Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more
Yes, a creditor is a liability. Creditors are treated as current liability.
A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.
Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.
In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.
Why are Creditors treated as a liability?
An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc
A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.
As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.
Treatment and Importance of Creditors
Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.
The significance/importance of creditors is as follows:
The amount due to creditors affects the current and acid test ratio of a company significantly.
It affects the short-term cash requirements of a company.
It affects the credit policy of the company. A company can extend longer credit periods to customers if it can avail longer credit periods from its suppliers.
Having too many creditors or a large amount due to creditors can affect investor sentiment negatively regarding the business.
We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.
Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.
Definition A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions. Or in other words, we can say a group of accounts with different characteristics. It is also called the Principal Book of accounts. For example:- salary account, aRead more
Definition
A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions.
Or in other words, we can say a group of accounts with different characteristics.
It is also called the Principal Book of accounts.
For example:– salary account, and debtor account.
Sub- ledger it is defined as a group of accounts with common characteristics. And is a part of ledger accounts.
For example:- customer account, vendor account, etc.
The difference between a ledger and a sub-ledger is that ledger accounts control sub-ledger accounts whereas a sub-ledger is a part of the ledger account.
Features Of Ledger
Ledger is prepared from the journal.
Ledger is a master record of all the accounts of the business.
The Ledger account shows the current balances of all accounts.
Ledger accounts summarize the effect of transactions upon assets, liabilities, capital, incomes, and expenditures.
Features Of Sub-Ledger
Sub-ledger in accounting provides up-to-date information about the daily activities of the business.
It keeps individual track of all balances.
Help locate errors in individual accounts.
A sub-ledger is a collection of different ledgers used in an account.
Utilities of ledger
The main utilities of a ledger are summarized as follows :
• Provides complete information about a particular account: Complete information relating to a particular account is available in one place in the ledger.
• Information on income and expenses: In the ledger, a separate account is maintained for each income and expense. The amount of total income and total expenses are known from the ledger accounts.
• Preparation of trial balance: Ledger helps in preparing trial balances which ensure arithmetical accuracy of the transaction recorded in the books of account.
• Helps in preparing final accounts: After preparing the trial balance, final accounts are prepared to know the profitability and financial position of the business.
Utilities of sub-ledger
The utilities of the sub-ledger are as follows :
• Track customer information: If a client has an outstanding credit debt or needs money refunded, a company can use a sub-ledger to verify the information quickly.
• Protect financial information: A sub-ledger allows a financial supervisor to isolate certain records so that employees can view only parts of the company’s financial information. This added level of security is important for large corporations.
• Create separate databases: Large companies usually process large amounts of financial data that may be too big for one database. Software programs organize this data into isolated files to calculate financial information in the general ledger of a business.
Conclusion
So here I conclude that a ledger is compulsory in the recording process whereas a sub-ledger is optional.
The ledger is used for preparing trial balance but the sub-ledger is not used for the same.
Sub ledger is controlled by the ledger.
The sub-ledger supports the transaction of each specific account indicated on the ledger.
Yes, the account receivable is a sub ledger account. It is an account that is used to record the payment history of each and every customer to whom the business has sold goods or provided services on credit. Accounts receivable represent the amount that the customers owe to the business with respectRead more
Yes, the account receivable is a sub ledger account. It is an account that is used to record the payment history of each and every customer to whom the business has sold goods or provided services on credit.
Accounts receivable represent the amount that the customers owe to the business with respect to the goods sold or services provided to them on credit. They are also known as trade receivable or debtors.
The accounts receivable subledger shows various details of every transaction like the invoice number, amount due, date of payment, discount allowed etc. The subledger accounts are also known as the subsidiary accounts.
Difference between general ledger and subledger accounts
Here is a list of the major differences between sub-ledgers and the general ledger:
The subsidiary accounts or the sub ledger are a subset of the general ledger. In other words we can say that subsidiary accounts are a part of the general ledger.
