Financial Management & Cost Accounting

Module 3. Trial balance , bank reconciliation, depreciation and final accounts

Lesson 15
INTRODUCTION AND PREPARATION TRADING ACCOUNT

15.1 Trading Account

Trading Account is prepared to know profitability of business by buying and selling or manufacturing and selling. It shows the profit from the main business; buying and selling other than the business isn’t included in Trading Account. It is one kind of ledger account.

NAME OF THE FIRM
TRADING ACCOUNT
for the year ended on 31^st December

Dr. Cr.

Particulars	Amount	Particulars	Amount
To Opening stock To Purchase less return To Wages To Carriage To Freight To Fuel To Stores consumed To Royalty To Manufacturing Expenses To Profit and Loss A/c Balancing figure Gross Profit (transferred to P and L A/c)		By Sales less Returns By Closing Stock Balancing figure Gross loss (transferred to P and L A/c)

Items Debited to Trading Account

Opening stock

It consists of stock of raw material, work in process, finished goods in hand. The valuation is done based on cost or market price whichever is lower. It is taken from Trial Balance.

Purchase

Purchase is debited to the Trading Account after deducting from Purchase Return. Purchase of raw material, work in process, finished goods is only shown here other purchases are not taken into consideration.

Another way is Net stock=Opening +Purchase-Closing

15.2 Direct Expenses

It includes those expenses which have been made for bringing or manufacturing goods ready for sale.

e.g. Wages ,Carriage, Freight, Import duty, Fuel, Power ,Light, Storage charges.

Items Credited to Trading Account

15.3 Sales

Sales of goods manufactured /brought is only included after deducting sales return.

15.4 Closing Stock

Closing Stock consist unsold goods which are manufactured or brought for sale.

15.5 Advantage of Trading Account

1. The various items of trading can be known separately.

2. Over stocking or under stocking can be known

3. The result of trading can be known separately.

4. The progress can be studied on the basis of gross profit ratio, year by year

Illustration:

The following appeared in the trial balance of a firm:

Particulars	Amount
Opening stock :Raw material Finished Goods Purchase Sales Returns: Purchase Sales Wages Factory Expenses Freight : In wards Out wards At the period of the concerned period the stock on hand were: Raw Material Work in progress Finished Goods	20000 35000 90000 175000 2500 1500 32500 22500 5000 7500 17500 5000 27500

Prepare the Trading Account of the firm.

Answer

Particulars	Amount (Rs)	Particular	Amount (Rs)
To Opening Stock: Raw Material Finished goods To Purchases 90000 Less Return 2500 To Wages To Factor Expenses To Freight Inwards To Gross Profit	20000 35000 87500 32500 22500 5000 21000	By Sales: 175000 Less :Return 1500 By Closing Stock: Raw Materials Work in process Finished goods	173500 17500 5000 27500
Total	223500		223500