SHETH N.K.T.T. COLLEGE OF COMMERCE, KHARKAR ALI, THANE (W) Project On “Trial Balance, Profit and Loss Account and Balance Sheet”Subject : Introduction to Financial Account.Class : F.Y.B.M.S. Div : A Semester : I Prepared by “RISHIKESH GARUDE” Academic Year : 2009 – 2010
INTRODUCTION A self-financing course – Bachelor of Management Studies(B.M.S.) introduced by the University of Mumbai has a subject–‘Introduction to Financial Accounts’ with project work for the students ofF.Y.B.M.S. (Semester- I). Our beloved subject teacher Prof. Miss Prachi Kulkarni , aprofessional Chartered Accountant has covered the entire syllabus in thesimple manner and lucid language. I been assigned a topic on “Trial Balance, Profit and Loss Accountand Balance Sheet” for the said subject. The objective of the present projectis to reconcile the gap between theory and practical knowledge. The presentproject discusses about the various aspects of the three important financialdocuments namely Trial Balance, Profit and Loss Account and BalanceSheet and an attempt has been made to cover all the necessary information atthe primary level. Every member of the group has contributed to the best oftheir interest and capacity. I am grateful to our beloved subject teacher Prof. Miss PrachiKulkarni for providing such an opportunity. We are also thankful to Prof Mr.A. O. Khadse; the Course Coordinator and Vice-Principal and Principal Dr.P. M. Karkhele for inspiring us and also for providing computer laboratoryfor the preparation of this project. We hope our project will be helpful to the students of commerce,B.M.S. etc and may be to the faculties and the college in general for furtherreference.Place: Thane.
TRIAL BALANCE Introduction and Meaning :- Trial Balance is a statement containing the list of all ledger accounts on a particular day. It is a table showing all debit and credit ledger balances. The debit balances are shown in one column and the credit balances are shown in another column. Both the columns are then totalled. The balances are taken after recording and posting all transactions upto a given date. To conclude Trial Balance means, “A list of ledger account titles and their respective balances, the total of debit balances being equal to the total of credit balances.” Advantages :- To ensure that all transactions have been recorded with identical debit and credit amounts and the balance of each account has been computed correctly. To provide arithmetical accuracy of various ledger accounts. As the Trial Balance contains the ledger balances on a particular date, thus the entire ledger is summarized in the form of a Trial Balance. Hence, it is summarized ledger. To provide base for preparing final accounts. Nature / Features :- It shows balances of all accounts. It is a primary step of Final Accounts. It is based on ledger Account balances. It checks arithmetical accuracy. It is unstandardised – as there is no specific format and arrangement of various ledger accounts in a Trial Balance. Opening stock forms the part of Trial Balance. Similarly, A Trial Balance is complete even without stock taking process. Purposes/Objectives :- 1) Arithmetical Accuracy – The main objective of preparing a Trial Balance is to check the arithmetical accuracy of the books. If there is no arithmetical error in writing the books, the total debit balances will be equal to the total credit balances. Under the Double Entry System, each debit has a corresponding credit of an equal amount. Hence, the total of all debits in the ledger must be equal to the total of all credits in the ledger. When the debits and credits are equal, the Trial Balance is said to be tallid
or agreed. An agreed Trial Balance thus means that the books are arithmetically accurate i.e. the figures are written correctly. The same Trial Balance itself means that it is a “Trial” or test of the accuracy of the ledger “Balances”. 2) Indicates Errors – If the Trial Balance does not tally, it is an indication that the books contain some errors. Steps can then be taken to find out and correct the errors. 3) Summary of Ledger – A Trial Balance is the link between the ledger and the final accounts. A Trial Balance prepared at the year end contains a ready list of the closing balances of all ledger accounts. The final accounts can be directly prepared from the Trial Balance without going through the ledger. Final accounts are always prepared after the Trial Balances are tallied. This ensures that the final accounts will be free from major arithmetical errors. Disadvantages :- All transactions have been correctly analyzed and recorded in the proper accounts. e.g. If the wages paid for the installation of plant had been erroneously recorded by the debiting the wages account in the plant account, the Trial Balance will still agree. All transactions have been recorded in the books of original entry. e.g. A sales invoice were to be completely omitted from being recorded in the Sales day Book, the error would not be disclosed in the Trial Balance. To conclude, it can be said that a Trial Balance should not, therefore regarded as conclusive proof of the correctness of the books of the accounts. Errors can be disclosed by Trial Balance :- 1) Omission to post an amount into ledger – The two sides of a Trial Balance will not agree when a transaction correctly recorded in the books of accounts. 2) Debit or Credit entries are not posted at all or posted twice – If only one side of the transactions is recorded or recorded twice, the Trial Balance will not agree. 3) Debits are wrongly posted as credits and vice versa – A Trial Balance will be in disagreement when a transaction is recorded on the wrong side of account. 4) Wrong totaling of subsidiary books – If the total of any subsidiary book is wrongly cast, it will cause a disagreement of the Trial Balance.
