
Even in an income statement (which is nothing but the Trading and Profit & Loss a/c prepared in a form
suitable for financial analysis) we start by considering the gross sales (i.e. gross revenue) and end with
arriving at the net profit.
Revenue Recognition
Revenues are
realized when goods and services are exchanged for cash or receivables (debtors).
realizable when assets received in exchange for goods and services are readily convertible to cash or
receivables (debtors).
earned when the duties to be entitled to compensation are performed.
Recognising revenue implies the act that would make the organisation consider that they have earned the revenue
involved in the transaction. Based on when the revenue is recognised there are two
types of accounting systems (1) Cash Basis of Accounting and (2) Accrual Basis or final,accounts,financial,account
Mercantile System of Accounting
ing,trading,profit,loss,account,
balance,sheet,trial,balance,wor
1.Cash Basis Accounting
k,sheet,adjustments
Under cash basis accounting revenues are recognized and earned only when cash is received irrespective
of when and how the services were performed or goods delivered.
To put it in different terms, the cash basis of accounting asks you to take into consideration all those
incomes/gains that have been received in cash or other assets and expenses/losses that have been paid
out in cash or other assets during the accounting period in consideration.
2.Accrual or Mercantile Basis Accounting

Under accrual or mercantile basis accounting, revenues are recognized and earned when they are realized
or realizable irrespective of when the cash is received.
To put it in different terms, the accrual basis of accounting asks you to take into consideration all those
incomes/gains and expenses/losses pertaining to the accounting period for which you are trying to
ascertain the profits and losses irrespective of whether the incomes are received in cash or not and the
expenses are paid out in cash or not.
3.Hybrid System of Accounting

This is not a system of accounting on its own. It is a combination of the Cash Basis Accounting and
Accrual Basis Accounting. This system is based on the concept of conservatism.
Under the hybrid system of accounting, incomes are recognised as in Cash Basis Accounting i.e. when
they are received in cash and expenses are recognised on accrual basis i.e. during the accounting period
in which they arise irrespective of when they are paid.
What Basis/system to follow?

The basis of accounting to be followed is dependent on the attitude and outlook of the organisation. If organisations
have a conservative attitude, they may adopt the hybrid system of accounting.
The traditional accounting systems used to adopt the cash basis of accounting. Organisations which are to abide by
the various regulations imposed by the various acts under which they are regulated are mostly required to adopt the
Mercantile System of Accounting which is supposed to reveal the information relating to the organisation in a more
appropriate manner than the cash basis of accounting.
Conversion from One System to Another

In practice we consider only the Cash and Accrual bases as the systems of accounting. As such, conversion implies
converting from cash basis of accounting to the mercantile basis of accounting and vice versa.
For the purpose of deriving each piece of information, a ledger account is created. The more the information we
need, the more the accounting heads we need to maintain.
Conversion
From Cash Basis to Accrual/Mercantile Basis would require the following information to be brought into the
books of accounts.
From Mercantile/Accrual Basis to Mercantile Basis would require the following information to be written off
from the books of accounts.
1.Expenses Outstanding [ Creditors]

The amount of expenses that have been incurred but have not yet been
paid out.
final,accounts,financial,account
ing,trading,profit,loss,account,
balance,sheet,trial,balance,wor
k,sheet,adjustments
Separate ledger accounts may be used for each distinct expenditure (like outstanding salaries a/c, Rent
payable a/c, Interest unpaid a/c etc.) or a single account may be used in place of all these (like
outstanding expenses a/c or creditors for expenses a/c).
Creditors !!! (for expenses)

When an expenditure is outstanding it amounts to a liability for the organisation. It may have to be paid
to a person or an organisation. Any person or organisation to whom we owe money is called a creditor. As
such, the "outstanding expenditure a/c" is a personal account in the nature of a creditor. Since it is
indicative of a creditor, it carries a credit balance and has to be shown on the liabilities side of the balance
sheet.
The creditors for expenses are cleared in the subsequent periods by paying them out.
2.Expenses Prepaid [ Debtors]

The amount of expenses that have not yet been incurred but have been paid out in advance.
Separate ledger accounts may be used for each distinct expenditure (like Advance salaries a/c, Rent
prepaid a/c, Interest paid in advance a/c etc.) or a single account may be used in place of all these (like
Prepaid expenses a/c or expenses paid in advance a/c).
3.Incomes Receivable [ Debtors]

