Definitions [4]
A trading account is a simple statement that shows whether a shop or business made a profit or loss by buying and selling goods during a year by comparing total sales and stock with buying costs and direct expenses.
A Profit and Loss Account is an account in the books of a business that records all indirect incomes and expenses for a period to find out whether the business made a net profit or a net loss.
A balance sheet is a financial statement that shows the assets, liabilities, and owner’s equity of a business at a specific point in time, providing a clear picture of its financial position.
Adjustments in final accounts are changes or entries made at the end of the accounting period to include any income or expenses that were missed or need to be updated so that the financial statements show the true financial position of the business.
Key Points
| Basis | Provision | Reserve |
|---|---|---|
| Nature | Liability or asset reduction | Shareholders' money |
| Purpose | For specific loss/expense | For specific or general use |
| Charge vs. Appropriation | Charged to profit | Appropriated from profit |
| Disclosure in Financial Statement | Shown as an expense in P&L | Shown under Shareholders' Funds |
| Disclosure in Balance Sheet | Under Provisions or asset deduction | Under 'Reserves & Surplus' |
| Investment Outside Business | Not allowed | Allowed (as fund) |
| Legal Requirement | Legally required | Based on prudence |
| Necessity | Mandatory even without profit | Created only if profits exist |
| Utilisation for Dividends | Not allowed | Allowed |
| Utilisation for Other Purposes | Only for the loss provided | Can be used for any purpose |
Concepts [20]
- Provisions and Reserves
- Types of Reserves-Revenue Reserve
- Types of Reserves-Capital Reserve
- Types of Reserves-General Reserve
- Types of Reserves-Specific Reserves
- Types of Reserves-Secret Reserves
- Basic Terms in Accounting
- Revenue and Deferred Revenue Expenditure
- Meaning of Capital Income and Revenue Income
- Difference Between Capital Income and Revenue Income
- Meaning of Capital Profit and Revenue Profit
- Difference Between Capital Profit and Revenue Profit
- Meaning of Capital Loss and Revenue Loss
- Difference Between Capital Loss and Revenue Loss
- Marshalling of a Balance Sheet Or Assets and Liabilities
- Trading Account
- Profit and Loss Account
- Balance Sheet
- Adjustments of Financial Statements - Goods Distributed as Free Samples and Manager's Commission
- Adjustments of Financial Statements - Abnormal Loss
