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Goodwill Patents Preliminary Expense A/c Claims Receivable

  2. Karishma
    This answer was edited.

    Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence. In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are theRead more

    Fictitious assets are expenses or losses not written off entirely in the profit and loss account during the accounting year in which they occur. Fictitious assets have no realizable value or physical existence.

    In the above, (C) preliminary expense is a fictitious asset. Preliminary expenses are the expenses incurred before the incorporation of a business. The word ‘fictitious’ means fake, these are not actually the assets of a company even though they are represented in the assets of the balance sheet.

    Since the benefit of a fictitious asset is received over a period of time, the whole amount is not charged to the profit and loss account. The amount is amortized over several years. These expenses are non-recurring in nature. These expenses are shown as assets under the head miscellaneous expenditure. Also known as deferred revenue expenditure.

     

    For example: A company incurred $50,000 as promotion costs before the formation of the business. This promotion cost will be deferred over 5 years. In the first year, $10,000 will be charged to the profit and loss account and the remaining $40,000 will be shown as an asset under the heading miscellaneous expenditure. Subsequently, $10000 will be charged to profit and loss for the next 4 years. The amount of $50,000 will be deferred over a span of 5 years.

    Some other examples of fictitious assets :

    • Promotional expenses: Expenses incurred for the promotion of business before the formation of the company such as advertising expenditures are amortized over many years.
    • Loss on the issue of shares or debentures: When a company issues shares or debentures at a discount, the discount is classified as a fictitious asset and is not treated as an expense or loss. It is amortized over several years.
    • Incorporation costs: Costs incurred during the formation of a business are incorporation costs. These include registration costs, licensing fees, legal fees and other costs incurred in setting up the business. These are fictitious assets and are amortized over several years.
    • Loss on Sale of Machinery: When a loss is incurred on the sale of machinery or equipment, that loss is also treated as a fictitious asset and is amortized over several years.

     

    Goodwill

    Goodwill is not a fictitious asset because goodwill has a realizable value and can be sold in the market. Goodwill is an intangible asset which does not have a physical existence but can be traded for monetary value. Goodwill has an indefinite life and is sold when the business is sold. Goodwill can be self-generated or purchased. Goodwill is shown as an intangible asset under the heading fixed asset in the financial statements.

     

    Patents

    Patents are intangible assets which do not have a physical existence but have realizable value and can be sold in the market. So, patents do not come under the category of fictitious assets. Patents are basically intellectual property. The purchase price of the patent is the initial purchase cost which is amortized over the useful life of the asset. Patents are shown as intangible assets under the heading fixed asset in the balance sheet of the company.

     

    Claim receivable

    Claim receivable is an asset if the claim has been authorized by the insurance company. Claim receivable has a monetary value, so does not come under the category of a fictitious asset. If the claim is not yet authorized by an insurance company, it will be shown as a footnote in the financial statements. Authorized claim receivable is shown as a current asset in the financial statement.

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  2. Saurav

    Accrual Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid. An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be furtRead more

    Accrual

    Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such amount has been paid.

    An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts

     

    Accrual Expense-

    Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.

    For example- If rent of 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March

    For example- Interest of 1,000 for the month of March of the loan amount of 10,000 paid in April then will be accounted for in the books in March

    These are the following accrued expense

    • Accrual Rent– Accrual rent means the amount for using the land of the landlord is paid at a later period than the period when it is put into use.
    • Accrual Insurance– Accrual insurance means the amount paid as a premium to the insurance company paid on a later period than the period when it is due
    • Accrual Expense- Acrrual expense means the amount for any expense paid on a later period than the period when it pertains to be paid
    • Accrual Wages- Accrual wages means the amount which is paid to employees on a later period than the period when the wages get due
    • Accrual Loan Interest– Loan Interest means the amount of interest on a loan which is paid on a later period than the period when it is due on

     

    Accrual Revenue-

    Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received in the later period.

