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Trading Account: Meaning, Format, Problem and Solution

Arjun EP

Published on: September 22, 2020

Meaning of Trading Account

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.

Advantages, features and importance of trading account

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.

Trading Account

ABC Company Ltd

As on 31^st 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 31^st 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 31^st 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 31^st 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 31^st 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