Points to remember :

All items which appear in the information part should be shown only once for the same amount whereas items which
appear outside the Trial Balance, known as adjustments, have to be shown at two places.

Accounting Items

A. Balance Sheet Items

Fixed Assets : Fixed assets are those assets which are held permanently by a business. These assets have a
long life and remain in the business for a longer period. They help the business in earning the future expected
profits. e.g., plant and machinery, land and building, furniture and fixtures, vehicles etc.

Current Assets: Current assets are those assets, which can be converted into cash within a short period,
usually one year. Following are the examples of current assets:

Cash : Cash consist of funds which are readily available for disbursement without restriction. Most of these
funds are usually on deposit with the banker ( known as cash at bank) and the balance in the temporary
storage facilities ( cash box) on the business premises ( known as cash in hand).

Investment: Investments are easily marketable securities and are generally converted into cash within the
accounting period.

Sundry Debtors : Sundry Debtors are amounts owed to the business generally by its customers arising out of
credit sales.

Bills Receivable: Bills receivables are acknowledgement of debts of the customers. When the amount owed
by debtors are evidenced by a written acknowledgement of obligation, it would appear not under the head
“Sundry Debtors” but under the head “Bills Receivables”.

Stock: Stock is a inventory of raw materials, half-finished goods or work-in-progress and finished goods.

Prepaid Expenses : Prepaid expenses are the expenses which are already incurred but the benefit is spread
over to more than one accounting period.

Accrued Income : Income that is earned in a fund or by company by providing a service or selling a product,
but has yet to be received. Mutual funds or other pooled assets that accumulate income over a period of time
but only pay it out to shareholders once a year are, by definition, accruing their income.

2. Liabilities: The term liability denotes claims against the assets of the business by the outsiders and the
proprietor. i.e., liabilities are the amounts owed by the business to the owners and the outsiders.

1. Internal Liabilities: Internal Liabilities denote proprietor’s equity, which consists of capital, reserve and net
profit. In case of a net loss, it is deducted from capital.
2. External Liabilities: External liabilities are the claims of outsiders against the assets of the business. They
are loans taken, creditors, bills payable, bank overdraft etc. External liabilities are classified into long-term
liabilities and short-term liabilities.

a. Long-Term Liabilities or Fixed Liabilities: Long term liabilities are repayable after a long period of time
and not repayable in one year. They do not require current assets for repayment Viz. loan on mortgage,
debentures, long term loan from banks or other financial institutions.

b. Current Liabilities: Current liabilities are those liabilities which are usually payable within a year.
Generally they are paid out of current assets or by creation of current liabilities. The following are the current
liabilities in a business.

(i) Accounts payable or bills payable and trade creditors,

Explanation of some liability items categorized abobe:

a. Capital: It is shown in the Balance Sheet on the liabilities side as the excess of assets over liabilities. It
denotes a debt of the business to the proprietor. i.e, it is the amount contributed by the owners of the
business. Capital is one of the major sources through which the major part of business requirement is met.

b. Reserve: It is a portion of profit, not yet paid to the proprietor. It is kept aside to strengthen the
financial position of the business and is shown on the Liabilities Side of the Balance Sheet.

c. Loan: If money is borrowed by the business from somebody for the purpose of the business, it is
credited to Loan Account. It is a liability of the business and is shown on the liabilities side of the Balance
Sheet. If any interest on loan is outstanding, such outstanding interest is also shown in the liabilities side
of the Balance Sheet as a separate item named ‘Outstanding Interest’.

Conversely, if any loan is granted to any person by the business, ‘Loan Account’ is debited as an asset. It
is to be shown on the assets side of the Balance Sheet. Any interest accrued but not received is also shown
on the assets side as a separate item named ‘Accrued Interest’.

d. Bank Overdraft: When the business withdraws money from the bank in excess of its deposits with or
without a previous arrangement with that bank, the excess amount so withdrawn is known as ‘Bank
Overdraft’.

e. Bills Payables: Bills Payables are the claims of the outsiders called suppliers against the business. In
other words, it is a written acknowledgement of debt.

f. Liabilities for Outstanding Expenses: It signifies the liability of the business for expenses incurred
during this year and will be shown on the ‘Liabilities Side’ of the Balance Sheet.

g. Creditors/ Sundry Creditors: Creditors/ Sundry Creditors are the suppliers of goods to the business on
credit. In other words, it is the claim from outsiders against the business.
 h. Incomes received in advance: Incomes received in advance are the incomes received but the service of
such income received shall be rendered in future. For example advance commission from customer or rent
received from tenant.