    For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue

    For example- Rent of 10,000 for the month of March received in April month then this rent will be accounted for in the books in March

    • Accrual Income- Acrrual expense means the amount for any income received on a later period than the period when it pertains to be received
    • Accrual Rent– Accrual rent means the amount for using the land of the entity by the other party is received at a later period than the period when it is put into use.
    • Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive
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  2. Saurav

    Accruals are not the same as provisions both are totally different from each other. Accruals and provision both are vital parts of accounts but work differently   Accrual Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irreRead more

    Accruals are not the same as provisions both are totally different from each other. Accruals and provision both are vital parts of accounts but work differently

     

    Accrual

    Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such an amount has been paid.

    An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts

     

    Accrual Expense

    Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.

    For example- 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March

    These are the following accrued expense

    • Accrual Rent– Accrual rent means the amount for using the land of the landlord is paid at a later period than the period when it is put into use.
    • Insurance– Accrual insurance means the amount paid as a premium to the insurance company paid on a later period than the period when it is due
    • Expense- Acrrual expense means the amount for any expense paid on a later period then the period when it pertains to be paid
    • Wages- Accrual wages means the amount which is paid to employees on a later period than the period when the wages get due

     

    Accrual Revenue

    Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received on later period. For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue

    • Accrual Rent– Accrual rent means the amount for using the land of an entity by another party is received on a later period than the period when it was put into use.
    • Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive

     

    PROVISIONS

    Provision refers to making a provision/allowance against any probable future expense that the company might incur in the near future. This amount is uncertain and difficult to predict its surety.

    However, as per the prudence concept of accounting a company needs to anticipate the losses that will incur in the near future due to which provision is made.

    For example- A company has debtors of 10,000 but as per the company’s previous records company anticipates that 1% of debtors will become bad debts. So in this case company will make a provision of 1% that is 100 on it.

    There are various types of provisions which are-

    • Provision on Depreciation– Provision for Depreciation means a provision for future depletion of assets has been already created
    • Provision for Doubtful Debts– Provision for Doubtful Debts means a provision created against debtors that doesn’t seem to be recovered in the near future
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  2. Karishma
    This answer was edited.

    A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period.  It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more

    A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period.  It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.

    When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.

    The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.

    Accounting entry for loss transferred is as follows :

    Capital A/c   …Dr.

    To Profit & Loss A/c

    (being net loss transferred to capital account)

     

    Example

    A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.

    Extract of a Profit and loss a/c showing net loss is as under:

    Profit and loss A/c for the year ended …..

    Particulars Amount (Dr.) Particulars Amount (Cr.)
    To gross loss b/d xxx By gross profit b/d xxx
    To salaries xxx By bank interest xxx
    To office rent xxx By commission received xxx
    To printing and stationery xxx By rent received xxx
    To insurance xxx By dividend xxx
    To audit fees xxx By profit on sale of asset xxx
    To electricity chares xxx By Net Loss xxx
    To depreciation xxx
    To bad debts xxx
    To bank charges xxx
    To miscellaneous expenditure xxx
    To interest on loans xxx
    Total xxx

    The debit balance for a non-corporate entity is shown as a reduction from the capital account

    Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :

    Balance Sheet as on…

    Liabilities Amount
    Equity and liabilities
    Capital

    Less: Profit & Loss A/c

    While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.

    Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :

    Balance Sheet as on..

    Liabilities Amount
    Equity and liabilities
    Reserves And Surplus

    Less: Profit & Loss A/c

    Conclusion:  Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.

    The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.

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  2. Karishma

    Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more

    Debit Balance

    A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.

    Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.

    Credit Balance

    A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.

    The credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.

     

    Credit Balance in the Passbook

    A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. “Credit balance in the passbook is also called bank balance”.

    The bank balance is the amount available for withdrawal. A bank balance is an asset to the individual or an enterprise which can be used for the purchase of another asset or payment of liability or expenses.

    All the transactions either debit or credit are recorded in the passbook. When the total amount of all credit entries in a passbook is more than the total of debit entries, it results in a credit balance. It means that the bank owes to an individual or enterprise.

