What concepts does trading account, profit&loss account follow?

Question

I am confused on how to treat things like deferred payment, prepaid items, last year's debt that just turned bad.

Answer 1

For a trading account you need to show the results of trading ( ie buying and selling of goods ) in order to ascertain the gross profit or gross loss of your business.
Now this means you need to use only those transcations which are directly connected with goods.


A profit&loss account is prepared after the trading account and it ascertains the net profit and loss for a particular period .
The net profit is the surplous you have in your hands after charging against gross profit all the expenses including depreciation and other provisions attributed to normal activities of a business (general expenses).

Deferred payments when related to sales of goods for filing in the trading account is debited . The person who has to give you money is the debtor.
And it is his liability and your asset ,
Itll always be added to the debit column

Prepaid items are your liability as you have to provide the customer with your service and is added to the credit column as its an advance payment.
Last year's debt that just turned bad is added to debit column in the P&L account.

I hope you this is of help to you.

Have a nice day.

:)

Answer 2

1

Answer 3

Trading, and Profit & Loss account, follow the accounting period convention,(amongst others), i.e you only include expenses incurred and revenue earned within one accounting period - usually one financial year. So that brings about the need for balance day adjustments for things like prepaid rent and insurance. These are items that are paid in advance, so the expense must be reduced (credited) and an asset account created (Prepaid Expense) for the amount of the payment which does not relate to the financial period you're accounting for. Last year's debt that has gone bad is accounted for as a Bad Debt, by creating an expense account called Bad Debts and crediting the asset Accounts Receivable or Debtors to reduce it. Deferred payments are expenses which have been incurred by the business in the financial period but not yet paid, so they should be added to the expense account (debited) and credited to a liability account called Accounts Payable or Creditors. These balanced day adjustments are done on the last day of the accounting period, and must be reversed ( all except the Bad Debts) on Day 1 of the new accounting period, to avoid double counting.
Hope this helps.

Answer 4

the best trading software http://tradingsolution.info
i have attended a lot of seminars, read counless books on forex trading and it all cost me thousands of dollars. the worst thing was i blew up my first account. after that i opened another account and the same thing happened again. i started to wonder why i couldn,t make any money in forex trading. at first i thought i knew everything about trading. finally i found that the main problem i have was i did not have the right mental in trading. as we know that psychology has great impact on our trading result. apart from psychology issue, there is another problem that we have to address. they are money management, market analysis, and entry/exit rules. to me money management is important in trading. i opened another account and start to trade profitably after i learnt from my past mistake. i don't trade emotionally anymore.
if you are serious about trading you need to address your weakness and try to fix it. no forex guru can make you Professional trader unless you want to learn from your mistake.

Answer 5

Sweetie you're going to need a few more than 17 accounts to be cool!!

Answer 6

On this site you find all the details about my favourite binary trading software http://tradingsignal.toptips.org

I like it because it's very easy to use: NO complex charts… NO baffling analysis... NO complicated methods... in fact nothing to learn at all! Check the site... (the proof videos are interesting)

Answer 7

Basically, there are 10 concepts. These concepts are listed under the head "Generally Accepted Accounting Principles". Shortly, GAAPs. The GAAPs are divided into Concepts and Conventions.

Accounting concepts may be considered as postulates i.e., basic assumptions or conditions upon which the science of accounting is based.

The term ‘convention’ denotes circumstances or traditions which guide the accountants while preparing the accounting statements.

Trading, Profit & Loss Account follows the following concepts

i) Business Entity Concept:
-----------------------------------

This concept implies that a business unit is separate and distinct from the person who supplies capital to it. Business is kept separate from the proprietor so that transactions of the business may also be recorded with him.

ii) Money Measurement Concept:
-------------------------------------------

Money is the only practical unit of measurement that can be employed to achieve homogeneity of financial data, so accounting records only those transactions which can be expressed in terms of money though quantitative records are also kept.

iii) Going Concern Concept:
----------------------------------

It is assumed that the business unit has a reasonable expectation of continuing business at a profit for an indefinite period of time.

iv) Cost Concept:
------------------------

A fundamental concept of accounting closely related to the going concern concept, is that an asset is recorded in the books at the price paid to acquire it and that this cost is the basis for all subsequent accounting for the asset. This concept does not mean that the asset will always be shown at cost but it means that cost becomes basis for all future accounting for the asset.

v) Dual Aspect Concept:
------------------------------
According to this concept, every financial transaction involves two fold aspects, (a) yielding of a benefit and (b) the giving of that benefit. For ex., of a business has acquired an asset, it must have given up some other asset such as cash or the obligation to pay for it in future.

