Meaning of Trade Discount

Trade discount is referred to as the discount that is offered by a seller to the buyer of the
product in the form of reduction in the price of the item.
Trade discounts are offered to increase the sales of the product and make the customers feel
that they are getting the best offer. No accounts are maintained for keeping track of the
discounts that are offered.
Meaning of Cash Discount
Cash discount is referred to as the discount that is offered by the seller of a product to the
buyer at the time of payment for the purchase. This reduction is provided at the value of the
invoice.
Cash discount is offered to make the customer or the buyer pay for the product promptly; it
helps the business in reducing or avoiding the credit risk completely.
Such discounts are mostly used in business transactions, where a creditor will be reducing the
amount to be paid by the debtor, if the payment is processed within the time limit.
Proper records are maintained for all such discount transactions both by the buyer and seller.

These points highlight the differences between the trade discount and cash discount.
Basis of Trade Discount Cash Discount
Comparison

Meaning It is the type of discount that is This discount is offered by the

offered by the seller to the buyer seller to the buyer on the invoice
as a reduction in the price of the amount at the time of making
product payment within the stipulated
time

Purpose of To ensure bulk sales of the To ensure prompt payment for the
offering product items purchased
discount

Accounting Not shown in any books of It is properly recorded in the

treatment accounting, reduction adjusted books of both buyer and seller.
with final price and the Recorded in profit and loss
discounted price is added to statement as an expense
record books

When discount At the time the purchase is made It is allowed at the time of
is allowed payment

Allowed on Both cash and credit transactions Only transactions involving cash
transactions payment are allowed.
Meaning and Features of Ledger
All the Accounts recognized based on transactions recorded in different journals will be
opened and maintained in a separate book called Ledger. 
So a Ledger is a book of Accounts; in which all types of Accounts relating to assets,
liabilities, capital, expenses and revenues are maintained. It is a complete set of Accounts of a
business enterprise.
Ledger is in a  book with pages consecutively numbered. It can also be a bundle of sheets.
All the items from the journal are recorded in Ledger Accounts and this process is known as
posting entries from Journal to Ledger Accounts.
 