5) Difference in amount between the entries – If different amounts are posted in two different accounts, the trial balance will not agree. 6) Error in computation of an account balance – If the balance of an account is not correctly computed, the balance of the ledger will not show the true position and will cause disagreement of the Trial Balance. 7) Omission of Account Balance – If the balance of an account is not listed in the Trial Balance at all, it would fail to agree. 8) Balance of an account wrongly recorded in the Trial Balance - If the balance of an account is wrongly recorded in the Trial Balance, there will be some disagreement. 9) Errors in extraction of the Trial Balance – The Trial Balance will not tally if any or both the columns are wrongly totaled up. Errors cannot be disclosed by Trial Balance :- 1) Errors of Omission – If a particular transaction omitted altogether from the books of original entry. 2) Errors of Principles – These errors arise because of an incorrect application of the principles of accounting. e.g. Failure to differentiate between capital and revenue expenditure. 3) Compensating Errors – These are group of errors, the total effect of which is not reflected in the Trial Balance. These errors are of a neutralising nature. One error is compensated by errors of an opposite nature. 4) Recording wrong amount in the books of original entry – If a transaction is wrongly recorded in the books of original entry and therefore carried through the ledger it will not cause disagreement in the Trial Balance. 5) Recording a transaction more than once –
The Trial Balance will agree if transaction is recorded correctly more than once. Methods of Locating Errors :- If the Trial Balance does not agree, the following procedure should carefully be followed: 1) At first, check the extraction and listing of the ledger account balances one by one. 2) Check the addition of both the columns (Dr. and Cr.) of the Trial Balance and ascertain the amount of difference. 3) Divide the exact difference by 9. If it is totally divisible by 9, this will mean that there is either a transposition error or a slide error. A transposition error is committed when the digit of an amount is misplaced. e. g.-Plant account has a balance of Rs. 5,760, but it has been written as 5,670 in the Trial Balance. The resulting error is Rs. 90 which is divisible by 9. A slide error is committed when the decimal point is placed incorrectly. Rs. 6250 is copied as Rs. 62.50. The resulting error is Rs. 6187.50 which is divisible by 9. 4) Divide the differences by 2 and scan the columns to see whether the said figure appears on the correct side i.e. Dr. or Cr. 5) Check the additions of the subsidiary books. 6) Re-compute the balances of the ledger accounts. 7) Check the posting from the subsidiary books to the ledger. In order to locate the causes of disagreement of a Trial Balance, the thorough checking is necessary in the books account. Preparing Trial Balance :- 1) Total method / Gross method – Under this method debit totals and credit totals of each account are transferred to the Trial Balance without finding of the difference of the two sides. The excess debit side over credit side or vice versa is automatically adjusted and both the sides tally. FORM/ FORMAT – Sr Name of Account L.F. Debit Total Credit Total No. Rs P Rs P Total
A Gross/Total Trial Balance is a list all ledger accounts with their debit and credit totals on a particular day. In such case, the accounts need to be only totalled and not balanced. A Gross/Total balance shows both the debit total and the credit total of each account in the amounts column. If an account has both debit and credit entries, the totals will appear in both the columns. A Gross/Total Trial Balance does not show the net balance of each account.2) Balance/Net Method – A Balance/Net method is a list of all ledger accounts with their net balances on a particular day. It shows only the net balance of each account. Hence, it is necessary to balance each account. A debit balance is shown in debit column and a credit balance is shown in credit column. Thus only one amount is shown against each account. This is type mostly used. In otherwords, under this method the differences of twosides i.e. debit and credit or each ledger account is taken to the Trial Balance. The excess of debit total over credit is put to the debit column and vice versa. Sr. Name of Account L.F. Debit Credit No. Balance Balance Rs P Rs P Total
3) Compound Method- Under this method a Trial Balance is prepared with both the balances as well as with total of the various accounts. It is a combination of both the 1st and 2nd method.Sr Name of Account L.F Debit Credit Debit CreditNo. Balance Balance Total Total Rs P Rs P Rs P Rs P Total Ready Recknor to prepare a Trial Balance :- While preparing a Trial Balance from a given list of balances extracted from the ledger debit and credit balances should be selected and following rules should be followed: Accounts of assets, drawings, debtors, losses and expenses show debit balances. Accounts of liabilities, capital, creditors, gains and incomes show credit balances.
