The correct answer is option B. Wages and salaries are debited to the trading account. The trading account helps us to determine the Gross Profit Or Loss that a company earns or incurs by carrying on its core manufacturing or trading activities. Let us discuss the above items and their treatments inRead more
The correct answer is option B. Wages and salaries are debited to the trading account.
The trading account helps us to determine the Gross Profit Or Loss that a company earns or incurs by carrying on its core manufacturing or trading activities.
Let us discuss the above items and their treatments in the final accounts one at a time:
Wages Outstanding
Firstly, “wages outstanding” is not debited into the trading account. It is a liability that is shown in the balance sheet.
Outstanding wages imply remuneration due to be paid to the workers for the services they have already rendered to the business.
Since the company has already received the service, it becomes a legal obligation for it to pay the wages to the workers for those services. Hence, outstanding wages are a liability.
Wages and Salaries
Wages and Salaries are debited to the trading account.
Wages Vs Salaries
Let us understand the difference between wages and salaries. Wages are the regular payments that are made daily, weekly or fortnightly. Such payments are mostly made to factory workers.
Salaries, on the other hand, are assumed to imply the remuneration paid to office workers and sales staff.
Wages are debited to the trading account, while salaries are debited to the Profit and Loss account.
Director’s Remuneration
No, the director’s remuneration is not debited to the trading account. This is because director’s generation is a business expense. It is a kind of salary provided to the director for the services rendered by him to the company.
Directors’ remuneration refers to compensation the company gives to its directors for the services rendered. It is debited to the Profit and Loss Account.
Advance Payment of Wages
No, advance payment of wages is not debited to a trading account. It is shown by reducing it to wages. Advance payment of wages implying paying remuneration to the workers before the commencement of the period for which the wages relate to.
However, one must note that if both wages and prepaid wages appear within the trial balance, then only the figure written against wages would appear in the trading account. There would be no treatment for prepaid wages.
Let us consider a scenario where wages of amount 5,000 is appearing inside trial balance. Outside the trial balance, the following information is provided
Wages prepaid for the current financial year = 1,000
Wages prepaid for the next financial year = 2,000
In the above case, the total wages to be debited to the trading account would be 5,000 + 1,000 – 2,000 = 4,000
Significance of the Final Accounts
It helps in determining the net profit or loss of the entity for the current financial year.
It is a major source of guidance for investors. Shareholders decide whether or not to invest in a company on the basis of final accounts.
It allows banks and investors to see your business’s total income, debt load a,nd financial stability.
What is net credit sales? Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales. Formula The formula for net credit sales is as follows: Net credit sales = Sales on credit - Sales returns - SalRead more
What is net credit sales?
Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales.
Formula
The formula for net credit sales is as follows:
Net credit sales = Sales on credit – Sales returns – Sales allowances
In the balance sheet, you can find credit sales in the “short-term assets “section. It can be calculated from account receivables, bills receivables, and debtors of the balance sheet.
Sales return: A sales return is when a customer or client returns or sends a product back to the seller. And this can happen due to various reasons, including:
Excess quantity ordered
Not upto Customer expectations
Shipping delays ( product arrived late )
Accidentally ordered an item and there can be more such reasons.
Sales allowance: A sales allowance is a discount that a seller offers a buyer as an alternative to the buyer for returning the product.
Because of a problem or issue with the buyer’s order or we can say that he is not satisfied with the product.
Cash sales: Cash sales are sales in which the payment is done at once or I can say that buyer has obligation to make payment to the seller.
Cash sales are considered to include bills, checks, credit cards, and money orders as forms of payment.
Example
Now after understanding the terms used in the formula let me explain to you with an example which is as follows:-
First, we will calculate the Total Sales for the Period:- In the month of May, Flipkart company had cash sales of Rs 80,000. The total amount in Accounts Receivables is Rs 150,000, with Rs 30,000 as the carryover from April’s receivables.
Since you only want to know about credit sales in the current period (September), you subtract Rs 30,000 from the total. This means that for the month of September, Flipcart Company had sales totaling Rs 200,000 (80,000 + 120,000).
