Financial Accounting explaintion

  Profit and loss Account:       Trading Account is prepared to ascertain the gross profit or gross loss made by the trader for any given period.   The next step in the preparation of financial Accounts is to prepare a profit and loss Account. The main object of the profit and loss Account is to know the net profit or net loss made by the business for a particular period.    The Trading Account is closed by transferring the gross profit or gross loss to the profit and loss Account. Therefore the profit and loss Account starts with gross profit on the Credit side or with gross loss on the debit side as the case may be.     The profit and loss Account is credited with the gains and incomes whether actually received or yet to be received relating to the business and belonging to the period such as discount received, commision received, intrest received, rent received etc.     It is debited with all expenses ( whether paid or yet to be paid) incidental to carry on the business such as offi

  Trading Account:-     Preparation of Trading Account is the first stage in the financial accounts. Trading Account is prepared by the trader for ascertaining the gross profit or gross loss.  This account is prepared to find out the difference between the actual cost of the goods sold and the sale proceeds.      It shows the profit or loss made by purchase and sale of goods without taking into account all the items of business expenditure such as general, distributive and administrative expenses. Therefore, in the trading Account it is necessary to include all items of charge directly affecting the cost of goods sold.     Gross profit is said is be made when the sale proceeds exceed the cost of goods sold. When sale proceeds are less than the cost of the goods sold, gross loss to incurred. The following is the usual from of a Trading Account. Note: * When Credit side of the Trading Account is more than the debit side the difference represents gross profit. * When the debit side of the

  Suspense Account:-      If the trial balance does not agree after transferring the balance of all ledger accounts including cash and 🏦 Balance and also errors are not located timely, then the trial balance is tallied by transferring the difference of debit and credit side to an account known as suspense Account. This is a temporary Account to be opened to proceed further and prepare the financial statements timely.

  Methods for preparation of trial balance:-   The different methods of preparation of trial balance are: 1) Total method 2) Balance method 3) Total and Balance method Total method       Under this method, every ledger account is totaled and that amount is transferred to trial balance. In this method, trial balance can be prepared as soon as ledger account is totaled. Time taken to balance the ledger accounts is saved under this method as Balance can be found out in the trial balance itself. The different of totals of each ledger account is the Balance of that particular account. This method is not commonly used as it cannot help in the preparation of the financial statements. Balance method     Under this method, every ledger account is balanced and those balances only are carrying forward to the trial balance. This method is used commonly by the accountant's and helps in the preparation on the basis of the balances of the ledger accounts. Total and Balance method Under this metho

  Objectives of Trial Balance:-   The preparation of trial balance has the following objectives. 1) Trial Balance enables one to establish whether the posting and other Accounting processes have been carried out without committing arithmetical errors. 2) Financial statements are normally prepared on the basic of agreed trial balance, otherwise the work may be cumbersome. Preparation of financial statements therefore is the second objective. 3) The trial balance serves as a summary of what is contained in the ledger., the  ledger may have to be seen only when details are required in respect of an account.    The form of the trial balance is simple and as shown below:           Trial balance as at..... Some important points to be noted are as follows: 1) A trial balance is prepared as on a particular date which should be mentioned at the top. 2) in the second column the name of the account is written. 3) in the fourth column the total of the debit side of the account concerned or the deb

  Trail Balance:-       After posting the accounts in the ledger, a statement is prepared to show separately the debit and credit balances. Such a statement is known as the Trail Balance. It may also be prepared by listing each and every account and entering in separate columns the totals of the debit and credit sides. Whichever way it is prepared, the totals of the columns should agree. An agreement indicates reasonable accuracy of the Accounting work, if the two sides do not agree, then there is simply an arithmetic errors(s) This follows from the fact that under the Double Entry System, the amount written on the debit side of various accounts is always equal to the amounts entered on the Credit side of other accounts and vice versa. Hence the totals of the debit sides must be equal to the totals of the Credit side. Also, total of the debit balances will be equal to the total of the Credit balances. Once this agreement is established, there is a reasonable confidence that the Account

  Journal proper:-        Journal proper is used to record those transactions which cannot be recorded in any of the subsidiary Books 📚. For example purchase of machinery from Automobile Dealers cannot be entered in purchases book because it is acquired to keep it permanently in the business and not to sell again. This cannot be passed through sales Book 📚 or cash book. It is not a bill transaction also. Hence it is evident that it cannot be passed through any of the subsidiary Books 📚 and as such a separate Book is maintained to record this transaction called ' journal proper '.       The use of journal at present is confined to record the following transactions. 1) opening entries 2) closing entries 3) Rectifying entries 4) Adjusting entries 5) Transfer entries 6) Credit purchases and sale of assets 7) Any other transaction which cannot be passed through any of the subsidiary Books 📚.