The amount of incomes (revenue) that have arisen and have not yet been received.
Separate ledger accounts may be used for each such income (like Interest Receivable a/c, Commission
Due a/c, etc.) or a single account may be used in place of all these (like Incomes Still Receivable a/c).
4.Incomes Pre-received [ Creditors]

Incomes that have not yet arisen but have been received in advance.
Separate ledger accounts may be used for each such income (like Interest received in advance a/c,
Commission Pre received a/c, etc.) or a single account may be used in place of all these (like Pre-received
Incomes a/c or Incomes received in advance a/c).
Any Nominal Account Head prefixed or suffixed by the terms

outstanding, prepaid, pre-received, still receivable, etc.,
indicates a personal account and not a nominal account.
Depending on the nature of the balance in the account, it is
an equivalent of either a creditor or a debtor.
Conversion from Cash Basis to Accrual Basis
To convert the accounting system from cash basis to accrual basis from a particular point of time, one
needs to identify the values attributable to the accounts of the nature as described above and bring them
into the books of accounts, which would take care of the adjustments to be made in the books for the
incomes/expenses relating to the past periods. From thereon, the incomes and expenses have to be
recorded on accrual basis.
The ledger accounts to be brought into the books of accounts are personal accounts and are an equivalent
of either debtors or creditors. Brining the ledger accounts equivalent to debtors would amount to brining
in an undisclosed asset into the books, which would result in a gain. Brining the ledger accounts
equivalent to creditors would amount to brining in an undisclosed liabilities into the books, which would
result in a loss. A ledger account by name "Profit and Loss Adjustment a/c" is used to record thess gains
or losses.
Journal Entries
Hide/Show
Journal in the books of M/s _____ for the period from _____ to _____
Date
V/R
No.
31/12/05
Particulars
L/F
Profit & Loss Adjustment a/c

To Expenses Outstanding a/c
Dr
Credit
Amount
(in Rs)
Debit Amount
(in Rs)
26,000
16,400
11,100
5,200
26,000
[For brining the expenses outstanding to be

paid into the books of accounts.]
31/12/05
Expenses Prepaid a/c

To Profit & Loss Adjustment a/c
Dr
16,400
[For brining the expenses paid in advance

into the books of accounts.]
31/12/05

To Incomes Pre-received a/c
Dr
11,100
[For brining in the amount of incomes

received in advane into books of accounts.]
31/12/05
Incomes Receivable a/c

Dr
5,200
[For brining the incomes receivable into the

books of accounts.]
Ledger Accounts
Hide/Show
Dr
Expenses Outstanding a/c

Date
Particulars
31/12/05 To Bal c/d
J/F
Amount
(in Rs)
26,000
Date
Cr
Particulars
31/12/05 By P/L
Adjustment.
J/F
26,000
(in Rs)
26,000
26,000
Dr
Amount
26,000

Date
Particulars
J/F
31/12/05 To P/L Adjustment
Amount
(in Rs)
16,400
Date
Cr
Particulars
31/12/05 By Bal c/d
J/F
16,400
Dr
Incomes Pre-received a/c

Particulars
J/F
(in Rs)
16,400
16,400
Date
Amount
16,400
Amount
(in Rs)
Date
Cr
Particulars
J/F
Amount
(in Rs)
31/12/05 To Bal c/d
11,100
31/12/05 By P/L
Adjustment.
11,100
11,100
Dr
11,100
11,100

Date
Particulars
J/F
31/12/05 To P/L Adjustment
Amount
Date
(in Rs)
5,200
Cr
Particulars
31/12/05 By Bal c/d
J/F
5,200
Dr
Amount
(in Rs)
5,200
5,200
5,200

Date
Particulars
31/12/05 To Out. Exp.

31/12/05 To Pre-rec. Inc.
J/F
Amount
Date
(in Rs)
26,000
11,100
Particulars
Cr
J/F
31/12/05 By Prepaid Exp.
31/12/05 By Inc. receivable