BALANCE SHEET Introduction and meaning:- Balance Sheet means a statement of Assets and liabilities of the business as on the last day of the accounting year. Balance Sheet thus, shows the financial position of the business. i.e. what it owns and what it owes. “Balance Sheet is a statement containing all the balances that remain in the ledger accounts after preparation of the profit and loss account.” Thus from the above statement it can be said that Balance Sheet is a statement of Assets and liabilities which helps to ascertain the financial position of a concern on a particular date i.e. on a date financial statement or final accounts are prepared or books of accounts are closed. In fact it treats the balances of all those ledger accounts, which have not yet been squared up. These accounts relate to Assets owned, expenses due but not paid, incomes accrued but not received or certain receipts which are not due or accrued. A Balance Sheet is a statement prepared to reflect the true and correct financial position of a business on a certain date. It is a statement that measures the solvency of the organization. The main object of a Balance Sheet is to show how proprietors capital stands invested in his business. It reveals the position of owned capital and borrowed funds and the manner in which they are invested in business. At the end of year, all Assets and labializes accounts are arranged properly and a Balance Sheet is drawn to show Assets owned by the trader and also the liabilities owned by him. The Balance Sheet is a statement and not ledger accounts. Hence, it is two sides are not known as the debit side and credit side. Instead they are termed as ‘Assets side’ and ‘Liabilities side’. The left hand side called ‘Liabilities side’ and right hand side is called ‘Assets side’. Balance Sheet contains the balances of real and personal accounts which are carried forward to the next accounting period. It should be noted that nominal accounts (income, expenses, losses and gains) are closed every year by transferred to profit and loss accounts. Every year such accounts are maintaining a fresh. It is only a real and personal account that is carried forward each year. Balance Sheet is prepared from the balances of real and personal accounts only. Features of Balance Sheet :- From the above mentioned explanation, it is said that Balance Sheet has following features. a) It is a statement and not an account. b) It considers and shows the accounting treatment of real and personal accounts only. c) It has two sides left hand side is ‘liabilities’ and right hand side is ‘Assets’ d) It is based on trial balance and prepared on a certain date.
e) It is a summary of a balances of those ledger account which have not be closed by transferred to trading and profit and loss account. f) It is last step in preparation of final account. g) It shows the nature and value of Assets and liabilities at a given date. h) The closing stock shown in the assts side in the Balance Sheet. Similarly, it cannot be completed stock taking. i) It shows the financial position of the firm. j) It shows all the concern in a systematic way either in order of liquidity or performance. Constraints/Limitations of Balance Sheet :- 1) Fixed Assets are shown in the Balance Sheet at historical cost less depreciation up to date. A conventional Balance Sheet cannot reflect the true value of these Assets. Again, intangible Assets are shown in the Balance Sheet at boo value, which may bear no relationship to market value. 2) Sometimes, Balance Sheet contains some Assets which command no market value such as preliminary expenses, debentures, discounts, etc. The inclusion of these fictions Assets unduly inflates the total value of Assets. 3) The Balance Sheet cannot reflect the value of certain factors such as skill and loyalty of staff 4) A conventional Balance Sheet may mislead untrained readers inflationary situations. Preparation of Balance Sheet :- It is clear that a Balance Sheet is not a ledger account but is merely a statement of ledger balances which are left open in the ledger or in the trial balances after the preparation of Trading and Profit and Loss Account. The Balance Sheet does not have ‘Debit side’ and ‘Credit side’ as in a ledger account or the words ‘To’ and ‘By’ is prefixed to the Assets and liabilities respectively. The debit balances of real and personal account are taken to the Assets sides of the Balance Sheet while credit balances of such accounts are taken to the liabilities side. No closing entries are required to be passed for transferring the real and personal account in the Balance Sheet. The balances of these accounts are carried forward and shown in the ledger of the following year as opening balances. However, the debit balance of drawing account is transferred to the debit of capital account and thus only drawing account may get closed. With all the balances shown in the Balance Sheet, the total of the two sides of a Balance Sheet must always agree. Arrangement of Assets and Liabilities :- The asset and liabilities should be shown in the Balance Sheet in a particular order. Joint stock companies, banking companies, etc. have to show their asset and liabilities in a particular order as per requirement of law but a sold trader is free to present them in any order he chooses.
