TRIAL BALANCE, PROFIT & LOSS A/C AND BALANCE SHEET

Submitted By:Taniya Gupta Section- C 13BSP

DEFINITION
IT IS A STATEMENT SHOWING CREDIT AND DEBIT

BALANCES FROM THE LEDGER.

HELPS ARITHMETICAL ACCURACY AND FACILITATES FINAL ACCOUNTS.

TRIAL BALANCE

BASIC PRINCIPLE :
SINCE IT IS DOUBLE ENTRY BOOK-KEEPING, HENCE,

ASSETS AND EXPENSES ARE DEBIT BALANCES

LIABILITIES AND INCOMES ARE CREDIT BALANCES . IN CASE OF ARITHMETICAL INACCURACY IDENTIFY CLERICAL/PRINCIPLE ERRORS AND RECTIFY

TRIAL BALANCE

TYPES OF ERRORS:
A) CLERICAL ERRORS -- ERRORS OF OMISSION --- OMISSION OF TRANSACTION FROM BOOKS --- COMPLETE OMISSION NOT AFFECTING TRIAL BALANCE --- PARTIAL OMISSION AFFECTING TRIAL BALANCE

TRIAL BALANCE

-- ERRORS OF COMMISSION
--- FIGURE POSTED ON THE WRONG SIDE OR WITH WRONG AMOUNT -- COMPENSATING ERRORS --- ONE ERROR BALANCES ANOTHER ERROR

. B) ERRORS OF PRINCIPLE -- ERRORS IN CONTRAVENTION OF ACCOUNTING PRINCIPLES

TRIAL BALANCE

RECTIFICATION OF ERRORS IS A SERIES OF STEPS:

PASS THE CORRECT ENTRY

COMPARE THE WRONG ENTRY WITH THE CORRECT ONE

PASS THE RECTIFICATION ENTRY IF TRIAL BALANCE DOES NOT TALLY THEN DIFFERENCE IS TRANSFERRED TO SUSPENCE ACCOUNT

TRIAL BALANCE

TYPICAL TRIAL BALANCE

NAME CREDIT CAPITAL DRAWINGS PURCHASES SALES EXPENSES DEBTORS(CUSTOMRES) CREDITORS(SUPPLIERS) CASH SALES RETURN DEBIT X X X X X X X X X

TRIAL BALANCE

TYPICAL ERRORS: -- CLERICAL: A) SALARY PAID 1000/- BUT POSTED AS 10, 000/-. RECTIFICATION: CREDIT SALARY WITH 9000/-.
B) SALARY PAID 1000/- BUT POSTED IN RENT A/C. RECTIFICATION: DEBIT SALARY AND CREDIT RENT WITH 1000/-. C) GOODS WORTH 100/- SOLD TO VIJAY WRONGLY RECORDED IN PURCHASE REGISTER. RECTIFICATION: CREDIT SALES AND PURCHASE A/Cs WITH 100/- EACH AND DEBIT VIJAY WITH 200/-.

TRIAL BALANCE

AFTER TRIAL BALANCE IS PREPARED ONE FINDS

. D) SALES OF 500/- POSTED AS 5000/- WHILE RENT PAID 500/- POSTED AS 5000/-. . RECTIFICATION: DEBIT SALES WITH 4500/-, CREDIT SUSPENCE WITH 4500/-, CREDIT RENT WITH 4500/-, DEBIT SUSPENCE WITH 4500/-. E) SALARY PAID AS 1000/- BUT POSTED AS 10,000/- IN RENT A/C. RECTIFICATION: DEBIT SALARY WITH 1000/- SUSPENCE WITH 9000/-; CREDIT RENT WITH 10000/

F) A PURCHASERS DEBIT BALANCE OF 9000/- HAS NOT BEEN TAKEN. RECTIFICATION: DEBIT DEBTORS, CREDIT SUSPENCE TO THE EXTENT OF 9000/-.

TRIAL BALANCE

Cash $25000 $300

$3500
$2,100 BALANCE: $26,300

Trial Balance
BALANCED!!

Calculating the profit or loss of a business

The purpose of a profit and loss account

It summarises all the sales revenue for the financial year. It summarises all the payments or expenses for the same year. The difference between the two totals is the profit or loss made in that year.

Why produce a profit and loss account?

It is a legal requirement. Tax is paid on the profit. It summarises all the years transactions as recorded in documents such as invoices. It shows the financial health of the business. It is studied by managers, shareholders, banks, financiers and other relevant groups of people.

The structure of a profit and loss account 1

Top part is concerned with gross profit, e.g. Sales 300,000 Cost of sales 100,000 Gross profit 200,000

Note: cost of sales is the same as cost of purchases. It is deducted from sales.

The structure of a profit and loss accounts 2

Second part is concerned with net profit, i.e. gross profit minus expenses. Gross profit 200,000 Expenses Salaries 55,000 Rent 10,000 Other 5,000 Total expenses 70,000 Net profit 130,000

Your turn!
320,000 160,000 ?? 480,000

Sales Cost of sales Gross profit

Expenses Salaries Rent Electricity Other Total expenses Net profit

68,000 12,000 5,000 5,000

90,000 ??
390,000 ??

The Accounting Equation

Assets = Liabilities + Equity
Shareholders Equity: Whats left of the companys assets after paying off liabilities. It also referred to as net assets.

17

Balance sheet classification:

Overview
ASSETS
= LIABILITIES +

EQUITY

Current assets Property, plant and equipment Investments Other assets

Current liabilities Long-term debt Other liabilities

Preferred and common stock Additional paidin capital Retained earnings

Contributed Capital

18

Assets classification and measurement

n

Resources with future economic benefit to a business entity as a result of a past transaction. Current Assets: cash and other assets that are reasonably expected to be realized in cash or sold, or consumed during a normal operating cycle or one year, whichever is longer Examples: Cash and cash equivalents, short-term investments (reported at the fair value), receivables (estimated amount collectible), inventory (LCM), prepaid expenses, etc.
19

Assets (contd.)
Long-term Investments: Comprise of the following Securities (i.e., bonds, stock, long-term notes) Fixed assets (i.e., land, building) Special funds (i.e., pension fund, bond sinking fund) Nonconsolidated subsidiaries or affiliated companies
20

Assets (contd.)
Property, Plant, Equipment (i.e., building, Land, Machinery and equipment, capital leases): assets used in firms operations and meet the following criteria:
1. Economic life > 1 year; 2. Acquired for use in operation; 3. Not for resale to customers; 4. $ is material. (materiality) Depreciation will be applied except for land.
21

Assets (contd.)
Intangible Assets: assets with no physical substance but have value based on rights or privileges that belong to the owner (i.e., goodwill, patents, franchises, trademarks,).

Amortization for limited life intangibles (i.e., patents, franchises) and impairment test for indefinite-life intangibles (i.e., goodwill).
22

Liabilities n Legal obligations required future payments of assets or services as a result of a business entitys past transactions or events. A. Current Liabilities B. Long-term Liabilities C. Other Liabilities
23

A. Current Liabilities
n

Obligations must be fulfilled in one year or one operating cycle, whichever is longer. (will require the use of current assets or the creation of current liability) (i.e., A/P, N/P, accrual payable, unearned revenue, income tax payable, current portion of L-T debt)
24

B. Long-Term Liabilities
n

Obligations are not due in next year or next operating cycle, whichever is longer. (i.e., bonds payable, pension liability)

25

C. Other Liabilities
n Long-term

advances from customers, deferred income taxes.

26

27