Planning of Earnings and Decline Account

Explanation of Specified goods of Profit and Decline Account

1. Salaries

Salaries are compensated ?quickbooks videos for that solutions of personnel and they are debited to earnings and loss ac- count remaining indirect price. If any salary has become paid out to proprietor or partners, it ought to be proven individually mainly because it necessitates special treatment at the time of revenue tax assessment.

2. Salaries and Wages

When wages account is involved with salaries it treated is as oblique expenditure and is also taken into revenue and loss account.

3. Lease

Lease from the place of work shop showroom or godown is an oblique price and so is debited to revenue & reduction account. However, rent of factory is debited to trading account. When a part with the building has long been sublet the lease received ought to be revealed on the credit side of financial gain and reduction 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 demonstrated on the debit side of gain and reduction account.

5. Interest

Interest on loan, overdraft or overdue debts is payable by the firm. It is really an indirect price; so debited to income and decline account. Interest on loan advanced by the firm on depositor investments is definitely an income on the firm and so is credited to the revenue and loss account.

If business has paid out any interest on capital to its proprietor or associates it should really also be debited in the financial gain and loss account but separately mainly because this item needs particular treatment method within 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 currently being a selling expenses is proven on the debit side of profit and decline account. Sometimes commission is also paid on purchases of goods, such 'as expense 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 revealed on the credit side of earnings 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 dealt with cost and are debited to financial gain and reduction account..

9. Traveling Expenses

Unless mentioned otherwise, traveling expenses are dealt with as indirect expenses and are debited to financial gain and decline account.

10. Horse & stable Expenses

Expenses incurred for that fodder of horses and wages paid out for looking after stable are dealt with as indirect expenses and debited to gain 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 gain 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 gain and reduction account is credited with its share of profits.

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 earnings and loss account.

13. Life Insurance Premium

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

14. Insurance Premium

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

15. Revenue Tax

In the case of merchant income-tax compensated is treated as a personal cost and is also shown 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 independently on the credit and debit side of earnings and decline 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 gain and decline account at a fixed percentage. The students really should exercise great care as regards the rate of depreciation. If rate is without words 'per annum', then the rate will be taken irrespective from 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 must 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 to the sale of assets during the year.

18. Stock at 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 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.