Livestock Economics, Marketing and Business Management

TRADING,PROFIT AND LOSS ACCOUNT

• ‘Final Accounts’ is the general name given for the Trading and Profit and Loss Account and Balance Sheet.
  • Trading Account is prepared to find out the Gross Profit or loss during the period.
  • Profit and loss Accounts is prepared to find out the net profit/ loss for the period and
  • Balance sheet indicates the overall position of the business at the every end of period.

Procedure for the preparation of Trading Account

• Debit Trading Account with the opening stock, net purchases and their direct expenses on the goods by transfer of balances from the respective ledger accounts. Thus, Trading Accounts will be debited with the total cost of the goods sold and unsold.
• Credit the Trading Account for the transfer of net sales from the sales Account.
• Since the profit can be found out only in regard to goods sold, the stock at close is credited to Trading Account on the basis of an Adjusting Journal Entry.
• The Profit and Loss (gross) on the Trading Account is transferred to the Profit and Loss Account by means of a Journal Entry.

List of Expenses chargeable under Trading Account or Profit and Loss Account:

• Wages: Productive and Manufacturing.
• Freight: Freight Inwards and Freight on Purchases
• Carriage: Carriage Inwards, Carriage on Purchase coal gas and water, oil, grease and waste.
• Customs duties, airport duties, dock dues and clearing charges, all factory or manufacturing expenses.

Procedure for preparing profit and Loss Account

• Gross Profit or Loss will be brought down from the Trading Account to the Credit or Debit side respectively of Profit and Loss Account.
• Debit the Profit and Loss Account and Credit the various nominal Accounts for bringing the various expenses of the business proper into the Profit and Loss Account.
• Credit the Profit and Loss Account and Debit the various nominal Accounts for bringing the various business incomes into the Account.
• The difference between the two sides of Profit and Loss Account will represent the Profit or Loss Account and since the Losses and Gains have to be borne by the proprietor, Profit and Loss Account will be closed by means of credit (net profit) and a debit (net loss).
• It is most important to note that all business expenses other than those transferred to Trading Account will have to be transferred to the Profit and Loss Account.
• Likewise, all business incomes will have to be brought into profit and Loss Account after making adjustments and Provisions if any.
• The indirect or selling expenses which find a place in profit and Loss Account after include, among others, the following:
  • Unproductive wages, wages and Salaries, Carriage on sales, Carriage outwards, Freight on sales/ outwards, all office expenses, trade expenses not accompanied by office expenses, export duties and taxes other than income tax.