Second, we will subtract the Sales Returns:- During the month of September, Flipcart Company issued Rs 20,000 in refunds, because several items were damaged during shipment, so the customer could not use them.
This amount would reduce the total number of cash sales if the accounts receivable balance was from a credit customer. This reduces the total sales to Rs 180,000 (Rs 200,000 in total sales – Rs 20,000 in returns).
Thirdly we will subtract the Sales Allowances:- Sales allowances are discounts offered to customers for not asking for full refunds.
For example, an item that had been shipped to a customer was the wrong size, but the customer told that he will agree to keep the item if the price could be adjusted. Flipcart Company issued Rs 10,000 in allowances in May.
After this deduction, the total sales for May are Rs 170,000 (Rs 180,000 – Rs 10,000).
Then at last there are any cash sales then subtract:- After figuring out the total number of sales for September and then subtracting the sales returns and allowances, the cash sales are deducted since you are focusing on net credit sales for the period.
After deducting the Rs 60,000 in cash sales, Flipcart Company has Rs 110,000 as net credit sales.
Why do we need net credit sales?
Net Credit sales help to calculate the accounts receivable turnover ratio.
Net credit sales also indicate the amount of credit you offer to your customer.
Net credit sale is also used to calculate other financial analysis items like days sales outstanding.
Net credit sales can be defined as the total sales made by a business on credit over a given period of time less the sales returns and allowances and discounts such as trade discounts. Net Credit Sales = Gross Credit Sales – Returns – Discounts – Allowances. Credit sales can be calculated from the ARead more
Net credit sales can be defined as the total sales made by a business on credit over a given period of time less the sales returns and allowances and discounts such as trade discounts.
Credit sales can be calculated from the Accounts receivable/ Bills Receivable/ Debtors figure in the Balance Sheet. It will be normally shown under the Current Assets head in the Balance Sheet.
Alternatively, you may observe the bills receivable ledger account to locate the figure of credit sales.
Net Credit Sales and related terms
Before we try to understand the concept of net credit sales with an example, let us discuss the term sales return. Sales return means the goods returned by the customer to the seller. It may be due to defects or any other reasons.
Now let us take an example. John is a retail businessman. He sells smartphones. He buys 100 smartphones from Vivo on credit. The smartphones are worth ₹1.5 lahks. He then returns smartphones worth 20,000 rupees to Vivo. He also gets an allowance of rupees 5,000 from Vivo.
In the above example, the credit sales of Vivo are of rupees 1.5 lakh. The net credit sales is of
1.5 lakh – 20,000 – 5, 000 = 1.25 lakh rupees.
Importance of Net Credit Sales
Net Credit Sales figure together with the accounts receivable figure acts as an indicator of the credit policy of the company.
It offers insights into the ability of the company to meet short-term cash obligations.
The credit policy also affects the total current assets that the company has in the manifestation of Accounts Receivable
Advantages and Disadvantages of Credit Sales.
Advantages
Increased Sales – The credit Policy facilitates increased sales for the company. The company can attract more customers with a liberal credit policy. For example, Apple got more customers when it started to sell its products on an EMI basis.
Customer Loyalty / Retention- Regular customers can be retained and made to feel honored by offering them more liberal credit terms.
Disadvantages
Delay in Cash Collection – Credit Sales imply that the company would get cash on a delayed basis. This money could have otherwise been put to use for some other profitable venture or could have borne interest for the company
Collection Expenses– The company had to incur additional expenditures for collecting money from debtors.
Risk of Bad Debts – With credit sales, there is always the risk that the buyer may become bankrupt and may not be able to pay the money due to the seller.
Overview And Definition Shareholder's equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity. For example – retainRead more
Overview And Definition
Shareholder’s equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity.
For example – retained earnings, common stock, etc.
Liabilities
Liabilities are the obligation or something a company or a person owes to another party. normally it is in cash form but it can be in other forms also.
And these liabilities need to be settled as per the terms agreed upon by the party.
