Important Items of Trading Account Part 2

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  1. Stock: It refers to the value of goods lying unsold on a particular date.

    1. Opening Stock – The value of the goods lying unsold at the beginning of the accounting year. It is on debit side of the trading account and there will be no opening stock for the first year of the business operations.

    2. Closing Stock – The value of the goods lying unsold at the end of the accounting year. It is on credit side of the trading account.

  2. Purchases: It represents the total value of the purchases during the year i.e. Net purchases (purchases – purchases returns). Purchases can be both in cash and on credit. Purchases appear on debit side of the trading account.

    Note: Goods received on consignment basis are never treated as purchases.

  3. Sales: It represents the total revenue received from the sale of goods. The sale could be either in cash or on credit. We represent Net Sales i.e. Total sales minus Sales returns. Sales appear on credit side of the trading account.

    Note: Goods sent on approval are not part of sales until approval is received.

  4. Direct Expenses: Expenses incurred directly for the purchase of goods or good manufactured. These expenses appear on debit side of the trading account. These include-

    1. Wages – Remuneration paid to the workers (blue collar employees – involve in direct production process).

    2. Carriage Freight – money paid for transport of goods purchased i.e. raw material etc.

    3. Others direct expenses such as packing materials, fuel, electricity, water and gas etc.

  5. Gross Profit/ Gross Loss:

Gross Profit = Net sales – Cost of goods sold (COGS)

Gross Loss = Cost of goods sold – Net sales

Where,

COGS = Opening Stock + Net Purchases + All Direct Expenses – Closing Stock

Need of Trading Account:

  • To know the Gross Profit or Gross Loss incurred by the business firm for a particular accounting period.

  • To know all direct expenses and their contribution. It helps in controlling of direct expenses.

  • To provide precaution measures to the management about the future losses.

Image of Trading Account

Image of Trading Account

Image of Trading Account

Transfer Entries:

Before preparing Trading Account for the year, all the closing entries should be entered in the journal proper. These journal entries are

Image of Transfer Entries

Image of Transfer Entries

Image of Transfer Entries

Example: The ledger balances extracted at the close of a trading year on 31st March, 2006 are given as-

Ledger Balances Extracted at the Close of a Trading Year
Title: Ledger balances extracted at the close of a trading year

Name of the Account

Amount (Rs.)

Opening stock

12000

Purchases

52000

Sales

74000

Purchase Returns

2000

Carriage Inward

800

Wages

4200

Closing stock

13500

Make necessary journal entries in the journal proper.

Solution: Journal of xyz Ltd. For the year ending on 31st March, 2006

Table of Journal of Xyz Ltd. For the Year Ending on 31st March, 2006
Title: table of Journal of xyz Ltd. For the year ending on 31st March, 2006

Date

Particulars

L.F

Amount (Rs.)

Dr.

Cr.

2006

Mar 31

Trading A/c Dr.

To Open Stock A/c

To Purchases A/c

To Wages A/c

To Carriage Inward A/c

(Transfer of debit balances to Trading A/c)

69,000

12,000

52,000

4,200

800

Mar 31

Sales A/c Dr.

Purchases Returns A/c Dr.

Closing Stock A/c Dr.

To Trading A/c

(Transfer of credit items to Trading A/c)

74,000

2,000

13,500

89,500

Mar 31

Trading A/c Dr.

To Profit and Loss A/c

(Transfer of gross profit to P&L A/c)

20,500

20,500