Category: Trial Balance

TRADING  ACCOUNT 

Trading Account gives the overall result of trading. i.e., purchasing and selling of goods. In other words, it explains whether purchasing of goods and selling them has prbved to be ,rofitable for the business or not. It takes into account on the one hand the cost of goods sold and on the other the value for which they have been sold away. In case the sales value is higher than the cost of goods sold, there will be a profit, while in a reverse case, there will be a loss. The profit disclosed by the Trading Account is termed as Gross Profit. Similarly the loss disclosed by the Trading Account is termed as Gross Loss.

Equation for Preparing Trading Account

On the basis of the Illustrations given in the preceding pages, the following equation can be derived for preparing Trading Account

Gross Profit = Sales — Cost of goods sold

Cost of goods sold = Opening Stock + Purchases + Direct Expenses –  Closing Stock Therefore, Gross Profit = Sales –  (Opening Stock  + Purchases + Direct Expenses –  Closing stock) Or Gross Profit = (Sales i- Closing Stock) –  (Opening Stock + Purchases + Direct Expense)

The term “Direct Expenses” include those expenses which have been incurred in purchasing the goods, bringing them to the business premises aud making them fit for sale. Examples of such expenses are carriage charges, octroi, import duty, expenses for seasoning the goods, etc.

Trial  Balance

The total of all the accounts with debit balances should equal the total of all the accounts with credit balances. This list is known as a trial balance.

In the double entry system every entry has its corresponding credit and debit. It follows, that at any given point of time, the posting from Journal, day books and cash book to the ledger is completed, the debit balances standing in all the ledgers including the cash book will equal the credit balances.

The next stage after posting accounts to the ledger is the preparation of a Trial Balance. The debit and credit balances of accounts are entered in this statement. The total of the debit and the total of the credit side must agree.

The trial balance is thus a list of the balances on the ledger accounts. If the totals of the debit and credit balances entered on the trial balance are not equal, then an error or errors have been made either:

1. In the posting of the transactions to the ledger accounts; or

2. In the balancing of the accounts; or

3. In the transferring of the balances from the ledger accounts to the trial balance.

Objects of preparing Trial Balance :

1. It forms the very basis on which final accounts are prepared.

2. It helps in knowing the balance on any particular account in the ledger.

3. It is used as a test of arithmetical accuracy.

The trial balance is the stepping stone for the preparation of financial statements.

Capital and Revenue Expenditure

Capital expenditure is the expenditure incurred for acquisition of assets the benefits of which are enjoyed over the years. The benefits of revenue expenditures are exhausted in the year of incurrence Thus it is seen that utilisation of business capital is made for two distinct purposes:

1) Expenses yielding benefits over the years termed – capital expenditure.The benefit of such expenditure lasts for a long period of time.Purchases of land, buildings, machinery, furniture, patents, etc, fees paid to lawyer for drawing a purchase deed of land, overhauling expenses of second
hand machinery, cartage paid for bringing machinery to the factory from supplier’s premises and money spent to install a machinery

2) Expenditures yielding benefits during the current accounting year – termed as revenue expenditure
Where the benefits of a revenue expenditure are extended beyond the accounting year of incurrence it is called a differed revenue expenditure.

Suppose a company incurred an expenditure of Rs. 100000 for advertisement before marketing of a new product. If the whole amount is charged in the current year, the profit of the company would not reflect a true picture as the benefits are likely to spread over three to four years. So 1/3 or 1/4 of the expenditure will be charged to current P/L Account
and the balance should be carried forward for remaining years. This will be shown on the assets side of the balance sheet as deferred revenue expenditure.

Expenses whose benefit expires within the year of expenditure and which are incurred to maintain the earning capacity of existing assets are termed as revenue expenditure. Amounts paid for wages, salary, carriage of goods, repairs, rent and interest, etc., are items of revenue expenditure. Depreciation on fîxed assets is also a revenue expenditure.

Difference Between Capital Expenditure and Revenue Expenditure

(I) Capital expenditure is incurred in acquiring or improving permanent assets which are not meant for resale. But revenue expenditure is a routine expenditure incurred in the normal course of business and includes cost of sales as also the upkeep of fixed assets etc.

(ii) Capital expenditure seeks to improve the earning capacity of the business whereas revenue expenditure is incurred to maintain the earning capacity of the business.

(iii) Capital expenditure is normally a non-recurring outlay but revenue expenditure is usually a recurring item.

Nifty Pivot Point Calculator comes under revenue expenditure, best example in the real world.