Trading Account
As already discussed, first section of trading and profit and loss account is called trading account. The aim of establishment trading account is to find out gross profit or gross loss while that of second section is to find out net profit or net loss.
Debit Card
Preparation of Trading Account
Trading account is ready mainly to know the profitability of the goods bought (or manufactured) sold by the businessman. The disagreement between selling price and cost of goods sold is the,5 earning of the businessman. Thus in order to presume the gross earning, it is critical to know:
(a) cost of goods sold.
(b) sales.
Total sales can be ascertained from the sales ledger. The cost of goods sold is, however, calculated. N order to presume the cost of sales it is critical to know its meaning. The ‘cost of goods’ includes the buy price of the goods plus expenses relating to buy of goods and brining the goods to the place of business. In order to presume the cost of goods ” we should deduct from the total cost of goods purchased the cost of goods in hand. We can study this phenomenon with the help of following formula:
Opening stock + cost of purchases – closing stock = cost of sales
As already discussed that the purpose of establishment trading account is to presume the gross profit of the business. It can be described as excess of whole of ‘Sales’ over ‘Cost of Sales’. This definition can be explained in terms of following equation:
Gross profit = Sales-Cost of goods sold or (Sales + closing Stock) -(Stock in the beginning + Purchases + Direct Expenses)
The opening stock and purchases along with buying and bringing expenses (direct exp.) are recorded the debit side whereas sales and closing stock is recorded on the prestige side. If prestige side is Jeater than the debit side the disagreement is written on the debit side as gross profit which is ultimately recorded on the prestige side of profit and loss account. When the debit side exceeds the prestige side, the disagreement is gross loss which is recorded at prestige side and ultimately shown on the debit side of profit & loss account.
Usual Items in a Trading Account:
A) Debit Side
1. opening Stock. It is the stock which remained unsold at the end of previous year. It must have been brought into books with the help of opening entry; so it all the time appears inside the trial balance. Generally, it is shown as first item at the debit side of trading account. Of course, in the first year of a business there will be no opening stock.
2. Purchases. It is usually second item on the debit side of trading account. ‘Purchases’ mean total purchases i.e. Cash plus prestige purchases. Any return outwards (purchases return) should be deducted out of purchases to find out the net purchases. Sometimes goods are received before the relevant invoice from the supplier. In such a situation, on the date of establishment final accounts an entry should be passed to debit the purchases account and to prestige the suppliers’ account with the cost of goods.
3. Buying Expenses. All expenses relating to buy of goods are also debited in the trading account. These include-wages, carriage inwards freight, duty, clearing charges, dock charges, excise duty, octroi and import duty etc.
4. Manufacturing Expenses. Such expenses are incurred by businessmen to establish or to render the goods in saleable health viz., motive power, gas fuel, stores, royalties, installation expenses, foreman and supervisor’s wage etc.
Though manufacturing expenses are strictly to be taken in the manufacturing account since we are establishment only trading account, expenses of this type may also be included in the trading account.
(B) prestige Side
1. Sales. Sales mean total sales i.e. Cash plus prestige sales. If there are any sales returns, these should be deducted from sales. So net sales are credited to trading account. If an asset of the firm has been sold, it should not be included in the sales.
2. closing Stock. It is the value of stock lying unsold in the godown or shop on the last date of accounting period. usually closing stock is given exterior the trial balance in that case it is shown on the prestige side of trading account. But if it is given inside the trial balance, it is not to be shown on the prestige side of trading account but appears only in the balance sheet as asset. closing stock should be valued at cost or shop price whichever is less.
Valuation of closing Stock
The ascertain the value of closing stock it is critical to make a perfect account or list of all the items in the god own together with quantities. On the basis of bodily consideration the stock lists are ready and the value of total stock is calculated on the basis of unit value. Thus, it is clear that stock-taking entails (i) inventorying, (ii) pricing. Each item is priced at cost, unless the shop price is lower. Pricing an account at cost is easy if cost remains fixed. But prices remain fluctuating; so the valuation of stock is done on the basis of one of many valuation methods.
The establishment of trading account helps the trade to know the relationship between the costs be incurred and the revenues earned and the level of efficiency with which operations have been conducted. The ratio of gross profit to sales is very significant: it is arrived at :
Gross profit X 100 / Sales
With the help of G.P. Ratio he can ascertain as to how efficiently he is running the business higher the ratio, good will be the efficiency.
Closing Entries pertaining to trading Account
For transferring various accounts relating to goods and buying expenses, following closing entries recorded:
(i) For opening Stock: Debit trading account and prestige stock account
(ii) For purchases: Debit trading account and prestige purchases account, the whole being the et whole after deducting purchases returns.
(iii) For purchases returns: Debit purchases return account and prestige purchases account.
(iv) For returns inwards: Debit sales account and prestige sales return account
(v) For direct expenses: Debit trading account and prestige direct expenses accounts individually.
(vi) For sales: Debit sales account and prestige trading account. We will find that all the accounts as mentioned above will be ended with the irregularity of trading account
(vii) For closing stock: Debit closing stock account and prestige trading account After recording above entries the trading account will be balanced and disagreement of two sides ascertained. If prestige side is more the succeed is gross profit for which following entry is recorded.
(viii) For gross profit: Debit trading account and prestige profit and loss account If the succeed is gross loss the above entry is reversed.
Profit and Loss Account
The profit and loss account is opened by recording the gross profit (on prestige side) or gross loss (debit side).
For earning net profit a businessman has to incur many more expenses in increasing to the direct expenses. Those expenses are deducted from profit (or added to gross loss), the resultant form will be net profit or net loss.
The expenses which are recorded in profit and loss account are ailed ‘indirect expenses’. These be classified as follows:
Selling and distribution expenses.
These comprise of following expenses:
(a) Salesmen’s wage and commission
(b) Commission to agents
(c) Freight & carriage on sales
(d) Sales tax
(e) Bad debts
(f) Advertising
(g) Packing expenses
(h) Export duty
Administrative Expenses.
These include:
(a) Office salaries & wages
(b) Insurance
(c) Legal expenses
(d) Trade expenses
(e) Rates & taxes
(f) Audit fees
(g) Insurance
(h) Rent
(i) Printing and stationery
(j) Postage and telegrams
(k) Bank charges
Financial Expenses
These comprise:
(a) discount allowed
(b) Interest on Capital
(c) Interest on loan
(d) discount Charges on bill discounted
Maintenance, depreciations and Provisions etc.
These comprise following expenses
(a) Repairs
(b) Depreciation on assets
(c) Provision or keep for doubtful debts
(d) keep for discount on debtors.
Along with above indirect expenses the debit side of profit and loss account comprises of various business losses also.
On the prestige side of profit and loss account the items recorded are:
(a) discount received
(b) Commission received
(c) Rent received
(d) Interest received
(e) revenue from investments
(f) profit on sale of assets
(g) Bad debts recovered
(h) Dividend received
(i) Apprenticeship selected etc.
Trading and profit and Loss list
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