Friday, October 10, 2014

Trading Account

Trading means buying and selling. The trading account shows the result of buying and selling of goods.
At the end of each year, it is necessary to ascertain the net profit or net loss. For this purpose, it is first necessary to know the gross profit or gross loss. The trading account is prepared to ascertain this. The difference between the selling price and the cost price of the goods is the gross earning of the business concern. Such gross earning is called as gross profit. However, when the selling price is less than the cost of goods purchased, the result is gross loss.
Let us now look at the format of the trading account

We’ll now see the explanation for each entity in the trading account.

Items appearing in the debit side of trading account

  1. Opening stock: Stock on hand at the beginning of the year is termed as opening stock. The closing stock of the previous accounting year is treated as the opening stock of the current accounting year. In the case of new business, there will not be any opening stock.
  2. Purchases: Goods Purchased during the year are included in Purchases, this includes both cash and credit purchases of goods. All the Purchases which have been purchased and returned back to the dealers due to some defects or excess are called as purchase returns. Purchase returns must be deducted from the total purchases to get net purchases.
  3. Direct Expenses: Expenses which are incurred from the stage of purchase to the stage of making the goods in saleable condition are termed as direct expenses. Some of the direct expenses are:

  • Wages: It is the amount paid to workers for the amount of labor they do for the organization.
  • Carriage or carriage inwards: It means the transportation charges paid to bring the goods from the place of purchase to the place of business.
  • Octroi Duty: Amount paid to bring the goods within the municipal limits.
  • Customs duty, dock dues, clearing charges, import duty etc.: These expenses are paid to the Government on the goods imported.
  • Other expenses: Fuel, power, lighting charges, oil, grease, waste related to production and packing expenses.

Items appearing in the credit side

Sales: This includes both cash and credit sale made during the year. Net sales are derived by deducting sales return from the total sales.
Closing stock: Closing stock is the value of goods which remain in the hands of the trader at the end of the year. It does not appear in the trial balance. It appears outside the trial balance. (As it appears outside the trial balance, first it will be recorded in the credit side of the trading account and then shown in the assets side of the balance sheet)

Let us prepare a Trading Account from the following information of a trader.

Total purchases made during the year 2003 Rs.2,00,000.

Total sales made during the year 2003 Rs.2, 50,000

To Purchases2,00,000By sales2,50,000
To Gross Profit c/d50,000

Let us also try to go through another example and try to learn about the Trading account in detail
The following example the information given for the year ending 31st March 2002
Opening stock Rs. 1, 70,000
Purchases return Rs. 10,000
Sales Rs.2, 50,000
Wages Rs. 50,000
Sales return Rs. 20,000
Purchases Rs. 1, 00,000
Carriage inward Rs. 20,000
Closing stock Rs. 1, 60,000

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