Page 1 • Components: Its main components include: ° Sales, services rendered and Closing Stock on the Credit Side of Trading Account; and ° Cost of such sales or services rendered, like Opening Stock, Purchases and other Direct Expenses on the debit side. Net Result of Trading Account: The difference of debit and credit sides is either Gross Profit or Gross Loss. ° If total of credit side exceeds the total of debit side, then the difference is called Gross Profit. ° However, if total of credit side falls short of total of debit side, then the difference is called Gross Loss. Features of Trading Account 1. It serves as the first step in preparation of Financial Statements. 2. It records value of net sales and cost of goods sold. 3. The balance of Trading Account shows Gross Profit or Gross Loss. 4. It provides the opening balance for Profit and Loss Account as balance of this account (Gross Profit or Gross Loss) is transferred to Profit and Loss Account. Format of trading a/c Trading Account for the year ending on ____________ Particulars Rs. Particulars Rs. To Opening Stock To Purchases Less: Purchases Return or Return Outward To Wages To Wages & Salaries To Manufacturing Expenses or Productive Expenses To Carriage or Carriage Inward or Carriage on Purchases To Coal, Gas and Power To freight, Octroi and Cartage Custom Duty or Import Duty To Dock and Clearing Charges To factory Lighting & Factory Rent To Other Direct Expenses To royalty By Sales Less: Sales Return or Return Inward By Closing Stock Total Total To gross profit transferred to P & L a/c By gross loss transferred to P & L a/c Notes 1. At the top of trading account, where headings are given, there the words "for the year ended" are written which indicate that this account shows the position of full accounting year and not the position of a single day. 2. Column of date is not made at the time of preparation of final accounts because it is written in heading. 3. Column of page no. is not shown at the time of preparation of final accounts because these are prepared from trial balance not from ledger. 4. Trading account will record all the direct/ factory / manufacturing expenses 5. it is a nominal a/c so apply the rule of nominal a/c debit all expenses an losses and credit all incomes and gains Illustration 1. Prepare Trading Account for the year ended 31st March, 2014 from the following balances: Rs. Stock (1st April, 2013) 10,000 Wages 5,000 Page 2 • Components: Its main components include: ° Sales, services rendered and Closing Stock on the Credit Side of Trading Account; and ° Cost of such sales or services rendered, like Opening Stock, Purchases and other Direct Expenses on the debit side. Net Result of Trading Account: The difference of debit and credit sides is either Gross Profit or Gross Loss. ° If total of credit side exceeds the total of debit side, then the difference is called Gross Profit. ° However, if total of credit side falls short of total of debit side, then the difference is called Gross Loss. Features of Trading Account 1. It serves as the first step in preparation of Financial Statements. 2. It records value of net sales and cost of goods sold. 3. The balance of Trading Account shows Gross Profit or Gross Loss. 4. It provides the opening balance for Profit and Loss Account as balance of this account (Gross Profit or Gross Loss) is transferred to Profit and Loss Account. Format of trading a/c Trading Account for the year ending on ____________ Particulars Rs. Particulars Rs. To Opening Stock To Purchases Less: Purchases Return or Return Outward To Wages To Wages & Salaries To Manufacturing Expenses or Productive Expenses To Carriage or Carriage Inward or Carriage on Purchases To Coal, Gas and Power To freight, Octroi and Cartage Custom Duty or Import Duty To Dock and Clearing Charges To factory Lighting & Factory Rent To Other Direct Expenses To royalty By Sales Less: Sales Return or Return Inward By Closing Stock Total Total To gross profit transferred to P & L a/c By gross loss transferred to P & L a/c Notes 1. At the top of trading account, where headings are given, there the words "for the year ended" are written which indicate that this account shows the position of full accounting year and not the position of a single day. 2. Column of date is not made at the time of preparation of final accounts because it is written in heading. 