• Profit = Total (Incomes + Gains) − Total

(Expenses + Losses)
Using this relation, a positive profit figure indicates a profit and a negative profit figure indicates
a loss.

• Math of Ascertainment of Profit/Loss

Nominal accounts are related to incomes/gains and expenses/losses. Thus the information
relating to the aspects that would define the profit or loss made by the organisation is contained
in the Nominal accounts.

» Nominal Accounts with Debit balances

Those ledger accounts which have a debit balance in them represent expenses or losses

The total (sum) of balances in all the nominal (ledger) accounts with a debit balance indicates the
total (expense + losses).

» Nominal Accounts with Credit balances

Those ledger accounts which have a credit balance in them represent incomes or gains.

The total (sum) of balances in all the nominal (ledger) accounts with a credit balance indicates
the total (incomes + gains).

If the total of (expense + losses) and (incomes + gains) are set off, we would be able to arrive at
the profit or loss made.

Thus the relation to ascertain the profit or loss can be written as

Profit = Sum of balances in Nominal accounts

with a Credit Balance
− Sum of balances in Nominal accounts with
a Debit Balance .
Conversion from One System to Another
In practice we consider only the Cash and Accrual bases as the systems of accounting. As such,
conversion implies converting from cash basis of accounting to the mercantile basis of accounting and
vice versa.

For the purpose of deriving each piece of information, a ledger account is created. The more the
information we need, the more the accounting heads we need to maintain.

Conversion

 From Cash Basis to Accrual/Mercantile Basis would require the following information to be
brought into the books of accounts.
 From Mercantile/Accrual Basis to Mercantile Basis would require the following information to
be written off from the books of accounts.

1. Expenses Outstanding [≡ Creditors]

The amount of expenses that have been incurred but have not yet been paid out.

Separate ledger accounts may be used for each distinct expenditure (like outstanding
salaries a/c, Rent payable a/c, Interest unpaid a/c etc.) or a single account may be used in
place of all these (like outstanding expenses a/c or creditors for expenses a/c).

Creditors !!! (for expenses)

When an expenditure is outstanding it amounts to a liability for the organisation. It may have to
be paid to a person or an organisation. Any person or organisation to whom we owe money is
called a creditor. As such, the "outstanding expenditure a/c" is a personal account in the nature
of a creditor. Since it is indicative of a creditor, it carries a credit balance and has to be shown on
the liabilities side of the balance sheet.

The creditors for expenses are cleared in the subsequent periods by paying them out.

2. Expenses Prepaid [≡ Debtors]

The amount of expenses that have not yet been incurred but have been paid out in advance.

Separate ledger accounts may be used for each distinct expenditure (like Advance salaries
a/c, Rent prepaid a/c, Interest paid in advance a/c etc.) or a single account may be used in
place of all these (like Prepaid expenses a/c or expenses paid in advance a/c).

3. Incomes Receivable [≡ Debtors]

 The amount of incomes (revenue) that have arisen and have not yet been received.

Separate ledger accounts may be used for each such income (like Interest Receivable a/c,
Commission Due a/c, etc.) or a single account may be used in place of all these (like
Incomes Still Receivable a/c).

4. Incomes Pre-received [≡ Creditors]

Incomes that have not yet arisen but have been received in advance.

Separate ledger accounts may be used for each such income (like Interest received in
advance a/c, Commission Pre received a/c, etc.) or a single account may be used in place
of all these (like Pre-received Incomes a/c or Incomes received in advance a/c).

 
Incomes Receivable
At the end of the accounting period, there may be incomes which have become due but have not yet
been received. If the organistion is following the mercantile system of accounting, these incomes are to
be brought into account.

 Credit » Income a/c

"Income a/c" is a nominal account with a credit balance. The balance in the "Income a/c"
generally indicates the total amount received on account of the income during the current
accounting period.

To bring the income that has not yet been brought into account into the books, the
relevant income account has to be credited.
[Income a/c – Nominal a/c – Credit all Incomes and Gains.]

 Debit » Income Receivable a/c

The income receivable is indicative of an amount that is owed to the organisation by a person or
organisation. The persons who owe to the organisation are its debtors.

Thus amount of income receivable is debited to the "Income Receivable a/c".

[Income Receivable a/c – Personal a/c – Debit the benefit receiver.]

Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006

Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)

1st to – Income Receivable a/c Dr – xxx

30th       To Income a/c – xxx

[For the amount income relating to the current period, not

yet received brought into the books.]

Adjustment
The amount of income receivable is to be

1. Added to the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
 2. Shown as an asset on the assets side of the balance sheet.

Explanation/Illustration » Hide/Show

Trial Balance of M/s ___ as on 1st April 2005

Debit Amount Credit Amount

Particulars L/F
(in Rs) (in Rs)

Income a/c –

Income Receivable – 6,800

a/c

Total      

The "Income a/c" being a nominal account is created anew in every accounting period. Thus it
has no balance on the opening day of the accounting period.

 Cash received towards the income

» Rs. 1,02,000 (includes past dues Rs. 5,200)
 Income is to be received @ Rs. 9,000/month

Income Receivable relating to the current period = Rs. 11,200 {(Rs. 9,000 × 12) − (Rs. 1,02,000 − 5,200)}

Method I :: "Income Receivable a/c" exists all throughout

"Income Receivable a/c" is treated as a separate asset and the amount received towards the past dues
are recorded through this account.

Journal in the books of M/s ____ for the period from 1st July 2005 to 30th June 2005

Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)

1st to – Cash/Bank a/c Dr – 1,02,000

31st       To Income a/c – 96,800
      To Income Receivable a/c – 5,200

[For the amount received towards the income relating to the

current period as well as the past period dues.]

Dr Income a/c Cr
 Amoun
Amount
Date Particulars J/F t Date Particulars J/F
(in Rs)
(in Rs)

31/03/0 To Bal c/d – 96,800 1st-31st By Cash/Bank a/c – 96,800

6

      96,800       96,800

        31/03/06 By Bal b/d – 96,800

Dr Income Receivable a/c Cr

Amoun
Amount
Date Particulars J/F t Date Particulars J/F
(in Rs)
(in Rs)

01/04/0 To Bal b/d – 6,800 1st-31st By Cash/Bank a/c – 5,200

5 31/03/06 By Bal c/d – 1,600

      6,800       6,800

01/04/0
To bal b/d – 1,600        
6

Trial Balance of M/s ___ as on 31st March 2006

Debit Amount Credit Amount

Particulars L/F
(in Rs) (in Rs)

Income a/c – 96,800

–
Income Receivable 1,600
a/c

Total      

Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006

Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)
30/06/06 – Income Receivable a/c Dr – 11,200
      To Income a/c – 11,200

[For the amount of income relating to the current period,

not yet received, brought into the books.]

Dr Income a/c Cr

Amount J/ Amount
Date Particulars J/F Date Particulars
(in Rs) F (in Rs)

31/03/0 To P/L a/c – 1,08,00 31/03/06 By Bal b/d – 96,800

6 0 31/03/06 By Inc. Rec a/c – 11,200

1,08,00
            1,08,000
0

               

Dr Income Receivable a/c Cr

J/ Amount Amount
Date Particulars Date Particulars J/F
F (in Rs) (in Rs)

31/03/06 To Bal b/d – 1,600 31/03/06 By Bal c/d – 12,800

31/03/06 To Income a/c – 11,200

      12,800       12,800

01/04/06 To bal b/d – 12,800        

Dr Trading and Profit & Loss a/c Cr

Amoun Amoun
Amount Amount
Particulars t Particulars t
(in Rs) (in Rs)
(in Rs) (in Rs)

 
Income a/c 1,08,000

           

Balance Sheet of M/s ______ as on 30th June 2006

Liabilities Amount Amoun Assets Amoun Amount

 t t

Income Receivable 12,800

 
 

           

Method II :: "Income Receivable a/c" is raised and written off

The "Income Receivable a/c" is created at the end of the accounting period and is written off by transfer
to the "Income a/c" at the beginning of the accounting period.

Trial Balance of M/s ___ as on 1st April 2005

Debit Amount Credit Amount

Particulars L/F
(in Rs) (in Rs)

Income a/c – –

Income Receivable – 6,800

a/c

Total      

The balance in the "Income Receivable a/c" at the beginning of the accounting period represents
the income receivable at the end of the previous period brought forward. The balance in the
"Income Receivable a/c" at the beginning of the accounting period is transfered to the "Income
a/c".

