Trading and Profit Loss Account
Trading and Profit Loss Account
Trading and Profit Loss Account
Learning Objectives: 1. 2. 3. 4. Define and explain trading account. What are the items of a trading account. Prepare the format of trading account. What are advantages of trading accounting?
The difference between the two sides of the trading account represents either gross profit or gross loss. Thus if the credit side is heavier that would mean that the trader has earned gross profit i.e., the excess of selling price of the goods sold over their purchase price. If the debit side is heavier it would mean that the trader has suffered gross loss i.e., purchase price of goods exceeds the selling price. The balance of trading account which represents either gross profit or gross loss is transferred to profit and loss account.
To dock charges To Wages To Duty To Freight To Clearing charges To Etc. Etc., To Gross profit (Transferred to profit and loss account)
Opening Stock:
In case of trading concerns it will consist of only finished goods or goods to be sold without alteration. In manufacturing concerns, the opening stock will consist of three parts (a). Stock of raw materials. (b). Stock of partly completed goods or work-in-progress. (c). Stock of finished goods. In case of new business there will be no opening stock.
Purchases:
This item includes both cash and credit purchases of goods bought with the object of sales.
Discount on Purchases:
It is also shown by way of deduction from purchases in the trading account.
Sales:
This item includes total of both cash and credit sales of goods in which businessman deals in. It is credited to trading account.
Discount on Sales:
This account has always a debit balance and is shown by deduction from sales in the trading account.
Direct Expenses:
Direct expenses are those expenses which are incurred to convert raw-materials into finished goods or which may be regarded as a part of the cost of purchasing the goods. e.g., wages paid by a manufacturer to construct furniture out of raw wood, the expenses
incurred to bring goods from the place of purchase to the business place of the trader etc. All the direct expenses are charged to the trading account. The items usually included in the direct expenses are: Wages: This item usually signifies some hourly, daily or piecework remuneration paid to laborers. It is direct expenditure and should be charged to trading account. 2. Manufacturing or Productive Wages: This item usually signifies the wages of factory workmen actually engaged in making or producing something. It is a direct charge on the cost of manufacturer. It is debited to manufacturing account or trading account. 3. Carriage Inward: Carriage means conveyance charges of goods by land. Carriage inward are the conveyance expenses incurred to bring the goods purchased in the godown or shop. It is debited to trading account. In examination questions when the item only "carriage" is given and is not expressly stated to be inward or outward, it should be assumed to be inward and debited to trading account. The reason is that carriage on goods is usually paid by the purchaser. 4. Cartage: The cartage charges on goods purchased are direct expenses and should be debited to trading account. 5. Freight: Freight is the charge made for conveyance of goods by sea. Freight on goods purchased is charged to trading account. 6. Customs Duty, Octroi Duty etc: When goods are purchased from a foreign country import duty will be payable. When goods are received from another city, the municipal corporation may charge octroi duty. All duties on goods purchased should be debited to trading account. 7. Excise Duty: It is a tax levied by the government. If the duty is levied on production it will be treated as manufacturing expenses and debited to trading account. 8. Stores Consumed: This item stores denote lubricating oil, tallow, grease, cotton and jute waste, etc., required for running the machinery of manufacturing concern. The amount of stores consumed is a direct expense and should be charged to trading account. 9. Motive Power: This item includes, coke, gas, water or electric energy consumed in propelling the machinery. It is debited to manufacturing account in the absence of a manufacturing account, it is debited to trading account. 10. Royalty: Royalty is an amount paid to a person for exploiting rights possessed by him it is usually paid to patentee, author, or landlord for the right to use his patent, copyright or land. If they are productive expenses, they are debited to manufacturing account; but in the absence of a manufacturing account, they are debited to trading account. 11. Manufacturing Expense: All other expenses such as factory rent, factory insurance, factory repair etc., are direct expenses and should be charged to trading account. 1.
brought into account by means of a journal entry debiting stock account and crediting the trading account.
2.
3.
2.
3. 4.
called the net profit and that of the loss over the gain is called the net loss. The account is closed by transferring the net profit or loss to capital account of the trader.
2.
Transferring all items of gains etc: Various nominal accounts (representing gains) To Profit and loss account
(This entry will close all the remaining nominal accounts)
3.
Transferring net gain to capital account: Profit and loss account To Capital account
(This entry closes the P & L account)
4.
Transferring net loss to capital account: Capital account To Profit and loss account
(This entry closes the P & L account)
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Net Sales Cost of Goods Sold: Merchandise is stock on 1st January Purchases Less: Purchases returns
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Net purchases
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Cost of goods available for sale Less merchandise in stock on 31st December
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GROSS PROFIT Operating Expenses: Selling Expenses: Sales salaries Advertising expenses Insurance expense - selling Store supplies expenses Sundry selling expenses Total selling expenses
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-----General Expenses: Office salaries Taxes Insurance expenses general Office supplies expenses Sundry general expenses --------------------------
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Net profit from operations Other Income: Rent income Other Expenses: Interest expenses
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NET PROFIT
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1.
2.
Expenses that are incurred directly in connection with the sale of goods are known as selling expenses. selling expenses include salaries or the salesmen, store supplies used, depreciation of the store equipment, and advertising. Expenses incurred in the general administration of the business are known as administrative expenses or general expenses. Examples of general expenses are office salaries, depreciation of equipment, and office supplied used.
Net Profit from Operations: The excess of gross profit on sales over total operating expenses is called net profit or net profit from operations. If operating expenses should exceed gross profit, the excess is designated as net loss or net loss from operations. Other Income: Minor sources of income are classified as other income or non-operating income. In a merchandising business this category often include income from interest, rent, dividends and gains from the sale of fixed assets. Other Expenses: Expenses that cannot be associated definitely with the operations are identified as other expenses or non-operating expenses. Interest expense that results from financing activities and losses incurred in the disposal of fixed assets are examples of items reported in this section. The two categories of non-operating items, other income and other expenses, are offset against each other on the profit and loss account. If the total of other income exceeds the total other expenses, the excess is added to net profit from operations; if the reverse is true, the difference is subtracted from net profit from operations. Net Profit: The final figure on the profit and loss account is labeled as net profit (or net loss) or net profit carried to balance sheet. It is the net increase in capital from profit making activities.