Trading and behalf and Loss catalogue

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Trading Account

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As already discussed, first section of trading and behalf and loss inventory is called trading account. The aim of preparation trading inventory is to find out gross behalf or gross loss while that of second section is to find out net behalf or net loss.

Preparation of Trading Account

Trading inventory is ready mainly to know the profitability of the goods bought (or manufactured) sold by the businessman. The divergence between selling price and cost of goods sold is the,5 earning of the businessman. Thus in order to hypothesize the gross earning, it is principal to know:

(a) cost of goods sold.

(b) sales.

Total sales can be ascertained from the sales ledger. The cost of goods sold is, however, calculated. N order to hypothesize the cost of sales it is principal to know its meaning. The 'cost of goods' includes the buy price of the goods plus expenses relating to buy of goods and brining the goods to the place of business. In order to hypothesize the cost of goods " we should deduct from the total cost of goods purchased the cost of goods in hand. We can study this phenomenon with the help of following formula:

Opening stock + cost of purchases - windup stock = cost of sales

As already discussed that the purpose of preparation trading inventory is to hypothesize the gross behalf of the business. It can be described as excess of number of 'Sales' over 'Cost of Sales'. This definition can be explained in terms of following equation:

Gross behalf = Sales-Cost of goods sold or (Sales + windup Stock) -(Stock in the beginning + Purchases + Direct Expenses)

The chance stock and purchases along with buying and bringing expenses (direct exp.) are recorded the debit side whereas sales and windup stock is recorded on the reputation side. If reputation side is Jeater than the debit side the divergence is written on the debit side as gross behalf which is ultimately recorded on the reputation side of behalf and loss account. When the debit side exceeds the reputation side, the divergence is gross loss which is recorded at reputation side and ultimately shown on the debit side of behalf & loss account.

Usual Items in a Trading Account:

A) Debit Side

1. chance Stock. It is the stock which remained unsold at the end of old year. It must have been brought into books with the help of chance entry; so it always appears inside the trial balance. Generally, it is shown as first item at the debit side of trading account. Of course, in the first year of a company there will be no chance stock.

2. Purchases. It is usually second item on the debit side of trading account. 'Purchases' mean total purchases i.e. Cash plus reputation purchases. Any return outwards (purchases return) should be deducted out of purchases to find out the net purchases. Sometimes goods are received before the relevant invoice from the supplier. In such a situation, on the date of preparation final accounts an entry should be passed to debit the purchases inventory and to reputation the suppliers' inventory with the cost of goods.

3. Buying Expenses. All expenses relating to buy of goods are also debited in the trading account. These include-wages, carriage inwards freight, duty, clearing charges, dock charges, excise duty, octroi and import duty etc.

4. Manufacturing Expenses. Such expenses are incurred by businessmen to originate or to render the goods in saleable health viz., motive power, gas fuel, stores, royalties, installation expenses, foreman and supervisor's wages etc.

Though manufacturing expenses are strictly to be taken in the manufacturing inventory since we are preparation only trading account, expenses of this type may also be included in the trading account.

(B) reputation Side

1. Sales. Sales mean total sales i.e. Cash plus reputation sales. If there are any sales returns, these should be deducted from sales. So net sales are credited to trading account. If an asset of the firm has been sold, it should not be included in the sales.

2. windup Stock. It is the value of stock lying unsold in the godown or shop on the last date of accounting period. usually windup stock is given outside the trial equilibrium in that case it is shown on the reputation side of trading account. But if it is given inside the trial balance, it is not to be shown on the reputation side of trading inventory but appears only in the equilibrium sheet as asset. windup stock should be valued at cost or shop price whichever is less.

Valuation of windup Stock

The ascertain the value of windup stock it is principal to make a perfect inventory or list of all the items in the god own together with quantities. On the basis of bodily notice the stock lists are ready and the value of total stock is calculated on the basis of unit value. Thus, it is clear that stock-taking entails (i) inventorying, (ii) pricing. Each item is priced at cost, unless the shop price is lower. Pricing an inventory at cost is easy if cost remains fixed. But prices remain fluctuating; so the valuation of stock is done on the basis of one of many valuation methods.

The preparation of trading inventory helps the trade to know the connection between the costs be incurred and the revenues earned and the level of efficiency with which operations have been conducted. The ratio of gross behalf to sales is very significant: it is arrived at :

Gross behalf X 100 / Sales

With the help of G.P. Ratio he can ascertain as to how efficiently he is running the company higher the ratio, great will be the efficiency.

Closing Entries pertaining to trading Account

For transferring assorted accounts relating to goods and buying expenses, following windup entries recorded:

(i) For chance Stock: Debit trading inventory and reputation stock account

(ii) For purchases: Debit trading inventory and reputation purchases account, the number being the et number after deducting purchases returns.

(iii) For purchases returns: Debit purchases return inventory and reputation purchases account.

(iv) For returns inwards: Debit sales inventory and reputation sales return account

(v) For direct expenses: Debit trading inventory and reputation direct expenses accounts individually.

(vi) For sales: Debit sales inventory and reputation trading account. We will find that all the accounts as mentioned above will be finished with the irregularity of trading account

(vii) For windup stock: Debit windup stock inventory and reputation trading inventory After recording above entries the trading inventory will be balanced and divergence of two sides ascertained. If reputation side is more the succeed is gross behalf for which following entry is recorded.

(viii) For gross profit: Debit trading inventory and reputation behalf and loss inventory If the succeed is gross loss the above entry is reversed.

Profit and Loss Account

The behalf and loss inventory is opened by recording the gross behalf (on reputation side) or gross loss (debit side).

For earning net behalf a businessman has to incur many more expenses in expanding to the direct expenses. Those expenses are deducted from behalf (or added to gross loss), the resultant frame will be net behalf or net loss.

The expenses which are recorded in behalf and loss inventory are ailed 'indirect expenses'. These be classified as follows:

Selling and distribution expenses.

These include of following expenses:

(a) Salesmen's wages and commission

(b) Commission to agents

(c) Freight & carriage on sales

(d) Sales tax

(e) Bad debts

(f) Advertising

(g) Packing expenses

(h) Export duty

Administrative Expenses.

These include:

(a) Office salaries & wages

(b) Insurance

(c) Legal expenses

(d) Trade expenses

(e) Rates & taxes

(f) Audit fees

(g) Insurance

(h) Rent

(i) Printing and stationery

(j) Postage and telegrams

(k) Bank charges

Financial Expenses

These comprise:

(a) reduction allowed

(b) Interest on Capital

(c) Interest on loan

(d) reduction Charges on bill discounted

Maintenance, depreciations and Provisions etc.

These include following expenses

(a) Repairs

(b) Depreciation on assets

(c) Provision or hold for doubtful debts

(d) hold for reduction on debtors.

Along with above indirect expenses the debit side of behalf and loss inventory comprises of assorted company losses also.

On the reputation side of behalf and loss inventory the items recorded are:

(a) reduction received

(b) Commission received

(c) Rent received

(d) Interest received

(e) revenue from investments

(f) behalf on sale of assets

(g) Bad debts recovered

(h) Dividend received

(i) Apprenticeship selected etc.

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