TRADING ACCOUNT - Accounts and Finance for Managers

This is first financial statement prepared by the owner of the enterprise to determine the gross profit during the year through the matching concept of accounting. The gross profit of the enterprise is calculated through the comparison of purchase expenses, manufacturing expenses, and other direct expenses with the sales.
It is prepared normally for one year in accordance with accounting period concept i.e., operating cycle of the enterprise which should not exceed 15 months with reference to the Companies Act 1956.

TRADING ACCOUNT

Balancing Process

  • Gross profit is the resultant of an excess of the credit side total over the total of debit side. It means that the gross profit is the excess of incomes in the credit side over the expenses in the debit side.

Gross Loss is the outcome of an excess of the debit side total over the total of credit side. It means that the gross loss is the excess of expenses in the debit side over the incomes in the credit side.

Illustration 1 with no opening stock and closing stock

Prepare the trading account for M/s Shan &Co Ltd., for the year ended 31st Mar, 2006
Total Purchases during the year Rs. 10, 000
Total Sales during the year Rs. 15, 000
In this problem, the Gross profit is simply found by deducting the sales volume from the purchases.
Gross profit = Sales – Purchases
First step open the Trading account for the year ended 31st Mar, 2006*

Trading account for the ended 31st march 2006

Gross profit Rs. 5,000 is the resultant of excess income over the expenses.
The total of the credit side more than the debit side total of the trading account.

Illustration 2 with Opening stock, various kinds of purchases and sales, Closing stock

From the following information, prepare the trading account for the year ended 31st Mar, 2006.
Final account

In this problem, the sales and purchases are given in two different categories viz. cash and credit. The credit and cash purchases and sales of a firm should be added to determine the total volume of purchases and sales made during the year.

The purpose of crediting the closing stock in the trading account is to find out the materials or goods consumed for trading purposes. In order to find out the total amount of goods or materials consumed during a year, three different components to be separately considered.

  • Opening Stock
  • Purchases and
  • Closing Stock

Opening Stock: It is a stock of goods or raw materials available at the opening of the accounting period, which is nothing but a closing stock of the yester accounting period utilized for trading during the current year.

Purchases: Purchase of goods or raw materials is either for resale or manufacturing.

Closing Stock: It is a stock nothing but an outcome of lesser volume of sales than the aggregate of opening stock and purchases
Material consumed could be calculated

Material consumption=Opening stock + Purchases - Closing stock

The closing stock is credited in the trading account in stead of deducting it directly from the aggregate of opening stock and purchases during the year. The posting of the closing stock under the credit side of the trading account not only facilitates the firm to find out the consumption during the year as well as reduces the cost of goods sold incurred during the year.

Trading account for the ended 31st march 2006

Illustration 3

Prepare trading account of M/s Sundar & Sons as on 31st Mar, 2005 from the following information extracted from the book of accounts

final account

final account

In this problem, Return out wards and in wards are given in addition to cash and credit purchases and sales of a firm to find out the Net purchases and the Net sales of the firm.
Net Sales = Cash Sales + Credit Sales - Sales Returns
Net Purchases = Cash Purchases + Credit Purchases - Purchase Returns

Trading account for the year ended 31st mar 2005

Gross Loss is due to en excess of the debit side total over the credit side total


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