Trading account deals with trading activities such as buying and selling of goods and services.
Most of the traders buy finished products and sell them without any changing; they are traders.
There are some traders who purchase raw materials in large quantity and pack them in small packets.
In such a condition, labour, machine and other expenses are needed.
From trading account, we can find out gross profit or gross loss.
This account is prepared to show the profit made on selling the goods.
These goods were purchased earlier for resale purposes.
The word ‘gross’ means without deduction because other incomes and expenses are remaining to deduct. Expenses related to premises or assets does not include in this account.
The calculation of the gross profit or loss separately is very important because it plays vital role for the trader.
Gross profit = Net sales − Cost of goods sold
Net sales = sales revenue – sales return
Cost of goods sold = Opening stock + Net purchase + Carriage or freight inward − Closing stock
Keep in Mind (KIM)
The amount associated with cost of the sold goods is known as cost of goods sold. While preparing trading account, some transactions of manufacturing account also included. |
Trading account deals with trading activities such as buying and selling of goods and services.
There are some traders who purchase raw materials in large quantity and pack them in small packets.
In such a condition, labour, machine and other expenses are needed.
From trading account, we can find out gross profit or gross loss.
The main features of trading account are given below:
· It helps to determine gross profit or gross loss of a business.
· It helps to know direct expenses (related to manufacturing or trading account).
· It helps to determine cost of goods sold.
· It helps to determine gross profit ratio.
ABC Company Ltd
As on 31st March 2020
Particulars |
|
Amount |
Particulars |
|
Amount |
To Opening stock: |
|
xxxx |
By Sales |
xxxx |
|
To Purchase |
xxxx |
|
Less: Return |
(xxx) |
xxxx |
Less: Return |
(xxx) |
|
By Closing stock |
|
xxxx |
Less: Free sample |
(xxx) |
|
By Gross loss c/d |
|
xxxx |
Less: Loss by fire1 |
(xxx) |
xxxx |
|
|
|
Purchase expenses: |
|
xxxx |
|
|
|
To Carriage or carriage inward |
|
xxxx |
|
|
|
To Freight or freight inward |
|
xxxx |
|
|
|
To Carriage on purchase |
|
xxxx |
|
|
|
To Purchase expenses |
|
xxxx |
|
|
|
To Octoi |
|
xxxx |
|
|
|
To Import duty or custom duty |
|
xxxx |
|
|
|
To Clearing charge |
|
xxxx |
|
|
|
To Dock charge (dock dues) |
|
xxxx |
|
|
|
To Coolie and cartage |
|
xxxx |
|
|
|
To Packing on purchase |
|
xxxx |
|
|
|
Factory expenses: |
|
|
|
|
|
To Wages and salary |
xxxx |
|
|
|
|
Add: Outstanding2 |
xxxx |
|
|
|
|
Less: Prepaid3 |
(xxx) |
xxxx |
|
|
|
To Productive wages |
|
xxxx |
|
|
|
To Store keeper’s salary |
|
xxxx |
|
|
|
To Fuel and power |
|
xxxx |
|
|
|
To Motive power |
|
xxxx |
|
|
|
To Store consumed* |
|
xxxx |
|
|
|
To Coal, gas, stem and water |
|
xxxx |
|
|
|
To Heating and power |
|
xxxx |
|
|
|
To Excise duty |
|
xxxx |
|
|
|
To Royalty (for manufacturing) |
|
xxxx |
|
|
|
To Factory insurance |
|
xxxx |
|
|
|
To Factory rent, rates and taxes |
|
xxxx |
|
|
|
To Estimate expenses |
|
xxxx |
|
|
|
To Benefit to workers |
|
xxxx |
|
|
|
To Other factory expenses |
|
xxxx |
|
|
|
To Gross profit c/d |
|
xxxx |