For example – taxes owned, trade payables, etc.
Assets
Assets are those which has ownership of a company and controlling power with the company. In other words, Or something which will generate profits today and in the future.
For example – cash, building, etc.
Conclusion
Therefore I can conclude that stockholders’ equity refers to the assets remaining in a business once all liabilities have been settled, or I can say as it is not the same thing as the company’s assets. Assets are what the business owns.
How to Calculate Shareholders’ Equity
Shareholders’ equity is the owner’s claim when assets are liquidated, and debts are paid up. It can be calculated using the following two formulas:
Formula 1:
Shareholders’ Equity = Total Assets – Total Liabilities
Let me now take the example of a small business owner who is into the business of chairs in India.
As per the balance sheet of the proprietorship firm for the financial year ending on March 31, YYYY, the following information is available. Determine the shareholders’ equity of the firm.
As per the Golden Rules As per the golden rules of accounting, a trading account is a nominal account. To ensure that financial statements accurately reflect a business's financial position and performance, the golden rules of accounting guide the preparation of financial statements. The point to noRead more
As per the Golden Rules
As per the golden rules of accounting, a trading account is a nominal account. To ensure that financial statements accurately reflect a business’s financial position and performance, the golden rules of accounting guide the preparation of financial statements.
The point to note is that it is almost impossible to apply the rules of debit and credit with certain accounts such as Trading A/c, Profit & Loss A/c, etc.
As per the Modern Rules
The purpose of a trading account is to record transactions related to the purchase and sale of goods for a business. In other words, it serves as a recording and reporting mechanism for business income and expenses.
An accounting period, like a month, quarter, or year, is the time when a trading account is prepared. It is used to calculate the business’s net profit or loss. Other financial statements, such as the balance sheet, are prepared using the information in a trading account.
In summary, a trading account is a type of income statement account that is used to track and report on the income and expenses from a business’s buying and selling activities
Rules of Debit and Credit
There are three main types of accounts according to the legacy rules of debit and credit: personal accounts, real accounts, and nominal accounts. A personal account is one that is related to an individual or entity owing the business money (e.g. a customer), or owing the business money (e.g. a supplier).
A real account is one that relates to assets such as cash, inventory, and property.
Nominal accounts are accounts that relate to income and expenses, such as a “trading account”.
To summarize, a trading account is a nominal account used to record and report the business’s income and expenses resulting from its buying and selling activities.
Profitability ratios measure how profitable a company is and are used to assess its performance and efficiency. Based on the income statement and balance sheet of a company, these ratios are calculated. In terms of profitability ratios, there are several types, each providing a different viewpoint.Read more
Profitability ratios measure how profitable a company is and are used to assess its performance and efficiency. Based on the income statement and balance sheet of a company, these ratios are calculated.
In terms of profitability ratios, there are several types, each providing a different viewpoint.
The following are some common profitability ratios:
Gross profit margin: This ratio measures the percentage of revenue that remains after the cost of goods sold has been deducted. Producing and selling efficiently is indicated by this metric.
Net profit margin: An organization’s net profit margin is the portion of revenue left after all expenses have been deducted. A company’s profitability is measured by this indicator.
Return on assets (ROA): This ratio measures how profitable a company’s assets are. In other words, it indicates how effectively a company generates profits from its assets.
Return on equity (ROE): This ratio measures the profitability of a company’s equity. It shows how effectively a company generates profits from its shareholders’ investments.
Analysts and investors use profitability ratios to evaluate a company’s performance and profitability ability.
An investor or analyst can evaluate a company’s relative strength and identify potential opportunities or risks by comparing its profitability ratios with its peers or its industry averages.
Here are 10 examples of accounting entries: A company purchases $500 worth of office supplies on credit from a supplier. Office supplies expense account would be debited Accounts payable would be credited A firm receives $1,000 in cash from a customer for services rendered. In this case, CashRead more
Here are 10 examples of accounting entries:
A company purchases $500 worth of office supplies on credit from a supplier.