    The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s credit balance is a positive or favourable balance while the passbook’s debit balance is a negative balance or unfavourable balance.

    For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $30,000. So here, the passbook will show a bank balance of $20,000 i.e. the credit balance of the passbook. It signifies the positive cash flow of the individual and that the bank owes $20,000 to the individual.

     

    Debit balance in Pass Book

    When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. Debit balance in the passbook is also called “Overdraft”. It means that an individual or enterprise owes to the bank.

     

    Reconciliation

    It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.

     

    Debit Balance Reconciliation

    The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.

     

    Credit Balance Reconciliation

    The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.

     

    Conclusion

    The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A credit balance signifies more deposits than withdrawals resulting in a positive bank balance.

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  2. Saurav
    This answer was edited.

    Credit balance means excess of credit side over debit side. For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a creditRead more

    Credit balance means excess of credit side over debit side.

    For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at the end there will be a credit balance of 6,000 of trade payable at the end

    .A Credit balance signifies all income and gains and all liabilities and capital that is there in business.

     

    Liabilities and Capital

    • Account Payables– Account Payables means the amount that is due to the customer by the entity. Its credit balance will always increase when there is an increase in account payables and will decrease when there is a decrease in account payables. For eg-: The stock that has been purchased in credit from creditors of 10,000 will result in an increase in credit balance.
    • Bank Overdraft-Bank Overdraft means when the amount withdrawn from the bank is more than the balance left in the bank. For example, there is a bank balance of 2,000 in the bank but an amount of 4,000 has been withdrawn from the bank. So in such a case, there will be a credit balance of 2,000 which is in Bank Overdraft
    • Bonds– Bonds are the amount that is withdrawn from people for a specific time period which gets redeemed at a coupon rate after such a specific period. For example- A 10% bond of 10,000 is given to a group of people which will be redeemed after 5 years.
    • Income Tax Payables-Income Tax Payable means the amount the company left to pay to the government in earlier periods. For example- There is a tax liability of 10,000 in FY20-21 from which 8,000 was paid in the current year and 2,000 paid in FY21-22.
    • Notes Payable– Notes Payable is a type of promissory note in which a person pays some amount to an entity that the entity will write in a specific period. For example Notes payable of 1,000 given by a person to an entity which will be returned in 3 months with interest
    • Capital– Capital means the amount that is introduced by the company at the beginning of the business for the operations and survival of the business. For example- A capital of 10,000 has been introduced by the company.

     

    Income and Gains

    • Interest Received-Interest Received means the amount which is invested by the company in some other entity and interest received on it
    • Dividend Received– Dividend means the amount received from the entity in which amount invested by the company
    • Rent Received– Rent is the amount that the company receives by letting out their land to another person or entity for use
    • Gains on Sale of Furniture– Gain on Sale of Furniture means that the amount received from the sale of furniture is more than the amount of furniture. So the difference between the amount received from the sale and the cost of furniture is called a gain on the sale of furniture.

    So after seeing all the above points we can conclude that the credit balance includes all the income in the P&L account and all the liabilities in the Balance sheet. So its balance increases when there is an increase in its account.

     

    Debit Balance

    Debit balance means excess of credit side over debit side.

    For Example- At begining of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end there will be a debit balance of 6,000 of trade receivables at the end

    A Debit balance basically signifies all expenses and losses and all positive balances of assets. The debit balance increases when any asset increases and decreases when any asset decreases.

     

    Asset

    • Cash and Bank Balance
    • Account Receivables
    • Property, Plant, and Equipment
    • Inventory
    • Investments
    • Bill Receivables
    • Intangible Assets

     

    Expenses and Loses

    • Rent
    • Depreciation
    • General Expenses
    • Loss on Sale of asset
    • Printing and stationery
    • Audit fees
    • Outstanding fees
    • Salaries and Wages
    • Insurance
    • Advertising
    • Promotional expenses
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Jayesh Gupta
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  2. Kajal
    This answer was edited.

    Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains” So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any).   TRADRead more

    Trading A/c is a Nominal A/c which follows the rule “Debit the expenses and losses, Credit the incomes and gains”

    So, the Credit side of Trading A/c shows income from the sale of goods. It includes Sales, Closing stock (if adjustment for it has not been made yet) and Gross Loss (if any).

     

    TRADING ACCOUNT

    Trading A/c is prepared for calculating the Gross Profit or Gross Loss arising from the trading activities of a business.

    Trading activities are mostly related to buying and selling of goods. However, in between buying and selling, a lot of activities are involved like transportation, warehousing, etc. So, all the expenses that are directly related to manufacturing or purchase of goods are also recorded in the Trading A/c.

     

    CREDIT SIDE OF TRADING ACCOUNT

    It includes,

    SALES – When goods are sold to earn a profit, it is called sales. It can be cash sales or credit sales.

    Suppose you are in the business of manufacturing and trading shirts. You sold shirts worth $ 20,000 during the year. This $20,000 is your sales.

    SALES RETURN – When the goods sold by you are returned by the customer, it is known as sales return. Sales return is deducted from the sales.

    Continuing with the above example, the customers returned shirts of $1,000 because they didn’t like them. This return is known as sales return or return inward (as goods are coming back i.e. in)

    CLOSING STOCK – Stock is nothing but goods that are either obtained for resale or manufactured for sale and are yet unsold on any particular date.

    The value of stock at the beginning of an accounting year is called Opening stock while the value of the stock at the end of an accounting year is called Closing stock.

    Closing stock is valued at cost price or market price whichever is less.

    It includes,

    1. Closing stock of raw materials
    2. Closing stock of semi-finished goods
    3. Closing stock of finished goods

    For example – On 31st March 2023, there was unused raw material worth $1,000 and shirts worth $5,000 remained unsold.

    So, we have Closing Stock of Raw material – $1,000

    Closing Stock of Finished Goods – $5,000

    Normally, the closing stock is given outside the Trial Balance because its valuation is made after accounts have been closed. It is incorporated in the books by transferring it to the Trading A/c. So, it is shown on the credit side of Trading A/c as well as on the assets side of the Balance sheet.

    However, if the closing stock is given inside the Trail Balance, it means that the closing stock must have already been deducted from the Purchases account. So, closing stock will only be shown on the assets side of the Balance sheet.

    GROSS LOSS – If purchases and direct expenses exceed sales, then it is a Gross loss. In other words, when Debit side > credit side.

     

    DEBIT SIDE OF TRADING ACCOUNT

    It includes

    OPENING STOCK – The value of the stock at the beginning of an accounting year is called Opening stock.

    The closing stock of the last year becomes the opening stock of the current year.

    PURCHASES – Goods that have been bought for resale or raw materials purchased for the manufacturing of the product are terms as Purchases. These goods must be related to the business you are doing. It includes cash as well as credit Purchases.

    PURCHASES RETURN – When goods bought are returned to the suppliers due to any reason. This is known as Purchase return. Purchase return is deducted from the Purchases.

    WAGES – Wages are paid to the workers who are directly engaged in the loading, unloading and production of goods.

    CARRIAGE or CARRIAGE INWARDS or FREIGHT – It refers to the cost of transporting goods from the supplier.

    MANUFACTURING EXPENSES – All expenses incurred in the manufacture of goods such as Coal, Gas, Fuel, Water, Power, Factory rent, Factory lighting etc.

    DOCK CHARGES – These are charged by port authorities when unloading goods at a dock or wharf. Such charges paid in connection with goods purchased are considered direct expenses and are debited to Trading a/c.

    IMPORT DUTY or CUSTOM DUTY – It is a tax collected on imports and specific exports by a country’s customs authorities.

    If import duty is paid on the import of goods, then they are shown on the Dr. side of the Trading A/c.

