Final Accounting » Business Owned by a Sole Proprietor

Final Accounting Trial Balance of M/s Wearall Textlies as on 31st March 2006 Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) Capital Opening Stock Closing Stock Purchases Rent Paid Sales Wages Commission Received Assets Debtors Creditors – – – – – – – – – – 15,000 25,000 1,50,000 25,000 50,000 1,51,000 45,000 1,00,000 3,20,000 3,000 38,000 Total   4,61,000 4,61,000 Dr Trading and Profit and Loss a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Opening Stock To Purchases To Wages To Gross Profit     15,000 1,50,000 50,000 1,30,000 By Sales By Closing Stock   3,20,000 25,000     3,45,000     3,45,000 To Rent To Net Profit   25,000 1,08,000 By Gross Profit By Commission Received   1,30,000 3,000     1,33,000     1,33,000             Dr Capital a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Balance c/d   2,08,000 By Balance b/d By Net Profit   1,00,000 1,08,000     2,08,000     2,08,000       By Balance b/d   2,08,000 • Recording Gross Profit and Net Profit Should the posting relating to gross profit and net profit read "To P & L a/c" and "To Capital a/c" respectively. How is it that it shows "Gross Profit" and "Net Profit" Explanation Hide/Show Gross profit (from Trading a/c) is transferred to Profit and Loss a/c. Net profit (from Profit and Loss a/c) is transferred to Capital a/c. ⇒ The journal entry for recording Gross Profit and net profit should be Journal in the books of M/s ____ for the period from __ to ____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) March 31st – Trading a/c       To Profit and Loss a/c Dr – – 1,30,000 1,30,000 [For the gross profit transferred to profit and loss account.] March 31st – Profit and Loss a/c       To Capital a/c Dr – – 1,08,000 1,08,000 [For the net profit transferred to capital account.] Dr Trading and Profit and Loss a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Profit & Loss a/c   1,30,000           3,45,000     3,45,000 To Capital a/c   1,08,000 By Trading a/c   1,30,000     1,33,000     1,33,000             • The Basic purpose of accounting? These postings can be interpreted as In "Profit and Loss a/c": There is a transfer of Rs. 1,30,000 Credit balance from "Trading a/c" to this account. and There is a transfer of Rs. 1,08,000 Credit balance from this account to "Capital a/c". In "Trading a/c": There is a transfer of Rs. 1,30,000 Credit balance from this account to "Profit and Loss a/c". In "Capital a/c": There is a transfer of Rs. 1,08,000 Credit balance from "Profit and Loss a/c" to this account. But, the postings fail to specify the reason for which the balances have been transferred. We only understand that there is a transfer from so and so account to so and so account and not the reason for which the transfer is being made. The basic purpose of accounting is derivation of information The more information we need, the more accounting heads we have to create. • Solution To provide us the information clearly indicating that the transfer is on account of Gross Profit being transferred to the Profit & Loss a/c and the Net Profit being transferred to the Capital a/c we create two accounts by name "Gross Profit" and "Net Profit" The Gross Profit from the "Trading a/c" is transferred to the "Gross Profit a/c" and from there to the "Profit & Loss a/c". The Net Profit from the "Profit & Loss a/c" is transferred to the "Net Profit a/c" and from there to the "Capital a/c". Journal in the books of M/s ____ for the period from __ to ____ Date V/R No. Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) March 31st – Trading a/c       To Gross Profit a/c Dr – – 1,30,000 1,30,000 [For the gross profit transferred to Gross Profit account.] March 31st – Gross Profit a/c       Profit and Loss a/c Dr – – 1,30,000 1,30,000 [For the gross profit transferred to profit and loss account.] March 31st – Profit and Loss a/c       Net Profit a/c Dr – – 1,08,000 1,08,000 [For the net profit transferred to Net Profit account.] March 31st – Net Profit a/c       Capital a/c Dr – – 1,08,000 1,08,000 [For the net profit transferred to capital account.] Dr Trading and Profit and Loss a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Gross Profit   1,30,000           3,45,000     3,45,000 To Net Profit   1,08,000 By Gross Profit a/c   1,30,000     1,33,000     1,33,000             Dr Capital a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Balance c/d   2,08,000 By Net Profit   1,08,000     2,08,000     2,08,000       By Balance b/d   2,08,000 Dr Gross Profit a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Profit and Loss a/c   1,30,000 By Trading a/c   1,30,000     1,30,000     1,30,000             Dr Net Profit a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Capital a/c   1,08,000 By Profit and Loss a/c   1,08,000     1,08,000     1,08,000             By doing this we ensure that the postings would give us the required information. For this we have to create additional accounting heads. • Controlling Accounts The accounts that we create only for the purpose of giving us additional information are called controlling accounts. These accounts do not carry any balance at the end. They are just raised and immediately written off. You can notice this from the "Gross Profit a/c" and "Net Profit a/c". They just receive and send the amounts through them so that the postings would show phrases that would give the information we need. We make use of the concept of controlling accounts in many situations in accounting.