|
|
|
|
|
xxxxx |
|
|
xxxxx |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
PROBLEM: 2
ABC Manufacturing Company Limited has following data on 31st March 2020:
Ledgers |
Amount |
|
Ledgers |
Amount |
|
Opening stock |
55,000 |
|
Wage |
25,000 |
|
Purchase |
115,000 |
|
Indirect material |
12,350 |
|
Sales |
222,450 |
|
Dividend received |
5,000 |
|
Purchase return |
4,450 |
|
Miscellaneous received |
1,250 |
|
Sales return |
5,500 |
|
Commission paid |
560 |
|
Carriage inward |
4,250 |
|
Land and building |
500,000 |
|
Freight inward |
3,500 |
|
Coal, gas, water and fuel |
7,500 |
|
Custom duty |
12,000 |
|
Tax paid |
5,000 |
|
Clearing charge |
11,500 |
|
Transfer to general reserve |
1,000 |
|
Royalty |
5,250 |
|
Motive power |
3,150 |
|
Factory rent |
12,450 |
|
Factory insurance |
4,000 |
|
Additional information:
Closing stock for the year Rs 75,000
Required: Trading account
[Answer: Gross profit = Rs 75,450]
SOLUTION:
Trading Account
ABC Manufacturing Company Ltd
As on 31st March 2020
Dr |
|
|
|
|
Cr |
Particulars |
|
Amount |
Particulars |
|
Amount |
To Opening stock |
|
55,000 |
By Sales |
272,450 |
|
To Purchase |
115,000 |
|
Less Return |
(5,500) |
266,950 |
Less: Return |
(4,450) |
110,550 |
By Closing stock |
|
75,000 |
To Carriage inward |
|
4,250 |
|
|
|
To Freight inward |
|
3,500 |
|
|
|
To Custom duty |
|
12,000 |
|
|
|
To Clearing charge |
|
11,500 |
|
|
|
To Royalty |
|
5,250 |
|
|
|
To Factory rent |
|
12,450 |
|
|
|
To Wage |
|
25,000 |
|
|
|
To Indirect material |
|
12,350 |
|
|
|
To Coal, gas, water, and fuel |
|
7,500 |
|
|
|
To Motive power |
|
3,150 |
|
|
|
To Factory insurance |
|
4,000 |
|
|
|
To Gross profit c/d |
|
75,450 |
|
|
|
|
|
341,950 |
|
|
341,950 |
Net profit = Cr 341,950 – Dr 226,500 = 75,450
Keep in Mind (KIM)
All the expenses related to semi-manufacturing, production and works are debited in manufacturing or trading account. All the income related to manufacturing, production and works are credited in manufacturing or trading account. It is not compulsory to write Dr and Cr at ear column. In production company, royalty is recorded in manufacturing or trading account. In trading company, royalty is recorded in profit and loss account. |
#####
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#####
PROBLEMS AND ANSWERS |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු =
Problem: 2A
YB Manufacturing Company has following extracted information on 31st March:
Opening stock |
5,000 |
|
Manufacturing expenses |
8,000 |
Sales |
200,000 |
|
Import duty |
5,000 |
Purchase return |
2,000 |
|
Motive power |
7,000 |
Wages |
40,000 |
|
Purchase |
80,000 |
Carriage inward |
3,000 |
|
Purchase expenses |
3,000 |
Sales return |
4,000 |
|
|
|
Required: Trading account if closing stock is $/₹/Rs 20,000.
[Answer: Gross profit = 67,000]
Problem: 2B
RB Manufacture has following extracted information on 31st March:
Opening stock |
60,250 |
|
Carriage on purchase |
15,150 |
Purchase |
190,500 |
|
Coal, gas and water |
7,550 |
Sales |
281,500 |
|
Power and electricity |
3,500 |
Return outward |
1,500 |
|
Royalty |
5,000 |
Return inward |
1,800 |
|
Store consumed (factory) |
1,500 |
Wages and salary |
46,800 |
|
|
|
Required: Trading account if closing stock is $/₹/Rs 93,750.
[Answer: Gross profit = 44,700]
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