3. Column of page no. is not shown at the time of preparation of final accounts because these are prepared from trial balance not from ledger. 4. Trading account will record all the direct/ factory / manufacturing expenses 5. it is a nominal a/c so apply the rule of nominal a/c debit all expenses an losses and credit all incomes and gains Illustration 1. Prepare Trading Account for the year ended 31st March, 2014 from the following balances: Rs. Stock (1st April, 2013) 10,000 Wages 5,000 Sales 1,55,000 Returns Outward 8,000 Freight 500 Purchases 1,00,000 Carriage Inwards 1,000 Returns Inward 5,000 Octroi Duty 2,500 Closing Stock as on 31st March, 2014 was valued at Rs.20,000. Solution: TRADING ACCOUNT Dr. for the year ended 31st March, 2014 Cr. Particulars Rs. Particulars Rs. To Opening Stock To Purchases 1,00,000 Less: Returns Outward 5,000 To Wages To Carriage inwards To Freight To Octroi Duty To Profit and Loss A/c (Gross Profit) 10,000 92,000 5,000 1,000 500 2,500 59,000 By Sales 1,55,000 Less: Returns Inward 5,000 By Closing Stock 1,50,000 20,000 1,70,000 1,70,000 Illustration 2. From the following information, prepare a Trading Account for the year ending 31 st March, 2015 and also pass the closing Journal Entries. Particulars Amt.(Rs.) Particulars Amt. (Rs.) Opening Stock 30,000 Wages 40,000 Cash Purchases 90,000 Freight 10,000 Cash Sales 1,40,000 Octroi 11,000 Credit Purchases 2,00,000 Purchases Return 7,000 Credit Sales 3,20,000 Sales Return 6,000 Carriage Outward 4,000 Depreciation 10,000 Stock on 31 st March, 2015 was Rs. 24,000. Solution: TRADING ACCOUNT Dr. for the year ended 31 st March, 2015 Cr. Particulars Amt. (Rs.) Particulars Amt. (Rs.) To Opening Stock 30,000 By Sales: To Purchases: Cash Sales 1,40,000 Cash Purchases 90,000 Credit Sales 3,20,000 Credit Purchases 2,00,000 Total Sales 4,60,000 Total Purchases 2,90,000 Less: Sales Return 6,000 4,54,000 Less: Purchases Return 7,000 2,83,000 By Closing Stock 24,000 To Wages 40,000 To Freight 10,000 To Octroi 11,000 To Gross Profit transferred to Profit and Loss A/c 1,04,000 4,78,000 4,78,000 Note: 'Carriage Outward' and 'Depreciation' are not shown in the Trading Account. They are shown in the Profit and Loss Account. Page 3 • Components: Its main components include: ° Sales, services rendered and Closing Stock on the Credit Side of Trading Account; and ° Cost of such sales or services rendered, like Opening Stock, Purchases and other Direct Expenses on the debit side. Net Result of Trading Account: The difference of debit and credit sides is either Gross Profit or Gross Loss. ° If total of credit side exceeds the total of debit side, then the difference is called Gross Profit. ° However, if total of credit side falls short of total of debit side, then the difference is called Gross Loss. Features of Trading Account 1. It serves as the first step in preparation of Financial Statements. 2. It records value of net sales and cost of goods sold. 3. The balance of Trading Account shows Gross Profit or Gross Loss. 4. It provides the opening balance for Profit and Loss Account as balance of this account (Gross Profit or Gross Loss) is transferred to Profit and Loss Account. Format of trading a/c Trading Account for the year ending on ____________ Particulars Rs. Particulars Rs. To Opening Stock To Purchases Less: Purchases Return or Return Outward To Wages To Wages & Salaries To Manufacturing Expenses or Productive Expenses To Carriage or Carriage Inward or Carriage on Purchases To Coal, Gas and Power To freight, Octroi and Cartage Custom Duty or Import Duty To Dock and Clearing Charges To factory Lighting & Factory Rent To Other Direct Expenses To royalty By Sales Less: Sales Return or Return Inward By Closing Stock Total Total To gross profit transferred to P & L a/c By gross loss transferred to P & L a/c Notes 1. At the top of trading account, where headings are given, there the words "for the year ended" are written which indicate that this account shows the position of full accounting year and not the position of a single day. 2. Column of date is not made at the time of preparation of final accounts because it is written in heading. 