Total cost of expanses during that month is $16,500 and the total gain is $40,700. Let us calculate either the business getting the profit or losses.
The actual net profit / loss : $40,700 - $16,500 = $24,200
If the business get the negative value, it mean the business not getting profit and have to adjust all the expanses which one have to reduce or have to improve the sales. In other situation, if business get positive value, it means the business get the profit so maybe the business has to plan how to get more profit in the next month. Maybe they have to hire more workers to improve the efficiency of produce more product to increase the profit.
The adequacy Profit and Loss Account is important report to the business situation. From here the firm will know either if the firm make a profit or losses.
If in case, the Profit and Loss Account is not prepared well or not adequacy. Probability the firm will not know the real situation of the business. This will affect to the firm situation, where the firm have wrong information. If the firm has wrong information, the decision making will be wrong. This will cause the business to be shut down or Bankruptcy.
- Balance Sheet as report business situation
Balance Sheet is also a part of financial statement. In Balance Sheet the statement needed for financial position of a business but will be preparing at a given moment in time. Balance Sheet statements are assets, liabilities and capital of a business.
Balance Sheet is slightly similar to the accounting equation. Where in balance sheet the business will find it own asset. To calculate the asset;
Assets = Capital introduced + retained profit – Liabilities
= $80,000 (Capital introduced) + $24,200 (retained profit) - $18,200 (Liabilities)
=$86,000
The assets of the business is $86,000
B) SALES RETURNS AND PURCHASES RETURNS ARE SEPARATELY IDENTIFIED FROM THE RECORDED SALES AND PURCHASES
- Returns of Goods
Mostly good are sold in credit by the business. Some good have to return back because:
- The goods defective or faulty construction
- Wrongly specification, type, quality and the size
- Goods are damaged
In business transaction good always sold on credit and usually written down in form of credit note. Credit note always sends by the seller to the buyer, which to inform the buyer account is credited in their (seller) former’s book.
There are two types of returned goods:
- Return Inward (Sales Return)
- Return Outward (Purchases Return)
- Return Inwards
In Return Inward Journal or Sales Return Book always recorded the good return by the buyer. When customer overcharged, this book also records the deduction amount in a customer’s account which refers from the copies of credit note. It’s important to separate the account from sales ledger and return inwards journal because in the return inwards journal, it had complete detail. In the return inwards journal it contain the customer’s name, goods type sold, the quantity of goods sold, the price of each good sold, sometime the discount given and some description note of returned good, rather than in the sales ledger only written down the return inwards with the amount itself without further detail. So it’s better to separate between the sales ledgers and return inward journal. Sales ledger’s also very important because it only contains the summary and the total amount of the sales.
- Return Outwards
It’s concept where sometime business also have to return back the goods to their supplier. It almost same as return inward but Return Outward or Purchases Return have to record all the good return in Return Outward Journal and the link to Purchases ledger. These transactions also use a document to be sending to the supplier. This document is called debit note. Return Outwards journal also very important to be separately from purchases ledger. But in Return Outwards journal slightly different, there’s no customer’s name and only have supplier’s name. Others contain almost same instead of sales, it is purchases. It also contains the types, quantity, value, and discount from the purchases. So it also important to be separately between the Return Outwards journal with purchases ledger for easily to get meaningful information to see the transaction detail and the summary in the ledger.
C) TYPE OF COSTS A TRADER MAY INCUR THAT WOULD NEED TO BE ADDED TO THE COST OF GOODS SOLD IN THE TRADING ACCOUNT
- Cost incur during purchases
In shipping the good it always have an additional cost to be added. The additional costs are:
- Carriage inwards
- Custom duty
- Insurance
- Carriage Inwards
If business bought goods, carriages have to pay. In business the purchases price already includes the carriage. But if the trader bought good by carriage forward so there will be additional cost to be pay separately by the trader, and this transportation cost called Carriage Inwards. This will increase the cost of purchases. In trading account we have to debited since it increase the value of purchases.
- Custom Duty
In a business sometime the goods needs to be import and export from foreign country. Mostly every country in the world gives tax to some imported and exported goods. In business’s almost all the imported or exported good given a tax. This tax is called custom duty. All the goods that business bought from foreign country have to be tax. Custom duty is part of cost incur during purchases, since it increase the value of purchases, so it’s also to be debited in trading account.
- Insurance
Insurance needed for secure reason and for unexpected problem. Sometime during shipping the goods, the ship sank to the sea so it’s important to buy insurance otherwise the business will lose their goods without anything. Business bought insurance for some purpose for reclaiming loses, if in case there’s problem occurs during transportation. Insurance also debited in trading account, it’s also increase the value of purchases.
D) NOTES TO FINANCIAL STATEMENTS
- Why Notes on Financial Statements Indispensable
Financial Statement is important because it’s the summaries and the analysis of an organization. Investor need for decision for investment purpose. Creditor need financial statement from the firm for approval their credit sales / loan. Governments need the financial statement for the taxation purpose. An auditor is enquiring for auditing purpose. Manager needed financial statement to analyst and to running business in decision making for future business planning.
These are the reasons for making the notes on Financial Statements:
- Users of Financial Statement must understand the details of the happening of the important transactions;
- Investors need the notes for investment. The investors want to know the situation of the business.
- Auditing also need this note for checking the business operation. If there any mistake in the accounting for adequacy. Sometime for checking the corruption in the business.
- Government needs the note, especially for collecting the tax. This is important because the tax is part of the government income.
REFERENCES
Study Guide of Principle of Accounting