Trial Balance : The statement of balances of ledger accounts is known as “Trial Balance”. The Trial balance is a test of arithmetical accuracy in transaction.
Bank Reconciliation : The reconciliation of the bank balance in trader records and the pass book balance is very important.
The reasons for the disagreement between Bank balance in trader records and balance in the statement received from bank.
Cheque issued but not presented
Cheque deposited but not collected
Direct depost by customers
Payments by bank as per standing instruction
Interest and dividends collected
Interest on overdraft and bank charges
Posting or other mistakes
Overdraft: Some times, the bank permits to some of their customer having current account to withdraw more their deposits up to a particular limit. When the trader has withdrawn from the bank more than his deposits, his balance is called as ‘Overdraft’
Petty Cash : A business has to make various very small payments such as postal charges, Tea Expenses, Paper clips etc. The person who is entrusted of with the task of small payments and keeping records of them is known as Petty Cashier. He is a subordinate of main cashier.
The cashier gives him an advance, which is fixed by taking into consideration the amount needed for the period. The petty cashier is not allowed to make payments above a particular limit. The petty cash account gives an idea about the extent of small payments incurred in a particular period.
Outstanding expenses: Outstanding expenses are the expenses already incurred for the period, but the payments are not yet made. They are adjusted by debiting the particular expenses account and crediting the outstanding expenses account. Expenses account Debit and Credit the Outstanding Expenses.
Prepaid Expenses: Expenses paid during the year for the benefit of the coming year., are known as ‘Prepaid expenses’
If a particular expense includes payment for the next period, such payment should be adjusted before transferring it to the Profit and Loss Account.
Prepaid Expense A/c Dr.
Income Received in Advance : The amount received for the services to be rendered by the business in the next period is known as ‘Income Received in Advance’ or Prepaid income. Hence the portion of this income applicable for the next period must be carried forward. The adjusting entry is
Income A/c Dr.
To Income Received in Advance A/c
Bad Debts: The irrecoverable portion of the Account receivables is called as ‘Bad Debits” . It is a business loss and hence it is to be deducted from Accounts Receivable and must be debited in the Bad Debits Account.
Bad Debt A/c Dr
To Account Receivables
Closing Stock : The unsold stock with the business at the end, is an asset as on that date, as well as an income for the period. Since, we debit the Purchase Account when goods are bought and Credit the Sales Account when they are sold, there is no entry in the books for the stock of goods at the end. The stock of goods is brought into account by debiting stock account and crediting to Trading Account.
Stock Account Dr (Balance Sheet side)
To Closing Stock (P& L side)
Depreciation on Fixed Assets : The permanent decrease in the value of fixed assets because of their use in the business is called ‘Depreciation’. The value lost on the fixed asset is a business expense.
Depreciation A/c Dr
Trading and profit and Loss Account : Trading and Profit and Loss Account is a statement of Income(revenues) and expenses of a business for a period. It reveals the end results of the business activities of the period. The result may be either profit or loss. Profit or Loss for the period is ascertained by matching the revenues and expenses of the period. This statement is also called Income
Gross profit the excess of sales over the cost of goods sold. If the cost of sales is more than the sales, the difference is gross loss.
Cost of Goods Sold = (Opening Stock + Purchases +Direct Expenses) – Closing Stock
Gross Profit = Sales – (Opening Stock + Purchases + Direct Expenses ) – Closing Stock
I.e Cost of Goods sold + Gross profit =Sales of Cost of Goods sold – Gross Loss = Sales
Direct Expenses (Other cost) : The direct expenses are the expenses very closely connected with the purchases and manufacture of goods. Such as Wages, Freight Charges, Packing cost, Factory expenses etc.
Balance Sheet: The statement of Assets and Liabilities of a business prepared as at a particulare date, in the proper format so as to show the exact financial condition on that date is known as ‘Balance Sheet.’
As the Balance sheet reveals the financial positions, it is also known as ‘Financial Statement’