3. Column of page no. is not shown at the time of preparation of final accounts because these are prepared from trial balance not from ledger. 4. Trading account will record all the direct/ factory / manufacturing expenses 5. it is a nominal a/c so apply the rule of nominal a/c debit all expenses an losses and credit all incomes and gains Illustration 1. Prepare Trading Account for the year ended 31st March, 2014 from the following balances: Rs. Stock (1st April, 2013) 10,000 Wages 5,000 Sales 1,55,000 Returns Outward 8,000 Freight 500 Purchases 1,00,000 Carriage Inwards 1,000 Returns Inward 5,000 Octroi Duty 2,500 Closing Stock as on 31st March, 2014 was valued at Rs.20,000. Solution: TRADING ACCOUNT Dr. for the year ended 31st March, 2014 Cr. Particulars Rs. Particulars Rs. To Opening Stock To Purchases 1,00,000 Less: Returns Outward 5,000 To Wages To Carriage inwards To Freight To Octroi Duty To Profit and Loss A/c (Gross Profit) 10,000 92,000 5,000 1,000 500 2,500 59,000 By Sales 1,55,000 Less: Returns Inward 5,000 By Closing Stock 1,50,000 20,000 1,70,000 1,70,000 Illustration 2. From the following information, prepare a Trading Account for the year ending 31 st March, 2015 and also pass the closing Journal Entries. Particulars Amt.(Rs.) Particulars Amt. (Rs.) Opening Stock 30,000 Wages 40,000 Cash Purchases 90,000 Freight 10,000 Cash Sales 1,40,000 Octroi 11,000 Credit Purchases 2,00,000 Purchases Return 7,000 Credit Sales 3,20,000 Sales Return 6,000 Carriage Outward 4,000 Depreciation 10,000 Stock on 31 st March, 2015 was Rs. 24,000. Solution: TRADING ACCOUNT Dr. for the year ended 31 st March, 2015 Cr. Particulars Amt. (Rs.) Particulars Amt. (Rs.) To Opening Stock 30,000 By Sales: To Purchases: Cash Sales 1,40,000 Cash Purchases 90,000 Credit Sales 3,20,000 Credit Purchases 2,00,000 Total Sales 4,60,000 Total Purchases 2,90,000 Less: Sales Return 6,000 4,54,000 Less: Purchases Return 7,000 2,83,000 By Closing Stock 24,000 To Wages 40,000 To Freight 10,000 To Octroi 11,000 To Gross Profit transferred to Profit and Loss A/c 1,04,000 4,78,000 4,78,000 Note: 'Carriage Outward' and 'Depreciation' are not shown in the Trading Account. They are shown in the Profit and Loss Account. Cost of goods sold 1. Cost of goods sold = net sales – gross profit 2. Net sales = sales – sales returns 3. Cost of goods sold = op stock – cl stock + purchases – purchase return + direct expenses (all exp. of trading a/c dr. side) 4. change in stock = op stock – cl stock 5. Net purchases = purchases – purchase return 6. Net adjusted purchases = op stock – cl stock + purchases – purchase return Illustration 3 Ascertain Cost of Goods Sold and Gross Profit from the following information: Indirect Expenses Rs. 15,200 Direct Expenses 18,600 Sales 1,20,000 Net Purchases 72,000 Returns Inward 12,000 Returns Outward 8,000 Closing Inventory 28,000 Opening Inventory 16,000 Solution: Cost of Goods Sold = Opening Inventory + Net Purchases + Direct Expenses - Closing Inventory = Rs. 16,000 + Rs. 72,000 + Rs. 18,600-Rs. 28,000 = Rs. 78,600 Gross Profit = (Sales - Returns Inward) - Cost of Goods Sold = (Rs. 1,20.000 - Rs. 12,000) - Rs. 78,600 = Rs. 29,400 Note: Net Purchases are after deducting returns outward from the amount of Purchases. Illustration 4 Determine Cost of Goods Sold and Gross Profit from the following information: Carriage Inward Rs. 4,300 Adjusted Purchases 70,500 Wages 5,200 Opening Stock 6,000 Sales 95,000 Purchases Return 6,500 Closing Stock 8,400 Sales Return 5,000 Solution: Cost of Goods Sold = Opening Stock + (Purchases - Purchases Return) + Direct Expenses - Closing Stock = Adjusted Purchases* + Wages + Carriage Inward = Rs. 70,500 + Rs. 5,200 + Rs. 4,300 = Rs. 80,000 Gross Profit = (Sales - Returns Inward) - Cost of Goods Sold = (Rs. 95,000-Rs. 5,000)-Rs. 80,000 = Rs. 10,000 Adjusted Purchases' = (Purchases Rs. Purchases Return) + Opening Stock - Closing Stock. Illustration 4 Calculate closing stock from the following details: Opening