By P/L Appropr.
37,100
Amount
(in Rs)
16,400
5,200
15,500
37,100
The overall gain or loss revealed by the "P/L Adjustment a/c" is written off to the "P/L Appropriation a/c"
or the "Capital a/c", depending on where the accumulated profits of the previous periods have been
transferred.
These would bring in all the adjustments needed for the various accruals, outstandings and prepaids that
have not been taken into consideration in the previous periods on account of not having received the cash
relating to the same.
Conversion from Accrual Basis to Cash Basis
To convert the accounting system from accrual/mercantile basis to cash basis from a particular point of
time, one needs to identify the accounts of the nature as described above and write them off from the
books of accounts, which would take care of the adjustments to be made in the books for the
incomes/expenses relating to the past periods. From thereon, the incomes and expenses have to be
recorded on cash basis.
The ledger accounts to be written off from the books of accounts are personal accounts and are an
equivalent of either debtors or creditors. Writing off the ledger accounts equivalent to debtors would
amount to writing off an existing asset in the books, which would result in a loss. Writing off the ledger
accounts equivalent to creditors would amount to writing off an existing liability in the books, which would
result in a gain. A ledger account by name "Profit and Loss Adjustment a/c" is used to record these losses
or gains.
Journal Entries
Hide/Show
Journal in the books of M/s _____ for the period from _____ to _____
Date
V/R
No.
31/12/05
Particulars
L/F

Dr
Credit
Amount
(in Rs)
Debit Amount
(in Rs)
31,650
18,700
13,650
8,750
31,650
[For writing off the expenses outstanding to

be paid, recorded as a liability, from the
books of accounts.]
31/12/05

To Expenses Prepaid a/c
Dr
18,700
[For writing off the expenses paid in

advance, recorded as an asset, from the
books of accounts.]
31/12/05

Dr
13,650
[For writing off the amount of incomes

received in advance, recorded as a liability,
from books of accounts.]
31/12/05

To Incomes Receivable a/c
Dr
8,750
[For writing off the incomes receivable,

recorded as an asset, from the books of
accounts.]
Ledger Accounts
Hide/Show
Dr

Date
Particulars
31/12/05 To P/L
Adjustment.
J/F
Amount
(in Rs)
31,650
Date
Cr
Particulars
31/12/05 By Bal b/d
J/F
31,650
Dr
(in Rs)
31,650
31,650

Date
Particulars
31/12/05 To Bal b/d
J/F
Amount
(in Rs)
18,700
Date
Cr
Particulars
31/12/05 By P/L
Adjustment
18,700
Dr
Amount
J/F
Amount
(in Rs)
18,700
18,700
Cr
Date
Particulars
31/12/05 To P/L
Adjustment.
J/F
Amount
(in Rs)
13,650
Date
Particulars
31/12/05 By Bal b/d
J/F
13,650
Dr
(in Rs)
13,650
13,650

Date
Particulars
31/12/05 To Bal b/d
J/F
Amount
(in Rs)
8,750
Date
Cr
Particulars
J/F
31/12/05 By P/L Adjustment
8,750
Dr
Amount
(in Rs)
8,750
8,750

Date
Particulars
31/12/05 To Prepaid Exp.

31/12/05 To Inc. receivable
31/12/05 To P/L Appropr.
J/F
Amount
(in Rs)
18,700
8,750
17,850
Date
Particulars
31/12/05 By Out. Exp.

31/12/05 By Pre-rec. Inc.
45,300
Amount
Cr
J/F
Amount
(in Rs)
31,650
13,650
45,300
The overall gain or loss revealed by the "P/L Adjustment a/c" is written off to the "P/L Appropriation a/c" or
the "Capital a/c", depending on where the accumulated profits of the previous periods have been
transferred.
These would bring in all the adjustments needed for the various accruals, outstandings and prepaids that
have been taken into consideration in the previous periods on account of not having received the cash
relating to the same.
Income/Profits
The profits relating to a particular accounting period are revealed by the "Profit & Loss a/c" relating to that period.
The profits are derived by transferring the ledger account balances in the nominal accounts to the "Trading a/" or
"Profit & Loss a/c" as the case may be.
The basis of accounting followed i.e. cash basis or mercantile basis would decide the amount of incomes/expenses in
relation to the accounting period. Since the figure of profit is dependent on the incomes/expenses, we can say that
the figure of profit would vary depending on the method of accounting being followed by the organisation.
Finding Income under a System given Income under the other

Many a times, in problem solving, we would be required to identify the income under the Mercantile basis accounting
from the income under cash basis account.
We know that the information relating to outstanding expenses, expenses paid in advance, pre-received incomes,
outstanding incomes receivable is to be dealt with in changing the accounting system from Cash to Mercantile or vice
versa from a particular point of time. The same accounts are to be dealt with in finding the income under one system
given the income under the other system of accounting. Moreover, we should understand that these accounts are to
be dealt along with the respective income/expenses accounts and not in isolation.
Adjusting Expenditure
Consider an expenditure like Salary. Within an accounting period, salary is expended as well as paid. The
amount of salary paid can be identified from the amount of cash paid or cheques issued towards salaries.
The amount of salary expended i.e. the expenditure on account of salary relating to the current
accounting period can be identified by making appropriate adjustments for outstanding and prepaid
salaries both at the beginning and ending of the accounting period.
o Opening Expenses Outstanding