The trial balance is prepared with the help of the general ledger and not with the help of subsidiary accounts.
The trial balance is prepared with the help of the general ledger and not with the help of subsidiary accounts.
The subledger accounts help us to store large volumes of data. They provide us with detailed and comprehensive analysis of each item of financial statements. On the other hand, a general ledger provides us with superficial information about every item in one place.
Importance/ use of Subsidiary Account
The usefulness of an accounts receivable sub ledger account lies in the fact that it provides detailed information about the money different customers owe to the business.
For example, the general ledger account may show that the total balance of trade receivable is 1 lakh without indicating the individual amount that each customer owes to the business. The subsidiary account can help us by showing that customer A owes 50000 rupees, customer B owes 30000 rupees while customer C owes 20000 rupees.
In short, the subsidiary accounts provide detailed information about each and every transaction. They help us to find useful information quickly and easily. They help us analyze the business policies and take corrective actions.
Thus, we can conclude that accounts receivable is a subledger account that provides us detailed information about the various credit transactions and the amount that each customer owes to the business. It helps us analyze our credit policies and take corrective actions. It helps us identify and classify bad debts as such on
Definition Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing. Broadly journal entries are of two types : 1. Simple entry 2. Compound entry Otherwise, they are categorized into seven types which are asRead more
Definition
Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing.
Broadly journal entries are of two types :
1. Simple entry
2. Compound entry
Otherwise, they are categorized into seven types which are as follows :
1. Opening entries
2. Closing entries
3. Rectification entries
4. Transfer entries
5. Adjusting entries
6. Entries on dishonor of bills
7. Miscellaneous entries
Explanation
Now let me explain to you the above types of entries mentioned which are as follows ;
Simple entry
• Is a journal entry in which one account is debited and another account is credited with an equal amount.
• For example, the purchase of goods of Rs 5000 cash. It will affect two accounts,i.e., purchase A/C and cash A/C with the amount of Rs 5000.
Compound entry
• Is a journal entry in which one or more accounts are debited and/or one or more accounts credited or vice versa. • For example the sale of goods to Sati for Rs 5000, Rs 2000 is received in cash, and the balance is to be received later.
• This transaction of the sale has an effect on three accounts i.e cash or bank A/C, Sati A/C, and sales A/C.
Opening entries
• Are defined as when books are started for the new year, the opening balance of assets and liabilities are journalized. For example bills payable, short-term loans, etc.
Closing entries
• At the end of the year, the profit and loss account has to be prepared. For this purpose, the nominal accounts are transferred to this account. This is done through journal entries called closing entries.
Rectification entries
• If an error has been committed, it is rectification through a journal entry.
Transfer entries
• If some amount is to be transferred from one account to another, the transfer will be made through a journal entry.
Adjusting entries
• At the end of the year, the number of expenses or income may have to be adjusted for amounts received in advance or for amounts not yet settled in cash.
• Such an adjustment is also made through journal entries. Usually, the entries pertain to the following :
Outstanding expenses,i.e., expenses incurred but not yet paid;
Prepared expenses,i.e., expenses paid in advance for some period in the future ;
Interest on capital is the interest proprietor’s investment in the business entity investment; and
Depreciation fall in the value of assets used on account of wear and tear. For all these, journal entries are necessary.
Entries on dishonor of bills
• If someone who accepts a promissory note ( or bill) is not able to pay in on the due date, a journal entry will be necessary to record the non–payment or dishonor.
Miscellaneous entries
The following entries will also require journalizing
• Credit purchase of things other than goods dealt in or materials required for the production of goods e.g. Credit purchase of furniture or machinery will be journalized.
• An allowance to be given to the customers or a charge to be made to them after the issue of the invoice.
• Receipt of promissory notes or issue to them if separate bills books have not been maintained.
• On an amount becoming irrecoverable, say, because, of the customer becoming insolvent.
• Effects of accidents such as loss of property by fire.
• Transfer of net profit to capital account.
