Profit refers to the excess of total revenue over total expenses. According to the rule "Debit all expenses and losses, Credit all incomes and gains", expenses are recorded on the debit side while revenues are recorded on the credit side. There is profit when Total revenue > Total expenses, whichRead more
Profit refers to the excess of total revenue over total expenses. According to the rule “Debit all expenses and losses, Credit all incomes and gains”, expenses are recorded on the debit side while revenues are recorded on the credit side.
There is profit when Total revenue > Total expenses, which means the balance of the credit side > the balance of the debit side. Since, in accounting Dr. side is always equal to the credit side, a balancing figure (representing profit or loss) is shown on the shorter side, to make both sides equal.
When Credit side > Debit side, Profit(balancing figure) is shown on the Dr. side so that both sides are equal.
PROFIT
Profit refers to the excess of total revenue over the total expenses of the business for an accounting year. In simple words, it shows how much extra the firm earned after deducting all the expenses it incurred during the year.
Profit = Total Revenue – Total Expenses
Suppose, the firm earned a total revenue of $10,000 for the accounting year 2022-23. Also, it incurred total expenses of $6,000 during the year. So, Profit for the AY 2022-23 is $4,000.
ASCERTAINING PROFIT
To ascertain profit earned or loss incurred by the firm during an accounting year, it prepares two accounts.
- Trading A/c
- Profit and Loss A/c
Points to be noted:
- Both accounts are Nominal Account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”
- The debit side records expenses while the Credit side records incomes.
- Both are balanced accounts, which means its Dr. side is always equal to its Cr. side.
- If they are not balanced, then a balancing figure is added to the shorter side which represents profit or the loss depending on which side is greater.
- If Dr. side > Cr. side, it means expenses are more than the incomes and thus, there is a loss.
- If Cr. side > Dr. side, it means there are more incomes than expenses and thus, there is Profit.
TRADING ACCOUNT
It is the first final account prepared for calculating gross profit or gross loss during the year because of the trading activities of the firm.
Trading activities are related to the buying and selling of goods. In between buying and selling a lot of activities are there like transportation, warehousing, loading, unloading, etc. All expenses that are directly related to buying and selling as well as manufacturing of goods are known as Direct expenses and are also recorded in the trading accounts.
Items included on the debit side:
- Opening stock
- Purchases
- Direct expenses like wages, import duty, royalty, manufacturing expenses, etc.
- Gross Profit
Items included on the credit side:
- Sales
- Closing stock
- Gross loss
Gross Profit is when Cr. side (incomes) > Dr. side (expenses). It is recorded on the debit side as a balancing figure.
PROFIT AND LOSS ACCOUNT
A businessman incurs a lot of expenses during the year which may be directly related or indirectly related to the business.
As the Trading account only considers direct expenses, the businessman prepares the P&L A/c which considers all the expenses incurred during a year to ascertain net profit or loss.
Items written on the Debit side
- Gross loss (transferred from the trading a/c)
- Office and administrative expenses (like employee’s salary, office rent, office lighting bills, legal charges, printing expenses, etc.)
- Selling and distribution expenses (like advertisement fees, commission, carriage outward, packaging charges, etc.
- Miscellaneous expenses (like interest on loan, interest on capital, repair, depreciation, etc.)
- Net Profit
Items written on the Credit side
- Gross Profit (transferred from trading a/c)
- Other incomes and gains (Like income from investments, interest received, rent received, etc.)
- Net loss
Net Profit is when the Cr. side (incomes)> Dr. side(expenses). It is recorded on the Debit side as a balancing figure.
See less
Definition Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business. Or in other words, we can say that the expected realization period is less than the operating cRead more
Definition
Current assets are defined as cash and other assets that are expected to be converted into cash or consumed in the production of goods or rendering of services in the normal course of business.
Or in other words, we can say that the expected realization period is less than the operating cycle period although it is more than the period of 12 months from the date of the balance sheet.
For example, goods are purchased with the purpose to resell and earn a profit, debtors exist to convert them into cash i.e., receive the amount from them, bills receivable exist again for receiving cash against it, etc.
List of current assets
The list of current assets is as follows:-
Now here are a few definitions for the above list of current assets which are as follows:-
Cash in hand
Cash comprises cash on hand and demand deposits with banks.
Cash equivalents
Cash equivalents are short-term, highly liquid investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value.
Bills receivables
It means a bill of exchange accepted by the debtor, the amount of which will be received on the specific date.
Sundry debtors
A debtor is a person or entity who owes an amount to an enterprise against credit sales of goods and/or services rendered.
Prepaid expenses
Expense that has been paid in advance and benefit of which will be available in the following years or year.
Accrued income
Income that has been earned in the accounting period but in respect of which no enforceable claim has become due in that period by the enterprise.
Closing stock
Stock or inventory at the end of the accounting period which is shown in the balance sheet and which is valued on the basis of the “ cost or net realizable value, whichever is lower “ principle is called closing stock.
Short term investment
Investments that are also known as marketable securities and are held for a temporary period of time i.e, for less than 12 months, and can be easily converted into cash are called short-term investments.
Criteria for classification
Now let us see the classification of assets in the case of companies as per Schedule III of the Companies act 2013.
An asset is a current asset if it satisfies any one of the following criteria which are as follows:-
Here is an extract of the balance sheet showing current assets
See less