Page 162 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes capitalised. If the membership fee permits only membership and all other services
or products are paid for separately, or if there is a separate annual subscription, the
fee should be recognised when received. If the membership fee entitles the member
to services or publications to be provided during the year, it should be recognised
on a systematic and rational basis having regard to the timing and nature of all
services provided.

Self Assessment

Fill in the blanks:
5. …………………… from service transactions is usually recognised as the service is
performed, either by the proportionate completion method or by the completed service
contract method.

6. Revenue is the …………………… receivables or other considerations.

8.5 Final Accounts with Adjustments

Final accounts are prepared from the various balances depicted by the Trial Balance. Some
balance of the Trial Balance accounts are used to prepare the Trading Account and some for the
preparation of the Profit & Loss Account and the remaining balances are transferred to the
Balance Sheet. Thus all the balances of accounts of the Trial Balance are used in the final accounts.
Therefore the preparation of final accounts is the final stage of accounting.

8.5.1 Trading and Profit & Loss Account

In the Trading and Profit & Loss Account all those accounts are disclosed which affect the profit
or loss of the business. In other words all the nominal accounts of the Trial Balance are used to
prepare the Trading and Profit & Loss Account. In the left hand side, all the expenses incurred
during a period and in the right hand side all the incomes earned during a period are disclosed.
This account contains two parts:

 Trading Account
 Profit & Loss Account

8.5.2 Trading Account

Trading account is the comparison of sales and purchase. This account is prepared to determine
the amount of gross profit or gross loss on sales. Trading account is prepared to know the
trading result. Trading result indicates gross profit or loss of the trading period. Gross profit or
loss is the difference between selling price and purchase price of the goods sold. If selling price
of the goods sold is more than the purchase price, the difference is known as gross profit. On the
contrary, when the situation is reverse, the difference is termed as gross loss. Here, purchase
price includes the cost of shipment and other direct expenses incurred until the goods reach the
point of sale and to make the goods ready for sale, if any. The proforma of Trading Account is
given.

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