Income Statement Items:

(1) Opening Stock (Opening Inventory): The stock of goods remains unsold at the end of the last year is termed as the
opening stock of the current year. In other words, the closing stock of the last year becomes the opening stock of the
current year. This item is shown as the first item on the debit side of the Trading Account. It should be kept in mind that
there will be no opening stock in case of newly started business. Opening Stock will include the Stock of Raw Materials,
Semi-finished goods and finished goods. This item appears on the debit side of the trial balance. Stock of goods is also
termed as inventory and, therefore, opening stock is termed as opening inventory.

(2) Purchases: Purchases includes goods which have been bought for resale. The amount of purchases appearing in the
trial balance includes cash purchases as well as credit purchases. Purchases account shown debit balance and hence it
appears on the debit side of the Trial balance. While preparing the final account, it is shown on the debit side of the
Training Account.

(3) Purchases Returns: When goods are returned by the business, for some reasons, “Returns Outwards Account” or
“Purchase Returns Account” is credited in the books of account and supplier’s account is debited. “Purchases Returns
Account” shows credit balance and appears on the credit side of the Trial Balance. There are two ways of showing
purchase returns in the Trading Account. It may be shown by way of deduction from Purchases on the debit side of the
Trading Account or it may be shown on the Credit side of the Trading Account. However, normally it is shown by way of
deduction from Purchases in order to show the figure of net purchase in the Trading Account.

(4) Direct Expenses: In case of a trading concern, all expenses incurred in purchasing the goods, bringing them to the
godown and into saleable condition are treated as direct expenses and charged to trading account. For example, carriage
inward, freight, wages etc. In case of manufacturing concern, cost of converting the raw materials into finished products
form part of direct expenses. Direct expenses to be debited to trading account include the following :

(a) Wages: Wages are paid to workers who are engaged in the production of goods and as such are debited to the trading
account. While preparing Trading Account, it should be noted that :

a) If the item ‘Wages and Salaries’ is given in the problem, it will be shown in the trading account. On the contrary, if
‘Salaries and Wages’ is given it will be shown in the profit & loss account.

b) If wage are paid for bringing a new machine or for its installation it will be added to the cost of the machine and hence
such expenses or wages will not be shown in the trading account.

(b) Carriage or Carriage Inward or Freight: Carriage or Carriage Inward or Freight is the expenses which are paid for
bringing the goods to the shop or to the factory and hence should be debited to trading account. However, if any carriage
or freight is paid for carrying charge of an asset, the amount should be added to the asset account and should not be
debited to trading account.

(c) Manufacturing Expenses: Manufacturing Expenses such as Coal, Gas, Fuel, Water, Power, Factory Rent, Factory
Lighting etc. are the expenses which are incurred in the manufacture of goods and hence these are shown on the debit side
of the Trading Account (where manufacturing account is not prepared).

(d) Dock Charges: Dock Charges are the charges levied on ships and their cargo while entering or leaving docks. If dock
charges are paid on import of goods they are shown on the debit side of trading account. If dock charges are paid on
export of goods they are shown on the debit side of the Profit and Loss account. In the absence of specific instructions,
these are debited to trading account.
(e) Import Duty or Custom Duty: Custom Duty is paid on import as well as on export of goods. Custom duty when paid
on the purchase of goods is charged to trading account and when it is paid on the sale of good it is charged to profit and
loss Account. In the absence of specific instructions, these are debited to trading account.

(f) Excise Duty: Excise Duty is the amount of duty or charges paid to the government on goods manufactured and is,
therefore, debited to the trading account.

(g) Octroi: Octroi is the amount levied by the municipal authority when the goods enter the city and hence debited to
trading account because they are connected with purchases.

