Method Of Preparation Of Trading Account

Method Of Preparation Of Trading Account

We know, Trial Balance is a list of all Ledger accounts balances, so all necessary information for preparation of a Trading A/c is available from the Trial Balance. As gross profit or gross loss of a particular period is determined through Trading Account. So it's heading will be as follows:

                           XYZ & Co.

Trading Account for the year ended 31.12.2005 

      (if accounting period ends on 31.12.2005)

From the Trial Balance the balance of opening stock A/c, Purchase A/c, Returns Inwards A/c end of all direct expenses are transfer on the debit side if the Trading A/c, and the balances of sales A/c, Returns outward A/c and closing stock A/c are transfer on the credit side of the Trading A/c.

If the credit side of a Trading A/c exceeds the debit side, the result is "Gross Profit", and id debit side exceeds the credit side, the result is "Gross Loss". 

The performa of a Trading Account is shown below:

If credit side exceeds the debit side = Gross Profit

If  debit side exceeds the credit side = Gross Loss

Different items of Trading Account are discussed below; (Debit side):

(1) Stock (Opening)

It is unsold part of the last year's purchases. It is available from stock A/c in the Ledger and has debit balance in Trial Balance. It indicates the value of goods lying unsold at the end of the last year. Now it will become the part of current year's purchases. Last year's closing stock is current year's opening stock. Again, current year's closing stock will be next year's opening stock. In the case of a newly set up business, there cannot, however, be any opening stock.

(2) Purchases

It is the value of all goods purchased in the current accounting year and it is available from Purchase A/c in the Ledger. 'Purchase returns' are deducted from Purchases and net purchases are shown on the side of the trading A/c.

(3) Carriage Inward

It means the expenses incurred or bringing purchased goods from the place where they have been purchased, to the shop or go down of the business. It should be remembered that expenses for sending sold goods to customer's shop or house are not recorded in this account. They are debited to carriage outward A/c, an indirect expense, which is transferred to profit and loss A/c. Carriage Inward is transferred to the debit side of the Trading A/c. 

(4) Wages

This refers to the remuneration paid to the workers for the loading and unloading of Purchased goods or it is the remuneration paid the workers who are directly engaged in productive activities. Any how, this is an expense which is directly related with saleable goods and is always debited to the Trading Account.  

(5) Insurance In Transit

While bringing the goods from outside, they may be destroyed or stolen in transit. Such loss may be insured against. The amount of premium paid to the "Insurance Company" is debited to the insurance in transit A/c and is transferred to the debit side of the Trading A/c being an expense connected with the purchase of goods.

(6) Custom Duty

The duty imposed by Government on import and export of goods is known as custom duty. Custom duty is of two types-import duty & export duty. Duty paid on goods imported from abroad is known as import duty and is debited to the Trading A/c. But duty paid on goods exported (i.e. export duty) being expenses connected with sales, is debited to P&L A/c. So, import duty on the goods purchased from abroad is a direct expenses and export duty on the goods sold is an indirect expense.

(7) Clearing Charges

In case of imports from abroad goods are cleared from ports. For this, port authorities charge something which is called clearing charges. This is a direct expense and is debited to Trading Account.

(8) Freight Inward

Charges paid or bringing purchased goods from abroad through steamer, rail or air are known as freight inward. Being an expense connected with the purchase of goods, it is debited to the Trading A/c.

(9) Transport Inward

As discussed above.

(10) Excise Duty On Goods Manufacture

Duty imposed by the government on goods manufactured or produced within the country, is called excise duty. This being an expense connected with the saleable goods or production, is  debited to the manufacturing A/c or Trading A/c, as the case maybe.

(11) Royalty

In a word, royalty means rent.A Manufacturer has to pay such rent, when he acquires the right to produce an article. 

(12) Dock Charges

These are duties imposed on ships and their cargoes when they are unloaded on the port. this is a direct expense and is debited to the Trading A/c.

(13) Coal, Coke, Fuel, Gas, Oil Etc

These items of expenditure being connected with the production of goods should be debited to the Manufacturing A/c or the Trading A/c as the case may be.

(14) Octori Duty

This is a duty which is imposed by the Municipal Corporation or the Municipal Committee when goods purchased enters its territory. So, when the goods are purchased from  the another city, this duty has to be paid. It is an expense connected with purchase of goods and is debited to the Trading A/c.

 (15) Consumable Stores

These are the expenses incurred to keep the machine in right condition and include engine oil, soft soap, cotton waste, oil grease and wase consumed in factory. The amount of such stores consumed  during the year will be debited to the Trading A/c.

(16) MANUFACTURING EXPENSES

All expenses incurred in manufacturing or producing the goods in factory as factory insurance, factory rent, depreciation on factory building, lighting are direct expenses and are debited to Manufacturing A/c as the case may be.

CREDIT SIDE(1) SALES

It is the values of all the goods solid during the current accounting year and it is available from the sale A/c in the Ledger. It  is the major source of revenue in a business which deals in goods. 'Sales returns' are deducted from sales and the net sales are show on the credit side of the Trading A/c.

(2) STOCK (CLOSING)

It indicates the value of goods lying unsold at the end of the current accounting year. At the end of the year a list of unsold goods in prepared showing the quantity and value of each item. The total of the list represent the value of closing stock. The list should be prepared with utmost care and attention. Although closing stock in an assent, yet it is shown on the credit of the Trading A/c.

WHY CLOSING STOCK IS SHOWN IN THE TRADING ACCOUNT ?

Closing stock is shown on the credit side of the Trading A/c in order to make the comparison correct and logical between expenses and revenue. If it is not shown, the matching of expenses and revenue may be wrong. For example, suppose we purchased 100 units of a product @ of Rs. 10 per unit and sold all these unit @ of Rs. 15 each. Our purchases are Rs. 1000 (100*10) and our sales are Rs. 1500 (100*15). Purchases are shown on the credit side of the Trading A/c and sales on the credit side resulting a gross profit of Rs. 500. This is a correct comparison .But, suppose, we  sold only 80 units @ of Rs. 15 each.In that case our purchases are, again Rs. 1000 but our sales are Rs. 1200 and the gross profit is Rs. 200. But this is not the true gross profit because we matched the purchases price of 100 units with the sales price of 80 units only, which is not justified.