Preparing Trading and Profit & Loss account :: Illustration

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, a newly set up business, over the accounting period from 1st June 20_5 to 30th June 20_5.

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

Illustration - Solution [Journal and Ledger]

Journal

The journal entries pertain to the whole of the accounting period.

Use of the date, V/R No. and L/F columns is avoided to make the presentation look unclutterd.

Journal in the books of M/s Trinity Foods for the period from 1st June 20_5 to 30th June 20_5
Particulars Amount
(Dr)
Amount
(Cr)
Cash a/c
To Capital a/c
Dr 1,00,000
1,00,000
[For the amount brought in by the proprietor towards his capital contribution.]
Bank a/c
To Cash a/c
Dr 10,000
10,000
[For the amount paid into bank.]
Furniture a/c
To Cash a/c
Dr 25,000
25,000
[For the amount paid towards purchase of Furniture.]
Purchases a/c
To Cash a/c
Dr 50,000
50,000
[For the amount paid towards purchase of goods/stock.]
Purchases a/c
To Ram a/c
Dr 15,000
15,000
[For the value of goods bought from Ram on credit.]
Bank a/c
To Sales a/c
Dr 75,000
75,000
[For the sales made for cash and the proceeds paid into bank directly.]
Rahim a/c
To Sales a/c
Dr 50,000
50,000
[For the value of goods sold on credit to Rahim.]
Salaries and Wages a/c
To Cash a/c
Dr 5,000
5,000
[For the amount paid in cash towards salaries and wages.]
Rent Paid a/c
To Bank a/c
Dr 8,000
8,000
[For the amount paid towards rent by cheque.]

Ledger Accounts

Use of the column J/F and the suffix a/c after the name of the account head is avoided to make the presentation look unclutterd.

Cash a/c
DrCr
Date Particulars Amount Date Particulars Amount
To Capital 1,00,000 By Bank
By Furniture
By Purchases
By Salaries & Wages
By By Balance c/d
10,000
25,000
50,000
5,000
10,000
  Total 1,00,000   Total 1,00,000
30/06/_5 To Balance b/d 10,000      
Capital a/c
DrCr
Date Particulars Amount Date Particulars Amount
30/06/_5 To Balance c/d 1,00,000 01/06/_5 By Cash 1,00,000
  Total 1,00,000   Total 1,00,000
      30/06/_5 By Balance b/d 1,00,000
Bank a/c
DrCr
Date Particulars Amount Date Particulars Amount
To Cash
To Sales
10,000
75,000

30/06/_5
By Rent Paid
By Balance c/d
8,000
77,000
  Total 85,000   Total 85,000
30/06/_5 To Balance b/d 77,000      
Furniture a/c
DrCr
Date Particulars Amount Date Particulars Amount
1st-30th To Cash a/c 25,000 30/06/_5 By Balance c/d 25,000
  Total 25,000   Total 25,000
30/06/_5 To Balance b/d 25,000      
Purchase a/c
DrCr
Date Particulars Amount Date Particulars Amount
To Cash a/c
To Ram a/c
50,000
15,000
30/06/_5 By Balance c/d 65,000
  Total 65,000   Total 65,000
30/06/_5 To Balance b/d 65,000      
Ram a/c
DrCr
Date Particulars Amount Date Particulars Amount
30/06/_5 To Balance c/d 15,000 By Purchases a/c 15,000
  Total 15,000   Total 15,000
      30/06/_5 By Balance b/d 15,000
Sales a/c
DrCr
Date Particulars Amount Date Particulars Amount
30/06/_5 To Balance c/d 1,25,000 By Bank a/c
By Rahim a/c
75,000
50,000
  Total 1,25,000   Total 1,25,000
      30/06/_5 By Balance b/d 1,25,000
Rahim a/c
DrCr
Date Particulars Amount Date Particulars Amount
To Sales a/c 50,000 30/06/_5 By Balance c/d 50,000
  Total 50,000   Total 50,000
30/06/_5 To Balance b/d 50,000      
Salaries and Wages a/c
DrCr
Date Particulars Amount Date Particulars Amount
To Cash 5,000 30/06/_5 By Balance c/d 5,000
  Total 5,000   Total 5,000
30/06/_5 To Balance b/d 5,000      
Rent Paid a/c
DrCr
Date Particulars Amount Date Particulars Amount
To Bank a/c 8,000 30/06/_5 By Balance c/d 8,000
  Total 8,000   Total 8,000
30/06/_5 To Balance b/d 8,000      

Illustration - Solution [Trial Balance]

The trial balance is a statement of ledger account balances as on a particular date or to be more specific as at a particular instance.
Trial Balance of M/s Trinity Foods" as on 30th June 20_5
Particulars L/F Amount
(Dr)
Amount
(Cr)
Cash
Capital
Bank
Furniture
Purchases
Ram
Sales
Rahim
Salaries and Wages
Rent Paid









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

Use of the suffix a/c after the name of the account head is avoided to make the presentation look unclutterd.

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 - Debit Balance
  • Sales - Credit Balance
  • Salaries and Wages - Debit Balance
  • Rent Paid - 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

Journal in the books of M/s Trinity Foods for the period from 1st June 20_5 to 30th June 20_5
Date Particulars Amount
(Dr)
Amount
(Cr)
June 30th Trading and Profit & Loss a/c
To Purchases a/c
To Salaries & Wages a/c
To Rent Paid a/c
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 Sales a/c
To Trading and Profit & Loss a/c
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.]

Ledgers

Trading and Profit & Loss a/c
DrCr
Date Particulars Amount Date Particulars Amount
30/06/_5
30/06/_5
30/06/_5
To Purchases
To Salaries & Wages
To Rent Paid
65,000
5,000
8,000
30/06/_5 By Sales 1,25,000
  sub-total 78,000   sub-total 1,25,000
30/06/_5 To Balance (Profit) 47,000      
  Total 1,25,000   Total 1,25,000

In a simplified form this account would be as below.

Trading and Profit & Loss a/c
DrCr
Particulars Amount Particulars Amount
To Purchases
To Salaries & Wages
To Rent Paid
To Balance (Profit)
65,000
5,000
8,000
47,000
By Sales 1,25,000
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 affected Ledger Accounts (Nominal)

Purchases a/c
DrCr
Date Particulars Amount Date Particulars Amount
To Cash
To Ram
50,000
15,000
30/06/_5 By Trading and P/L a/c 65,000
  Total 65,000   Total 65,000
Sales a/c
DrCr
Date Particulars Amount Date Particulars Amount
30/06/_5 To Trading and P/L a/c 1,25,000 By Bank
By Rahim
75,000
50,000
  Total 1,25,000   Total 1,25,000
Salaries and Wages a/c
DrCr
Date Particulars Amount Date Particulars Amount
To Cash 5,000 30/06/_5 By Trading and P/L a/c 5,000
  Total 5,000   Total 5,000
Rent paid a/c
DrCr
Date Particulars Amount Date Particulars Amount
To Bank a/c 8,000 30/06/_5 By Trading and P/L a/c 8,000
  Total 8,000   Total 8,000

Trial Balance Redrawn/Remade

The trial balance is a list of ledger account balances at an instance. 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 since all the nominal accounts would have been closed by transfer to the Trading and Profit & Loss a/c.

Trial Balance after closing Nominal Accounts

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 30/06/20_5
[after closing Nominal accounts]
Particulars L/F Amount
(Dr)
Amount
(Cr)
Cash
Capital
Bank
Furniture
Ram
Rahim
Trading and Profit & Loss






10,000

77,000
25,000

50,000
 
1,00,000


15,000

47,000
Total   1,62,000 1,62,000