Features of Ledger Account
A Ledger book is an Accounts book to which various transactions of an enterprise are posted
under different Accounts.
It follows the double-entry system.
It is also known as the Principal book of Account as it is the book of final entry of
transactions after the journal or all-purpose books. 
In the Ledger, all the types of Accounts relating to assets, liabilities, capital and revenue are
maintained. 
It is the only record of the business transaction classified into relevant Accounts.
Posting-
1. Every journal entry will have to be posted into all separate and respective Accounts which
have been debited and credited in the journal entry. For example, for purchase machinery,
machinery a/c is debited and purchases a/c  is credited in the journal. When this entry is
posted in the Ledger, it must be posted in machinery a/c and as well as in Sales Account. 
2. Posting will be done on the debit side of the Account which has been debited in the journal
book, and the credit side of the Account which has been credited in the journal book. In the
case of the above example of the machinery purchase, posting will be made on the debit side
of the machinery a/c Account, as it has been debited in a journal and the credit side of
Purchases a/c as it had been credited in the journal. 
3. The date of the transaction has to be put in the date column. The method of recording the
data in the Ledger is the same as in a journal. 
4. While posting on the debit side of an Account, in the particulars column we should write
the name of the Account which had been credited in the journal and add the word 'To' before
the name. 
5. Similarly while posting on the credit side of an Account, we should put the name of the
Account which has been debited in the journal and add the word 'By' before the name. In the
case of the above example, we shall write 'To purchases A/c' in the particulars column on the
debit side of the Cash Account; and 'By Machinery A/c' in the particulars column on the
credit side of the Sales Account. 
The Different Types of Ledgers
There are three different types of Ledgers:
1. Sales Ledger - A sales Ledger is a book in which a corporation records the sale of
products, services, or the cost of things to clients. The sales revenue and income statement are
depicted in this Ledger.
2. Purchase Ledger - A purchase Ledger is a Ledger in which a corporation records the
transactions of purchasing services, products, or goods from other companies. It allows you
to see how much money the company has paid out to other companies.
3. General Ledger - There are two types of the general Ledger: nominal Ledger and private
Ledger. The nominal Ledger records spending, revenue, depreciation, insurance, and other
financial transactions. Private Ledgers contain private information such as salary, wages,
capital, and so on. A private Ledger is not accessible to everyone.
Final Accounts: Explanation
Every businessman enters into business activities to make a profit.
The role of accounting is to compile the financial records of a business in such a manner that
yields its profit or loss. All transactions of a business are, in the first instance, recorded in
the books of original entry.
These transactions are posted into ledgers in classified form and summarized before
arithmetical accuracy is checked by means of a trial balance. After the preparation of the trial
balance, the next step is preparing the final accounts.
These accounts consist of the following:
Trading Account
Profit and Loss Account
Balance Sheet
Objectives of Preparing Final Accounts
The objectives of preparing final accounts are:
1. To Ascertain the Results of Transactions
Final accounts show the profit earned or loss sustained by the business in a particular period.
The preparation of a trading, profit, and loss account or income statement shows
the profit or loss.
2. To Know the Financial Position of the Business
Besides determining profit and loss, the financial position of the business is measured
through final accounts. The financial position of the business is shown with the help of a
balance sheet.
Trial Balance: The Basis of Final Accounts
The basis of final accounts is the trial balance. The trial balance includes all the balances of
the ledger accounts, including the account balances of
expenses, revenue, assets, liabilities, capital, and drawings.
A trial balance has two columns: debit and credit. Debit balances usually represent expenses
and assets drawings that appear in the debit column of the trial balance.
Credit balances represent revenue, capital, and liabilities: these appear in the credit column of
the trial balance.
From the trial balance, expenses and revenues are transferred to the trading and profit and
loss account. Assets, liabilities, and drawings are transferred to the balance sheet.
Final Accounts are the accounts, which are prepared at the end of a fiscal year. It gives a
precise idea of the financial position of the business/organization to the owners, management,
or other interested parties. Financial statements are primarily recorded in a journal; then
transferred to a ledger; and thereafter, the final account is prepared.
Final account includes the following components −
Trading Account
Manufacturing Account
Profit and Loss Account
Balance Sheet
Now, let us discuss each of them in detail −
Trading Account
Trading accounts represents the Gross Profit/Gross Loss of the concern out of sale and
purchase for the particular accounting period.
Study of Debit side of Trading Account
Opening Stock − Unsold closing stock of the last financial year is appeared in debit side of
the Trading Account as “To Opening Stock“of the current financial year.
Purchases − Total purchases (net of purchase return) including cash purchase and credit
purchase of traded goods during the current financial year appeared as “To Purchases” in the
debit side of Trading Account.
Direct Expenses − Expenses incurred to bring traded goods at business premises/warehouse
called direct expenses. Freight charges, cartage or carriage charges, custom and import duty
in case of import, gas, electricity fuel, water, packing material, wages, and any other expenses
incurred in this regards comes under the debit side of Trading Account and appeared as “To
Particular Name of the Expenses”.
Sales Account − Total Sale of the traded goods including cash and credit sales will appear at
outer column of the credit side of Trading Account as “By Sales.” Sales should be on net
releasable value excluding Central Sales Tax, Vat, Custom, and Excise Duty.
Closing Stock − Total Value of unsold stock of the current financial year is called as closing
stock and will appear at the credit side of Trading Account.
Closing Stock = Opening Stock + Net Purchases - Net Sale
Gross Profit − Gross profit is the difference of revenue and the cost of providing services or
making products. However, it is calculated before deducting payroll, taxation, overhead, and
other interest payments. Gross Margin is used in the US English and carries same meaning as
the Gross Profit.
Gross Profit = Sales - Cost of Goods Sold
Operating Profit − Operating profit is the difference of revenue and the costs generated by
ordinary operations. However, it is calculated before deducting taxes, interest payments,
investment gains/losses, and many other non-recurring items.
Operating Profit = Gross Profit - Total Operating Expenses
Net Profit − Net profit is the difference of total revenue and the total expenses of the
company. It is also known as net income or net earnings.
Net Profit = Operating Profit - (Taxes + Interest)
Format of Trading Account
Trading Account of M/s ABC Limited
(For the period ending 31-03-2014)

Particulars Amount Particulars Amount

To Opening Stock XX By Sales XX

To Purchases XX By Closing Stock XX

To Direct Expenses XX By Gross Loss c/d XXX

To Gross Profit c/d XXX

Total XXXX Total XXXX

Manufacturing Account
Manufacturing account prepared in a case where goods are manufactured by the firm itself.
Manufacturing accounts represent cost of production. Cost of production then transferred to
Trading account where other traded goods also treated in a same manner as Trading account.
Important Point Related to Manufacturing Account
Apart from the points discussed under the section of Trading account, there are a few
additional important points that need to be discuss here −
Raw Material − Raw material is used to produce products and there may be opening stock,
purchases, and closing stock of Raw material. Raw material is the main and basic material to
produce items.
Work-in-Progress − Work-in-progress means the products, which are still partially finished,
but they are important parts of the opening and closing stock. To know the correct value of
the cost of production, it is necessary to calculate the correct cost of it.
Finished Product − Finished product is the final product, which is manufactured by the
concerned business and transferred to trading account for sale.
Raw Material Consumed (RMC) − It is calculated as.
RMC = Opening Stock of Raw Material + Purchases - Closing Stock
Cost of Production − Cost of production is the balancing figure of Manufacturing account as
per the format given below.
Manufacturing Account
(For the year ending……….)

