Trading accounts and its format

What is trading Accounts in Accounting and its Format

What is Trading Accounts ?

Trading accounts is first  part of Income statement .It shows either Gross Profit or Gross Loss. 

The Gross Profit or Gross Loss is then transfer to Profit and Loss Accounts which is secound part of Income statement .

Now We can say that Trading accounts is prepared to calculate gross profit and gross loss which incurred due to trading activities in business.

If the amount of sales of goods or service in a particular period exceeds the amount of purchase and the expenses directly connected with such purchases the difference is termed as Gross profit. On the other hand if the purchases and direct expense exceed the sale the difference is called gross loss. 

Trading accounts includes all direct expenses .

According to J.R Batuboi ” The trading accounts shows the result of buying and selling of goods .In preparing this account the general establishment charges are ignored and only the transaction in goods are included”

Trading Accounts shows all the transaction relating to goods purchases and we can say all expense till sale of goods 

Why to prepare Trading Accounts ?

Some point to know why to prepare Trading Account.

1) Trading Account help to find out Gross profit and loss.

Trading account gives information about gross profit or gross loss made by the firm in a particular financial year, which results from buying or selling of goods during a particular financial year.

It helps to analyze  and compare the gross profit or gross loss to two financial years .Thus gives us information for improvement .

2) Trading Account Gives information of Closing stock

Closing stock has to be valued and recorded in a trading account. We can compare this stock with the closing stock of the previous year and if the stock shows an increasing trend the reason may be to consideration.

3) Trading accounts provide information about the direct expenses

They recorded all the expenses incurred on the purchase and manufacturing of goods in the trading account in a summarized form and are also known as direct expense .

Percentage of such expense on sales can be calculated compared and analysis with those of previous year  .It help to control the expense .

4) It provides safety against possible losses .

If the ratio of gross profit has decreased in comparison to the preceding year the businessman can take effective measures to safeguard himself against future losses.

For example, he may increases the sale price of his goods or may proceed to analyze and control the direct expense.

Trading Account Format

Trading accounts for the year ending ………….

Particular Dr.

Amount

Particular Cr.

Amount

To opening stock

Xxxx

By sales

 – Sales Return (return Inward)

Xxx

To Purchase

-Purchase Return

/ Return Inward

Xxxxxx

By closing stock

XXX

To wages

 

 

 

To wages and salaries

Xxxx

 

 

To carriage or carriage inward

Xxx

 

 

To carriage of purchase

Xxx

 

 

To gas fuel and power

Xxx

 

 

To freight ,octroi and cartage

Xxx

 

 

To manufacturing expense

 xxx

 

 

To factory lighting

Xxx

 

 

To productive expense

Xxx

 

 

To Royalty

Xxx

 

 

To Custom duty

Xx

 

 

To dock charges

xxx

 

 

 

 

 

 

 To Gross profit C/d

xxx

 By Net Loss C/d

Xxx

 

Xxxx

 

xxxx

 

 

 

 

 

Item in Debit side of Trading Accounts

Item written on the Debit side of Trading Accounts

  1. Opening Stock :

Opening stock is the stock which carried forward from the last year of goods remain unsold .This is closing stock of last year and this year it is opening stock .

It may include

a) Raw material

b) Semi-finished goods

c) Finished goods.

2.Purchase Accounts :

Purchase accounts include all goods purchase during the year for resale .They are expense by nature and direct expense for firm,

2) Purchase return Account:

It include means goods once purchased are return to its supplier .Purchase return is given in the credit side of Trial balance .Purchase return is deducted from purchase .

3. Direct Expenses :

All direct expenses are to be written in the debit side of trading accounts as it contain information of expenses relating to goods purchased means bring them to godown and converting them into finished goods.

a) Wages : Wages are given to worker who are directly engaged in loading, unloading and production of goods.

b)Carriage or Carriage on purchase : When goods are bring to the godwon by truck ,train etc the freight paid to bring such goods are known as Carriage or carriage on Purchase.

c) Manufacturing Expense : Expenses incurred while converting raw material into fished goods are terms of manufacturing expenses.

d) Dock charges:

Dock charges are charges  levied on ships and cargo  who used to bring goods through ships from  other destination .When dock charges are paid. They are expense for the organization that need to be shown in trading accounts in the books of accounts.

e) Import duty  or custom duty :

When goods or raw material of goods  are purchased from other country, then government imposes tax which is import duty that we need to show in trading account which is direct expense.

f)Octroi :

The local body of the district or state levied this when goods enter the city and hence debited the trading accounts.

g) Royalty 

This the amount paid to the owner of mine or patent for using his right or patent. It charged royalty in trading accounts because it increases the cost of production because it need to be paid to its owner. 

Item in Credit side of Trading Accounts

Item written on the credit side of trading accounts

  1. Sales Account

They showed sales account in the credit side of the trading account and it is direct income for the firm. It includes both cash and credit sales.

2 .Sales Retun 

The goods once sold are returned by the customer  is known as Sales return. We deduct sales return from sales on the credit side of the trading account .we write Sales return on credit side of trial balance.

Closing Stock :

The goods remain unsold during the year is known as closing stock.

They value closing stock at cost price or market value, whichever is higher.

The closing stock includes closing stock of raw material , semi-finished goods and finished goods.

It is generally given outside trial balance .The valuation of closing stock when accounts are closed. It is incorporated in accounts after passing adjustment journal entry .

 

Closing stock a/c

To Trading A/c

(closing stock transfer to Trading accounts)

Point to remember while preparing trading account

  1. We value the closing stock at cost or market price, whichever is less.
  2. However, firstly, we need to show the amount of closing stock on the income side of Trading account and secondly, in the balance sheet under current asset.
  3. On the date of preparation of trading account, we value the Closing stock which is physically available.
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