This represents the amount of expenditure that has been outstanding at the beginning of the
accounting period.
This would have to be cleared by paying out the amount in the current period. Therefore, the
cash paid in the current period towards the expenditure is assumed to include this outstanding
amount also (unless there is an indication to the contrary).
Thus to find the expenditure relating to the current period only, this amount has to be deducted
from the Cash Paid for the expense during the current period.
o Opening Expenses Prepaid

This represents the amount of expenditure that has been paid in advance during the previous
period. The prepaid expenses account shows a debit balance at the end of the previous
accounting period. It is an equivalent of a debtor and is treated as an asset. During the current
accounting period, this account is closed by transferring the balance to the expenditure account.
Thus to find the expenditure relating to the current period only, this amount has to be added to
the Cash Paid for the expense during the current period.
o Closing Expenses Outstanding

This represents the amount of expenditure relating to the current accounting period that has not
yet been paid.
Thus to find the expenditure relating to the current period only, this amount has to be added to
the Cash Paid for the expense during the current period.
o Closing Expenses Prepaid

This represents the amount of expenditure relating to the subsequent accounting periods that
has been paid in advance during the current accounting period.
Thus to find the expenditure relating to the current period only, this amount has to be deducted
from the Cash Paid for the expense during the current period.
Date
Particulars
J/F
01/01/05 To Bal b/d
1st_31st To Cash/Bank a/c

31/12/05 To Bal c/d
Amount
(in Rs)
15,425
2,48,000
45,300
Date
Particulars
01/01/05 By Bal b/d

1st_31st By P/L a/c
31/12/05 By Bal c/d
J/F
3,08,725
01/01/06 To Bal b/d
23,750
Dr
Amount
(in Rs)
18,200
2,66,775
23,750
3,08,725
01/01/06 By Bal b/d
45,300
Expenditure a/c
Date
Particulars
31/12/05 To Bal c/d
J/F
Amount
(in Rs)
Date
Cr
Particulars
01/01/05 By Bal b/d

45,300
J/F
3,08,725
(in Rs)
18,200
3,08,725
01/01/06 By Bal b/d
Dr
Amount
45,300
Expenditure a/c
Date
Particulars
01/01/05 To Bal b/d
J/F
Amount
(in Rs)
Date
Cr
Particulars
Amount
(in Rs)
15,425
31/12/05 By Bal c/d
3,08,725
01/01/06 To Bal b/d
J/F
23,750
3,08,725
23,750
Opening Outstanding vs Prepaid

The "Expenditure Outstanding a/c" is a personal account with a credit balance and is an equivalent of a
creditor (a liability). Creditors are cleared by paying out the amount due. Thus the oustandings of the
previous periods may be paid out in full or in part during the subsequent periods.
The "Expenditure Prepaid a/c" is a personal account with a debit balance and is an equivalent of a debtor
(an asset). Debtors are normally liquidated by paying realising the amounts due from them. But, the
prepaid expenditure is not an asset that is liquidated by realising it in cash. It is liquidated by absorbing
(writing off) the asset as an expenditure during the subsequent periods.
Adjusting Incomes
Consider an income like Interest. Within an accounting period, interest is earned as well as received in
cash. The amount of interest received can be identified from the amount of cash/cheques received
towards interest. The amount of interest earned i.e. the income on account of salary relating to the
current accounting period can be identified by making appropriate adjustments for outstanding and prereceived interest both at the beginning and ending of the accounting period.
o Opening Income Receivable
This represents the amount of income that has been outstanding and still receivable at the
beginning of the accounting period.
This would be cleared by realising the amount in the current period. Therefore, the cash received
in the current period towards the income is assumed to include this outstanding amount also
(unless there is an indication to the contrary).
Thus to find the income relating to the current period only, this amount has to be deducted from
the Cash received towards the income during the current period.
o Opening Income Pre-received

