Preparation of Income and Loss Account

Clarification of Selected things of Revenue and Reduction Account

one. Salaries

Salaries are paid out ?quickbooks to the companies of workforce and they are debited to revenue and reduction ac- depend becoming oblique price. If any wage is paid to proprietor or associates, it should be demonstrated individually since it necessitates distinctive therapy at the time of cash flow tax assessment.

two. Salaries and Wages

When wages account is provided with salaries it taken care of is as indirect expense and is also taken into revenue and loss account.

three. Lease

Hire in the place of work store showroom or godown is surely an indirect price and so is debited to revenue & reduction account. However, rent of factory is debited to trading account. When a part on the building has long been sublet the lease received really should be shown on the credit side of earnings and loss account as a separate item.

4. Rates and Taxes

These are levied by the local authorities to meet public expenditure. It becoming an indirect expenditure is proven on the debit side of financial gain and reduction account.

5. Interest

Interest on loan, overdraft or overdue debts is payable by the firm. It can be an indirect expense; so debited to financial gain and decline account. Interest on loan advanced by the firm on depositor investments is really an income of the firm and so is credited to the earnings and loss account.

If business has paid out any interest on capital to its proprietor or companions it should really also be debited in the gain and loss account but individually for the reason that this item needs specific therapy at the time of income-tax evaluation.

6. Commission

In business sometimes agents are appointed to effect sales, who are paid out commission as their remuneration. So this remaining a selling expenses is revealed on the debit side of profit and reduction account. Sometimes commission is also compensated on purchases of goods, such 'as price ought to be debited in the trading account. Sometimes the firm can also act as an agent to the other business houses and in such cases it receives commission from them. Commission so received is shown on the credit side of gain and reduction account.

7. Trade Expenses

They are also termed as 'sundry expenses'. Trade expenses represent expenses of such a nature for which it is not worthwhile to open separate accounts. Trade expenses are not taken to trading account.

8. Repairs

Repairs to the plant, machinery, building are oblique expenses are taken care of cost and they are debited to income and decline account..

9. Traveling Expenses

Unless mentioned otherwise, traveling expenses are handled as oblique expenses and are debited to revenue and decline account.

10. Horse & stable Expenses

Expenses incurred for your fodder of horses and wages paid out for looking after stable are addressed as oblique expenses and debited to revenue and loss account.

11. Apprentice Premium

This is the amount charged from persons to whom training is imparted by the business. It is undoubtedly an revenue and is particularly credited to profit and decline account. In case apprentice premium is charged in advance for two or three years, then the amount is distributed over number of years and each year's financial gain and reduction account is credited with its share of cash flow.

12. Bad debts

It is the amount which could not be recovered by the trader on account of credit sales. It is a business reduction, so is debited in the income and loss account.

13. Life Insurance Premium

If the premium is compensated on the life policy in the proprietor of your business; it is handled as his drawings and it is shown by way of deduction from the capital account. It really should not be taken to earnings and reduction account.

14. Insurance Premium

If insurance premium account appears in the trial balance, it stands for your insurance of your business. This is taken to revenue and loss account. Insurance premium on goods purchased, factory building, factory machines are taken care of as direct expenditure and therefore are taken to trading account.

15. Revenue Tax

In the case of merchant income-tax paid out is handled as a personal cost and is particularly demonstrated by way of deduction from capital account. Income-tax in case of companies is handled differently.

16. Discount allowed and Received

Discount is a reward for prompt payment. It is belief to show discount received and discount allowed individually on the credit and debit side of financial gain and loss account respectively instead of showing the net balance of this account.

17. Depreciation

Depreciation is a reduction incurred on account of use of fixed assets in the business. Generally, it is charged from profit and decline account at a fixed percentage. The students should really exercise great care as regards the rate of depreciation. If rate is without words 'per annum', then the rate will be taken irrespective in the period of accounts. This is very important when the period of accounts is less than one year. On the other hand, if the rate of depreciation is 'per annum' the depreciation ought to be calculated on the assets with due consideration to the period for which the asset has been used in business during the year. In case of additions to assets during the year, it is advisable to ignore depreciation on additions if the date of additions is not given. Same rule shall hold good for the sale of assets during the year.

18. Stock within the end appearing in the trial balance.

It is important to emphasize the rule that balance appearing in the trial balance is taken to one and only one place. It may either be trading account or financial gain and reduction account or balance sheet. Since stock with the end can be an asset, it will betaken to balance sheet. On the other hand, so long as there is stock in trade, account for that must be kept open and thus be taken to the assets side of balance sheet.