Accumulated profit is the amount of profit left after the payment of dividends to the shareholders. It is also known as retained earnings. It is the profit that is not distributed as dividends to shareholders, hence called retained earnings. This accumulated profit is an important source of internal finance for a company. Accumulated profit or retained earnings can be ascertained using the following formula:

Accumulated profit = Opening balance of accumulated profit + Net Profit/Loss (loss being in the negative figure) – Dividend paid

Accumulated profit can be put to the following uses:

• To reinvest into the business in form of capital assets or working capital.
• To repay the debt of the company.
• To pay dividends in future.
• To set off the net loss made by the company.

Accumulated profit and reserves are often considered the same. But in substance, they are not. The reserves are actually part of the accumulated profit, but the converse is not true. They are created by transferring amounts from the accumulated profit. While reserves are created for purpose of strengthening the financial foundation of a firm, the accumulated profit’s main purpose is to make reinvest in the business to increase its growth.

The amount of accumulated profits depends upon the retention ratio and dividend payout ratio of a company.  The retention ratio is the opposite of the dividend payout ratio.

The formula of dividend pay-out ratio = Dividend payable/Net Income

And retention ratio = 1 – (Dividend payable/Net Income)

If the retention ratio is more than the dividend payout ratio, the accumulated profit remains positive.

The term ‘contra’ means opposite or against. In financial accounting, we encounter the term ‘contra’ in:

• Contra accounts
• Contra entries

The meaning of contra in the above mention terms is also the same as their general meaning. Contra accounts mean the account which is opposite of the account it corresponds to.

Contra entries are entries of the debit and credit aspects related to the same parent account.  Let’s discuss them in detail.

Contra accounts

Any account which is created with the purpose of reducing or offsetting the balance of another account is known as a contra account.

A contra account is just the opposite of the account to which it relates. The most common examples are the sales discount account and sales return account which is the contra account of the sales account.  They are just the opposite of the sales accounts.

Contra Entries

Contra entries refer to the entries which show the movement of the amount within the same parent account. Here, the debit and credit entry is posted on the debit and credit side respectively of a single parent account.  Mainly, contra entries are the entries involving cash and bank accounts.

The following transactions are recorded as contra entries:

• Cash to Bank transactions: Deposit of cash into the bank account by the entity.
• Bank to Cash transactions: Withdrawal of cash from the bank.
• Cash to cash transactions: Transfer of cash to the petty cash account.
• Bank to Bank transactions: Transfer of amounts from one bank account to other bank accounts of the same entity.

Contra entries are marked by the letter ‘C’ beside the postings in the ledger. Deposit of cash in to bank will be posted in cashbook as below:

Meaning

The term ‘Sundry creditors’ consist of two words:  ‘Sundry’ and ‘creditors’. 

The word ‘sundry’ means the items which are not significant enough to be named separately. It also refers to a collection of miscellaneous items.

Creditors are the person from whom money is borrowed or goods are purchased on credit by a business or a non-business entity. They have to be repaid after a period of time which is usually less than or up to one year.

By combining the meaning of both words, ’sundry’ and ‘creditor’, the term ‘sundry creditor’ will refer to the collection of insignificant creditors of an entity.

Back in the days when accounting records were maintained on paper, only the records of those creditors were maintained separately, from whom goods are purchased regularly and in large amounts. 

But there used to be numerous other creditors with whom the transactions were occasional and insignificant. To reduce the paperwork, records of all such creditors were maintained on a single page or book under the head ‘Sundry Creditors’

Nowadays, as accounting records are maintained digitally, hence maintaining records of each and every creditor is not a problem. 

Hence, every creditor whether small or big, is grouped under the head ‘Sundry creditor’ or ‘Trade Creditor’.

Accounting Treatment 

Sundry creditors are the persons to whom a business owes money. 

Hence, as per golden rules of accounting, Sundry creditor is a personal account and the golden rule for personal account is, ‘Debit the receiver and credit the giver’ 

We know sundry creditors are liabilities, hence, as per modern rule of accounting, sundry creditors are credited in case of increase and debited in case of decrease.

Example, a business purchased goods for Rs. 10,000 from ABC & Co. The journal entry will as follows:

Here, ABC & Co is the creditor. It is credited as it is a personal account and the creditor has given the goods to the business, hence the giver is credited.

From point of view of modern rules of accounting, ABC & Co. is a creditor, a liability. On purchase of goods on credit, a liability is created. Hence, ABC & Co A/c is credited.

Balance sheet

Sundry creditor is a current liability, so it is shown on the liabilities side of a balance sheet. Trade payable and accounts payable mean sundry creditors only.