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Preparing Trading and Profit & Loss account :: Illustration

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... From Page 3

Illustration » Problem

 
 
To get an understanding and feel of the process of final accounting, let us go through an example of an organisations accounting consisting of a few transactions during an accounting period.

Following are the transactions relating to M/s Trinity Foods, over an accounting period from 1st June 2005 to 30th June 2006.

  • Started business with Capital Rs. 1,00,000
  • Paid into Bank Rs. 10,000
  • Bought Furniture and paid cash Rs. 25,000
  • Bought goods for cash Rs. 50,000
  • Bought goods from Ram on Credit Rs. 15,000
  • Sold a part of the goods for Rs. 75,000 and paid the proceeds into bank directly
  • Sold the remaining goods on credit for Rs. 50,000 to Rahim
  • Paid Salaries and Wages Rs. 5,000
  • Paid rent by cheque Rs. 8,000

Illustration » Solution [Journal and Ledger]

 
 

Journal Entries » Hide/Show

Journal in the books of M/s Trinity Foods for the period from 1st June 2005 to 30th June 2005
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
1st to 30th Dr
1,00,000
1,00,000
[For the amount brought in by the proprietor towards his capital contribution.]
1st to 30th Dr
10,000
10,000
[For the amount paid into bank.]
1st to 30th Dr
25,000
25,000
[For the amount paid towards purchase of Furniture.]
1st to 30th Dr
50,000
50,000
[For the amount paid towards purchase of goods/stock.]
1st to 30th Dr
15,000
15,000
[For the value of goods bought from Ram on credit.]
1st to 30th Dr
75,000
75,000
[For the sales made for cash and the proceeds paid into bank directly.]
1st to 30th Dr
50,000
50,000
[For the value of goods sold on credit to Rahim.]
1st to 30th Dr
5,000
5,000
[For the amount paid in cash towards salaries and wages.]
1st to 30th Dr
8,000
8,000
[For the amount paid towards rent by cheque.]

Ledger Accounts » Hide/Show

DrCash a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th To Capital a/c 1,00,000 1st-30th
"
"
"

30/06/05
By Bank a/c
By Furniture a/c
By Purchases a/c
By Sal. & Wages a/c

By Balance c/d





10,000
25,000
50,000
5,000

10,000
  Total   1,00,000   Total   1,00,000
30/06/05 To Balance b/d 10,000        
DrCapital a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
30/06/05 To Bal c/d 1,00,000 01/06/05 By Cash a/c 1,00,000
  Total   1,00,000   Total   1,00,000
        30/06/05 By Balance b/d 1,00,000
DrBank a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th To Cash a/c
To Sales a/c

10,000
75,000
1st-30th

30/06/05
By Rent Paid a/c

By Bal c/d


8,000

77,000
  Total   85,000   Total   85,000
30/06/05 To Balance b/d 77,000        
DrFurniture a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th To Cashl a/c 25,000 30/06/05 By Bal c/d 25,000
  Total   25,000   Total   25,000
30/06/05 To Balance b/d 25,000        
DrPurchases a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th
"
To Cash a/c
To Ram a/c

50,000
15,000
30/06/05 By Bal c/d 65,000
  Total   65,000   Total   65,000
30/06/05 To Balance b/d 65,000        
DrRam a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
30/06/05 To Bal c/d 15,000 1st-30th By Purchases a/c 15,000
  Total   15,000   Total   15,000
        30/06/05 By Balance b/d 15,000
DrSales a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
30/06/05 To Bal c/d
1,25,000 1st-30th
"
By Bank a/c
By Rahim a/c

75,000
50,000
  Total   1,25,000   Total   1,25,000
        30/06/05 By Balance b/d 1,25,000
DrRahim a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th To Sales a/c 50,000 30/06/05 By Bal c/d 50,000
  Total   50,000   Total   50,000
30/06/05 To Balance b/d 50,000        
DrSalaries and Wages a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th To Cash a/c 5,000 30/06/05 By Bal c/d 5,000
  Total   5,000   Total   5,000
30/06/05 To Balance b/d 5,000        
DrRent Paid a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th To Bank a/c 8,000 30/06/05 By Bal c/d 8,000
  Total   8,000   Total   8,000
30/06/05 To Balance b/d 8,000        

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Illustration » Solution [Trial Balance]

 
 

The trial balance is nothing but a statement of ledger account balances as on a particular instance.