    ROYALTY – Royalty refers to the amount paid for the use of assets belonging to another person. It includes royalty for the use of intangible assets, such as copyrights, trademarks, or franchisee agreements. It is also paid for the use of natural resources, such as mining leases.

    Royalty is charged to the Trading A/c as it increases the cost of production.

    GROSS PROFIT – When sales exceed the amount of purchases and the expenses directly connected with such purchases i.e. when Credit side> Debit side.

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Simerpreet
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  2. Karishma
    This answer was edited.

    Debit Balance A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise. Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr. Credit Balance ARead more

    Debit Balance

    A debit accounting entry represents an increase in asset or expense account or a decrease in liabilities of an individual or enterprise.

    Debit balance is the amount in excess of debit entries over credit entries in the general ledger. The debit balance is shown as Dr.

    Credit Balance

    A credit accounting entry represents a decrease in assets or an increase in liabilities or income accounts of an individual or enterprise.

    Credit balance is the amount in excess of credit entries over debit entries in the general ledger. The credit balance is shown as Cr.

     

    Debit Balance in the Passbook

    A passbook is a record of a customer’s account transactions kept by the bank. The passbook is a copy of the bank account of the customer in the books of banks. Debit balance in the passbook is also called “Overdraft”.

    All the transactions either debit or credit are recorded in the passbook. When the total amount of all debit entries in a passbook is more than the total of credit entries, it results in a debit balance. It means that an individual or enterprise owes to the bank.

    The overdraft facility given by the bank has a limit i.e. only a certain amount can be withdrawn in excess of the amount deposited and if one avails overdraft facility, interest is also charged by the bank.

    The amount withdrawn by a customer from the bank is shown as a debit entry and the amount deposited by the customer is shown as a credit entry. The passbook’s debit balance is a negative balance or unfavourable balance while the passbook’s credit balance is a positive or favourable balance.

    For example: An individual deposited $50,000 in a bank account and withdrew a total sum of $60,000. So here, the passbook will show an overdraft of $10,000 i.e. the debit balance of the passbook. It signifies negative cash flow of the individual and that individual owes $10,000 to the bank.

     

    Credit balance in Pass Book

    On the other hand, when the total amount of all the debit entries in a passbook is less than the total amount of credit entries, it results in a credit balance. It means the amount deposited by a customer is more than the amount withdrawn indicating the positive cashflow in the account.

     

    Reconciliation

    It is the process of identifying and rectifying differences between the passbook and cashbook maintained by the bank and customer respectively. The aim is to ensure the accuracy of the transaction recorded in the cashbook and passbook.

    Debit Balance Reconciliation

    The debit balance in the cashbook and the credit balance in the passbook shows that some outstanding cheques are in the process of clearing and these cheques need to be adjusted for reconciliation of the balance of the passbook and cashbook.

    Credit Balance Reconciliation

    The credit balance in the cashbook and debit balance in the passbook shows that deposits already recorded in the cashbook are yet to be recorded in the passbook by the bank and these deposits need to be adjusted in the passbook for reconciliation of the balance of the passbook and cashbook.

    Conclusion

    The debit and credit balance of the passbook is the indicator of the financial position of an enterprise or individual. A debit balance signifies more withdrawals than receipts resulting in an overdraft.

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Simerpreet
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  2. Saurav
    This answer was edited.

    Debit balance means excess of credit side over debit side. For Example- At the beginning of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end therRead more

    Debit balance means excess of credit side over debit side.

    For Example- At the beginning of the year the debit balance of trade receivables is 3,000 and there is a decrease(credit) of trade receivables of 1,000 during the year and an increase(debit) of trade receivables of 4,000 then at the end there will be a debit balance of 6,000 of trade receivables at the end

    A Debit balance basically signifies all expenses and losses and all positive balances of assets. The debit balance increases when any asset increases and decreases when any asset decreases.