Here are some examples of journal entries showing the above types :
Definition Net profit is defined as the excess of revenues over expenses during a particular period. For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits. When the result of this computationRead more
Definition
Net profit is defined as the excess of revenues over expenses during a particular period.
For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
Liabilities
It means the amount owed (payable) by the business. liability towards the owners ( proprietor or partners ) of the business is termed an internal liability.
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability. For example – taxes owned, trade payables, etc.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company and will benefit the business in current and future periods.
In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – cash, building, etc.
Why debtors are treated as a liability?
Now let me explain to you why net profits are treated as a liability and not as an asset because of the following characteristics :
• Net Profit shows the credit balance of the Profit And Loss Account.
• It is treated directly in the balance sheet by adding or subtracting from the capital.
• Net Profit is a measure of the profitability of the company after taking into consideration all costs incurred during the accounting period.
• Net profit is the last line in an income statement and is the figure that concerns most people who use such a statement.
• Net income is reported on the income statement (profit and loss account) and forms a key indicator of a company’s performance.
Importance Of Net Profit
Now I will let you know the importance of net profit which is as follows :
Owners
Net profit allows owners to calculate the tax to be paid and how much earnings need to be distributed to the business owners.
Investors
Investors need to see net profit as they need to access the risk before investing they basically judge the revenue-generating capacity of a firm based on net profit.
Competitors
For making the comparison competitors tend to look at the net profit of the company to know how are they performing in the industry so that they can build themselves strong.
Creditors
Creditors look at the net profit for the purpose of obtaining business loans or we can say that determines a prospective debtor’s capacity to pay future debts.
Conclusion
Now after the above explanation, we can say that,
Net Profit is shown on the liability side as it belongs to shareholders so the company has to give it to shareholders so we are showing it under the liability side.
Net Profit with respect to the company is a liability as it has to pay it to shareholders.
Net Profit with respect to shareholders is an asset.
Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. When the result of this computation is negative it is referred to as gross loss Formula : ToRead more
Definition
Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.
When the result of this computation is negative it is referred to as gross loss
Formula :
Total Revenues – Cost Of Goods Sold
Net profit is defined as the excess of revenues over expenses during a particular period.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
The basic difference between gross profit and net profit is that gross profit estimates the profitability of a company whereas net profit is to show the performance of the company.
Key points of Gross Profit
Some of the key points of as for gross profits follows :
• Stage of calculation: Gross Profit is calculated in the first stage of the Final Account.
• Purpose of calculation: It is calculated to know the total profit earned during the particular accounting
• Type of balance: Gross Profit shows the credit balance of the Trading Account.
• Dimension: It is a narrow concept as it is a part of Net Profit.
• Treatment: It is not treated directly in the balance sheet. It is transferred to the Profit And Loss Account.
Key points of Net Profit
Some of the key points of as for gross profits follows :
• Stage of calculation: Net Profit is calculated in the second stage of the Final Account.
• Purpose of calculation: It is calculated to know the net profit earned during the particular accounting
• Type of balance: Net Profit shows the credit balance of the Profit And Loss Account.
• Dimension: It is a wider concept as it includes Gross Profit.
• Treatment: It is treated directly in the balance sheet by adding or subtracting from the capital.
Examples
Now let me explain to you by taking an example which is as follows :
In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
Then, COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.
= Rs ( 73000 + 10000+ 7000- 5000)
= Rs 85000
GROSS PROFIT = REVENUE – COST OF GOODS SOLD
= Rs ( 100000 – 85000 )
= Rs 15000
Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
Then,
Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. Gross profit and net profit are gross profit estimates of the profitability of a company. WhRead more
Definition
Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.
Gross profit and net profit are gross profit estimates of the profitability of a company.
When the result of this computation is negative it is referred to as gross loss
Formula :
Total Revenues – Cost Of Goods Sold
Net profit is defined as the excess of revenues over expenses during a particular period.
Net profit is to show the performance of the company.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
Examples
Now let me explain to you by taking an example which is as follows :
In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
Then,
COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.