Office supplies expense account would be debited
Accounts payable would be credited
A firm receives $1,000 in cash from a customer for services rendered. In this case,
Cash account would be debited
Service revenue account would be credited
A business pays $250 in salaries to its employees.
A debit would be made to the salaries expense account
A credit would be made to the cash account
A business borrows $5,000 from a bank and receives the funds as a loan. The entry would be,
A debit to the bank account
A credit to the loan payable account
A company sells $800 worth of inventory to a customer for cash.
The entry would be a debit to the cash account
A credit to the sales revenue account
A firm purchases $3,000 worth of equipment on credit from a supplier.
The entry would be a debit to the equipment account
A credit to the supplier’s account
A company incurs $500 in advertising expenses for a new marketing campaign (cash).
The entry would be a debit to the advertising expense account
A credit to the cash account
A firm collects $1,200 from a customer. The entry would be,
A debit to the cash account
A credit to the customer’s account
A business pays $700 in rent for its office space. The entry would be,
A debit to the rent expense account
A credit to the cash account
An organization pays off a $2,000 loan to the bank. The entry would be,
Which of the following is debited to trading account?
The correct answer is option B. Wages and salaries are debited to the trading account. The trading account helps us to determine the Gross Profit Or Loss that a company earns or incurs by carrying on its core manufacturing or trading activities. Let us discuss the above items and their treatments inRead more
The correct answer is option B. Wages and salaries are debited to the trading account.
The trading account helps us to determine the Gross Profit Or Loss that a company earns or incurs by carrying on its core manufacturing or trading activities.
Let us discuss the above items and their treatments in the final accounts one at a time:
Wages Outstanding
Firstly, “wages outstanding” is not debited into the trading account. It is a liability that is shown in the balance sheet.
Outstanding wages imply remuneration due to be paid to the workers for the services they have already rendered to the business.
Since the company has already received the service, it becomes a legal obligation for it to pay the wages to the workers for those services. Hence, outstanding wages are a liability.
Wages and Salaries
Wages and Salaries are debited to the trading account.
Wages Vs Salaries
Let us understand the difference between wages and salaries. Wages are the regular payments that are made daily, weekly or fortnightly. Such payments are mostly made to factory workers.
Salaries, on the other hand, are assumed to imply the remuneration paid to office workers and sales staff.
Wages are debited to the trading account, while salaries are debited to the Profit and Loss account.
Director’s Remuneration
No, the director’s remuneration is not debited to the trading account. This is because director’s generation is a business expense. It is a kind of salary provided to the director for the services rendered by him to the company.
Directors’ remuneration refers to compensation the company gives to its directors for the services rendered. It is debited to the Profit and Loss Account.
Advance Payment of Wages
No, advance payment of wages is not debited to a trading account. It is shown by reducing it to wages. Advance payment of wages implying paying remuneration to the workers before the commencement of the period for which the wages relate to.
However, one must note that if both wages and prepaid wages appear within the trial balance, then only the figure written against wages would appear in the trading account. There would be no treatment for prepaid wages.
Let us consider a scenario where wages of amount 5,000 is appearing inside trial balance. Outside the trial balance, the following information is provided
In the above case, the total wages to be debited to the trading account would be 5,000 + 1,000 – 2,000 = 4,000
Significance of the Final Accounts
See lessHow to find net credit sales from balance sheet?
What is net credit sales? Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales. Formula The formula for net credit sales is as follows: Net credit sales = Sales on credit - Sales returns - SalRead more
What is net credit sales?
Net credit sales are those revenues by a business entity, less all sales returns and allowances. Immediate payment in cash is not included in net credit sales.
Formula
The formula for net credit sales is as follows:
Net credit sales = Sales on credit – Sales returns – Sales allowances
In the balance sheet, you can find credit sales in the “short-term assets “section. It can be calculated from account receivables, bills receivables, and debtors of the balance sheet.
Credit sales = closing debtors + receipts – opening debtors
Steps to calculate net credit sales
Terms relevant to understand before calculation
Sales return: A sales return is when a customer or client returns or sends a product back to the seller. And this can happen due to various reasons, including:
Sales allowance: A sales allowance is a discount that a seller offers a buyer as an alternative to the buyer for returning the product.
