What is Trading A/c?
Trading Account is prepared to ascertain the Gross Profit of the company. After the preparation of Trial-balance, the Trading Account is prepared. This is the part of financial statements which shows the results of goods purchase and sales or service rendered during an accounting period. Gross Profit arise when the sale proceeds exceeds the Cost of Goods Sold (COGS). On the other hand, when the sale proceeds are less than the Cost-of-Goods-Sold , gross loss will be incurred.
To Calculate the Cost-of-Goods-Sold , we have to consider the following techniques:
|Opening Stock of Raw Materials||*****|
|Add: Purchase Made during the year||****|
|Add: Direct Expenses (related with Purchase or Manufacturing the Goods)||****|
|Less : Closing Stock of Raw Materials||(***)|
|Cost of Goods Sold||****|
Items of Trading Account
The following items are usually included in the Trading Account:
- Stock – Opening Stock & Closing Stock
- Direct Expenses
The above items are discussed as follows:
Stock : Beginning & Closing
Stock means the items which are unsold on a particular date. There is two types of Stock:
- Beginning Stock
- Closing Stock
Opening stock is the closing stock of previous year which is unsold items of previous year and brought forward in the current accounting period. Opening Stock is shown on the Debit Side of the Trading Account.
Closing Stock are the stock which is unsold goods at the end of the current accounting period. Closing Stock is valued either at cost price or at market price whichever is lower. Closing Stock is not shown in the Trial balance and are shown in the credit side of Trading Account as well as on the asset side of the Balance Sheet.
Purchases are the goods which are bought for resale . The following items to be deducted from the amount of purchase:
- Purchase Returns or return outwards.
- Goods withdrawn by the proprietor for personal use.
- Hire Purchase
- Goods Distributed by way of samples
- Goods given a charity.
The expenses which are directly attributable to the purchase of goods or to bring the goods in a sale-able condition is called direct expenses. Some example of direct expenses are as follows:
|Carriage Inward||Carriage paid for bringing the goods to the godown. This expenses are debited to Trading A/c.|
|Freight & Insurance||Freight and insurance are paid in case of purchase/import of goods. This expenses are debited to trading A/c but in case of sale the freight & insurance are debited to Profit and Loss Account.|
|Wages||Wages which are directly related with the production will be debited Trading A/c. Other wages will be debited to Profit and loss account. If, there is no indication whether this is direct or indirect, it should be considered as direct.|
|Fuel, Power and Lighting Expenses||Fuel, Power which are incurred for running the machines is direct expenses and to be debited to the trading ac/c. Lighting expenses of factory is direct expenses which charged to Trading A/c and lighting expenses for the administrative office are indirect expenses which is to charged to profit and loss account.|
|Packing Expenses||Sometimes this is considered as direct expenses and sometimes indirect expenses. When packing are the part of finished product it have to consider as direct expenses and when the packing are related with the sale of goods it will consider as a indirect expense.|
|Manufacturing Expenses||All Manufacturing expenses are to charged with Trading Ac/. The examples of manufacturing expenses are Factory rent, factory insurance etc.|
Sales includes both cash and credit sales of those goods which are purchased for resale purpose. Net sales means total sales less VAT and goods return from the customers (sales return). To ascertain the sales, following points needs to be considered:
- Fixed assets sales should not be included with sales
- Goods sold on hire purchase should be recorded separately.
- When goods sold but not yet despatched , should not included with the sales.
- Advance sales will not include with the current sales.
Closing Entries for Trading Account
The Journal entries necessary to transfer opening stock, Purchases, Sales and returns to the Trading A/c are called closing entries because they serve to close these Accounts. The closing entries of trading account are as follows:
- For transfer of opening stock, net purchases and direct expenses to Trading A/c:
|To Beginning Stock A/c||Credit|
|To Purchases A/c||Credit|
|To Direct Expenses A/c||Credit|
|(Being Opening Stock, Purchases and Direct Expenses are transferred to Trading A/c)|
2. For Transfer of Net Sales and Closing Stock to Trading A/c:
|Ending Stock A/c||Debit|
|To, Trading A/c||Credit|
(Being sales, closing stock transferred to Trading Account)
3. a . When Gross Profit Transfer to Profit & Loss A/c:
|To Profit & Loss Account||Credit|
|( As Gross Profit Transferred to Profit & Loss A/c)|
b. When Gross Loss Transfer to Profit & Loss Account:
|Profit & Loss A/c||Debit|
|To Trading Account||Credit|
|(Being the gross loss transferred to Profit & Loss A/c)|
Format of Trading Account
|Less: Return inwards/ sales return||$ 14,000|
|Less : Cost of Goods Sold:|
|Add: Purchases less return||$55,000|
|Add: Carriage inwards||$5,000|
|Add: Packing Cost||$4,000|
|Less : Closing Stock||$ 10,000|
|Cost of Goods Sold||$ 62,000|
|Gross Profit||$ 49,000|