Illustrative - Financial Statements Commerce Notes | EduRev

 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 gains