= Rs ( 73000 + 10000+ 7000- 5000)
= Rs 85000
GROSS PROFIT = REVENUE – COST OF GOODS SOLD
= Rs ( 100000 – 85000 )
= Rs 15000
Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
Then,
NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES + OTHER INCOMES
= Rs ( 15000 – 2000 + 1000)
= Rs 14000
Treatment
Treatment of gross profit and net profit is given as follows :
Gross profit
• Gross profit appears on the credit side of the trading account.
• Gross profit is located in the upper portion beneath revenue and cost of goods sold.
Net profit
• Net profit appears on the credit side of the profit and loss account.
• It is treated directly in the balance sheet by adding or subtracting from the capital.
Here is an extract of the trading and profit/loss account and balance sheet showing GROSS PROFIT & NET PROFIT :
Is creditor an asset or liability ?
Yes, a creditor is a liability. Creditors are treated as current liability. A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest. Creditors may be secureRead more
Yes, a creditor is a liability. Creditors are treated as current liability.
A creditor is a person who provides money or goods to a business and agrees to receive repayment of the loan or the payment of goods at a later date. The loan may be extended with or without interest.
Creditors may be secured creditors or unsecured creditors. In the case of secured creditors, some collateral is usually pledged to them. In the case of a default, they can sell or otherwise dispose of the collateral in any manner to recover the money due to them.
In the case of unsecured creditors, no collateral is pledged against the amount due to them. In the case of a default, they can approach a Court to enforce repayment but cannot sell any asset of the company by themselves.
Why are Creditors treated as a liability?
An asset is something from which the business is deriving or is likely to derive economic benefit in the future. The business has legal ownership of that asset which is legally enforceable in a court of law. For example, Plant and Machinery, accrued interest, building, etc
A liability is a legal obligation of the business. It may be in the form of outstanding payments or loans or the owner’s share of the company that the company has to pay them as and when demanded.
As the company has a legal obligation to pay money to the creditor, they are treated as a liability. Most creditors are to be repaid within 1 year and are hence classified as current assets.
Treatment and Importance of Creditors
Creditors are mostly treated as current liabilities. They are shown under the head “current liabilities” of the balance sheet of a company.
The significance/importance of creditors is as follows:
We can conclude that the creditor being a person to whom the business is legally liable to pay a certain sum of money after a certain period of time has to be classified as a liability.
Creditors play a major role in determining the success of a business. They act as a major constituent of the supply cycle of the business and affect the cash flows of the business. They are shown under the head “current liabilities” of the balance sheet of a company.
See lessWhat is the difference between ledger and subledger?
Definition A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions. Or in other words, we can say a group of accounts with different characteristics. It is also called the Principal Book of accounts. For example:- salary account, aRead more
Definition
A ledger may be defined as a book that contains, in a summarized and classified form, a permanent record of all transactions.
Or in other words, we can say a group of accounts with different characteristics.
It is also called the Principal Book of accounts.
For example:– salary account, and debtor account.
Sub- ledger it is defined as a group of accounts with common characteristics. And is a part of ledger accounts.
For example:- customer account, vendor account, etc.
The difference between a ledger and a sub-ledger is that ledger accounts control sub-ledger accounts whereas a sub-ledger is a part of the ledger account.
Features Of Ledger
Features Of Sub-Ledger
Utilities of ledger
The main utilities of a ledger are summarized as follows :
• Provides complete information about a particular account: Complete information relating to a particular account is available in one place in the ledger.
• Information on income and expenses: In the ledger, a separate account is maintained for each income and expense. The amount of total income and total expenses are known from the ledger accounts.
• Preparation of trial balance: Ledger helps in preparing trial balances which ensure arithmetical accuracy of the transaction recorded in the books of account.
• Helps in preparing final accounts: After preparing the trial balance, final accounts are prepared to know the profitability and financial position of the business.
