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Slide 1: ==== ==== Let me help you create the life you desire. http://lnk.co/H7VIT ==== ==== Explanation of Certain items of Profit and Loss Account 1. Salaries Salaries are paid for the services of employees and are debited to profit and loss ac- count being indirect expense. If any salary has been paid to proprietor or partners, it should be shown separately because it requires special treatment at the time of income tax assessment. 2. Salaries and Wages When wages account is included with salaries it treated is as indirect expense and is taken into profit and loss account. 3. Rent Rent of the office shop showroom or godown is an indirect expense and so is debited to profit & loss account. However, rent of factory is debited to trading account. When a part of the building has been sublet the rent received should 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 being an indirect expenditure is shown on the debit side of profit and loss account. 5. Interest Interest on loan, overdraft or overdue debts is payable by the firm. It is an indirect expense; so debited to profit and loss account. Interest on loan advanced by the firm on depositor investments is an income of the firm and so is credited to the profit and loss account. If business has paid any interest on capital to its proprietor or partners it should also be debited in the profit and loss account but separately because this item needs special treatment at the time of income-tax assessment. 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 profit and loss
Slide 2: account. Sometimes commission is also paid on purchases of goods, such 'as expense should 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 profit 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 indirect expenses are treated expense and are debited to profit and loss account.. 9. Traveling Expenses Unless mentioned otherwise, traveling expenses are treated as indirect expenses and are debited to profit and loss account. 10. Horse & stable Expenses Expenses incurred for the fodder of horses and wages paid for looking after stable are treated as indirect expenses and debited to profit and loss account. 11. Apprentice Premium This is the amount charged from persons to whom training is imparted by the business. It is an income and is credited to profit and loss 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 profit and loss account is credited with its share of income. 12. Bad debts It is the amount which could not be recovered by the trader on account of credit sales. It is a business loss, so is debited in the profit and loss account. 13. Life Insurance Premium If the premium is paid on the life policy of the proprietor of the business; it is treated as his drawings and is shown by way of deduction from the capital account. It should not be taken to profit and loss account. 14. Insurance Premium If insurance premium account appears in the trial balance, it stands for the insurance of the business. This is taken to profit and loss account. Insurance premium on goods purchased, factory
Slide 3: building, factory machines are treated as direct expense and are taken to trading account. 15. Income Tax In the case of merchant income-tax paid is treated as a personal expense and is shown by way of deduction from capital account. Income-tax in case of companies is treated differently. 16. Discount allowed and Received Discount is a reward for prompt payment. It is belief to show discount received and discount allowed separately on the credit and debit side of profit and loss account respectively instead of showing the net balance of this account. 17. Depreciation Depreciation is a loss incurred on account of use of fixed assets in the business. Generally, it is charged from profit and loss account at a fixed percentage. The students should exercise great care as regards the rate of depreciation. If rate is without words 'per annum', then the rate will be taken irrespective of 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 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 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 loss account or balance sheet. Since stock at the end is 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. The author is an engineering graduate, B.E.(Hons), and is managing his own software development firm, HiTech Computer Services, that mainly deals in accounting, billing and inventory control software for traders, industries, business houses, hotels, hospitals, medical stores, newspapers, magazines, petrol pumps, automobile dealers, commodity brokers and other business segments, website and web application deveopment for business. The software are available both for intranet and internet. These software are available for download from the website: Evaluation version accounting software download is available at http://www.hitech-onweb.com/p10.asp Copy of the article and full Financial Accounting Primer or Tutorial is available at http://www.hitech-on-web.com/Accounting_Ledger.asp
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