Trading - Principles of Accounting, Accountancy and Financial Management B Com Notes | EduRev

Accountancy and Financial Management

B Com : Trading - Principles of Accounting, Accountancy and Financial Management B Com Notes | EduRev

The document Trading - Principles of Accounting, Accountancy and Financial Management B Com Notes | EduRev is a part of the B Com Course Accountancy and Financial Management.
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Definition and Explanation:
The account which is prepared to determine the gross profit or gross loss of a business concern is called trading account.
It should be noted that the result of the business determined through trading account is not true result. The true result is the net profit or the net loss which is determined through profit and loss account. The trading accounting has the following features:

  1. It is the first stage of final accounts of a trading concern.
  2. It is prepared on the last day of an accounting period.
  3. Only direct revenue and direct expenses are considered in it.
  4. Direct expenses are recorded on its debit side and direct revenue on its credit side.
  5. All items of direct expenses and direct revenue concerning current year are taken into account but no item relating to past or next year is considered in it.
  6. If its credit side exceeds it represents gross profit and if debit side exceeds it shows gross loss.

Purpose of Preparing Trading Account:
The profit or loss determined by a trading account is the gross result of the business but not the net result. If so, then a question arises - what is the use of preparing a trading account? This account is necessary because of the following advantages.

  1. Gross profit of a business is very important data, since all business expenses are met out of it. So the amount of gross profit should be adequate to meet the indirect expenses of a business concern.

  2. The amount of net sales can be determined through this account. Gross sales can be ascertained from sales account in the ledger, but net sales cannot be so obtained. The true sales of a business is net sales - not gross sales. Net sales are determined by deducting sales returns from gross sales in trading account.

  3. The success or failure of a business can be ascertained by comparing net sales of the current year with that of the last year. It should be noted that an increase in the amount of net sales of the current year over the last year may not be regarded as a sign of success, since sales may increase because of rise in price level.

  4. Percentage of gross profit on net sales (gross profit ratio) can be easily determined from trading account. This percentage is very important yardstick for measuring the success or failure of a business. Compared to last year, if the rate increases, it indicates success; on the other hand if the rate decreases, it is an indication of failure.

  5. Percentage of different items of buying expenses (direct expenses) on gross profit can be easily determined and by comparing the percentage of the current year with that of the previous year the variations can be ascertained. An analysis of variances will disclose their cause which will help in controlling the amount of expenses.

  6. Inventory or stock turnover ratio can be determined from trading account. The success or failure of a business can be measured by this rate. Higher rate indicates a favorable sign i.e. goods are sold soon after their purchase. On the other hand, low rate signifies deterioration, i.e. goods are sold long after their purchase.

Method of Preparation of Trading Account:
Trial balance is a list of all ledger accounts balances, so all the necessary information for preparation of a trading account 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 account, purchases account, returns inwards account and of all direct expenses are transferred on the debit side of the trading account, and the balance of the sales account, returns outwards account, and closing stock account are transferred on the credit side of the trading account. If the credit side of the trading account exceeds the debit side, the result is "gross profit", and if debit side exceeds the credit side, the result is "gross loss". The format of a trading account is shown below:

Name of Business
Trading Account for the year ended .....

 

 

Rs.

 

 

Rs.

Stock (Opening)

 

 

Sales

-----

 

Purchases

-----

 

Less returns

-----

-----

Less returns

-----

-----

 

 

 

 

 

 

Stock (closing)

 

-----

Carriage inward

 

-----

Gross loss (Transferred to P&l A/C)

 

-----

Wages

 

-----

 

 

 

Insurance in transit

 

-----

 

 

 

Custom duty

 

-----

 

 

 

Clearing charges

 

-----

 

 

 

Freight inward

 

-----

 

 

 

Transportation inward

 

-----

 

 

 

Excise duty on goods

 

-----

 

 

 

Royalty

 

-----

 

 

 

Dock charges

 

-----

 

 

 

Coal, Coke, Gas, fuel

 

-----

 

 

 

Motive power

 

-----

 

 

 

Oil, water

 

-----

 

 

 

Gross profit (Transferred to P&l A/C)

 

-----

 

 

 

If credit side exceeds the debit side = Gross profit
If debit side exceeds the credit side = Gross loss

Example:
The following are some ledger balances taken out from the trial balance of XYZ company on 31st December 2005.

