The trading and profit and loss accounts are temporary accounts in the general ledger. The trading account shows the gross profit and is particularly useful for a trading business which buys and sells finished products as it allows the gross profit and gross profit percentage to be calculated.
The sales return day book is used to record goods returned by customers. The sales return book is not part of the double entry posting and is simply a chronological list of credit notes issued to customers and used to post the accounts receivable and general ledgers.
When a partner retires the existing partnership is dissolved. To calculate the amount due to the retiring partner net assets are adjusted to fair value. Depending on the method of partnership accounting used bonus or goodwill journal entries may be necessary if the amount paid to the retiring partner differs from their adjusted net asset value.
The equity method of accounting reflects the economic reality of an investment transaction. By recording changes in the value of the investee business in an investment account the investor recognizes the significant influence it has over the operations of the investee.
The net cash flow in or out for a business for an accounting period must be matched by changes in cash flow funding.
If we use the example cash flow statement below, the top half of the cash flow statement shows the cash flows in and out due to operating. financing and investing activities the final figure (highlighted in green) represents the net cash flow out of the business, in this case £57,000. In order for this to happen, the business must match this cash flow out with additional funding.
A business expects to receive consideration for the sale of goods to its customers. Since accounting periods are for a defined time period a process is needed to allocate the correct amount of consideration to the correct period. This process is referred to as revenue recognition and is applied using a five step revenue model.
Net purchases is equal to the gross purchases of goods from suppliers less the amount of purchase returns, allowances, and discounts. To arrive at the total cost of goods purchased the business needs to add the cost of freight-in needed to deliver the goods to their present location and condition ready for sale to customers.