vi) Accounting Period Concept:
--------------------------------------
According to the going concern concept it is assured that a business entity has a reasonable expectation of continuing business for an indefinite period of time. This assumption provides much of the justification that the business will not be terminated, so it is reasonable to divide the life of the business into accounting periods so as to be able to know the profit or loss of each such period and the financial position at the end of such a period. Normally accounting period adopted is one year as it helps to take corrective action, to pay income tax, to absorb the seasonal fluctuations and for reporting to the outsiders. A period of more than one year reduced the utility of accounting data.

vii) Matching Concept:
-----------------------------

This concept is based on the accounting period concept. The most important objective of running a business is to ascertain profit periodically. The determination of profit of a particular accounting period is essentially a process of matching the revenue recognized during the period and the costs to be allocated to the period to obtain the revenue. It is, thus, a problem of matching revenues and expired costs, the residual amount being the net profit or net loss for the period. Revenue is considered to be earned on the date at which it is realized i.e., on the date when the goods are delivered or services rendered to the customer even though payment may be received at some future date. Revenue may also be considered to be earned at the time the cash is collected, regardless when the sale is made or service is rendered.

Like revenue, all costs incurred during the period are not taken, but only costs related to the accounting period are taken. The purchase of fixed assets is not taken, but only costs related to the accounting period are taken. The purchase price of fixed assets is not taken but only depreciation on fixed assets related to the accounting period is taken. Expenses paid in advance are excluded from the total costs and expenses outstanding are added to the total costs to arrive at the costs attached to the period.

viii) Realisation Concept:
---------------------------------
According to this concept, revenue is considered as a being earned on the date at which it is realized i.e. on the data when the property in goods passes to the buyer and he becomes legally liable to pay. However, in case of hire-purchase sales, the ownership of goods sold on hire-purchase does not pass to the purchaser when the goods are delivered but it passes when the last installment is paid. But sales are presumed to have been made to the extent of down payment, installments received and installments due, but not received.

xi) Accrual Concept:
-------------------------

The essence of accrual concept is that revenue is recognized when it is realized, that is when sale is complete or services are given and it is immaterial whether cash is received or not. Similarly, according to this concept, expenses are recognized in the accounting period in which they help in earning the revenue whether cash is paid or not. Thus, to ascertain correct profit or loss for an accounting period and to show the true and fair financial position of the business at the end of the accounting period, we make record of all expenses and incomes relating to the accounting period whether actual cash has been paid or received or not. Therefore, as a result of the accrual concept, outstanding expenses and outstanding incomes are taken into consideration while preparing final accounts of a business entity.

the last concept is Object Evidence Concept.

x) Objective Evidence Concept:
---------------------------------------
Objectivity connotes reliability, trust worthiness and verifiability, which means that there is some evidence in ascertaining the correctness of the information reported. Entries in accounting records and data reported in financial statements must be based on objectively determined evidence. Invoices and vouchers for purchases and sales, bank statements for amount of cash at bank, physical checking of stock in hand etc. are examples of, objective evidence which are capable of verification. As far as possible, every entry in accounting records should be supported by some objective evidence. Evidence should be such which will minimize the possibility of error and bias or fraud.

Evidence is not always conclusively objective for there are numerous occasions in accounting where judgments and other subjective factors play part. In such situation, it should be seen that most objective evidence available should be used. For ex., the Provision for Bad and Doubtful Debts Account is an estimate of the losses expected from failure to collect sales made on credit. Estimation of this account should be made on such objective factors as past experience in collecting debtors and reliable forecasts of future business activities.

you may not get confused with the prepaid expenses or deffered payments or bad debts.

Deferred Revenue Expenditure:
---------------------------------------
Deferred revenue expenditure is the expenditure which is originally revenue in nature but the amount spent is so large that the benefit is received for not a year but for many years. A proportionate amount is charged to profit and loss account of each year and balance is carried forward to subsequent years as deferred revenue expenditure. It is shown as an asset in the balance sheet, e.g., heavy expenditure incurred on advertisements.


Bad debts to be written off
------------------------------------
Bad Debts Account Dr.
To Sundry Debtors A/c

(i) Amount of bad debts to be debited to profit and loss account.
(ii) To be deducted from sundry debtors in the balance sheet.

Reserve for doubtful debts
------------------------------------
Profit and Loss Account Dr.
To Reserve for Doubtful Debts A/C

(i) To be debited to profit and loss account.
(ii) To be shown by way of deduction from sundry debtors in the balance sheet.

Pre-Paid expenses:
--------------------------

Pre-Paid Expenses A/c Dr.
To Expenses (Name) Accounts

(i) Amount to be deducted from particular item in the profit and loss accounts.
(ii) To be shown on the liabilities side of the balance sheet.

i think my answer is very long but it will be very useful to you.

i have given u an website address, if u visit that particular website, they have clearly explained with lot of illustrations.

ALL THE BEST!!!