 
$
 
$
Stock on 1.12005
60,000
Returns outwards
16,000
Purchases
360,000
Returns inwards
30,000
Carriage inwards
24,000
Sales
500,000

The closing stock is valued at $10,000.

Required:
Prepare a trading account for the year ended 31st December 2005. Show the journal entries to close the above account (closing entries).
Solution:
xyz co.
Trading Account for the year ended 31.12.2005

 
 
$
 
 
$
Stock 1.1.2005
 
60,000
Sales
500,000
 
Purchases
3,60,000
 
Less returns
30,000
470000
Less returns
16,000
3,44,000
 

 
 

 
Stock (closing)
 
100,000
Carriage inward
 
24,000
 
 
 
Custom duty
 
12000
 
 
 
Gross profit (transf. to P&L A/C)
 
130,000
 
 
 
 
 
570,000
 
 
570,000

Closing Entries:

Date

Description

L/F
Amount ($)
Amount ($)
2005
 
 
 
 
Dec.31
Trading account
 
486,000
 
 
Stock (opening) account
 
 
60,000
 
Purchase account
 
 
360,000
 
Returns inwards account
 
 
30,000
 
Carriage inwards account
 
 
24,000
 
Custom duty
 
 
12,000
 
(Being transferred of above A/C to trading account)
 
 
 
Dec.31
Sales account
 
500,000
 
 
Returns outwards account
 
16,000
 
 
Trading account
 
 
516,000
 
(Being transferred of above A/C to trading account)
 
 
 
Dec.31
Stock (closing) account
 
100,000
 
 
Trading account
 
 
100,000
 
(Being closing stock taken into account)
 
 
 
Dec.31
Trading account
 
130,000
 
 
Profit and loss account
 
 
130,000
 
(Being gross profit transferred to P&L account)
 
 
 

Example:
The following are some ledger balances taken out from the trial balance of XYZ company on 31st December 2005.

Trading - Principles of Accounting, Accountancy and Financial Management B Com Notes | EduRev

The closing stock is valued at $10,000.
Required:
Prepare a trading account for the year ended 31st December 2005. Show the journal entries to close the above account (closing entries).
Solution:

xyz co.

Trading Account for the year ended 31.12.2005

Trading - Principles of Accounting, Accountancy and Financial Management B Com Notes | EduRevTrading - Principles of Accounting, Accountancy and Financial Management B Com Notes | EduRev

Closing Entries:

Trading - Principles of Accounting, Accountancy and Financial Management B Com Notes | EduRev

Advantages of Preparing Trading Account Format

  • It is a very important statement from the cost point of view of the goods. By preparing the Trading account entities can take the decision for continuing or discontinuing a particular product. It helps to earn the maximum profit or reduce the losses.
  • With the help of a trading account, Sales tax authorities can easily see the correct purchases and correct sales as per the sales tax return submitted by a business firm.
  • It also helps the Excise authorities to assess the excise duties of business firms.
  • The management decides the price of the product with the help of a trading account, after keeping in mind the market competition.

Items in Trading Account Format
Trading Account contains the following details

  • Opening stock details of raw material, semi-finished goods and finished goods.
  • Closing stock details of raw material, semi-finished goods, and finished goods.
  • Total purchases of goods fewer Purchase Returns.
  • Total sales of goods fewer Sales Returns.
  • All direct expenses related to purchases or sales or manufacturing of goods.

Trading - Principles of Accounting, Accountancy and Financial Management B Com Notes | EduRev

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