However, there are two possible methods in which Assets and liabilities can be presented in the Balance Sheet. These are as follows:-a) Order of Preference or Priority:- In this case, fixed asset and fixed liabilities are shown first followed by current Assets and liabilities. On the Assets side the order will be as under- Goodwill, land and building, plant and machinery, furniture and fixtures, motor cars, shares, closing stock, sundry debtors, bills receivable, investment, cash at bank, cash in hand and prepaid expenses. On the liabilities side the order will be as under: Capital, loans, creditor, bills payable, bank overdraft and outstanding expenses.b) Order of Liquidity:- In this case, Assets are arranged in the order of liquidity i.e. the order in which they can be cover into cash and the liabilities in the order in which they are to be paid off. On the Assets side, the order will be as under: Cash in hand, cash at bank, investment, bills receivable, sundry debtors, closing stock, furniture and fixtures, plant and machinery, land and building and goodwill. On the liabilities side, the order will be as under: Bills payable, sundry creditors, outstanding expenses, loans, bank overdraft and capital. Classification of Assets :- Assets have been classified into:-1) Fixed Assets.2) Current Assets3) Fictions Assets.1) Fixed Assets:- Assets or properties of more or less permanent nature are called fixed Assets. They are not meant for resale but they facilitate smooth conduct of business. Thus, land, building, plant, machinery, furniture, fixtures, fittings, office equipment, loose toolset. are fixed Assets.2) Current Assets:- This are held temporarily in business and are meant for conversion into cash. They are also known as ‘Circulating Assets’ or ‘Floating Assets’ as their form goes on changing from time to time. Thus, cash may be use to buy goods or raw materials which may be converted into finished goods which may be sold to customer from whom cash is finally recovered. In this way, cash balance changes
into raw materials, which are converted into finished products, which is covered partly into cash(sales) and partly into debtors, and finally the amount due from debtors is received in cash. However, the final cash collected is more than the initial cash due to an element of profit. In the event of losses it will get reduced in the process. e. g. current Assets are cash and bank balances, closing stock, sundry debtors, etc Fixed Assets are shown in the Balance Sheet at cost less depreciation return off till the date of Balance Sheet. Current Assets are shown at cost or market value whichever is less. However, this rule generally applies to the stock of goods on hand.3) Fictions Assets:- Those Assets which are not representing by anything concrete are called ‘fictitious Assets’. There is no tangible property to support them. These Assets generally represent huge expenditure which cannot be fully charged to any one year Profit and loss account. They are shown on the Assets side of the Balance Sheet and return off over a long period. Each year, the extent to which they are not return off, they are shown in the Balance Sheet. For example of fictitious Assets are preliminary expenses, deferred revenue expenditure on advertising, etc. Classification of Liabilities :- The liabilities may be broadly classified as follows-1) Fixed liabilities.2) Current liabilities.3) Contingent liabilities.1) Fixed liabilities:- These are the liabilities to be paid off after a long period of time. It is a long term liability which does not become due within a relatively short period, usually, a year. e.g. Long term loans, moorages, debentures. In case, where capital is treated as a liability, then it can also be regarded as fixed liabilities.2) Current liabilities:- These liabilities are short term debts which are usually paid off of within a year or less. It includes any liability accrued and be paid out of current assented: trade, creditors, bank overdraft, bills payable, outstanding expenses, etc.3) Contingent liabilities:- These are not the actual liabilities and become the real liabilities depending upon the happening of some uncertain future events. In other words, contingent liabilities become actual liabilities provided the contemplated events takes place. In case, the event do not take place no liability occurs. e.g- pending suits against traders in the court of law, bills discounted with bank, workers disputes relating to demand for higher wages and bonus etc.