Particulars Amoun Particulars Amount

t

To Opening Stock of Work- By Closing Stock of Work-

XX XX
in-Progress in-Progress

To Raw Material Consumed XX By Scrap Sale XX

To Wages XXX By Cost of Production XXX

To Factory overhead (Balancing figure)

Power or fuelxx

Dep. Of Plant

Rent- Factory

Other Factory [Link] xxx

Total XXXX Total XXXX

Profit and Loss Account
Profit & Loss account represents the Gross profit as transferred from Trading Account on the
credit side of it along with any other income received by the firm like interest, Commission,
etc.
Debit side of profit and loss account is a summary of all the indirect expenses as incurred by
the firm during that particular accounting year. For example, Administrative Expenses,
Personal Expenses, Financial Expenses, Selling, and Distribution Expenses, Depreciation,
Bad Debts, Interest, Discount, etc. Balancing figure of profit and loss accounts represents the
true and net profit as earned at the end of the accounting period and transferred to the Balance
Sheet.
Profit & Loss Account of M/s ………
(For the period ending ………..)

Particulars Amount Particulars Amount

To Salaries XX By Gross Profit b/d XX

To Rent XX

To Office Expenses XX By Bank Interest received XX

To Bank charges XX By Discount XX

To Bank Interest XX By Commission Income XX

 By Net Loss transfer to
To Electricity Expenses XX XX
Balance sheet

To Staff Welfare Expenses XX

To Audit Fees XX

To Repair & Renewal XX

To Commission XX

To Sundry Expenses XX

To Depreciation XX

To Net Profit transfer to

XX
Balance sheet

Total XXXX Total XXXX

Balance Sheet
A balance sheet reflects the financial position of a business for the specific period of time.
The balance sheet is prepared by tabulating the assets (fixed assets + current assets) and the
liabilities (long term liability + current liability) on a specific date.
Assets
Assets are the economic resources for the businesses. It can be categorized as −
Fixed Assets − Fixed assets are the purchased/constructed assets, used to earn profit not only
in current year, but also in next coming years. However, it also depends upon the life and
utility of the assets. Fixed assets may be tangible or intangible. Plant & machinery, land &
building, furniture, and fixture are the examples of a few Fixed Assets.
Current Assets − The assets, which are easily available to discharge current liabilities of the
firm called as Current Assets. Cash at bank, stock, and sundry debtors are the examples of
current assets.
Fictitious Assets − Accumulated losses and expenses, which are not actually any virtual
assets called as Fictitious Assets. Discount on issue of shares, Profit & Loss account, and
capitalized expenditure for time being are the main examples of fictitious assets.
Cash & Cash Equivalents − Cash balance, cash at bank, and securities which are
redeemable in next three months are called as Cash & Cash equivalents.
Wasting Assets − The assets, which are reduce or exhausted in value because of their use are
called as Wasting Assets. For example, mines, queries, etc.
Tangible Assets − The assets, which can be touched, seen, and have volume such as cash,
stock, building, etc. are called as Tangible Assets.

Intangible Assets − The assets, which are valuable in nature, but cannot be seen, touched,
and not have any volume such as patents, goodwill, and trademarks are the important
examples of intangible assets.
Accounts Receivables − The bills receivables and sundry debtors come under the category of
Accounts Receivables.
Working Capital − Difference between the Current Assets and the Current Liabilities are
called as Working Capital.
Liability
A liability is the obligation of a business/firm/company arises because of the past
transactions/events. Its settlement/repayments is expected to result in an outflow from the
resources of respective firm.
There are two major types of Liability −
Current Liabilities − The liabilities which are expected to be liquidated by the end of
current year are called as Current Liabilities. For example, taxes, accounts payable, wages,
partial payments of long term loans, etc.
Long-term Liabilities − The liabilities which are expected to be liquidated in more than a
year are called as Long-term Liabilities. For example, mortgages, long-term loan, long-term
bonds, pension obligations, etc.
Grouping of Assets and Liabilities
There may be two types of Marshalling and grouping of the assets and liabilities −
In order of Liquidity − In this case, assets and liabilities are arranged according to their
liquidity.
In order of Permanence − In this case, order of the arrangement of assets and liabilities are
reversed as followed in order of liquidity.
Financial Statements with Adjustments Entries and their Accounting Treatment
In order to prepare a true and fair financial statement, there are some very important
adjustments those have to be done before finalization of the accounts (as shown in the
following illustration) −
[Link] Adjustments Accounting
. Treatments