Stock— Rs.20,000; Cash Sales— Rs.60,000; Credit Sales— Rs.40,000; Purchase— Rs.70,000. Rate of Gross Profit on Cost 33 1 3 % Solution: Page 4 • Components: Its main components include: ° Sales, services rendered and Closing Stock on the Credit Side of Trading Account; and ° Cost of such sales or services rendered, like Opening Stock, Purchases and other Direct Expenses on the debit side. Net Result of Trading Account: The difference of debit and credit sides is either Gross Profit or Gross Loss. ° If total of credit side exceeds the total of debit side, then the difference is called Gross Profit. ° However, if total of credit side falls short of total of debit side, then the difference is called Gross Loss. Features of Trading Account 1. It serves as the first step in preparation of Financial Statements. 2. It records value of net sales and cost of goods sold. 3. The balance of Trading Account shows Gross Profit or Gross Loss. 4. It provides the opening balance for Profit and Loss Account as balance of this account (Gross Profit or Gross Loss) is transferred to Profit and Loss Account. Format of trading a/c Trading Account for the year ending on ____________ Particulars Rs. Particulars Rs. To Opening Stock To Purchases Less: Purchases Return or Return Outward To Wages To Wages & Salaries To Manufacturing Expenses or Productive Expenses To Carriage or Carriage Inward or Carriage on Purchases To Coal, Gas and Power To freight, Octroi and Cartage Custom Duty or Import Duty To Dock and Clearing Charges To factory Lighting & Factory Rent To Other Direct Expenses To royalty By Sales Less: Sales Return or Return Inward By Closing Stock Total Total To gross profit transferred to P & L a/c By gross loss transferred to P & L a/c Notes 1. At the top of trading account, where headings are given, there the words "for the year ended" are written which indicate that this account shows the position of full accounting year and not the position of a single day. 2. Column of date is not made at the time of preparation of final accounts because it is written in heading. 3. Column of page no. is not shown at the time of preparation of final accounts because these are prepared from trial balance not from ledger. 4. Trading account will record all the direct/ factory / manufacturing expenses 5. it is a nominal a/c so apply the rule of nominal a/c debit all expenses an losses and credit all incomes and gains Illustration 1. Prepare Trading Account for the year ended 31st March, 2014 from the following balances: Rs. Stock (1st April, 2013) 10,000 Wages 5,000 Sales 1,55,000 Returns Outward 8,000 Freight 500 Purchases 1,00,000 Carriage Inwards 1,000 Returns Inward 5,000 Octroi Duty 2,500 Closing Stock as on 31st March, 2014 was valued at Rs.20,000. Solution: TRADING ACCOUNT Dr. for the year ended 31st March, 2014 Cr. Particulars Rs. Particulars Rs. To Opening Stock To Purchases 1,00,000 Less: Returns Outward 5,000 To Wages To Carriage inwards To Freight To Octroi Duty To Profit and Loss A/c (Gross Profit) 10,000 92,000 5,000 1,000 500 2,500 59,000 By Sales 1,55,000 Less: Returns Inward 5,000 By Closing Stock 1,50,000 20,000 1,70,000 1,70,000 Illustration 2. From the following information, prepare a Trading Account for the year ending 31 st March, 2015 and also pass the closing Journal Entries. Particulars Amt.(Rs.) Particulars Amt. (Rs.) Opening Stock 30,000 Wages 40,000 Cash Purchases 90,000 Freight 10,000 Cash Sales 1,40,000 Octroi 11,000 Credit Purchases 2,00,000 Purchases Return 7,000 Credit Sales 3,20,000 Sales Return 6,000 Carriage Outward 4,000 Depreciation 10,000 Stock on 31 st March, 2015 was Rs. 24,000. Solution: TRADING ACCOUNT Dr. for the year ended 31 st March, 2015 Cr. Particulars Amt. (Rs.) Particulars Amt. (Rs.) To Opening Stock 30,000 By Sales: To Purchases: Cash Sales 1,40,000 Cash Purchases 90,000 Credit Sales 3,20,000 Credit Purchases 2,00,000 Total Sales 4,60,000 Total Purchases 2,90,000 Less: Sales Return 6,000 4,54,000 Less: Purchases Return 7,000 2,83,000 By Closing Stock 24,000 To Wages 40,000 To Freight 10,000 To Octroi 11,000 To Gross Profit transferred to Profit and Loss A/c 1,04,000 4,78,000 4,78,000 Note: 'Carriage Outward' and 