(h) Royalty: Royalty is the amount paid to the owner of a mine or patent for using his right or patent. Where the payment
of royalty is based on production, it is usually charged to trading account because it increases the cost of production.
However, if it is specifically started in the problem that the Royalty is payable on the basis of sales, it will be charged to
Profit and Loss Account.

(i) Packing Charges/Packing Expenses: Packing material is used for packing of materials at different stages.

(a) If packing charges are incurred to make goods saleable or to bring it in a saleable condition, these are direct
expenses. They are as such debited to the Trading Account.

(b) If the packing expenses are connected with sales or they have been incurred after the goods have been sold, they are
treated as selling expenses and are debited to the Profit and Loss Account.
For example, a manufacturer of biscuits sell biscuits packed in poly packs. In order to make the biscuits available in
saleable condition, this primary packing is necessary. Therefore, they are treated as direct expenses. Now, a person
purchases three packets of such biscuits and the seller packs these three packets for handing over the purchaser, the
expenses incurred on such secondary packing is indirect and will be treated as selling expenses and debited to Profit and
Loss Account.

5) Sales: Sales account appearing in the Trial Balance, shows the total sales made during the accounting period. This
includes both cash and credit sales. Sales account shows credit balance. It is treated as revenue and as such it is shown
on the credit side of the Trading Account. In respect of sales, the following points must be noted :

1) Only the sale of goods is treated as sales for the purpose of preparation of Trading Account.
2) If sales include sale of fixed asset, it should be deducted from sales.
3) If any goods have been sold on approval and included in sales, it should be deducted from sales, if the approval
period has not expired. Such sales should be recorded separately.
(2) Sales Return: When goods are returned by the buyers, for some reasons, “Returns Inwards Account” or “Sales Return
Account” is debited in the books of account and the buyer’s account is credited. ‘Sales Return Account’ appears on the
debit side of the Trial Balance. There are two ways of showing sales returns in the Trading Account. It may be shown by
way of deduction from sales in the Trading Account. An alternative way to show the sales returns is to put it in the debit
side of the Trading Account. But normally it is shown by way of deduction from sales in order to show the figure of net
sales.

(6) Closing Stock (Closing Inventory): The goods remain unsold at the end of the year is known as Closing Stock. It is
valued at cost price or market price whichever is less. It includes the Closing Stock of raw material, Closing Stock of
semi-finished goods and Closing Stock of finished goods.

(7) Indirect Expenses: Each and every business house is required to incur some other expenses other than the direct
expenses in course of their day to day business activities. Such expenses include expense of revenue nature other than the
direct expenses such as Office and Administrative expenses, Selling and Distribution expenses, financial charges etc.
These expenses are termed as indirect expenses because they are not directly related to purchase of goods and bringing
them into saleable condition. Indirect expenses debited to profit and loss account are state below :

(a) Office and Administrative Expenses: Expenses such as salary of office employees, office rent, lighting, postage,
printing, stationery, audit fee, legal charges etc. are treated as Office and Administrative Expenses.
 (b) Selling and Distribution Expenses : Expenses such as advertisement charges, commission, carriage outwards, bad-
debts, packing charges etc. are treated as Selling and Distribution Expenses.

(c) Financial Charges: Expenses such as interest on loan, interest on capital, interest on overdraft etc. are treated as
financial charges.

(d) Miscellaneous Expenses: Expenses such as interest on loan, interest on capital, repair charges, depreciation, charity
etc. are treated as Miscellaneous Expenses.

(e) Other Losses: Such as loss by fire, loss due to accident etc.

(f) Bad Debt : A debt is an amount due from an outsider to the business for the goods sold on credit. Bad debt is the
amount which is irrecoverable from the customers.

g) Provision for bad debt or Reserve for doubtful debt : This is a debt which may or may not be recovered from the
debtors. According to the convention of conservatism in accounting principles, all possible losses should be provided for
and hence this amount is also considered as an indirect expense.

h) Discount on debtors: Business generally allows cash discount to the debtors who make payments promptly.

i) Prepaid expense : This is the expense which is paid in advance and whose benefit is yet to be received.

J) Outstanding expenses : These expenses are those expenses which are due to be paid in current year but have not been
paid. They include salaries, rent, commission etc.

k) outstanding income : This income must have been received during the year but is not received either fully or partly.