Trial Balance of M/s Trinity Foods" as on 30th June 2005
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Cash a/c
Capital a/c
Bank a/c
Furniture a/c
Purchases a/c
Ram a/c
Sales a/c
Rahim a/c
Salaries and Wages a/c
Rent Paid a/c









10,000

77,000
25,000
65,000


50,000
5,000
8,000
 
1,00,000



15,000
1,25,000


Total   2,40,000 2,40,000

Preparing Trading and Profit and Loss Account : Journal & Ledger

 
 
Consider the above Trial Balance. There are a total of 4 nominal accounts with either debit or credit balances.
  • Purchases a/c [Debit Balance]
  • Sales a/c [Credit Balance]
  • Salaries and Wages a/c [Debit Balance]
  • Rent Paid a/c [Debit Balance]

To ascertain the profit or loss made by the organisation, the balance in these accounts should be transferred to the "Trading and Profit & Loss a/c". The journal entries for these transfers would be:

» Journal Entries Hide/Show

Journal in the books of M/s Trinity Foods for the period from 1st June 2005 to 30th June 2005
Date V/R
No.
L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
June 30th Dr


78,000
65,000
5,000
8,000
[For the transfer of debit balances in nominal accounts at the end of the accounting period to the Trading and Profit & Loss a/c for the purpose of ascertaining profits.]
June 30th Dr
1,25,000
1,25,000
[For the transfer of credit balances in nominal accounts at the end of the accounting period to the Trading and Profit & Loss a/c for the purpose of ascertaining profits.]

» Trading and Profit & Loss a/c

The "Trading and Profit & Loss a/c" would be

DrTrading and Profit & Loss a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
30/06/05
"
"
To Purchases a/c
To Salaries & Wages a/c
To Rent Paid a/c


65,000
5,000
8,000
30/06/05 By Sales a/c 1,25,000
  sub-total   78,000   sub-total   1,25,000
30/06/05 To Bal (Profit) 47,000        
  Total   1,25,000   Total   1,25,000

Since the credit side total is greater, the account has a credit balance. Since a credit balance in a nominal account indicates a gain, we can say that there is a profit.

» Other Ledger Accounts Affected Hide/Show

DrPurchases a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th
"
To Cash a/c
To Ram a/c

50,000
15,000
30/06/05 By Bal c/d 65,000
  Total   65,000   Total   65,000
30/06/05 To Balance b/d 65,000 30/06/05 By Trdg. P/L a/c 65,000
  Total   65,000   Total   65,000
               
DrSales a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
30/06/05 To Bal c/d
1,25,000 1st-30th
"
By Bank a/c
By Rahim a/c

75,000
50,000
  Total   1,25,000   Total   1,25,000
To Trdg, & P/L a/c   1,25,000 30/06/05 By Balance b/d 1,25,000
  Total   1,25,000   Total   1,25,000
               
DrSalaries and Wages a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th To Cash a/c 5,000 30/06/05 By Bal c/d 5,000
  Total   5,000   Total   5,000
30/06/05 To Balance b/d 5,000 30/06/05 By Trdg. P/L a/c 5,000
  Total   5,000   Total   5,000
               
DrRent Paid a/cCr
Date Particulars J/F Amount
(in Rs)
Date Particulars J/F Amount
(in Rs)
1st-30th To Bank a/c 8,000 30/06/05 By Bal c/d 8,000
  Total   8,000   Total   8,000
30/06/05 To Balance b/d 8,000 30/06/05 By Trdg. P/L a/c 8,000
  Total   8,000   Total   8,000
               

The balance in these nominal accounts becomes zero after the balances are transferred to the "Trading and Profit & Loss a/c". Thus, nominal accounts are closed at the end of the accounting period by transfer to the "Trading and Profit & Loss a/c".

In the subsequent accounting period, if the same nominal account heads are used, they are opened anew. Thus these accounts pertaining to the current accounting period are independent of the nominal accounts with the same name in any other accounting period.

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Trial Balance Redrawn/Remade

 
 
The trial balance is a list of ledger account balances at an instance when it is drawn. If we consider the instance after having prepared the "Trading and Profit & Loss a/c", we do not find a balance in any nominal account. All the nominal accounts are closed by transfer to the "Trading and Profit & Loss a/c", thereby leaving a nil balance in all of them.

The "Trading and Profit & Loss a/c" is also a nominal account and has a credit balance if there is a profit and a debit balance if there is a loss. If we make a trial balance after having prepared the "Trading and Profit & Loss a/c" we will find only real and personal accounts in it apart from the nominal account "Trading and Profit & Loss a/c".

 
Trial Balance of M/s Trinity Foods" as on 30th June 2005
[After closing Nominal accounts]
Particulars L/F Debit Amount
(in Rs)
Credit Amount
(in Rs)
Cash a/c
Capital a/c
Bank a/c
Furniture a/c
Ram a/c
Rahim a/c
Trading and Profit & Loss a/c






10,000

77,000
25,000

50,000
 
1,00,000


15,000

47,000
Total   1,62,000 1,62,000

Author Credit : The Edifier ... Continued Page 5

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