Preparation of Earnings and Decline Account

Explanation of Sure things of Income and Loss Account

1. Salaries

Salaries are paid out ?quickbooks training for your products and services of personnel and are debited to earnings and loss ac- count getting indirect cost. If any salary is paid out to proprietor or companions, it should be demonstrated independently as it calls for special therapy in the time of revenue tax evaluation.

two. Salaries and Wages

When wages account is included with salaries it taken care of is as indirect expense and is taken into income and decline account.

three. Rent

Hire in the workplace store showroom or godown is really an indirect expenditure and so is debited to earnings & reduction account. However, rent of factory is debited to trading account. When a part of your building has actually been sublet the lease received must be shown on the credit side of profit and loss account as a separate item.

4. Rates and Taxes

These are levied by the local authorities to meet public expenditure. It getting an oblique expenditure is revealed on the debit side of earnings and loss account.

5. Interest

Interest on loan, overdraft or overdue debts is payable by the firm. It is undoubtedly an oblique expense; so debited to revenue and decline account. Interest on loan advanced by the firm on depositor investments is an earnings of the firm and so is credited to the financial gain and reduction account.

If business has paid out any interest on capital to its proprietor or partners it need to also be debited in the gain and reduction account but independently for the reason that this item needs unique therapy for the time of income-tax evaluation.

6. Commission

In business sometimes agents are appointed to effect sales, who are paid commission as their remuneration. So this being a selling expenses is shown on the debit side of income and loss account. Sometimes commission is also compensated on purchases of goods, such 'as expense should really 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 financial gain and loss 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 addressed expenditure and therefore are debited to gain and reduction account..

9. Traveling Expenses

Unless mentioned otherwise, traveling expenses are taken care of as oblique expenses and are debited to earnings and reduction account.

10. Horse & stable Expenses

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

11. Apprentice Premium

This is the amount charged from persons to whom training is imparted by the business. It is surely an cash flow and is also credited to income 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 revenue 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 decline, so is debited in the financial gain and decline account.

13. Life Insurance Premium

If the premium is paid on the life policy of the proprietor of the business; it is dealt with as his drawings which is proven by way of deduction from the capital account. It must not be taken to financial gain and loss account.

14. Insurance Premium

If insurance premium account appears in the trial balance, it stands with the insurance of the business. This is taken to earnings and decline account. Insurance premium on goods purchased, factory building, factory machines are dealt with as direct price and therefore are taken to trading account.

15. Cash flow Tax

In the case of merchant income-tax compensated is addressed as a personal cost and is revealed by way of deduction from capital account. Income-tax in case of companies is taken care of 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 income 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 reduction account at a fixed percentage. The students must exercise great care as regards the rate of depreciation. If rate is without words 'per annum', then the rate will be taken irrespective with 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 should really be calculated on the assets with due consideration to the period for which the asset has actually 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 that sale of assets during the year.

18. Stock with 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 profit and reduction account or balance sheet. Since stock within the end is undoubtedly 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.