    Assets

    All the assets that appear in the balance sheet always have a debit balance. The debit balance under it will increase as it debits. Some of these assets can be illustrated below -:

    •  Cash and Bank Balance: Cash and Bank Balance means the amount that is held by a person in physical form or in a current/savings account.
    • Property, Plant, and Equipment-  Property Plant, and Equipment means assets that are used for the production of goods and services.
    • Account Receivables– Account Receivables means the amount that is due from debtors to whom goods were sold at credit for a specified time period.
    • Inventory – Inventory means goods that are used in the normal course of business.
    • Investments– Investments are the amount invested in other companies from which they were expecting returns in future periods.

     

    Expenses and Losses

    All expenses that appear on the debit side of the P&L account have a debit balance in their accounts.

    For eg-: A rent of 10,000 is given to the landlord under which the work has been done by the entity.

    For eg-: A depreciation of 10% is there on an asset of 12,000 will result in a debit balance under depreciation in the P&L Account.

    Some of the following expenses can be illustrated below

    • Rent- Rent means a property that an entity takes on lease for business purpose and pay a certain amount to the landlord for such lease.
    • Depreciation– Depreciation means a fall in the value of an asset due to its usage every year
    • Loss on Sale of an asset- Loss on the Sale of an Asset means the sale amount of the asset is less than its WDV
    • Printing and stationery– Printing and Stationery means the paperwork or anything related to stationery used for business purposes
    • Audit fees– Audit fees are the amount which is given to an auditor for auditing the financials of an entity
    • Salaries and Wages– Salaries and Wages are the amount given to employees for the work they have done for the entity
    • Insurance– Insurance means a premium given by an entity for insurance done by them
    • Advertising– Advertising means any promotion that a company does of its product to increase its revenue

    So after seeing all the above points we can conclude that the debit balance includes all the expenses that are in the P&L account and all the assets that are there in the Balance sheet. So its balance increases when there is an increase in its account.

     

    CREDIT BALANCE

    Credit balance means excess of credit side over debit side.

    For example, At the beginning of the year, the credit balance of trade payable is 3,000 and there is a debit of trade payable of 1,000 during the year and an increase(credit) of trade payable of 4,000 then at end there will be a credit balance of 6,000 for trade payable at the end

    .A Credit balance signifies all income and gains and all liabilities and capital that is there in business.

    Liabilities

    • Account Payables
    • Bank Overdraft
    • Bonds
    • Income Tax Payables
    • Notes Payable
    • Deferred Tax Liability

     

    Income and Gains

    • Interest Received
    • Dividend Received
    • Rent Received
    • Gains on Sale of Capital Gains

     

     

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  2. Kajal
    This answer was edited.

    Trading A/c is a nominal account which follows the rule "Debit all expenses and losses, Credit all incomes and gains". So, all expenses relating to the purchase or manufacturing of goods are shown on the debit side of the Trading A/c. It includes Opening Stock, Purchases, Wages, Carriage Inward, ManRead more

    Trading A/c is a nominal account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”.

    So, all expenses relating to the purchase or manufacturing of goods are shown on the debit side of the Trading A/c. It includes Opening Stock, Purchases, Wages, Carriage Inward, Manufacturing Expenses, Dock charges, and other direct expenses that are directly related to the manufacturing or purchase.

     

    TRADING ACCOUNT

    Trading A/c is prepared for calculating the Gross Profit or Gross Loss arising from the trading activities of a business.

    Trading activities are mostly related to buying and selling of goods. However, in between buying and selling, a lot of activities are involved like transportation, warehousing, etc. So, all the expenses that are directly related to manufacturing or purchase of goods are also recorded in the Trading A/c.

     

     

    DEBIT SIDE OF TRADING A/C

    The items shown on the Dr. side are,

    OPENING STOCK – Stock is nothing but goods that are either obtained for resale or manufactured for sale and are yet unsold on any particular date.

    The value of stock at the beginning of an accounting year is called Opening stock while the value of the stock at the end of an accounting year is called closing stock.

    The closing stock of the last year becomes the opening stock of the current year.