'Depreciation' are not shown in the Trading Account. They are shown in the Profit and Loss Account. Cost of goods sold 1. Cost of goods sold = net sales – gross profit 2. Net sales = sales – sales returns 3. Cost of goods sold = op stock – cl stock + purchases – purchase return + direct expenses (all exp. of trading a/c dr. side) 4. change in stock = op stock – cl stock 5. Net purchases = purchases – purchase return 6. Net adjusted purchases = op stock – cl stock + purchases – purchase return Illustration 3 Ascertain Cost of Goods Sold and Gross Profit from the following information: Indirect Expenses Rs. 15,200 Direct Expenses 18,600 Sales 1,20,000 Net Purchases 72,000 Returns Inward 12,000 Returns Outward 8,000 Closing Inventory 28,000 Opening Inventory 16,000 Solution: Cost of Goods Sold = Opening Inventory + Net Purchases + Direct Expenses - Closing Inventory = Rs. 16,000 + Rs. 72,000 + Rs. 18,600-Rs. 28,000 = Rs. 78,600 Gross Profit = (Sales - Returns Inward) - Cost of Goods Sold = (Rs. 1,20.000 - Rs. 12,000) - Rs. 78,600 = Rs. 29,400 Note: Net Purchases are after deducting returns outward from the amount of Purchases. Illustration 4 Determine Cost of Goods Sold and Gross Profit from the following information: Carriage Inward Rs. 4,300 Adjusted Purchases 70,500 Wages 5,200 Opening Stock 6,000 Sales 95,000 Purchases Return 6,500 Closing Stock 8,400 Sales Return 5,000 Solution: Cost of Goods Sold = Opening Stock + (Purchases - Purchases Return) + Direct Expenses - Closing Stock = Adjusted Purchases* + Wages + Carriage Inward = Rs. 70,500 + Rs. 5,200 + Rs. 4,300 = Rs. 80,000 Gross Profit = (Sales - Returns Inward) - Cost of Goods Sold = (Rs. 95,000-Rs. 5,000)-Rs. 80,000 = Rs. 10,000 Adjusted Purchases' = (Purchases Rs. Purchases Return) + Opening Stock - Closing Stock. Illustration 4 Calculate closing stock from the following details: Opening Stock— Rs.20,000; Cash Sales— Rs.60,000; Credit Sales— Rs.40,000; Purchase— Rs.70,000. Rate of Gross Profit on Cost 33 1 3 % Solution: Total Sales = Cash Sales + Credit Sales = Rs.1,00,000 Let Cost = Rs.100, Gross Profit = 33 1 3 on Cost, Sales 133 1 3 Gross Profit on Sales = 33 1 3 / 133 1 3 = 1 4 . Gross Profit = Rs.1,00,000 x 1 4 Rs.25,000 Cost of Goods Sold = Sales – Gross Profit – Rs.1,00,000 – Rs.25,000 = Rs.75,000 Cost of Goods Sold = Opening Stock + Purchases – Closing Stock Rs.75,000 = Rs.20,000 + Rs.70,000 – Closing Stock Closing Stock = Rs.20,000 + Rs.70,000 – Rs.75,000 = Rs.15,000. Profit and Loss Account Profit and Loss Account shows net profit earned or net loss incurred. It is credited with gross profit and other incomes and debited with indirect expenses. The difference between the totals of two sides is either net profit or net loss. • Starting Point of Profit and Loss Account: A Profit and Loss Account starts with the balance of Trading Account, i.e. either with Gross Profit or with Gross Loss as the case may be. So, Profit and Loss Account starts with Gross Profit on the credit side or Gross Loss on the debit side. • All Indirect Expenses and Losses are Debited: All the expenses and losses which have not been debited to the Trading Account are now debited to Profit and Loss Account. These expenses include Office and Administrative Expenses, Selling and Distribution Expenses, etc. Such expenses are termed as 'Indirect Expenses'. • All Indirect Incomes and Gains are Credited: All the indirect incomes and gains are transferred to the credit of Profit and Loss Account. For example, Discount Received, Commission Received, Profit on sale of an asset, etc. • Net Result: The difference of the two sides of the Profit and Loss Account is either Net Profit or Net Loss. ° If total of credit side exceeds total of debit side, then the difference is 'Net Profit'. ° However, if total of debit side exceeds total of credit side, then the difference is 'Net Loss'. ° The net result, i.e. Net Profit or Net Loss is transferred to the Capital Account. Net Profit increases the Capital, while Net Loss decreases it. Features of Profit and Loss Account 1. It is the second part of the Income Statement. 2. It relates to and is prepared at the end of a particular accounting period. 