India Trial Balance

[Account_Newbie]

hi,

I am newbie to accounting system. I have learnt few basic stuffs on Accounting and currently looking into Trial balance. i know that the trial balance contains, Debit and Credit details of a particular firm or an org. My understanding is as follows,

Weth Debit....Expense, Asset and Divident increases(D-E-A-D)
With Credit....Liability, Revenue/Income, Equity increases

Also i know that, on the debit side the above mentioned accounts are mentioned and so on the Credit side.

But i am facing difficulty in understanding, what type of transactions we need to consider them as Debit and Credit side.

Can anybody illustrate this with an example? it would be of great help, if you do so.

 

[Triest123]

hi,

I am newbie to accounting system. I have learnt few basic stuffs on Accounting and currently looking into Trial balance. i know that the trial balance contains, Debit and Credit details of a particular firm or an org. My understanding is as follows,

Weth Debit....Expense, Asset and Divident increases(D-E-A-D)
With Credit....Liability, Revenue/Income, Equity increases

Also i know that, on the debit side the above mentioned accounts are mentioned and so on the Credit side.

But i am facing difficulty in understanding, what type of transactions we need to consider them as Debit and Credit side.

Can anybody illustrate this with an example? it would be of great help, if you do so.

=> For those of business transactions which (1) can be measured by money and (2)
are recognised or realised in the current accounting period should be recorded on
the trial balance.

e.g.
1. You signed a purchase order / sales order with your vendor/customer in the year 2013 stating the shipment schedule and the price of the goods for the coming year (i.e. 2014)

=> In the trial balance 2013, no record should be made as the sale / purchase will take place in the year 2014.
In other words, sales / purchase transaction should be recorded in the trial balance 2014 as they are realised or recognised only in the year 2014

2. You purchase/ sales goods on credit in the year 2013. Payments are made in the year 2014.

As the sales/ purchase are realised in the year 2013, these transactions should be recorded
in the 2013's trial balance even though the payments are effected in 2014
(Accrual Concept)


I strongly advise you should study the "Accounting Concepts & Conventions" before
preparing the Trial Balance.

 

[dollybroun]

A bookkeeping worksheet in which the balances of all ledgers are compiled into debit and credit columns. A company prepares a trial balance periodically, usually at the end of every reporting period. The general purpose of producing a trial balance is to ensure the entries in a company's bookkeeping system are mathematically correct.

 

[Account_Newbie]

Thank you all. Like one of my friend suggested, i should understand the basics first and then go for Trial Balance. I am working on it. Between, i got another question which is more like basic stuff.

There are two things in the business. Those are,
Profit is liability to a business and Loss is Asset to the business.

I understood the first part. When we are thinking business as a firm, if a firm makes a profit it is liable to distribute the profit to all its share holders and other investments like Retained earnings for the future expansion of the company.
But in the case of 'Loss is an asset to the Company' i am little confused that, how its going to work. I am unable to think even contradictory of profit.
Can anybody please explain with an example?

 

[bklynboy]

There are two things in the business. Those are,
Profit is liability to a business and Loss is Asset to the business.

Where are you learning this from? Profit is not a liability. I don't understand where you are getting this information. Profit represents the earnings generated from the business and is the equity of that business. It is simply a measure of how much the firm has made or lost. I know people tend to argue that its the residuals left over to be distributed but this is a stretch in my opinion.

Loss is an asset also makes no sense unless you are speaking about the ability to recover in the future (such as using tax NOL's against future taxable income). In general though I disagree with the statement.

Thoughts?

 

[Triest123]

Thank you all. Like one of my friend suggested, i should understand the basics first and then go for Trial Balance. I am working on it. Between, i got another question which is more like basic stuff.

There are two things in the business. Those are,
Profit is liability to a business and Loss is Asset to the business.

I understood the first part. When we are thinking business as a firm, if a firm makes a profit it is liable to distribute the profit to all its share holders and other investments like Retained earnings for the future expansion of the company.
But in the case of 'Loss is an asset to the Company' i am little confused that, how its going to work. I am unable to think even contradictory of profit.
Can anybody please explain with an example?

=> "Profit" stands for the liablity to the Owner (i.e. the profit earned should be distributed to the owner). So, profit is on the credit side.

On the contrary, "Loss" stands for the owner owe the business. In other words, the owner
need to invest money into the business so as to maintain the "life" of the business.
So, loss is on the debit side. (But it does not stand for the asset of the business, it stands for the reduction of the worth of the business)

 

[bklynboy]

Triest123,

I agree profit is on the credit side but dont see how this is a liability. Financial statements are prepared to show the position of a business at any given moment and accumulated profit is not categorized as a liability in this presentation. I get why people continue to call it a liability because it is the amount "owed" to owners through future distributions or for use in expansion. But this is not how accountants define a liability.

 

[Account_Newbie]

i read an article on the internet about this. This is what they say,

Profits Are Liability. Losses are Asset.

per my understanding, Why because,

According to Separate entity concept Owner & the business
are not one& the same. The company is entirely different from its owners.

Asset= what we own
Liability= what we owe

i. profit is a liabilty because business runs with owners/ share holders capilal. so the profit is to be reimbus to the owner of the business. Therefore it is a liablity to the business. i.e we owe(liable) to the owners


ii. In the same way in case of loss owners has to compensate to the business. Therefore it is an asset to the business.i.e We owns (Asset) to be compensated by the
owners.

This is because 'Entity Concept'. The entity concept says that, the business of the owner and the owner himself are two separate entities. It is due to this reason, that the the owners fund(Capital plus accumulated Surplus is regarded as a liablity of the business entity)

I think, its the way of perceiving the things in this way. end of the day/month/year, if a company is in profit it means, business owner and equity owners are in profit and for the loses, the same people would have to bear the loss.

 

[bklynboy]

I see the thought. My only argument then is that a loss is not an asset as it does not need to be repaid - meaning the business has no right to get payment from owners to cover the loss. For instance, if I own shares of a company and the company has losses I am not required to pay into the company to cover the loss so I dont see how the company can claim it has an asset due from its owners. The business could dissolve and never get the funds needed from investors to cover the loss.