Question

From the following m/s Hari and Om you are required to prepare trading and profit and loss account

Answer 1

From the following m/s Hari and Om you are required to prepare trading and profit and loss account

Answer 2

Answer:

I

n chapter 9, you learnt about the preparation of

simple final accounts in the format of trading and

profit and loss account and balance sheet. The

preparation of simple final accounts pre-supposes

the absence of any accounting complexities which

are normal to business operations. These

complexities arise due to the fact that the process

of determining income and financial position is

based on the accrual basis of accounting. This

emphasises that while ascertaining the profitability,

the revenues be considered on earned basis and

not on receipt basis, and the expenses be considered

on incurred basis and not on paid basis. Hence,

many items need some adjustment while preparing

the financial statements. In this chapter we shall

discuss all items which require adjustments and

the way these are brought into the books of account

and incorporated in the final accounts.

10.1 Need for Adjustments

According to accrual concept of accounting, the profit

or loss for an accounting year is not based on the

revenues realised in cash and the expenses paid in

cash during that year. There may exist some receipts

and expenses in the current year which partially

relate to the previous year or to the next year. Also,

there may exist incomes and expenses relating to the

current year that still need to be brought into books

of account. Such items duly adjusted, the final

accounts will not reflect the true and fair view of the

state of affairs of the business.

Explanation:

For example, an amount of ` 1,200 paid on July 01, 2016 towards insurance

premium. Any general insurance premium paid usually covers a period of 12

months. Suppose the accounting year ends on March 31,2017, it would mean

that one fourth of the insurance premium is paid on July 01, 2016 relate to the

next accounting year 2017-18. Therefore, while preparing the financial

statements for 2016-17, the expense on insurance premium that should be

debited to the profit and loss account is ` 900 (` 1,200 – ` 300).

Let us take another example. The salaries for the month of March, 2017

were paid on April 07, 2017. This means that the salaries account of 2016-17

does not include the salaries for the month of March 2017. Such unpaid salaries

is termed as salaries outstanding which have to be brought into books of

account and is debited to profit and loss account along with the salaries already

paid for the month of April, 2016 up to Feburary, 2017.