This represents the amount of income that has been received in advance during the previous
period. The pre-received income account shows a credit balance at the end of the previous
accounting period. It is an equivalent of a creditor and is treated as a liability. During the current
accounting period, this account is closed by transferring the balance to the income account.
Thus to find the income relating to the current period only, this amount has to be added to the
Cash received for the income during the current period.
o Closing Income Receivable

This represents the amount of income relating to the current accounting period that has not yet
been received.
Thus to find the income relating to the current period only, this amount has to be added to the
Cash received towards the income during the current period.
o Closing Income Pre-received

This represents the amount of income relating to the subsequent accounting periods that has
been received in advance during the current accounting period.
Thus to find the income relating to the current period only, this amount has to be deducted from
the Cash received towards the income during the current period.
Particulars
Cash Received during the Current Period
(+) Opening Income Pre-received
Closing Income Receivable
() Opening Income Receivable

Closing Income Pre-received
Income relating to the current period
Amount
Amount
1,32,500
8,125
5,245
6,850
3,750
13,370
1,45,870
10,600
1,35,270
The
adjustment
relating
to
the
incomes
can
be
summarised
as
follows:
Cash
Received
+
Opening
Income
Pre-received
Opening
Income
Receivable
+ Closing Income Receivable Closing Income Pre-received = Income.
Using the above relation, either the cash received (which would be the income to be considered in cash
basis accounting) or the income pertaining to the current period (which would be the income to be
considered under the mercantile basis accounting) can be found.
Deriving the Information using the Ledger a/c's

Dr
Hide/Show
Income Pre-received a/c

Date
Particulars
01/01/05 To Income a/c

31/12/05 To Bal c/d
J/F
Amount
(in Rs)
8,125
3,750
Date
Cr
Particulars
01/01/05 By Bal b/d

31/12/05 By Income a/c
J/F
11,875
(in Rs)
8,125
3,750
11,875
Dr
Amount
3,750
Income Receivable a/c

Date
Particulars
01/01/05 To Bal b/d

31/12/05 To Income a/c
J/F
Amount
(in Rs)
6,850
5,245
Date
Cr
Particulars
01/01/05 By Income a/c

31/12/05 By Bal b/d
J/F
12,095
Dr
Amount
(in Rs)
6,850
5,245
12,095
5,245
Income a/c
Date
Particulars
01/01/05 To Inc. Rec a/c

1st_31st To P/L a/c
31/12/05 To Inc. Pre. a/c
J/F
Amount
(in Rs)
6,850
1,35,270
3,750
Date
Cr
Particulars
01/01/05 By Inc. Pre. a/c

1st_31st By Cash/Bank
31/12/05 a/c
By Inc. Rec. a/c
J/F
1,45,870
Dr
Amount
(in Rs)
8,125
1,32,500
5,245
1,45,870
Income a/c
Date
Particulars
01/01/05 To Bal b/d

1st_31st To P/L a/c
31/12/05 To Bal c/d
J/F
Amount
(in Rs)
6,850
1,35,270
3,750
Date
Cr
Particulars
01/01/05 By Bal b/d

1st_31st By Cash/Bank
31/12/05 a/c
By Bal c/d
J/F
1,45,870
Dr
Amount
(in Rs)
8,125
1,32,500
5,245
1,45,870
Income a/c
Date
Particulars
01/01/05 To Bal b/d
J/F
Amount
(in Rs)
Date
Cr
Particulars
J/F
Amount
(in Rs)
6,850
31/12/05 By Bal c/d
5,245
01/01/06 To Bal b/d
Dr
5,245
Income a/c
Date
Particulars
31/12/05 To Bal c/d
J/F
Amount
(in Rs)
Date
Cr
Particulars
J/F
Amount
(in Rs)
01/01/05 By Bal b/d
8,125
01/01/06 By Bal b/d
3,750
3,750
Opening Receivable vs Received in Advance

The "Income Receivable a/c" is a personal account with a debit balance and is an equivalent of a debtor
(an asset). Debtors are normally liquidated by realising the amounts due from them. Thus the Incomes
receivable relating to the previous periods may be realised in full or in part during the subsequent periods.
The "Income Pre-received a/c" is a personal account with a credit balance and is an equivalent of a
creditor (a liability). Creditors are cleared by paying out the amount due to them. But, the pre-received
income is not a liability that is cleared by paying out in cash. It is cleared by absorbing (writing off) the
liability as an income during the subsequent periods.
A Nominal Account with a balance represents a personal

account. It is an equivalent of a debtor (debit balance) or a
creditor (credit balance) depending on the nature of
balance.
Statement for Finding Income under Mercantile System
Particulars
Amount
Profit/Income under Cash Basis Accounting

