Capital and Revenue, Trading account, Profit and loss account, Balance sheet, Journal Proper, Preparation of final account
Trading account is the first step of final account which is prepare to ascertain gross profit or gross loss of a business. It helps to show the results of buying and selling of goods during an accounting period.
This note describes about the profit and loss account and also provides the entries which are posted on the debit and credit side of profit and loss account. Profit and loss account is the second step of final account. It is prepared after the preparation of trading account. It is prepared to know the net profit and net loss in the business during an accounting period.
Balance sheet is prepared after ascertaining net profit and net loss from profit and loss account. It is the summary of the personal account and real accounts having debit and credit balances.
The amount of depreciation is charged as a fixed percentage of book or depreciated value for every year. Since, the depreciation is charged at the rate of fixed percentage, the amount continues to diminish in succeeding years. Therefore it is known as Diminishing Balance Method.
Capital is the source of the basis of revenue. In other words, capital is invested in the business to earn revenue. The relation between capital and revenue is like tree and its fruits. Capital is a tree which produces fruits and revenue is a fruits which can be consumed.
Journal proper is one of the important journals or subsidiary books. It is a subsidiary book in which not all but only a few types of transactions are recorded. There are certain types of transactions which are not recorded in other subsidiary books but are recorded in the journal proper.