INTRODUCTION

The primary purpose of this chapter is, as indicated in the final section of the previous chapter, to introduce the method of preparing a detailed profit and loss account within the double entry system, by the use of revenue and expense accounts. There are, however, three subsidiary objectives. Firstly, the appropriation or capital account, which links profit, P, to change in net worth, ΔN, and which was introduced in chapter 2, will be illustrated. Secondly, the numerical illustration will relate to a manufacturer (R. T. Zan) rather than a retailer (R. E. Taylor), and this will give us the opportunity of examining how stocks and work-in-progress are recorded. Thirdly, we shall start to use the debit (dr.) and credit (cr.) notation, rather than the elementary ‘+’ and ‘-’ used earlier, and balances will now be carried down by the double entry ‘c/d, b/d’ method. We shall, however, continue to use the tabular double entry system, because its compactness has particular advantages in displaying the inter-relationships between accounts which are of particular importance in the illustrations presented here. In chapter 5, we shall resort to the T account format.

A BASIC ILLUSTRATION

Our illustration will begin by presenting accounts which have a single profit and loss account, as in chapter 3, rather than separate revenue and expense accounts.