(+) Opening Expenses Outstanding
Opening Incomes Pre-received
Closing Expenses Prepaid
Closing Incomes Receivable
() Opening Expenses Prepaid

Opening Incomes Receivable
Closing Expenses Outstanding
Closing Incomes Pre-received
Profit/Income under Mercantile/Accrual Basis Accounting
2,48,000
18,200
8,125
23,750
5,245
15,425
6,850
45,300
3,750
Statement for Finding Income under Cash System

This statement is just the converse of the above statement.
Amount
55,320
3,03,320
49,775
2,53,545
Particulars
Amount
Profit/Income under Mercantile/Accrual Basis Accounting
(+) Opening Expenses Prepaid

Opening Incomes Receivable
Closing Expenses Outstanding
Closing Incomes Pre-received
() Opening Expenses Outstanding

Opening Incomes Pre-received
Closing Expenses Prepaid
Closing Incomes Receivable
Profit/Income under Cash Basis Accounting
Amount
2,53,545
15,425
6,850
45,300
3,750
18,200
8,125
23,750
5,245
49,775
3,03,320
55,320
2,48,000

Trial Balance FinalAccounts Concepts

Diunggah oleh

Informasi Dokumen

Deskripsi Asli:

Hak Cipta

Format Tersedia

Bagikan dokumen Ini

Bagikan atau Tanam Dokumen

Opsi Berbagi

Apakah menurut Anda dokumen ini bermanfaat?

Apakah konten ini tidak pantas?

Hak Cipta:

Format Tersedia

Trial Balance FinalAccounts Concepts

Diunggah oleh

Hak Cipta:

Format Tersedia

Trial Balance What? Why?

Trial Balance of M/s Wearall Textlies as on 31st March 2006

Why is a Trial Balance prepared?

Isn't Trial Balance made for enabling preparation of Final Accounts?

When is a Trial Balance prepared?

Theoretically, the trial balance can be prepared as and when needed.

Accounting Cycle Absence of Preparation of Trial

Debit Amount Credit Amount

[For bringing the balances in the various ledger

Recording the transactions for making up the final accounts

Making the Trading a/c

Making the Profit and Loss a/c

[For carrying the balances in the various

Final Accounting : Use of

Final Accounting : Use of Trial Balance : Avoiding

Reduction of Work involved in Manual Accounting

Information in Trial Balance To be dealt with only

Interpreting the items in the Trial Balance

Trial Balance of M/s Wearall Textlies as on 31/03/06 Statement of Analysis

Making up the Final Accounts

Balance Sheet of M/s Wearall Textlies as on 31st March 2006

Care in dealing with Profit and Loss Appropriation a/c (or

Profit and Loss Appropriation a/c

31/03/06 To Bal c/d

31/03/06 By Bal b/d

01/04/06 By Balance b/d

Trial Balance used in Final Accounting : When

Transactions after the Trial Balance

Transactions which do not occur in the normal course of business

Examples for such transactions

Transactions which have to be recorded only towards the end

Transactions relating to Error Rectifications

Why are they called Adjustments? Why not Additional

Accounting for the Transactions

[For the transfer of wages erroneously

30/06/06 To Bal b/d

30/06/06 To Salaries a/c

30/06/06 By Bal c/d

The Method of Adjustment

Effect of the Transaction

A. () From Salaries on the debit side of P/L a/c

B. (+) To Wages on the debit side of Trading a/c

Why call them Adjustment? Why not Additional Transactions?

To make the Adjustment Know the Journal

Trial Balance of M/s Azaya Traders" as on 30th June 2006.

The following additional information is available

Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.

Trial Balance of M/s Azaya Traders as on 30/06/06 Statement of Analysis

Detailed Explanation Hide/Show

[For the value of machine purchased on

30/06/06 To Bal b/d

30/06/06 By Bal c/d

30/06/06 To Bal c/d

30/06/06 By Machine a/c

01/07/06 By Balance b/d

Wages to the extent of Rs. 43,000 are incorrectly recorded as Salaries.

Ramsay Machine Tools a/c

Detailed Explanation Above

Balance Sheet of M/s Azaya Traders as on 30th June 2006

Adjustments to be Dealt with at least

Adjusting more than two accounts

accounts may have to be adjusted.

Valuation of Assets Direct