    Opening stock includes,

    1. Opening Stock of Raw materials
    2. Opening Stock of Semi-finished goods
    3. Opening Stock of Finished goods

    For example – Suppose you are in the business of manufacturing and trading shirts. On 31st March 2023, there was unused raw material worth $10,000 and shirts worth $50,000 remained unsold.

    So, we have Closing Stock of Raw material – $10,000

    Closing Stock of Finished Goods – $50,000

    This closing stock of last year becomes your opening stock during the current year i.e. on 1st April 2023, we have

    Opening Stock of raw material – $10,000

    Opening Stock of Finished Goods – $50,000

    PURCHASES – Goods that have been bought for resale or raw materials purchased for manufacturing the product are terms as Purchases. These goods must be related to the business you are doing.

    It includes cash as well as credit Purchases.

    Continuing with the above example, suppose you bought raw material worth $ 1,00,000 for manufacturing and shirts worth $50,000 for resale (and not for personal consumption) then both these will be termed as purchases for you. So, your purchases will be $1,50,000 ($1,00,000 + $50,000)

    PURCHASES RETURN – When goods bought are returned to the suppliers due to any reason. This is known as Purchase return. Purchase return is deducted from the Purchases.

    In the above example, you bought shirts worth $50,000 for resale. Out of which shirts worth $20,000 were defective. So, you returned them to the supplier. This return of $20,000 is your purchase return or return outwards (as goods are going out)

    WAGES – Wages are paid to the workers who are directly engaged in the loading, unloading and production of goods.

    For example – Paid $10,000 to workers for manufacturing shirts.

    However, it would be included in Trading A/c only if the wages are paid for work which is directly related to the manufacturing or purchase of goods otherwise it will be shown in P&L A/c.

    Suppose you hired a manager to take care of your business and paid him $20,000 as salary. This salary is indeed an expense for the business but is not directly related to the manufacturing of goods. Since it is an indirect expense, it can only be recorded in P&L  A/c and not in the Trading A/c.

    CARRIAGE or CARRIAGE INWARDS or FREIGHT – It refers to the cost of transporting goods from the supplier.

    Suppose, you ordered raw material in bulk which was transported to you by a van and you paid its fare. This fare is nothing but your carriage inwards.

    However, if carriage or freight is paid on bringing an asset, the amount should be added to the asset account and must not be debited to the trading account.

    MANUFACTURING EXPENSES – All expenses incurred in the manufacture of goods such as  Coal, Gas, Fuel, Water, Power, Factory rent, Factory lighting etc.

    DOCK CHARGES – These are charged by port authorities when unloading goods at a dock or wharf. Such charges paid in connection with goods purchased are considered direct expenses and are debited to Trading a/c.

    IMPORT DUTY or CUSTOM DUTY – It is a tax collected on imports and specific exports by a country’s customs authorities. If import duty is paid on the import of goods, then they are shown on the Dr. side of the Trading A/c.

    For example –  Paid $15,000 as import duty for importing shirts for resale.

    ROYALTY – Royalty refers to the amount paid for the use of assets belonging to another person. It includes royalty for the use of intangible assets, such as copyrights, trademarks, or franchisee agreements. It is also paid for the use of natural resources, such as mining leases.

    Royalty is charged to the Trading A/c as it increases the cost of production.

    GROSS PROFIT – When sales exceed the amount of purchases and the expenses directly connected with such purchases i.e. when Credit side> Debit side.

     

    CREDIT SIDE OF TRADING A/C

    SALES – When goods are sold to earn a profit, it is called sales. It can be cash sales or credit sales.

    SALES RETURN – When the goods sold are returned by the customer, it is known as a sales return. Sales return is deducted from the sales.

    CLOSING STOCK – The goods remaining unsold at the end of the year are termed as closing stock. It is valued at cost price or market price whichever is less.

    GROSS LOSS – If purchases and direct expenses exceed sales, then it is a Gross loss. In other words, when Debit side > Credit side.

     

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