(I hope that before you read this, you’ve arrived at the correct profit / loss for the Hitesh Traders example.)
चिंतन शिविर (Chintan Shivir) means a gathering of people where they think upon (and hopefully, improve on) their shortcomings in carrying out a particular task. At other times, it is also seen as a ‘Brainstorming Session’.
Put simply, it is where we have detailed discussion on a particular topic / issue.
In our first edition of Chintan Shivir, let us try to put forth the problems you and I might’ve faced in the calculation of profit/loss discussed in the solution pdf.
1. It is too time consuming.
Even if you didn’t go by my calculating the net profit or loss, fact of the matter is:
- You did have to go through every single entry
- See whether it contains items recognised as either Income/Gain or, Expense/Loss then,
- Group them together on a separate page
- Make necessary adjustments for closing stock, prepaid expenses, etc.
Only after all these steps can you arrive at the Profit/Loss for the period.
2. Repetition of Items
In the journal solution, we can clearly see items like Purchases, Sales, Cash, etc. repeating on different dates.
Repeated item: Purchases
Repeated item: Sales
Now, this repetition of items makes perfect sense when we make entries day-by-day, but it is surely a nuisance when we are calculating profit / loss (even I made mistakes in this process).
Thus, wouldn’t it be better if we had some arrangement whereby, similar items could be grouped & we could track the total figure?
This would shorten our process to a great extent, which reduces the chances of making errors.
While all this sounds good, what would such an arrangement look like? What form would it take? How do we materialize this idea in real life?
Regarding these specifics, one idea comes to mind: Why not just maintain another book?
In addition to journal where we originally make our entries, we can maintain a Second book where similar items will be grouped and we can simply separate Incomes & Expenses for our P&L calculation.
While this may mean spending a few more minutes in our daily accounting, this would surely help us reach our goal of saving time on any day, be it 31st of March or some other date, where we wish to check our profitability.
And not coincidently, this second book does exist in today’s accounting world and is known by the name…
‘Ledger’.
Thus, today’s Chintan Shivir has helped us address the issues in journal and understand the rationale behind the spawn of Ledger to resolve those issues.
Leave a Reply