Table of Contents
Format of Trading Account
TRADING ACCOUNT-
A Trading Account is prepared to ascertain the results of the trading activities of the business enterprise.
A business firm either purchases goods from others and sells them or manufactures and sells them to earn profit. These are known as trading activities.
A trading account is prepared for calculating the gross profit or gross loss arising as a result of the trading activities of a business.
Or
Trading account shows the result of buying and selling of goods, It is prepared to determine the gross profit or the gross loss .
Or
In other worlds, the Trading account is prepared to show the result of manufacturing, buying, and selling of goods.
At the end of each year, it is necessary to ascertain the net profit or net loss.
For this purpose, it is first necessary to know the gross profit or gross loss.
The trading account is prepared to ascertain this.
The difference between the selling price and the cost price of the goods is the gross earning of the business concern. Such gross earning is called as gross profit.
However, when the selling price is less than the cost of goods purchased, the result is gross loss.
All direct expenses are debited to the Trading account.
Direct incomes are credited to the Trading account.
OBJECTIVES OF TRADING ACCOUNT-
Preparation of Trading Account serves the following objectives:
- It provides information about Gross Profit and Gross Loss: It informs of the gross profit or gross loss as a result of buying and selling the goods during the year. The percentage of Current Year’s gross profit on the amount of sales can be calculated and compared with those of the previous years. Thus, it provides data for comparison, analysis and planning for a future period.
- It provides information about the direct expenses: All the expenses incurred on the purchase and manufacturing of goods are recorded in the trading account in a summarised form. Percentage of such expenses on sales can be calculated and compared with those of the previous years. In this way it enables the management to control and rationalise the expenses.
- Comparison of closing stock with those of the previous years: closing stock has to be valued and recorded in a trading account. This stock can be compared with the closing stock of the previous years and if the stock shows an increasing trend, the reasons may be inquired into.
- It provides safety against possible losses: If the ratio of gross profit has decreased in comparison to the preceding year, the businessman can take effective measures to safeguard himself against future losses. For example, he may increase the sale price of his gods or may proceed to analyse and control the direct expenses.
ALSO READ : 30 transactions with their Journal Entries, Ledger, Trial balance and Final Accounts- Project
Closing Entries Relating to Trading Account
The preparation of the Trading Account requires that the balances of all such accounts which are due to appear in the Trading Account are transferred to it. The entries required for such transfer are termed as Closing entries. These will be as follows:
- Purchases Return Account is closed by transferring its balance to Purchase Account. Following entry is recorded for this purpose.
Purchases Return A/c Dr.
To Purchases A/c
(Transfer of Purchases Return Account to Purchases (Account)
- Similarly, the Sales Return Account is closed by transferring its balance to the Sales Account as:
Sales A/c Dr.
To Sales Return A/c
(Transfer of Sales Return Account to Sales Account)
- Closing entry for those accounts which are to be transferred to the Dr. side of the Trading Account:
Trading A/c Dr.
To Opening Stock A/c
To Purchases A/c
To Wages A/c
To Direct Expenses A/c
To Carriage A/c
To Gas, Fuel & Power A/c
To Freight, Octroi & Cartage A/c
To Manufacturing exp. A/c
To Factory Rent & Lighting A/c
To Customs Duty A/c
To Royalty A/c
To Other Direct Expenses A/c
(Transfer of above accounts to the Dr. side of the Trading A/c)
4.Closing entry for those accounts which are to be transferred to the Cr. Side of the Trading Account:
Sales A/c Dr.
Closing Stock A/c Dr.
To Trading A/c
(Transfer of above accounts to the Cr. Side of the Trading A/c)
- Another Closing entry is needed to close the trading account itself. If the credit side of the Trading Account exceeds the debit, the difference will be Gross Profit. The Gross Profit will be transferred to the credit of a newly opened account called profit and loss account:
Trading A/c Dr.
To Profit & Loss A/c
(Transfer of Gross Profit to the Credit side of P&L Account)
- If the debt side of the Trading Account exceeds the credit, the difference will be Gross Loss. It will be transferred to the debit of P & L a/c by means of the following entry:
Profit and Loss A/c Dr.
To Trading A/c
(Transfer of Gross Loss to the debit side of P&L Account)
