DAY 2 Prepare JAIIB Accounting and Finance for Banking 2024

Trial Balance & Ledger

Stage Within an Accounting Cycle.

Identify a transaction
Prepare voucher for evidence
Record a journal entry
-Prepare a ledger
Balance the ledger
Execute all adjustments
-Prepare a trial balance
Prepare financial statements

Go Back to Day 1

Ledger – It is prepared after recording journal entries, consequently, it acts as a support to prepare the trial balance.

Trial Balance – It is the next step after adjusting and closing the ledger accounts, therefore acting as the groundwork for the preparation of financial statements.

Difference Between Ledger & Trial Balance

Although ledger and trial balance are both integral parts of the same accounting cycle, there is still a considerable difference between ledger and trial balance. They both have their respective relevance and timing in the business cycle. In short, a ledger is an account wise summary of all monetary transactions, whereas a trial balance is the debit and credit balance of such ledger accounts.

Traditionally a ledger was prepared in a physical book with a separate page for each account and a trial balance was derived from these accounts. In the modern days, all the data is stored in ERPs with the help of computers.

Ledger Vs Trial Balance in Table Format

Trading and Profit and Loss Account
It is motto of every business to know Profit or Loss from the business during current financial year.

• Trading Account includes, Opening Stock, Purchases and all Direct Expenses. The
  resultant figure is always Gross Profit
• Profit and Loss Account is started with Gross Profit or Gross Loss. The Administrative
  and Selling Expenses which are also called Indirect Expenses are deducted. Incomes
  are credited. The resultant figure is always Net Profit.

Related Links:

What is a Trading Account?

A trading account helps in determining the gross profit or gross loss of a business concern, made strictly out of trading activities. Trading involves buying and selling activities. In the trading account, the cost of goods sold is subtracted from net sales for the period to calculate gross profit. Only direct revenue and direct expenses are considered in it. Trading account is prepared mainly to know the profitability of the goods bought by the businessman.

The difference between selling price and cost of goods sold is the earning for the businessman, which is also known as gross profit. Whereas, net profit means all revenues minus all expenses including the cost of goods sold, the selling, general and administrative expenses and the non-operating expenses. Thus in order to calculate the gross earning, it is necessary to know the cost of goods sold and sales figures. Also,

Gross Profit = Sales – COGS (Sales + Closing Stock) – (Stock in the beginning + Purchases + Direct Expenses)

Items included on the debit side are opening stock, purchases, and direct expenses and on the credit side are sales and closing stock. The resultant figure is either gross profit or gross loss.

Closing entries for Gross Profit/Loss

In case of gross profit:

Trading A/c -Dr.

To Profit and Loss A/c

And, in case of gross loss:

Profit and Loss A/c -Dr.

To Trading A/c

What is the Profit and Loss Account?

The profit and loss account is opened by recording the gross profit on credit side or gross loss on the debit side.

For earning the net profit, a businessman has to incur many more expenses in addition to the direct expenses. Those expenses are deducted from profit or added to gross loss and thus, the resultant figure will be net profit or net loss.

Expenses included in the profit and loss account are Selling and distribution expenses, Freight & carriage on sales, Sales tax, Administrative Expenses, Financial Expenses, Maintenance, depreciation and Provisions and more. On the credit side, Discount received, Commission received, Profit on sale of assets and more appear.

Closing entries for Net Profit/Loss

In case of a net profit:

Profit and Loss A/c -Dr.

To Capital A/c

And, in the case of net loss:

Capital A/c -Dr.

To Profit and Loss A/c

ALSO STUDY in Day 2: Cash Book and Subsidiary Books – Financial Books AFB

JOIN US FOR MORE INFORMATION