3. It is prepared according to accrual basis of accounting. 4. It is credited with gross profit and indirect incomes and is debited with indirect expenses and losses. 5. The balance of this account is either Net Profit or Net Loss. 6. Net Profit or Net Loss directly affects the capital. Net Profit increases the capital, while Net Loss decreases it. Difference Between Trading Account and Profit and Loss Account Basis Trading Account Profit and Loss Account 1. Part Trading Account is a part of Profit and Loss Account. Profit and Loss Account is the main Account. 2. Items In Trading Account, Opening Stock, Purchases, Sales, Closing Stock and Direct Expenses are written. In Profit and Loss Account, all indirect expenses related to office, administration, sales, distribution, finance, etc. are written. 3. Net Result The net result is either Gross Profit or Gross Loss. The net result is either Net Profit or Net Loss. 4. Transfer of Balance Balance of Trading Account, i.e. Gross Profit or Gross Loss is transferred to Profit and Loss Account. Balance of Profit and Loss Account, i.e. Net Profit or Net Loss is transferred to Capital Account. Page 5 • Components: Its main components include: ° Sales, services rendered and Closing Stock on the Credit Side of Trading Account; and ° Cost of such sales or services rendered, like Opening Stock, Purchases and other Direct Expenses on the debit side. Net Result of Trading Account: The difference of debit and credit sides is either Gross Profit or Gross Loss. ° If total of credit side exceeds the total of debit side, then the difference is called Gross Profit. ° However, if total of credit side falls short of total of debit side, then the difference is called Gross Loss. Features of Trading Account 1. It serves as the first step in preparation of Financial Statements. 2. It records value of net sales and cost of goods sold. 3. The balance of Trading Account shows Gross Profit or Gross Loss. 4. It provides the opening balance for Profit and Loss Account as balance of this account (Gross Profit or Gross Loss) is transferred to Profit and Loss Account. Format of trading a/c Trading Account for the year ending on ____________ Particulars Rs. Particulars Rs. To Opening Stock To Purchases Less: Purchases Return or Return Outward To Wages To Wages & Salaries To Manufacturing Expenses or Productive Expenses To Carriage or Carriage Inward or Carriage on Purchases To Coal, Gas and Power To freight, Octroi and Cartage Custom Duty or Import Duty To Dock and Clearing Charges To factory Lighting & Factory Rent To Other Direct Expenses To royalty By Sales Less: Sales Return or Return Inward By Closing Stock Total Total To gross profit transferred to P & L a/c By gross loss transferred to P & L a/c Notes 1. At the top of trading account, where headings are given, there the words "for the year ended" are written which indicate that this account shows the position of full accounting year and not the position of a single day. 2. Column of date is not made at the time of preparation of final accounts because it is written in heading. 3. Column of page no. is not shown at the time of preparation of final accounts because these are prepared from trial balance not from ledger. 4. Trading account will record all the direct/ factory / manufacturing expenses 5. it is a nominal a/c so apply the rule of nominal a/c debit all expenses an losses and credit all incomes and gains Illustration 1. Prepare Trading Account for the year ended 31st March, 2014 from the following balances: Rs. Stock (1st April, 2013) 10,000 Wages 5,000 Sales 1,55,000 Returns Outward 8,000 Freight 500 Purchases 1,00,000 Carriage Inwards 1,000 Returns Inward 5,000 Octroi Duty 2,500 Closing Stock as on 31st March, 2014 was valued at Rs.20,000. Solution: TRADING ACCOUNT Dr. for the year ended 31st March, 2014 Cr. Particulars Rs. Particulars Rs. To Opening Stock To Purchases 1,00,000 Less: Returns Outward 5,000 To Wages To Carriage inwards To Freight To Octroi Duty To Profit and Loss A/c (Gross Profit) 10,000 92,000 5,000 1,000 500 2,500 59,000 By Sales 1,55,000 Less: Returns Inward 5,000 By Closing Stock 1,50,000 20,000 1,70,000 1,70,000 Illustration 2. From the following information, prepare a Trading Account for the year ending 31 st March, 2015 and also pass the closing Journal Entries. Particulars Amt.