1 First
Treatment
Where an
opening and
closing stock
adjusted
through a
purchase
account and
the value of
Closing Stock
Closing Stock
given in Trial
Unsold stock at the end of Financial year called
Balance −
Closing stock and valued at “Cost or market value
Closing stock
whichever is less”
will be shown
as adjusted
purchase
account on the
debit side of
Trading
account and
will appear in
the Balance
Sheet under
current Assets.

2 Outstanding Expenses Accounting

 Treatment
Outstanding
expenses will
be added in
Trading or
Profit & Loss
account in
Expenses which are due or not paid called as particular
outstanding expenses. expense
account and
will appear in
liabilities side
of the Balance
Sheet under
the current
liabilities.

3 Accounting
Treatment
Prepaid
Expenses will
be deducted
from the
particular
Prepaid Expenses expenses as
Expenses which are paid in advance are called as appear in
Prepaid Expenses. Trading &
Profit & Loss
account and
will be shown
in the Balance
Sheet under
the current
assets.

4 Accrued Income Accounting

The income, which is earned during the year, but not Treatment
yet received at the end of the Financial Year is called Accrued
as Accrued Income. income will be
added to a
particular
income under
the Profit &
Loss account
and will be
shown in the
Balance Sheet
as current
assets.
5 Accounting
Treatment
An income to
be reduced by
the amount of
advance
Income Received in Advance
income in
An income received in advance, but not earned like
profit & loss
advance rent etc.
account and
will appear as
current
liabilities in
the Balance
Sheet.

6 Accounting
Treatment
Debit Side of
Profit & Loss
Interest on Capital
account
Where an interest paid on the capital introduced by the
Add to capital
proprietor or partner of the firm.
account
(Credit side of
Capital
account).

7 Accounting
Treatment
Credit Side of
Profit & Loss
Interest on Drawing account
Where an interest paid on the capital introduced by the Reduced from
proprietor or partner of the firm. capital
account (Debit
side of
Drawing
account).

8 Provision for Doubtful Debts Accounting

If there is any doubt on the recovery from Sundry Treatment
Debtors. Debit Side of
Profit & Loss
Account
In a Balance
Sheet,
provision for
the Doubtful
will be
deducted from
the Sundry
 Debtors’
Account.

9 Accounting
Treatment
Debit Side of
Profit & Loss
Account
In a Balance
Provision for Discount on Debtors Sheet,
If there is any offer of discount to pay the debtors provision for
within certain period. the Discount
on Debtors
will be
deducted from
the Sundry
Debtors
Account.

10 Accounting
Treatment
Debit Side of
Profit & Loss
Account
Bad Debts
In a Balance
Unrecovered debts or irrecoverable debts
Sheet, Sundry
debtors will be
shown after
deducting the
Bad Debts.

11 Accounting
Treatment
Credit Side of
Profit & Loss
Account
Reserve for Discount on Creditors
In a Balance
If there is any chance to get discount on the payment of
Sheet, Sundry
sundry creditors within certain period.
Creditors will
be shown after
deducting the
Reserve for
Discount.

12 Loss of Stock by fire Accounting

There may be three conditions in this case Treatment
1. If Stock is
fully insured
Credit Side of
Trading
 Account
Assets side of
Balance Sheet
(With full
value of loss)
2. If Stock is
partially
insured
Credit side of
Trading
Account
(With Total
value of Loss)
Debit side of
Profit & Loss
a/c
(With value of
loss
unrecoverable)
Asset Side of
Balance Sheet
( With value
recoverable)
3. If Stock is
not insured
Credit Side of
Trading
Account
Debit side of
Profit & Loss
Account

13 Accounting
Treatment
Debit side of
Profit & Loss
Reserve Fund
Account
Liabilities side
of Balance
Sheet

14 Accounting
Treatment
Credit side of
Trading
Free Sample to Customers
Account
Debit Side of
Profit & Loss
Account
15 Accounting
Treatment
Debit side of
Profit & Loss
Account
Managerial Commission
Liabilities side
of Balance
Sheet as
commission
payable

16 Accounting
Treatment
Sales
AccountDr
To Debtors
A/c
Goods on Sale or Approval Basis
(With Sale
If there is any un-approved stock lying with the
Price)
customers at the end of financial year.
Stock
AccountDr
To Trading
Account
(with cost
price)