Keep proper records of finances for better management

Proper accounting enables the small enterprise to prepare the profit and loss account and balance sheet of its assets and liabilities through which it can assess its functioning and progress of the venture. Therefore, it must keep regular record of its cash receipts, cash expenses, non-cash receipts and expenses in journals. It is advisable to keep three separate journals for these types of transactions i.e. cash receipt journal, cash disbursement journal, and general journal for non-cash sales and purchase, depreciation etc. These accounts help in preparation of the unit’s final accounts in the following schematic way:

Daily recording of entries for cash and non-cash transactions (Post them into) Journals/Cash book (from these records prepare) — Ledgers [from ledgers prepare) — Final accounts a) profit & loss statement; and b) balancesheet.

If daily entries are recorded of the firm’s dealings, a part-time accounts clerk can be engaged who at the weekend could post entries into proper ledgers. Entrepreneurs should verify every week that the balance in the summary accounts in the general ledger is equal to the sum of the balances of all individual accounts in subsidiary ledgers. A trial balance should be prepared to depict equality of debit and credit sides of the general ledger. Once the trial balance shows that the accounts are in balance, financial statements can be prepared for the business concern.

There are two important financial statements of a business enterprise viz. profit & loss account and balancesheet. The profit & loss account is conventionally divided into three parts viz. (1) Trading & manufacturing account; (2) profit and loss account; and (3) profit & loss appropriation account. Terms which come under debit and credit are explained below: Opening stock: While starting a trading business, goods for sale are required to be stocked which is purchased in advance; Purchase less return: When opening stock is not adequate, fresh purchases are made during the accounting period. Defective goods are returned; Carriage inwards: This shows the freight paid on purchase of goods; Duty and clearing changes paid to agencies engaged for getting the goods cleared and transported are to be recorded; Sales less returns: on credit side returned from customers; Closing stock: the accounts, sales are to be recorded in net form after deducting the goods sold; during the accounting period there may be goods left out not sold which will form the subject matter of closing stock; Gross profit (loss): Trading during the period may result into profit and loss. Profit is excess of turnover income over expenses and loss is vice-versa. Profit or loss as the case may be are transferred to profit and loss a/c accordingly.

Manufacturing account would also be prepared in the same format with expenses being shown on the debit side and sales income on the credit side. Expenses side (debit side) covers the first item on the opening stock: of raw material stock in process and finished goods. as the case may be. The other items towards direct cost are: Purchases less returns, wages (manufacturing), freight and cartage, gas, water etc/; fuel & power; factory rent, miscellaneous manufacturing expenses; repairs to factory buildings; maintenance chargesplant and machinery/land and building, and finally the gross profit (transferred to the profit & loss account). On the credit (right hand) side, the first item is sales less returns, followed by closing stocks of raw material; stock-in-process; and finished goods; and gross loss (transferred to P&L A/c).

It may be observed that in the above trading account and manufacturing accounts, administration expenses, publicity and promotional expenses etc. have not been included to arrive at gross profit or gross loss. Neither have various cash receipts and incomes accruing from varied sources been recorded. All these items are recorded in Profit & Loss Account which in traditional format contain on debit side the following items: viz. Balance brought forward; selling and distribution expenses; packing charges, carriage outwards, publicity, commissions paid to salesman; provision for bad debts; administration expenses (i.e. salaries, rent and taxes, lightening and insurance, printing and stationary, telephone charges, postage and telegraphs, legal expenses etc.) financial expenses (i.e. discounts allowed; interest on load paid; preliminary expenses written off) repair & maintenance; depreciation, and finally the net profit (transferred to P&L Appropriation A/c) and total.

On the credit side of P&L A/c, the first item to be recorded is gross profit (brought over) followed by other receipts of income like discounts, interests, rent, commissions received etc.; income from any other source and finally the net loss (transferred to P&L Appropriation A/c).Profit & Loss Appropriation A/c exhibits as to how the net profits for the year were appropriated. The debit side (left hand side) of the P&L Appropriation A/c would record: Provision for taxation; provision for repayment of capital, provision for specific liability, amount transferred to reserves and withdrawal by partners. The balance would be transferred to the balancesheet. On the credit side, balance net profit for this year is written followed by the amount transferred from reserves if any and finally total on each side to match.

As a matter of fact for non-corporate entities there is no prescribed format or specimen form for Profit & Loss account. However, for corporate entities, the Companies Act, 1956, provides vide Section 211 form and contents of balance sheet and profit and loss account. Sub-section (2) of Section 211 stipulates that every profit & loss account of a company shall give a true and fair view of the profit and loss of the company for the financial year and shall comply with the requirements of part II of schedule VI. Similarly for balance sheet, the Act provides a format in Part I of Schedule VI.For non-corporate bodies, there is no prescribed format. They maintain the accounts as per their convenience in the traditional format discussed above. However, the Reserve Bank of India has prescribed a format for the purpose of non-corporate borrowers wishing to deal with banks or borrowers for availing of loan/credit lines from them. The format is available in the application form for loans from banks.