PROF. MS. TRUPTI NAIK

Accounting Terms

(Semester I)

Balance sheet is the statement showing assets and liabilities of the business at the end of the year.

Profit and Loss account shows net profit for the year

Trading Account is prepared to ascertain gross profit for the year.

Trial balance is the statement showing summary of different accounts maintained in the ledger.

Ledger: it is a book in which different accounts are maintained.

Journal: elementary book for maintaining monetary transactions of business at the elementary level.

Types of income statements

Income Statement

Manufacturing Account

Trading Account

Profit and Loss Account

Types of Business Activity

Business

Purchases goods from

others and sells

Manufactures and sells Services

Trading Account

Trading Account

Gross Profit Gross Loss

Format of Trading.docx

Stock refers to the goods lying unsold on a particular date.

Opening Stock

• Value of goods lying unsold at the beginning of the accounting year.

• It is shown on the debit side of the Trading a/c.

• In the first year of business there is no opening stock

Closing stock

• Value of goods lying unsold at the end of the accounting year.

• It is valued at the cost price or market price whichever is less.

• It is shown on the credit side of the Trading Account.

• Purchases : Total items purchased for resale during the year.

• It can be both in cash and on credit.

• Purchases are shown on the debit side of the Trading a/c.

• These are always shown as net purchases = Total purchases - Purchase returns.

• Goods received on consignment basis are never treated as purchases.

• Goods received on ‘sale or return’ basis are never treated as purchases.

• Sales: refer to the total revenue from sale of goods of the business.

• It includes both cash sales and credit sales.

• These are recorded on the credit side of the Trading A/c.

• Sales are shown at their net value i.e. Total Sales – Sales Return.

• Goods sent on ‘sale or approval’ are not part of sales until approval is received.

• Direct Expenses: are the expenses that can be attributed directly to the purchase of goods or goods manufactured.

• These are shown on the debit side of the Trading A/c.

1. Wages i.e. wages relate to production.

2. Carriage /Cartage/ Freight i.e. amount paid for carriage of goods purchased or raw material purchased for manufacturing.

3. Customs and Import duty, packing materials, gas, electricity water, fuel, oil, heating and lighting, factory rent and insurance.

• Gross Profit/Gross Loss: It is the excess of net sales revenue over cost of goods sold.

• Gross Profit = Net Sales - Cost of Goods Sold.

• If, Total of credit side > Total of debit side = ‘Gross Profit’ and is shown on the debit side of Trading A/c.

• If Total of debit side > Total of credit side = ‘Gross Loss’ and is shown on the credit side of the Trading A/c.

Profit and Loss a/c -‘net profit’ or ‘net loss’.

Indirect expenses

Administrative

Selling and Distribution

Financial

Depreciation and maintenance charges

Other expenses

Income other than sales

Interest on Investment

Discount received

Commission Received

Interest on Fixed deposits

Rent Received

Format of Profit and Loss.docx

Selling and Distribution Expenses:

• The expenses are incurred to materialize sales.

• Carriage on sales(carriage outwards)

• Advertisement,• Selling expenses, • Travelling

expenses• Salesman

commission, • Depreciation on

delivery van, • Salary of driver of

the delivery van.

Office and administration

expenses:• Expenses incurred

on establishment and maintenance of office

• Rent, rates and taxes,

• Postage, • Printing and

stationery, • Insurance, • Legal charges, • Audit fees, • Office salaries

Financial expenses:

• Expenses that are incurred to arrange Finances for business

• Interest on loan, • Interest on capital, • Discount on bills

Depreciation and maintenance charges:

Depreciation means decline in the value of fixed asset due to wear and tear, lapse of time, obsolescence, etc.

• It is not charged to P/L a/c in the year in which it is purchased.

• Expenses other than depreciation: Expense incurred on repairs and renewals, maintenance of assets.

Other expenses: • Expenses which are not included under the above mentioned

heads of expenses e.g. losses and expenses due to fire, theft etc.

Balance Sheet

• Balance sheet is a statement which shows the financial position of a business organization on a particular date which is generally the last date of the accounting period.

Balance Sheet.doc

Assets and Liabilities

• Assets: refer to the financial resources of the business and can broadly be divided into Current Assets and Fixed Assets

• Liabilities denote claims against the assets of the business. Liabilities can be of two types owners liability or capital and outsiders liabilities

Fixed Assets

• Purchased for permanent i.e. long term use and these help the business to earn revenue.

• E.g. Building, Machinery, Motor Vehicle, etc.

• These assets are not for sale in ordinary course of business but can be disposed off, if no more needed for business use.

Current Assets

• Acquired by the business either for resale or for converting them into cash.

• These are normally realized within a period of one year.

• E.g. cash in hand, cash at bank, bill receivable, debtors, stock etc.

Tangible Assets

• These are the assets that can be seen, touched and have certain volume e.g. Building, Machinery, goods etc. are tangible assets.

Intangible Assets

• Assets which can neither be seen nor touched and have no volume

• E.g Patents, trademark, goodwill

Long term Liabilities

• These are the liabilities which are not payable during the current accounting year.

• Generally, the funds raised through such means are used for purchase of fixed assets.

• E.g. Capital, Reserves, loan on mortgage, loan from financial institutions.

Owners’ funds

• The amount owing to the proprietor or proprietors is called owners’ funds.

• As per business entity concept this is a liability of the business.

• Also includes undistributed profits and reserves.

Current Liabilities

• These are the liabilities which are payable during the current year.

• E.g. Bank overdraft, trade creditors, bill payable etc.