(Rs.) Particulars Amt. (Rs.) Opening Stock 30,000 Wages 40,000 Cash Purchases 90,000 Freight 10,000 Cash Sales 1,40,000 Octroi 11,000 Credit Purchases 2,00,000 Purchases Return 7,000 Credit Sales 3,20,000 Sales Return 6,000 Carriage Outward 4,000 Depreciation 10,000 Stock on 31 st March, 2015 was Rs. 24,000. Solution: TRADING ACCOUNT Dr. for the year ended 31 st March, 2015 Cr. Particulars Amt. (Rs.) Particulars Amt. (Rs.) To Opening Stock 30,000 By Sales: To Purchases: Cash Sales 1,40,000 Cash Purchases 90,000 Credit Sales 3,20,000 Credit Purchases 2,00,000 Total Sales 4,60,000 Total Purchases 2,90,000 Less: Sales Return 6,000 4,54,000 Less: Purchases Return 7,000 2,83,000 By Closing Stock 24,000 To Wages 40,000 To Freight 10,000 To Octroi 11,000 To Gross Profit transferred to Profit and Loss A/c 1,04,000 4,78,000 4,78,000 Note: 'Carriage Outward' and 'Depreciation' are not shown in the Trading Account. They are shown in the Profit and Loss Account. Cost of goods sold 1. Cost of goods sold = net sales – gross profit 2. Net sales = sales – sales returns 3. Cost of goods sold = op stock – cl stock + purchases – purchase return + direct expenses (all exp. of trading a/c dr. side) 4. change in stock = op stock – cl stock 5. Net purchases = purchases – purchase return 6. Net adjusted purchases = op stock – cl stock + purchases – purchase return Illustration 3 Ascertain Cost of Goods Sold and Gross Profit from the following information: Indirect Expenses Rs. 15,200 Direct Expenses 18,600 Sales 1,20,000 Net Purchases 72,000 Returns Inward 12,000 Returns Outward 8,000 Closing Inventory 28,000 Opening Inventory 16,000 Solution: Cost of Goods Sold = Opening Inventory + Net Purchases + Direct Expenses - Closing Inventory = Rs. 16,000 + Rs. 72,000 + Rs. 18,600-Rs. 28,000 = Rs. 78,600 Gross Profit = (Sales - Returns Inward) - Cost of Goods Sold = (Rs. 1,20.000 - Rs. 12,000) - Rs. 78,600 = Rs. 29,400 Note: Net Purchases are after deducting returns outward from the amount of Purchases. Illustration 4 Determine Cost of Goods Sold and Gross Profit from the following information: Carriage Inward Rs. 4,300 Adjusted Purchases 70,500 Wages 5,200 Opening Stock 6,000 Sales 95,000 Purchases Return 6,500 Closing Stock 8,400 Sales Return 5,000 Solution: Cost of Goods Sold = Opening Stock + (Purchases - Purchases Return) + Direct Expenses - Closing Stock = Adjusted Purchases* + Wages + Carriage Inward = Rs. 70,500 + Rs. 5,200 + Rs. 4,300 = Rs. 80,000 Gross Profit = (Sales - Returns Inward) - Cost of Goods Sold = (Rs. 95,000-Rs. 5,000)-Rs. 80,000 = Rs. 10,000 Adjusted Purchases' = (Purchases Rs. Purchases Return) + Opening Stock - Closing Stock. Illustration 4 Calculate closing stock from the following details: Opening Stock— Rs.20,000; Cash Sales— Rs.60,000; Credit Sales— Rs.40,000; Purchase— Rs.70,000. Rate of Gross Profit on Cost 33 1 3 % Solution: Total Sales = Cash Sales + Credit Sales = Rs.1,00,000 Let Cost = Rs.100, Gross Profit = 33 1 3 on Cost, Sales 133 1 3 Gross Profit on Sales = 33 1 3 / 133 1 3 = 1 4 . Gross Profit = Rs.1,00,000 x 1 4 Rs.25,000 Cost of Goods Sold = Sales – Gross Profit – Rs.1,00,000 – Rs.25,000 = Rs.75,000 Cost of Goods Sold = Opening Stock + Purchases – Closing Stock Rs.75,000 = Rs.20,000 + Rs.70,000 – Closing Stock Closing Stock = Rs.20,000 + Rs.70,000 – Rs.75,000 = Rs.15,000. Profit and Loss Account Profit and Loss Account shows net profit earned or net loss incurred. It is credited with gross profit and other incomes and debited with indirect expenses. The difference between the totals of two sides is either net profit or net loss. • Starting Point of Profit and Loss Account: A Profit and Loss Account starts with the balance of Trading Account, i.e. either with Gross Profit or with Gross Loss as the case may be. So, Profit and Loss Account starts with Gross Profit on the credit side or Gross Loss on the debit side. • All Indirect Expenses and Losses are Debited: All the expenses and losses which have not been debited to the Trading Account are now