Utilities of sub-ledger
The utilities of the sub-ledger are as follows :
• Track customer information: If a client has an outstanding credit debt or needs money refunded, a company can use a sub-ledger to verify the information quickly.
• Protect financial information: A sub-ledger allows a financial supervisor to isolate certain records so that employees can view only parts of the company’s financial information. This added level of security is important for large corporations.
• Create separate databases: Large companies usually process large amounts of financial data that may be too big for one database. Software programs organize this data into isolated files to calculate financial information in the general ledger of a business.
Conclusion
So here I conclude that a ledger is compulsory in the recording process whereas a sub-ledger is optional.
The ledger is used for preparing trial balance but the sub-ledger is not used for the same.
Sub ledger is controlled by the ledger.
The sub-ledger supports the transaction of each specific account indicated on the ledger.
See lessIs account receivable a subledger ?
Yes, the account receivable is a sub ledger account. It is an account that is used to record the payment history of each and every customer to whom the business has sold goods or provided services on credit. Accounts receivable represent the amount that the customers owe to the business with respectRead more
Yes, the account receivable is a sub ledger account. It is an account that is used to record the payment history of each and every customer to whom the business has sold goods or provided services on credit.
Accounts receivable represent the amount that the customers owe to the business with respect to the goods sold or services provided to them on credit. They are also known as trade receivable or debtors.
The accounts receivable subledger shows various details of every transaction like the invoice number, amount due, date of payment, discount allowed etc. The subledger accounts are also known as the subsidiary accounts.
Difference between general ledger and subledger accounts
Here is a list of the major differences between sub-ledgers and the general ledger:
Importance/ use of Subsidiary Account
The usefulness of an accounts receivable sub ledger account lies in the fact that it provides detailed information about the money different customers owe to the business.
For example, the general ledger account may show that the total balance of trade receivable is 1 lakh without indicating the individual amount that each customer owes to the business. The subsidiary account can help us by showing that customer A owes 50000 rupees, customer B owes 30000 rupees while customer C owes 20000 rupees.
In short, the subsidiary accounts provide detailed information about each and every transaction. They help us to find useful information quickly and easily. They help us analyze the business policies and take corrective actions.
Thus, we can conclude that accounts receivable is a subledger account that provides us detailed information about the various credit transactions and the amount that each customer owes to the business. It helps us analyze our credit policies and take corrective actions. It helps us identify and classify bad debts as such on
See lessWhat are 5 types of journal entries?
Definition Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing. Broadly journal entries are of two types : 1. Simple entry 2. Compound entry Otherwise, they are categorized into seven types which are asRead more
Definition
Journal Entry is an entry made in the journal is called journal entry. And the process of recording a transaction in a journal is called journalizing.
Broadly journal entries are of two types :
1. Simple entry
2. Compound entry
Otherwise, they are categorized into seven types which are as follows :
1. Opening entries
2. Closing entries
3. Rectification entries
4. Transfer entries
5. Adjusting entries
6. Entries on dishonor of bills
7. Miscellaneous entries
Explanation
Now let me explain to you the above types of entries mentioned which are as follows ;
Simple entry
• Is a journal entry in which one account is debited and another account is credited with an equal amount.
• For example, the purchase of goods of Rs 5000 cash. It will affect two accounts,i.e., purchase A/C and cash A/C with the amount of Rs 5000.
Compound entry
• Is a journal entry in which one or more accounts are debited and/or one or more accounts credited or vice versa.
• For example the sale of goods to Sati for Rs 5000, Rs 2000 is received in cash, and the balance is to be received later.
• This transaction of the sale has an effect on three accounts i.e cash or bank A/C, Sati A/C, and sales A/C.
Opening entries
• Are defined as when books are started for the new year, the opening balance of assets and liabilities are journalized. For example bills payable, short-term loans, etc.
Closing entries
• At the end of the year, the profit and loss account has to be prepared. For this purpose, the nominal accounts are transferred to this account. This is done through journal entries called closing entries.
