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Trading Account | Advantage | Format | Problem and Solution | Final Accounts

Arjun EP

Published on: July 4, 2020

Preparation of Final Accounts

Final accounts are also known as financial statements.

These statements are prepared to know about operating results and overall financial position to the company.

Joint Stock Company needs to prepare its final account at the end of every financial year.

Generally, final accounts of a manufacturing company involve the following statements:

(1) Manufacturing account

(2) Trading account

(3) Profit and loss account

(4) Profit and loss appropriation account

(5) Balance sheet

According to Company Act, annual financial statement should be prepared by the board of directors of a public limited company every year at least thirty (30) days prior to the holding of its annual general meeting.

In the case of private limited company, within the six months of the expiry of its financial year.

According to company act, financial statement involves the following statements:

(a) Balance sheet as at the last date of the accounting or financial year.

(b) Profit and loss account of the accounting or financial year.

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Trading Account | Concept 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

Net purchase = Purchase – Purchase 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:

· Trading account 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.

Difference between Manufacturing Account and Trading Account

In manufacturing account, raw materials are converted to work in progress or finished good with the help of man and machine.

In trading account, goods are sold to the customers without adding additional value.

Difference between Manufacturing Account and Trading Account

Bases	Manufacturing account	Trading account
Nature of goods	Goods are converted to semi-finished product or finished product.	Goods are sold without additional processing; but small quantity packaging may possible.
Nature of inventory	There are three types of inventories i.e. raw materials, work in progress and finished good.	There is only one type of inventory i.e. finished good.
Sales price	Sales price is determined by adding profit on cost price.	Sales price is determined by adding profit on purchase price.
Intangible assets	There may be intangible assets like patents. Trademark, design, research etc.	Generally, intangible assets are recorded in trading account.
Costs and expenses	A clear distinction is made between costs and expenses.	No distinction is made between costs and expenses.
Result	It is prepared to find out ‘cost of production’	It is prepared to find out ‘gross profit or gross loss’

Format of trading account

Trading Account

ABC Company Ltd

As on 31^st December 20X1

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:
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		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

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2A

ABC Manufacturing Company Limited has following extracted data on 31^st December 2021:

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 $75,000

Required: Trading account

[Answer: Gross profit = $75,450]

SOLUTION:

Trading Account

ABC Manufacturing Company Ltd

As on 31^st December 2021

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

Gross profit = Cr 341,950 – Dr 226,500 = 75,450

Keep in Mind (KIM)

All the expenses related to manufacturing, production and works are debited in manufacturing.

All the income related to manufacturing, production and works are credited in manufacturing.

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.

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2B

AM Textile (P) Limited has following extracted data for the current year:

	Amount $		Amount $
Stock (1 Jan):		Factory insurance	5,000
Raw materials	1,24,000	Factory rent	1,20,000
Work in progress	1,06,000	Repairs of machinery	6,000
Finished goods	2,40,000	Depreciation on machinery	30,000
Purchase of raw materials	8,60,000	Sales of finished goods	21,50,000
Freight inward	35,000	Sales of scrap	28,000
Manufacturing wages	3,60,000	Stock (31 Dec):
Import duty	60,000	Raw materials	1,08,000
Dock dues	12,000	Work in progress	92,000
Motive power	50,000	Finished goods	3,20,000
Lubricant and grease	3,000

Required: (a) Manufacturing account; (b) Trading account

[Answer: (a) Cost of production = $15,43,000; (b) Gross profit = $6,87,000]

SOLUTION:

Manufacturing Account

AM Textile (P) Limited

As on 31^st December 2021

Particulars		Amount	Particulars		Amount
To Opening stock:			By Closing stock:
Raw materials	124,000		Raw materials	108,000
Work in progress	+106,000	230,000	Work in progress	+92,000	200,000
To Raw materials purchase	860,000		By Scrap sold		28,000
Less: Return	Nil	860,000	By Cost of production (b/f)		15,43,000
To Freight inward		35,000	(transferred to trading account)
To Import duty		60,000
To Dock dues		12,000
To Manufacturing wages		360,000
To Motive power		50,000
To Lubricant and grease		3,000
To Factory rent		120,000
To Factory insurance		5,000
To Repairs of machinery		6,000
To Depreciation on machinery		30,000
		17,71,000			17,71,000

Trading Account

AM Textile (P) Limited

As on 31^st December 2021

	Amount $			Amount $
To Opening stock of finished good	240,000	By Sales	21,50,000
To Cost of production	15,43,000	Less: Return	Nil	21,50,000
To Gross profit (b/f; c/d)	6,87,000	By Closing stock of finished good		3,20,000


	24,70,000			24,70,000

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Problems and Answers of Trading Account in Final Accounts

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2A

YB Manufacturing Company has following extracted information on 31^st December:

	Amount $		Amount $
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]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2B

RB Manufacture has following extracted information on 31^st December:

	Amount $		Amount $
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]

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country

PROBLEM: 2C

EP Textile (P) Limited has following extracted data for the current year: (amount in thousand dollars):

	Amount $		Amount $
Stock (1 Jan):		Direct wages	24,000
Raw materials	10,800	Royalty	600
Semi-finished goods	8,400	Depreciation on machinery	7,000
Finished goods	21,000	Depreciation on factory building	2,000
Purchase of raw materials	75,000	Sundry factory expenses	2,800
Purchase return	4,000	Stock (31 Dec):
Freight inward	2,500	Raw materials	14,500
Sales	190,000	Semi-finished goods	15,000
Sales return	6,000	Finished goods	26,000
Power and heating	4,800