Because of a problem or issue with the buyer’s order or we can say that he is not satisfied with the product.
Cash sales: Cash sales are sales in which the payment is done at once or I can say that buyer has obligation to make payment to the seller.
Cash sales are considered to include bills, checks, credit cards, and money orders as forms of payment.
Example
Now after understanding the terms used in the formula let me explain to you with an example which is as follows:-
Why do we need net credit sales?
- Net credit sale is also used to calculate other financial analysis items like days sales outstanding.
See lessHow to find net credit sales in the annual report?
Net credit sales can be defined as the total sales made by a business on credit over a given period of time less the sales returns and allowances and discounts such as trade discounts. Net Credit Sales = Gross Credit Sales – Returns – Discounts – Allowances. Credit sales can be calculated from the ARead more
Net credit sales can be defined as the total sales made by a business on credit over a given period of time less the sales returns and allowances and discounts such as trade discounts.
Net Credit Sales = Gross Credit Sales – Returns – Discounts – Allowances.
Credit sales can be calculated from the Accounts receivable/ Bills Receivable/ Debtors figure in the Balance Sheet. It will be normally shown under the Current Assets head in the Balance Sheet.
Credit sales = Closing debtors + Receipts – Opening debtors.
Alternatively, you may observe the bills receivable ledger account to locate the figure of credit sales.
Net Credit Sales and related terms
Before we try to understand the concept of net credit sales with an example, let us discuss the term sales return. Sales return means the goods returned by the customer to the seller. It may be due to defects or any other reasons.
Now let us take an example. John is a retail businessman. He sells smartphones. He buys 100 smartphones from Vivo on credit. The smartphones are worth ₹1.5 lahks. He then returns smartphones worth 20,000 rupees to Vivo. He also gets an allowance of rupees 5,000 from Vivo.
In the above example, the credit sales of Vivo are of rupees 1.5 lakh. The net credit sales is of
1.5 lakh – 20,000 – 5, 000 = 1.25 lakh rupees.
Importance of Net Credit Sales
Advantages and Disadvantages of Credit Sales.
Advantages
Disadvantages
- Delay in Cash Collection – Credit Sales imply that the company would get cash on a delayed basis. This money could have otherwise been put to use for some other profitable venture or could have borne interest for the company
- Collection Expenses– The company had to incur additional expenditures for collecting money from debtors.
- Risk of Bad Debts – With credit sales, there is always the risk that the buyer may become bankrupt and may not be able to pay the money due to the seller.
See lessIs shareholders equity a liability or asset?
Overview And Definition Shareholder's equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity. For example – retainRead more
Overview And Definition
Shareholder’s equity represents the net value of a company. As an accounting measure, shareholders’ equity (also referred to as stockholders’ equity) is the difference between a company’s assets and liabilities. It is also called the book value of equity.
For example – retained earnings, common stock, etc.
Liabilities
Liabilities are the obligation or something a company or a person owes to another party. normally it is in cash form but it can be in other forms also.
And these liabilities need to be settled as per the terms agreed upon by the party.
For example – taxes owned, trade payables, etc.
Assets
Assets are those which has ownership of a company and controlling power with the company. In other words, Or something which will generate profits today and in the future.
For example – cash, building, etc.
Conclusion
Therefore I can conclude that stockholders’ equity refers to the assets remaining in a business once all liabilities have been settled, or I can say as it is not the same thing as the company’s assets. Assets are what the business owns.
How to Calculate Shareholders’ Equity
Shareholders’ equity is the owner’s claim when assets are liquidated, and debts are paid up. It can be calculated using the following two formulas:
Formula 1:
Shareholders’ Equity = Total Assets – Total Liabilities
Formula 2:
Shareholders’ Equity = Share Capital + Retained Earnings – Treasury Stock
Let me now take the example of a small business owner who is into the business of chairs in India.