Rectification entries
• If an error has been committed, it is rectification through a journal entry.
Transfer entries
• If some amount is to be transferred from one account to another, the transfer will be made through a journal entry.
Adjusting entries
• At the end of the year, the number of expenses or income may have to be adjusted for amounts received in advance or for amounts not yet settled in cash.
• Such an adjustment is also made through journal entries. Usually, the entries pertain to the following :
Outstanding expenses,i.e., expenses incurred but not yet paid;
Prepared expenses,i.e., expenses paid in advance for some period in the future ;
Interest on capital is the interest proprietor’s investment in the business entity investment; and
Depreciation fall in the value of assets used on account of wear and tear. For all these, journal entries are necessary.
Entries on dishonor of bills
• If someone who accepts a promissory note ( or bill) is not able to pay in on the due date, a journal entry will be necessary to record the non–payment or dishonor.
Miscellaneous entries
The following entries will also require journalizing
• Credit purchase of things other than goods dealt in or materials required for the production of goods e.g. Credit purchase of furniture or machinery will be journalized.
• An allowance to be given to the customers or a charge to be made to them after the issue of the invoice.
• Receipt of promissory notes or issue to them if separate bills books have not been maintained.
• On an amount becoming irrecoverable, say, because, of the customer becoming insolvent.
• Effects of accidents such as loss of property by fire.
• Transfer of net profit to capital account.
Here are some examples of journal entries showing the above types :
See lessIs net profit an asset or liability?
Definition Net profit is defined as the excess of revenues over expenses during a particular period. For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits. When the result of this computationRead more
Definition
Net profit is defined as the excess of revenues over expenses during a particular period.
For a business i.e. company/firm, it is a liability towards shareholders/promoters/partners/proprietors, etc. as it is their capital that has earned these profits.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
Liabilities
It means the amount owed (payable) by the business. liability towards the owners ( proprietor or partners ) of the business is termed an internal liability.
On the other hand, liability towards outsiders, i.e., other than owners ( proprietors or partners ) is termed as an external liability. For example – taxes owned, trade payables, etc.
For example creditors, bank overdrafts, etc.
Assets
An asset is a resource owned or controlled by a company and will benefit the business in current and future periods.
In other words, it’s something that a company owns or controls and can use to generate profits today and in the future.
For example – cash, building, etc.
Why debtors are treated as a liability?
Now let me explain to you why net profits are treated as a liability and not as an asset because of the following characteristics :
• Net Profit shows the credit balance of the Profit And Loss Account.
• It is treated directly in the balance sheet by adding or subtracting from the capital.
• Net Profit is a measure of the profitability of the company after taking into consideration all costs incurred during the accounting period.
• Net profit is the last line in an income statement and is the figure that concerns most people who use such a statement.
• Net income is reported on the income statement (profit and loss account) and forms a key indicator of a company’s performance.
Importance Of Net Profit
Now I will let you know the importance of net profit which is as follows :
Owners
Net profit allows owners to calculate the tax to be paid and how much earnings need to be distributed to the business owners.
Investors
Investors need to see net profit as they need to access the risk before investing they basically judge the revenue-generating capacity of a firm based on net profit.
Competitors
For making the comparison competitors tend to look at the net profit of the company to know how are they performing in the industry so that they can build themselves strong.
Creditors
Creditors look at the net profit for the purpose of obtaining business loans or we can say that determines a prospective debtor’s capacity to pay future debts.
Conclusion
Now after the above explanation, we can say that,
Net Profit is shown on the liability side as it belongs to shareholders so the company has to give it to shareholders so we are showing it under the liability side.
Net Profit with respect to the company is a liability as it has to pay it to shareholders.
Net Profit with respect to shareholders is an asset.
See lessWhat is Gross profit versus net profit?
Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. When the result of this computation is negative it is referred to as gross loss Formula : ToRead more
Definition
Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.
