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Discy Latest Questions

  1. This answer was edited.

    In the Income Statement, Trading account represents the first part and Profit & Loss account represents the second part. Trading account gives the overall purview of all trading activities, such as purchase and sale of products. It is prepared to ascertain gross profit or gross loss. ProfitRead more

    In the Income Statement, Trading account represents the first part and Profit & Loss account represents the second part.

    Trading account gives the overall purview of all trading activities, such as purchase and sale of products. It is prepared to ascertain gross profit or gross loss. Profit & Loss account gives the final working results of the business. It is prepared to ascertain net profit or net loss.

    Steps to prepare Income Statement from Trial Balance

    All the debit side items related to expenses and credit side items related to income listed in the trial balance shall be posted on the debit side and credit side of the income statement respectively.

    1. Post opening stock on the debit side of the income statement.

    2. Post purchases and sales on the debit and credit side respectively. Deduct purchase return from Purchases and sales return from Sales to arrive at the Net Purchases and Net Sales.

    3. Post all the direct expenses incurred for the purchase & production of goods eg. wages, factory rent, custom duty, carriage inward, manufacturing expenses, etc on the debit side.

    4. Post the amount of closing stock stated in the adjustments.

    5. Make all the necessary adjustments, if any, related to outstanding and prepaid expenses, goods withdrawn for personal use, goods destroyed, etc

    6. Now, find out the gross profit or gross loss.
    If total of credit side > total of debit side ie. credit balance, then the amount of difference is gross profit.
    If total of debit side > total of credit side ie. debit balance, then the amount of difference is gross loss.

    7. Carry forward the ascertained gross profit to the credit side or gross loss to the debit side of the second part of the income statement ie. profit & loss account.

    8. Post all the indirect expenses such as office or administrative expenses, financial expenses, selling or distribution expenses, etc on the debit side of the income statement.

    9. Post all the indirect incomes such as commission received, rent received, dividend received, etc on the credit side of the income statement.

    10. Consider all the necessary adjustments, if any, such as outstanding and prepaid expenses, outstanding and pre-received income, reserve for doubtful debts.

    11. Calculate depreciation and amortization on the assets and post the amount on the debit side.

    12. Now, find out the net profit or net loss.
    If total of credit side > total of debit side ie. credit balance, then the amount of difference is net profit.
    If total of debit side > total of credit side ie. debit balance, then the amount of difference is net loss.

    These steps complete the process of preparation of income statement from trial balance.

    Illustration

    A snippet of trial balance and income statement has been attached for better understanding.

    Trial Balance

    Prepare Income Statement from the above given Trial Balance.

    Income Statement

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  1. This answer was edited.

    As we can see, the term ‘Bad Debt’ comprises of the word ‘bad’, which gives us a fair idea that it is something about the debtors who are not good for the business. So basically, Bad Debt is the amount owed by the customer to the business which is now irrecoverable. It is an expense for the businessRead more

    As we can see, the term ‘Bad Debt’ comprises of the word ‘bad’, which gives us a fair idea that it is something about the debtors who are not good for the business.
    So basically, Bad Debt is the amount owed by the customer to the business which is now irrecoverable. It is an expense for the business and it may arise due to reasons such as fraud, insolvency of the debtor, etc. We can also refer to it as Uncollectible Accounts Expense and Irrecoverable Debts.

    Yes, bad debts are recorded in the Income statement.  The Income statement shows the aggregate financial position of a business during a specified period by displaying the amount of revenue generated and expenses incurred by a business. Bad debts being an expense are recorded under operating expenses in the Income Statement or on the debit side in the Profit & Loss a/c.

    Example

    ABC Ltd. sells goods to a retailer for 40,000 at 50 days credit. However, after 50 days, the company realizes that the retailer has been declared insolvent and the amount is no longer recoverable. This amount of 40,000 is an expense for ABC Ltd and leads to a fall in the accounts receivable.
    The journal entries to be recorded in the books of ABC Ltd are as follows:

    Bad debts a/cDebit40,000Debit the increase in expense
    To Retailer’s a/cCredit40,000Credit the decrease in asset

    (being amounts written off as bad debts transferred to bad debts account)

    Profit and loss a/cDebit40,000
    To Bad debts a/cCredit40,000

    (being bad debts transferred to profit and loss a/c)

    Bad debts as shown in the Income statement

    (Extract of Income Statement)

    PARTICULARSAMOUNTAMOUNT
    Revenue8,00,000
    Expenses:
    COGS50,000
    Insurance expense60,000
    Depreciation expense20,000
    Bad debts expense40,000
    Total Expense1,70,000

    Hope this helps.

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