The profit earned by an entity is determined through the profit and loss account. All the expenses are recorded on the debit side of the profit and loss account while all the incomes are recorded on the credit side. The profit is shown as the credit balance of profit and loss A/c. When the sum of itRead more
The profit earned by an entity is determined through the profit and loss account. All the expenses are recorded on the debit side of the profit and loss account while all the incomes are recorded on the credit side.
The profit is shown as the credit balance of profit and loss A/c. When the sum of items on the debit side of a profit and loss account is less than the sum of those on the credit side, it implies profit while when the sum of the items on the credit side is less than the sum of those on the debit side, it implies a loss for the entity.
The Reason for Credit
Profit is recorded as an increase in equity
To understand the reason why profit is recorded as a credit balance, we must first understand the basic principle of debit and credit.
The basic principle of debits and credits is that debits increase asset accounts and decrease liability and equity accounts while credits decrease asset accounts and increase liability and equity accounts.
The revenue that a company earns is credited to the income account and increases equity.
The expenses that a company incurs to earn that revenue are debited to the expense account and decrease equity.
The difference between revenue and expenses is the profit, which is recorded as an increase in equity.
Increase in equity due to revenue – decrease in equity due to expense = profit
Gross Profit Vs Net Profit
Revenue is the total income that a business or profession earns. Profit is the excess revenue that remains after reducing all expenses from it.
Gross profit is the profit that a company earns after reducing the cost of goods sold from sales revenue while net profit is the profit that a business earns after reducing the total of all its direct and indirect expenses from its direct as well as indirect allowable business income.
Conclusion
The basic principle of debit and credit governs the classification of profit as a debit or credit. Since profit increases our equity, it is a credit.
In the case of a company, it belongs to the shareholders. It is usually recorded in the retained earnings account. Profit can be reinvested in the business or can be distributed as a dividend. In the case of a sole proprietorship, the profit belongs to the owner and is recorded in the owner’s capital account.
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Meaning The term ‘Sundry creditors’ consist of two words: ‘Sundry’ and ‘creditors’. The word ‘sundry’ means the items which are not significant enough to be named separately. It also refers to a collection of miscellaneous items. Creditors are the person from whom money is borrowed or goods are puRead more
Meaning
The term ‘Sundry creditors’ consist of two words: ‘Sundry’ and ‘creditors’.
The word ‘sundry’ means the items which are not significant enough to be named separately. It also refers to a collection of miscellaneous items.
Creditors are the person from whom money is borrowed or goods are purchased on credit by a business or a non-business entity. They have to be repaid after a period of time which is usually less than or up to one year.
By combining the meaning of both words, ’sundry’ and ‘creditor’, the term ‘sundry creditor’ will refer to the collection of insignificant creditors of an entity.
Back in the days when accounting records were maintained on paper, only the records of those creditors were maintained separately, from whom goods are purchased regularly and in large amounts.
But there used to be numerous other creditors with whom the transactions were occasional and insignificant. To reduce the paperwork, records of all such creditors were maintained on a single page or book under the head ‘Sundry Creditors’
Nowadays, as accounting records are maintained digitally, hence maintaining records of each and every creditor is not a problem.
Hence, every creditor whether small or big, is grouped under the head ‘Sundry creditor’ or ‘Trade Creditor’.
Accounting Treatment
Sundry creditors are the persons to whom a business owes money.
Hence, as per golden rules of accounting, Sundry creditor is a personal account and the golden rule for personal account is, ‘Debit the receiver and credit the giver’
We know sundry creditors are liabilities, hence, as per modern rule of accounting, sundry creditors are credited in case of increase and debited in case of decrease.
Example, a business purchased goods for Rs. 10,000 from ABC & Co. The journal entry will as follows:
Here, ABC & Co is the creditor. It is credited as it is a personal account and the creditor has given the goods to the business, hence the giver is credited.
From point of view of modern rules of accounting, ABC & Co. is a creditor, a liability. On purchase of goods on credit, a liability is created. Hence, ABC & Co A/c is credited.
Balance sheet
Sundry creditor is a current liability, so it is shown on the liabilities side of a balance sheet. Trade payable and accounts payable mean sundry creditors only.
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