Trading Account

Meaning: The trading account is an account which shows only the result of trading called gross profit or gross loss. It is the account which merely shows the result of buying and selling of goods without taking into account administration, selling and distribution expenses incurred in conducting the business. Objectives: 1. It reveals the stock of goods existing at the beginning of the year and also at the end of the year. 2. It helps to know the cost of goods purchased and the total sales during the trading period. 3. The direct expenses incurred during the accounting period can be known from the trading account. 4. It discloses the gross result of the business on account of buying and selling of goods. 5. The help of trading account, a trader can compare can his purchases, sales and stock of goods with those of previous years to know whether the progress has been made or not. 6. The percentage of gross profit helps the trader to affect the necessary in the selling price of the goods in future. Preparation of the trading account: The trading account is prepared from only those transactions which are directly connected with the goods. Such transactions are: 1. Opening stock. 2. Purchases of goods. 3. Purchases return. 4. Direct expenses incurred on goods. 5. Sale of goods. 6. Sale return. 7. Closing stock of goods.

Format of trading Account

Particulars To opening stock : Raw materials xxx Semi finished goods xxx Finished goods xxx To purchases xxx Less: returns out xx Wards or purchase return To Direct Expenses: Wages Freight and carriage Cartage Import duty and octroi Coal, gas fuel and power Excise duty Dock charges Lighting and heat charges Carriage inwards Manufacturing expenses Factory expenses Production expenses Royalty Gross profit transferred to P & L a/c Amount Particulars By sales Less: returns in Wards or sales Returns Amount xxx xx XXX By closing Stock : Raw materials xxx Semi finished goods xxx Finished goods xxx XXX By balance of gross loss transferred to P & La/c

XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX XXX

XXX

XXXX

XXXX

Explanation of the important items recorded in the trading account: Debit side of the trading account: 1. Opening stock: It is the first item in this account. It is the value of stock of goods at the beginning of the year. Generally there will be opening stock except in case of a newly commenced business. It will be given in trial balance as a debit item. The opening stocks of manufacturing concern consist of raw materials, partly finished goods and finished goods. 2. Purchases: This item includes credit purchases as well as cash purchases of goods. The total purchases are shown in the inner column to deduct purchases returns if any. In absence of purchases returns the total purchases will be treated as net purchases. 3. Carriage inwards: These are the expenses incurred for bringing the goods purchased to the premises of a trader. For e.g. Carriage, cartage, freight etc, paid for transportation of goods. This is shown on the debit side of trading account. Carriage and cartage etc., paid to bring the assets purchased should not be taken to trading account but they should be added to the value of the particular asset. 4. Wages: It paid to workers or labourers, who are directly engaged in the manufacture of goods, should be debited to trading account. Wages paid to other workers who are not engaged in manufacture of goods should be debited to P & account or to the concerned asset, as the case may be. 5. Freight and octroi: It is paid on the purchase of goods should be debited to trading to account. But freight and octroi paid on the purchase of an asset is added to the value of the particular asset. 6. Fuel and power: These are the direct expenses incurred for the manufacture of goods. They should be debited to trading account.

7. Coal, gas and electricity: These expenses are incurred during the process of manufacturing goods and they are debited to trading account. But part of the electricity charges may be for office lighting which is to be debited to profit and loss account. 8. Duty and clearing charges: Import duty, excise duty etc., incurred on the purchase of goods should be debited to trading account. 9. Stores consumed: It is the expense incurred on oil, cotton waste, grease etc., in course of manufacturing the goods and should be debited to trading account. 10.Other direct expenses: The other direct expenses like factory expenses, factory rent, factory insurance, salary of foreman or works manger and royalty on manufacture of goods and materials for special packing of goods are debited to trading account. Credit side of the trading account: 1. Net sales: It is the first item on the credit side of the trading account. Sales include both cash sales and credit sales. The total sales are shown in the inner column. The sale return or returns inwards, if any are deducted from such total to show the net sale in the outer column. 2. Closing stock : The second item on the credit side of the trading account is closing stock. The closing stock represents the stock of finished goods at the close of the trading period in case of a trading concern. But in case of manufacturing concern it represents the stock of raw materials; semi finished goods and finished goods at the close of the trading period. The closing stock generally, does not appear in the trial balance. Therefore its value has to be calculated and brought into books of account by means of a journal entry, debiting closing stock account and crediting trading account.

Exercises:
1. Prepare the trading account from the following information.

Particulars Opening stock Purchases Carriage inwards Wages Sales Closing stock

Amount 5000 15000 1000 2000 25000 8000 (Ans: G/p 10000)

2. From the following information prepare trading account Particulars Opening stock Purchases Purchases returns Sales Sales returns Carriage inwards Duty and clearing charges Closing stock

Amount 15000 82000 2000 123000 3000 5000 4000 16000

(Ans: G/p: 32000) 3. Prepare trading account for the year ending 31.12 2011 from the following ledger balances. Particulars Amount Particulars Amount Stock on 1.1.2011 5000 Carriage inwards 1200 Purchases 72000 Selling expenses 700 Sales 91000 Wages 2800 Return inwards 1000 Office salaries 3000 Return outwards 2000 Office rent 400 Advertisement 500 Cash discount 300 Stock as on 31.12.2011 was valued at Rs.7000 (Ans: G/P: 18000)

4. The following are the balances extracted from the ledger of a manufacturing concern. Prepare a trading account Particulars Amount Stock at commencement: Raw materials 10000 Partly finished goods 5000 Finished goods 45000 Purchases of raw materials 71000 Freight and octroi on purchases 1500 Manufacturing wages 40000 Motive power and water for factory 3500 Factory rent 3000 Stores consumed 2000 Sales 157500 Return inwards 2500 Return outwards 1000 Stock at close Raw materials 12000 Partly finished goods 6000 Finished goods 57000 (Ans: G/P: 50000) 5. Prepare trading account from the following ledger account balances of a manufacturer Particulars Amount Particulars Amount Stock at commencement: Return outwards 5500 Raw materials 50000 Sales 300000 Partly finished goods 25000 Stock at close Finished goods 75000 Raw materials 60000 Freight and octroi 7000 Partly finished goods 30000 Manufacturing wages 20000 Finished goods 85000 Gas, electricity and water for the factory 18000 Stores consumed 10000 Factory rent 8000 Factory expenses 3000 Purchases of raw materials 35500 Return inwards 15000 (Ans: G/P: 50000)