When the result of this computation is negative it is referred to as gross loss
Formula :
Total Revenues – Cost Of Goods Sold
Net profit is defined as the excess of revenues over expenses during a particular period.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
The basic difference between gross profit and net profit is that gross profit estimates the profitability of a company whereas net profit is to show the performance of the company.
Key points of Gross Profit
Some of the key points of as for gross profits follows :
• Stage of calculation: Gross Profit is calculated in the first stage of the Final Account.
• Purpose of calculation: It is calculated to know the total profit earned during the particular accounting
• Type of balance: Gross Profit shows the credit balance of the Trading Account.
• Dimension: It is a narrow concept as it is a part of Net Profit.
• Treatment: It is not treated directly in the balance sheet. It is transferred to the Profit And Loss Account.
Key points of Net Profit
Some of the key points of as for gross profits follows :
• Stage of calculation: Net Profit is calculated in the second stage of the Final Account.
• Purpose of calculation: It is calculated to know the net profit earned during the particular accounting
• Type of balance: Net Profit shows the credit balance of the Profit And Loss Account.
• Dimension: It is a wider concept as it includes Gross Profit.
• Treatment: It is treated directly in the balance sheet by adding or subtracting from the capital.
Examples
Now let me explain to you by taking an example which is as follows :
In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
Then,
COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.
= Rs ( 73000 + 10000+ 7000- 5000)
= Rs 85000
GROSS PROFIT = REVENUE – COST OF GOODS SOLD
= Rs ( 100000 – 85000 )
= Rs 15000
Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
Then,
NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES + OTHER INCOMES
= Rs ( 15000 – 2000 + 1000)
= Rs 14000
Conclusion
So here I conclude that gross profit is the difference between revenues from sales and/or services rendered and its direct cost.
Whereas net profit is after the deduction of total expenses from the total revenues of the enterprise.
See lessCan someone give examples of net profit and gross profit?
Definition Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses. Gross profit and net profit are gross profit estimates of the profitability of a company. WhRead more
Definition
Gross profit is the excess of the proceeds of goods and services rendered during a period over their cost, before taking into account administration, selling, distribution, and financial expenses.
Gross profit and net profit are gross profit estimates of the profitability of a company.
When the result of this computation is negative it is referred to as gross loss
Formula :
Total Revenues – Cost Of Goods Sold
Net profit is defined as the excess of revenues over expenses during a particular period.
Net profit is to show the performance of the company.
When the result of this computation is negative it is called a net loss.
Net profit may be shown before or after tax.
Formula :
Total Revenues – Expenses
Or
Total Revenues – Total Cost ( Implicit And Explicit Cost )
Examples
Now let me explain to you by taking an example which is as follows :
In a business organization there were the following data given as purchases made Rs 73000, inventory, in the beginning, was Rs 10000, direct expenses made were Rs 7000, closing inventory which was Rs 5000, revenue from operation during the period was Rs 100000.
Then,
COST OF GOODS SOLD = Purchases + Opening Inventory + Direct Expenses – Closing Inventory.
= Rs ( 73000 + 10000+ 7000- 5000)
= Rs 85000
GROSS PROFIT = REVENUE – COST OF GOODS SOLD
= Rs ( 100000 – 85000 )
= Rs 15000
Now from the above question keeping the gross profit same if the indirect expenses of the organization are Rs 2000 and the other income is Rs 1000.
Then,
NET PROFIT = GROSS PROFIT – INDIRECT EXPENSES + OTHER INCOMES
= Rs ( 15000 – 2000 + 1000)
= Rs 14000
Treatment
Treatment of gross profit and net profit is given as follows :
Gross profit
• Gross profit appears on the credit side of the trading account.
• Gross profit is located in the upper portion beneath revenue and cost of goods sold.
Net profit
• Net profit appears on the credit side of the profit and loss account.
• It is treated directly in the balance sheet by adding or subtracting from the capital.
Here is an extract of the trading and profit/loss account and balance sheet showing GROSS PROFIT & NET PROFIT :
See less