Introduction

• The financial statement helps to measure the performance of the business by calculating the profit earned and loss incurred by the business and measuring the financial position of the business.

Objectives

Define and implement Trading account Define and implement Profit & loss account Use Information Systems for Financial

Accounting

TRADING ACCOUNT

An account held at a financial institution and administered by an investment dealer that the account holder uses to employ a trading strategy rather than a buy-and-hold investment strategy.

OrAn account similar to a traditional bank account,

holding cash and securities, and is administered by an investment dealer.

FORMATS OF TRADING SHEETS

Below is an eg of trading account of XYZ RECREATIONAL CLUB.

Why is trading account prepared?

• Trading a/c is created to calculate the gross profit or gross loss incurred by the business.

Uses• A trading account is appropriate in any case

where a business buys and sells goods. for example. a shopkeeper.

• A trading account is not appropriate where only services are provided. for example. a taxi driver. Where the purchase of goods is an necessary, although one may incidental part of providing a service a trading account is not be sent in.

For example:

• A plumber has to buy many kinds of materials for his job, such as pipes, fittings, solder. He may arrange with his customers to buy pieces of equipment, for example a boiler, which he supplies and fixes. Although his customers would pay for the cost of these and there may be some profit, that is not the main function of his job, and he may choose not to show this in a separate trading account. All his business activities would then be shown in a profit and loss account. If he sells any materials for the purchaser to use or resell, a trading account is required.

Contents-

• Trading a/c consist of dr(debit)side and cr(credit) side balance.

• List of Items to be posted on Debit and Credit side of Trading Account

• Here is the list of items which is to be posted on the debit side and credit side of the trading account of the company –

• Debit side of trading account• 1. Opening stock• 2. Purchase – It includes cash and credit purchases of

goods, purchase return is deducted from gross purchases.

Credit side of trading account

• 1. Sales – It includes cash and credit sales and sales return is deducted from gross sales

• 2. Closing stock – the stock lying unsold at the end of the accounting year is called as “Closing stock”

• the closing stock of current year is will be the opening stock of next year.

• 3. Gross Loss – If company makes loss then it is shown on credit side of trading account.

3. Direct Expenses – Direct expenses includes all the expenses which are directly attributable to the purchase of goods like wages, carriage inward, manufacturing expenses etc….4. Gross Profit – If company makes profit then it is shown on debit side of trading account.

Defining and Implementing a Profit and Loss Account

The result shown by the trading account is not sufficient to determine the net profit earned by the organization. Therefore, the accounts department of the organization prepares the profit & loss account. The information determined by the profit & loss account is used by the organization to control its expenses.

A Profit & loss Account is used to provide the following information:

Provide information of the net profit or loss. Enable comparison of current year’s profit

with the previous year’s profit. Exercise control over expenses by comparing

the expenses of the current year with those of the previous year.

• Equation:

• Net profit/Net loss = ( Gross profit/Gross loss - Indirect expenses + Non-sales income)

• The components are divided into:• Indirect Expenses: 1. Selling and Distribution Expenses 2. Administration and Office management expenses 3.Financial Expenses• Non-sales Income: 1. Depreciation 2. Deferred revenue expenditure

Particulars Amount ($)

Salaries 3,000

Rent 4,000

Discount allowed 400

Advertising 5,000

Freight outwards 4,000

Discount received 500

Sharp Clothing Company earned a gross profit of $ 23,700.

The following information is provided :

The Accountant of the company has to prepare the Profit & Loss account.

Particulars Amount Particulars Amount

To Salaries

To Rent

To Discount Allowed

To Advertising Expenses

To Freight Outwards

To Net Profit transferred to Capital/Equity Account

3,000

4,000

400

5,000

4,000

7,800

By Gross Profit transferred from Trading account

By Discount Received

23,700

500

24,200 24,200

Profit & Loss account of Sharp Clothing

For the year ending March 31,2004Dr. Cr.

Using Information Systems for Financial Accounting

There are two drawbacks of creating financial statements manually. First, it takes lot of time to prepare the accounts books and then to post the entries to the respective sides of the financial statements. Secondly, the financial statements generated may not be accurate.

To overcome these drawbacks, an organization can use an Accounting Information Systems(AIS). AIS is an automated way to implement the accounting process.

Accounting Information System

An organization needs to perform several finance-related business activities and make important financial decisions to satisfy its customers and improve its performance. To achieve these goals, an organization can use AIS, which is a type of a data processing systems that collects data from various sources, processes that data, and generates information to perform tasks.

Using Information Systems for Financial Accounting

There are two drawbacks of creating financial statements manually. First, it takes lot of time to prepare the accounts books and then to post the entries to the respective sides of the financial statements. Secondly, the financial statements generated may not be accurate.

To overcome these drawbacks, an organization can use an Accounting Information Systems(AIS). AIS is an automated way to implement the accounting process.

Components of AIS

The components of an AIS include data , hardware, software, network, workforce, and the Graphical User Interface(GUI).

Using Information Systems for Financial Accounting

There are two drawbacks of creating financial statements manually. First, it takes lot of time to prepare the accounts books and then to post the entries to the respective sides of the financial statements. Secondly, the financial statements generated may not be accurate.

To overcome these drawbacks, an organization can use an Accounting Information Systems(AIS). AIS is an automated way to implement the accounting process.

Benefits of AIS

An AIS accepts financial and non-financial transactions as inputs. It also helps the decision-makers by organizing these transactions.

Providing efficiency and reliability Ensuring accurate reporting Generating error-free financial statements

Types of AIS

An organization can use AIS for achieving long term goals, making financial budgets, and maintaining the financial performance of the organization. The most commonly-uses AISs are:

Tally Navision

CONCLUSION

The main objectives of financial accounting is to report business performance.

Financial statements can help analysts to assess the business performance of an organization. Its indicate whether the business has earned a profit or incurred a loss.

Its helps to implement Information systems for creating accurate financial statements.