debited to Profit and Loss Account. These expenses include Office and Administrative Expenses, Selling and Distribution Expenses, etc. Such expenses are termed as 'Indirect Expenses'. • All Indirect Incomes and Gains are Credited: All the indirect incomes and gains are transferred to the credit of Profit and Loss Account. For example, Discount Received, Commission Received, Profit on sale of an asset, etc. • Net Result: The difference of the two sides of the Profit and Loss Account is either Net Profit or Net Loss. ° If total of credit side exceeds total of debit side, then the difference is 'Net Profit'. ° However, if total of debit side exceeds total of credit side, then the difference is 'Net Loss'. ° The net result, i.e. Net Profit or Net Loss is transferred to the Capital Account. Net Profit increases the Capital, while Net Loss decreases it. Features of Profit and Loss Account 1. It is the second part of the Income Statement. 2. It relates to and is prepared at the end of a particular accounting period. 3. It is prepared according to accrual basis of accounting. 4. It is credited with gross profit and indirect incomes and is debited with indirect expenses and losses. 5. The balance of this account is either Net Profit or Net Loss. 6. Net Profit or Net Loss directly affects the capital. Net Profit increases the capital, while Net Loss decreases it. Difference Between Trading Account and Profit and Loss Account Basis Trading Account Profit and Loss Account 1. Part Trading Account is a part of Profit and Loss Account. Profit and Loss Account is the main Account. 2. Items In Trading Account, Opening Stock, Purchases, Sales, Closing Stock and Direct Expenses are written. In Profit and Loss Account, all indirect expenses related to office, administration, sales, distribution, finance, etc. are written. 3. Net Result The net result is either Gross Profit or Gross Loss. The net result is either Net Profit or Net Loss. 4. Transfer of Balance Balance of Trading Account, i.e. Gross Profit or Gross Loss is transferred to Profit and Loss Account. Balance of Profit and Loss Account, i.e. Net Profit or Net Loss is transferred to Capital Account. Profit and Loss Account for the year ended Particulars Rs. Particulars Rs. To Gross Loss b/d Office and Administrative Expenses: To Salaries To Salaries & Wages To rent rates & taxes To Office Lighting To Rent, Rates and Taxes To Postage and Telegram To Printing & Stationery To Legal Expenses To Audit Fee To Telephone Expenses To Insurance Premium To Establishment Expenses To Travelling Expenses To Trade Expenses To General Expenses Selling & Distribution Expenses: To Godown Rent To Carriage on Sales or Carriage outward To Advertisement To Commission To Packing Charges To Export Duty To Bad Debts To Sales Tax To Expenses on Delivery Van Other Expenses: To Discount To Depreciation To Repair & Renewals To Interest Paid To Bank Charges To Entertainment Expenses To Donation & Charity To Loss on Sale of Assets By Gross Profit b/d By Rent Received By Commission Received By Discount Received By Interest Received By Dividend Received By Bad Debts Recovered By Apprentice Premium By Profit on Sale of Assets By Miscellaneous Receipts By income from other expenses Total Total To Net Profit Transferred to Capital A/c By Net loss Transferred to Capital A/c Notes: 1. It is important to keep this thing in our mind that only those expenses, losses, incomes and gains are shown in profit and loss account which are related to business. Personal and household expenses, income tax, life insurance premium, etc. are not shown in this account because these are not related to business. These are deducted from capital account because these are treated as drawings. 2. All those expenses, which have not been shown in trading account, are shown in profit and loss account. 3. Apprentice Premium is an income which is received for providing training to new entrants. 4. P & L account will record all the indirect/ office / selling expenses 5. it is a nominal a/c so apply the rule of nominal a/c debit all expenses an losses and credit all incomes and gainsRead More
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