Form and Layout :- The Balance Sheet is generally prepared in ‘T’ form having two sides, one to show the Assets and the other liabilities. The left hand side is generally called as the liabilities side and the right hand side is called the asset side. This is called the traditional form. Now-a-days, the Balance Sheet is also prepared in the vertical or ‘T’ form in a way a layman can understand. Liabilities Rs. Rs. Assets Rs. Rs. a) Fixed Liabilities. a) Fixed Assets. b) Current Liabilities. b) Current Assets. c) Contingent Liabilities. c) Fictitious Assets.
PROFIT AND LOSS ACCOUNT Introduction and Meaning :- Profit and Loss account shows closing balances of all nominal accounts relating to the remaining income and expenses. Debit side of the profit & loss account shows expenses like administrative expenses, selling expenses, financial expenses, depreciation and other unusual expenses and losses. Where as credit side of the Profit and Loss Account shows other business income and gains. The balance of the profit and loss account shows the result of business operations during the year. The net profit or net loss shown by the Profit and Loss account is transferred to the capital account of proprietor. Hence, it is a part of financial statement, which shows the result of business operations conducted during the year. Features :- a) It shows the overall result of the business as a whole. b) It deals with the remaining costs and expenses which are of indirect nature. c) It accounts for all normal and abnormal losses. Purpose :- The purpose of Profit and Loss account is to find out net profit earned or net loss incurred during the year. Contents :- The Profit and Loss Account contains all indirect expenses and losses other than those shown on debit side of Trading Account are shown on debit side of Profit and Loss account. Whereas, all indirect resource incomes and gains other than those shown on credit side of Trading Account are shown on credit side of Profit and Loss account. Classification of Expenses :- a) Administrative expenses:- Administrative expenses are the expenses incurred to plan, organize, administer and control the business. e. g. Salaries to office staff, Rent, rates, insurance, lighting of office, Printing, telephones, telex, postage, Depreciation and repairs of office equipments, building, furniture, vehicles, Legal charges, audit charges, bank charges, etc.
b) Selling and distribution expenses:- Selling expenses are the expenses incurred to create and increase demand for goods. Distribution expenses are the expenses incurred from the time the goods sold leave the trader’s premises till the goods reach the customers. e. g. Packing materials, Salaries of sales and distribution staff, Travelling, conveyance, Commission or discount on sales, Advertisement or showroom expenses, Warehouse or sales office rent, rates, insurance, lighting, Freight outward, carriage outward, expenses on exports, Depreciation and repairs of delivery van, vehicles, etc.c) Finance charges and others:- Finance expenses are the expenses incurred to obtain loans, bank charges, discount to debtors, interest paid on loans. Form/ Layout/ Format :- Profit & loss A/c for the year ended___________ Date Particulars Rs. Rs. Date Particulars Rs. Rs. Conclusion :-
From the contents discussed in the present project it may be concluded that allthese financial documents are inter- related with each other. The Trial Balance serve as abase for Profit and Loss Account and Profit and Loss Account facilitate preparation ofBalance Sheet. This is very much true that the present project doesn’t cover the entireinformation about the topic, but certainly provides basic information. This provides anopportunity for the further study to the interested persons. References/ Bibliography :- 1) Hanif Mukherjee – Modern Accountancy. 2) S. Kr. Paul – Financial Accounting. 3) S. K. Paul – Fundamentals of Accounting. 4) Hrishikesh Chakraborty – Advanced Accounting. 5) Shukla and Grewal –Accountancy. 6) L. N. Chopade, D. H. Choudhary – Introduction to Financial Accounts. 7) Prof (Mrs.) Varsha Ainapure – Introduction to Financial Accounting and Mukund Ainapure