Ascertaining Profits

Transfer of balances between ledger accounts

Consider the transaction paid cash into bank 1,00,000.

The Journal entry to be recorded and the ledger accounts affected by the transaction would be

Journal in the books of ___ for the period from ___ to ___
Date	R/V No.	Particulars		L/F	Amount
Date	R/V No.	Particulars		L/F	Debit	Credit
—	—	Bank a/c To Cash a/c	Dr.	- -	1,00,000	1,00,000
—	—	[For the amount of cash paid into bank.]		- -	1,00,000	1,00,000

When there is available cash, Cash account has a debit balance.

Paying cash into bank will result in bank account being debited and cash account being credited.

This can be interpreted as

Transferring a Debit balance from Cash account to Bank account.
Transferring a Credit balance from Bank account to Cash account.
[Though a possibility, this is an inappropriate interpretation in this case.]

Dr	Cash a/c	Cr

Particulars

Amount

Particulars

Amount

To Balance b/d

1,25,000

By Bank a/c
By Balance c/d

1,00,000
25,000

1,25,000

To Balance b/d

25,000

Dr	Bank a/c	Cr

Particulars

Amount

Particulars

Amount

To balance b/d
To cash a/c

1,50,000
1,00,000

By Balance c/d

2,50,000

To Balance b/d

2,50,000

Transferring a debit balance from one account to another, results in the second (transferee) account being debited and the first (transferor) account being credited.

Transferring a debit balance from here to there, results in a debit there and a credit here.

Transferring a credit balance from one account to another, results in the second (transferee) account being credited and the first (transferor) account being debited.

Transferring a credit balance from here to there, results in a credit there and a debit here.

Nominal Accounts to ascertain profits

The principle of debit and credit in relation to nominal accounts
- debit all expenses and losses, credit all incomes and gains.

From this principle we can conclude that the nominal accounts hold all the information relating to expenses, losses, incomes and gains.

Apart from the information relating to the expenses, losses, incomes and gains, organisations intend to know/have the information about the affect of these over a period. The net affect of expenses, losses, incomes and gains over a period is what we call the profit/loss for that period.

To obtain such information, they prepare one or more ledger accounts, at the end of the period, to which the balances in all the nominal accounts are transferred. Manufacturing a/c, Trading a/c, Profit and Loss a/c are all such accounts.

All nominal accounts are closed at the end of the accounting period by transfer to either the manufacturing a/c, trading a/c or profit and loss a/c as the case may be.

Since the information in these accounts is an aggregate of the information in the nominal accounts, we can say that these accounts are also nominal accounts.

Any account prepared to ascertain profits or losses out of a set of transactions is a nominal account.

Profits/Losses from Manufacturing a/c and Trading a/c are transferred to the profit and loss account. Manufacturing a/c and Trading a/c being nominal accounts are also closed by transferring the balance which represents either Manufacturing/Trading Gross Profit to the profit and loss account.

Interpretation of Debits and Credit

Since the postings to Profit & Loss a/c are on account of a transfer, we can say that

Debits to Profit & Loss a/c represents
1. transfer of debit balances from other nominal accounts to this account.
  These postings represents expenses or losses.
2. transfer of credit balances to other nominal accounts
  These postings represent transfer of profits.
Credits to Profit & Loss a/c represents
1. transfer of credit balances from other nominal accounts to this account.
  These postings represents incomes or gains.
2. transfer of debit balances to other nominal accounts
  These postings represent transfer of losses.

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