Final Accounting » Business Owned by the Partnership Firm

Assuming all other data to be the same and the capital of Rs. 1,00,000 is owned by the two partners Mani and Murthy as Rs. 30,000 and Rs. 70,000 respectively. Trial Balance of M/s Wearall Textlies as on 31st March 2006 Particulars L/F Debit Amount (in Rs) Credit Amount (in Rs) Mani's Capital Murthy's Capital Opening Stock Closing Stock Purchases Rent Paid Sales Wages Commission Received Assets Debtors Creditors – – – – – – – – – – – 15,000 25,000 1,50,000 25,000 50,000 1,51,000 45,000 70,000 30,000 3,20,000 3,000 38,000 Total   4,61,000 4,61,000 The Trading and profit and loss account would be the same ⇒ Net Profit = Rs. 1,08,000. Dr Trading and Profit and Loss a/c Cr Particulars Amount (in Rs) Amount (in Rs) Particulars Amount (in Rs) Amount (in Rs) To Opening Stock To Purchases To Wages To Gross Profit     15,000 1,50,000 50,000 1,30,000 By Sales By Closing Stock   3,20,000 25,000     3,45,000     3,45,000 To Rent To Net Profit c/d   25,000 1,08,000 By Gross Profit By Commission Received   1,30,000 3,000     1,33,000     1,33,000 To Net Profit (Mani) To Net Profit (Murty)   36,000 72,000 By Net Profit b/d   1,08,000     1,08,000     1,08,000             • Distribution of Profits among Partners Partners profit sharing ratio ⇒ Mani : Murthy = 1 : 2 = 1 3 : 2 3 Partners share of profits = Firms profit × Profit sharing proportion Mani's Share = Rs. 1,08,000 × 1 3 = Rs. 36,000 Murthy's Share = Rs. 1,08,000 × 2 3 = Rs. 72,000 Rs. 72,000 Dr Partners Capital a/c's Cr Particulars Mani (in Rs) Murthy (in Rs) Particulars Mani (in Rs) Murthy (in Rs) To Balance c/d 1,06,000 1,02,000 By Balance b/d 70,000 30,000       By Net Profit 36,000 72,000   1,06,000 1,02,000   1,06,000 1,02,000       By Balance b/d 1,06,000 1,02,000 The difference that you can notice is that the profit of Rs. 1,08,000 instead of getting into the account representing a single owner (capital account) is distributed among all the owners i.e. their respective capital accounts.

Is that all the difference !!!

Surely, not If this is the only difference, then you have completed learning Partnership accounting. This example is given to make you understand that Capital and its related aspects differ for each form of business organisation. Therefore, learning about accounting for partnership firms involves learning about the various aspects related to Capital.

Author Credit : The Edifier

... Continued Page 3