Dr Income Receivable a/c Cr

Amount Amount
Date Particulars J/F Date Particulars J/F
(in Rs) (in Rs)

01/04/05 To Bal b/d – 6,800 01/04/05 By Income – 6,800

a/c

      6,800       6,800

               
The closing balance in the "Income a/c" indicates the total income receivable at the end of the
accounting period. Even in this case, the total amount received during the current period is to be
treated as being received for the income (without seggregating between receipt for the current
period and receipt
The amount that isfor the previous
received during period dues)period, whether towards the current period dues or
the current
the previous period dues is recorded through the "Income a/c", as that is the only account that is
The postings in the "Trading a/c" or "Profit and Loss a/c" would be the same as above with the
available.
only difference being in the name of the account head that is shown in the balance sheet. "Income
a/c" would appear in the balance sheet instead of the "Income Receivable a/c".

Adjustment during Final Accounting

Adjustment is bringing in the effect of the transactions through mathematical operations of addition and
subtraction. The adjustments to be made can be found out by ascertained the net effect of the journal
entries to be recorded.

Adjustments are generally required for transactions which are not yet recorded at the time of
making up the final accounts i.e. towards the end of the accounting period.

For the income receivable to be recorded at the end of the accounting period.

Regular Entries Net Effect

1) Income Receivable a/c   Dr

      To Income a/c
Income Receivable a/c   Dr
    To Trading a/c (Or) Profit & Loss a/c
2) Income a/c   Dr
      To Trading a/c (Or) Profit & Loss a/c
a/c
The net effect would give an understanding on where the amounts are to be adjusted.

The amount of income receivable at the end of the accounting period is to be

1. Added to the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as an asset on the assets side of the balance sheet.

Method I
Dr Trading and Profit & Loss a/c Cr

Amoun Amoun
Amount Amount
Particulars t Particulars t
(in Rs) (in Rs)
(in Rs) (in Rs)
 Income 96,800
  (+) Cur. Per. Out.   11,200
Total Inc 1,08,000

           

Balance Sheet of M/s ______ as on 30th June 2006

Amoun Amoun Amoun

Liabilities Assets Amount
t t t

     
Inc Out. 1,600
  (+) Curr. Per. due   11,200
Total Inc. Out. 12,800
 

           

Method II
Dr Trading and Profit & Loss a/c Cr

Amoun
Amount Amount Amount
Particulars t Particulars
(in Rs) (in Rs) (in Rs)
(in Rs)

Income 95,200
  (+) Total   12,800
Out. 1,08,000
Total Inc

           

Balance Sheet of M/s ______ as on 31st March 2006

Amoun
Liabilities Amount Assets Amount Amount
t

       
Inc. 12,800
 Outstanding  

           

Income Prereceived
At the end of the accounting period, there may be incomes which have been received in advance. These
are incomes which are received in advance and would have to be adjusted in the relevant income during
the subsequent accounting periods.

Advances received are treated in a different manner from incomes prereceived, the difference
being that the advances are repayable whereas incomes prereceived are liquidated by adjusting
them in the amounts to be received in the future towards the income.

 Debit » Income a/c

"Income a/c" is a nominal account with a credit balance. The balance in the "Income a/c"
generally indicates the total amount received on account of the income during the current
accounting period.

On the assumption that the receipts towards the income include the income prereceived,
the income has to be adjusted (reduced) to ascertain the actual income that can be
considered for the current period.

"Income a/c" shows a credit balance and as such to reduce it, the "Income a/c" has to be
debited.
[Income a/c – Nominal a/c – Debit the benefit receiver.]

 Credit » Income Prereceived a/c

The income prereceived is indicative of an amount that is owed by the organisation to another
person or organisation. The persons to whom the organisation owes are its creditors.

Thus amount of income prerecieved is credited to the "Income Prereceived a/c".

[Income Prereceived a/c – Personal a/c – Credit the benefit giver.]

Journal in the books of M/s ____ for the period from 1st April 2005 to 31st March 2006

Debit Credit
V/R
Date Particulars L/F Amount Amount
No.
(in Rs) (in Rs)

1st to – Income a/c Dr – xxx

31st       To Income Prereceived a/c – xxx
 [For the amount income relating to the subsequent periods
received in advance being adjusted from the current period
income.]

Adjustment
The amount of income prereceived is to be

1. Deducted from the relevant income on the credit side of the "Trading a/" or "Profit & Loss a/c".
2. Shown as a liability on the liabilities side of the balance sheet.