As per the balance sheet of the proprietorship firm for the financial year ending on March 31, YYYY, the following information is available. Determine the shareholders’ equity of the firm.
Given, Total Assets = Net property, plant & equipment + Warehouse premises + Accounts Receivable + Inventory
= Rs (1000,000 + 300,000 + 500,000 + 800,000)
Total Assets = Rs 2600,000
Again, Total liabilities = Net debt+ Accounts payable + Other current liabilities
= Rs (700,000 + 700,000 + 600,000)
Total Liabilities = Rs 2,000,000
Therefore, the shareholders’ equity of the firm as on March 31, YYYY, can be calculated as,
= Rs (2600,000 – 2,000,000)
Shareholders’ Equity = Rs 600,000
Therefore, the shareholders’ equity, as of March 31, YYYY, stood at Rs 600,000.
See lessWhich type of account is trading account?
As per the Golden Rules As per the golden rules of accounting, a trading account is a nominal account. To ensure that financial statements accurately reflect a business's financial position and performance, the golden rules of accounting guide the preparation of financial statements. The point to noRead more
As per the Golden Rules
As per the golden rules of accounting, a trading account is a nominal account. To ensure that financial statements accurately reflect a business’s financial position and performance, the golden rules of accounting guide the preparation of financial statements.
The point to note is that it is almost impossible to apply the rules of debit and credit with certain accounts such as Trading A/c, Profit & Loss A/c, etc.
As per the Modern Rules
The purpose of a trading account is to record transactions related to the purchase and sale of goods for a business. In other words, it serves as a recording and reporting mechanism for business income and expenses.
An accounting period, like a month, quarter, or year, is the time when a trading account is prepared. It is used to calculate the business’s net profit or loss. Other financial statements, such as the balance sheet, are prepared using the information in a trading account.
In summary, a trading account is a type of income statement account that is used to track and report on the income and expenses from a business’s buying and selling activities
Rules of Debit and Credit
There are three main types of accounts according to the legacy rules of debit and credit: personal accounts, real accounts, and nominal accounts. A personal account is one that is related to an individual or entity owing the business money (e.g. a customer), or owing the business money (e.g. a supplier).
A real account is one that relates to assets such as cash, inventory, and property.
Nominal accounts are accounts that relate to income and expenses, such as a “trading account”.
To summarize, a trading account is a nominal account used to record and report the business’s income and expenses resulting from its buying and selling activities.
See lessWhat are profitability ratios?
Profitability ratios measure how profitable a company is and are used to assess its performance and efficiency. Based on the income statement and balance sheet of a company, these ratios are calculated. In terms of profitability ratios, there are several types, each providing a different viewpoint.Read more
Profitability ratios measure how profitable a company is and are used to assess its performance and efficiency. Based on the income statement and balance sheet of a company, these ratios are calculated.
In terms of profitability ratios, there are several types, each providing a different viewpoint.
The following are some common profitability ratios:
Gross profit margin: This ratio measures the percentage of revenue that remains after the cost of goods sold has been deducted. Producing and selling efficiently is indicated by this metric.
Net profit margin: An organization’s net profit margin is the portion of revenue left after all expenses have been deducted. A company’s profitability is measured by this indicator.
Return on assets (ROA): This ratio measures how profitable a company’s assets are. In other words, it indicates how effectively a company generates profits from its assets.
Return on equity (ROE): This ratio measures the profitability of a company’s equity. It shows how effectively a company generates profits from its shareholders’ investments.
Analysts and investors use profitability ratios to evaluate a company’s performance and profitability ability.
An investor or analyst can evaluate a company’s relative strength and identify potential opportunities or risks by comparing its profitability ratios with its peers or its industry averages.
See lessWhat are 10 examples of journal entries?
Here are 10 examples of accounting entries: A company purchases $500 worth of office supplies on credit from a supplier. Office supplies expense account would be debited Accounts payable would be credited A firm receives $1,000 in cash from a customer for services rendered. In this case, CashRead more
Here are 10 examples of accounting entries:
I also found a long list of example journal entries and a free PDF to download here.
See less