Trading and Profit and Loss Account

Trading Account

As already discussed, the first section of the trading and profit and loss account is called trading. The purpose of the trading account is prepared to find gross profit or gross loss, while the second section is to find the net profit or loss.

Preparation of Trading Account

Trading account is prepared mainly to know the profitability of products purchased (or manufactured) sold by the businessman. The difference between selling price and cost of goods sold is', 5 gain of the merchant. Therefore, to calculate the gross profit, you need to know:

(A) the cost of goods sold.

(B) sales.

The total sales can be ascertained by record sales. The cost of goods sold, however, calculated. n to calculate the cost of sales, you must know its meaning. The 'cost of goods includes the purchase price of goods and expenditure on the purchase of goods and salting of goods to the workplace. To calculate the cost of goods "should be deducted from the total cost of goods purchased cost of goods in hand we are able to study this phenomenon with the help of following formula.:

Opening stock + purchase costs - closing stock = cost of goods sold

As already said the aim of preparing trading account is to calculate the gross profit of the business. Can be described as an excess of the amount of 'Sales' over 'expenses'. This definition can be explained in terms of the following equation:

Gross Profit = Sales-Cost of goods sold or (Sales + Closing stock) - (Stock + Purchases + beginning direct costs)

The opening stock and purchases with the purchase and bring direct expenditure (Exp.) are recorded in the debt, while department store sales and closing is recorded on the credit side. If the side is Jeater credit than debit side the difference is written on the debit side as the gross profit which is then recorded on the credit of the profit and loss. When the debt exceeds the credit side, the difference is the gross loss, which is recorded alongside credit and, finally, shown on the debt side of the profit and loss.

Items usually in a trading account:

A) Debit Side

1. Opening Stock. And 'the stock, which remained unsold at the end of the previous year. It must have been brought in books with the help of open entry, so it always appears in the trial balance. Generally, it is shown as the first entry to the debit side of trading account. Of course, in the first year of a business there will be no opening stock.

2. Purchases. Normally it is the second item on the debit side of trading account. Purchases of the average total purchases, ie purchases in cash, no credit. Any outward return (round-trip purchase) must be deducted from the purchase to find out net purchases. Sometimes goods are received before the invoice from the supplier. In this situation, the date of preparation of final accounts an entry should be passed to debit the account purchases and credit the account of suppliers with the cost of goods.

3. Purchase costs. All expenditure on the purchase of goods are charged to the account trading. These include wages, freight inwards, duty, clearing charges, port charges, excise, octroi and import duties, etc.

4. Production costs. These expenses are incurred by businessmen to manufacture or to make the goods in salable condition ie., Motive power, fuel gas, stores, royalties, fees Factory Foreman and supervisor salaries, etc.

Although the costs of production are strictly to be taken into account work since we are preparing only trading account, the cost of this type may also be included in the trading account.

(B) Credit Side

1. Sales. Sales Total sales means that sales for cash, no credit. If there are any returns for sale, these should be deducted from sales. Thus, net sales are credited to the trading account. If an asset of the company was sold, it should not be included in sales.

2. Closing Stock. And 'the value of unsold securities lying in godown or shop the last day of the accounting period. The closing date is normally available outside the trial balance in this case is shown on the side credited to trading account. But if it is given within the trial balance, should not be shown on the side credited to the trading account but appears only in the balance sheet as assets. Closing stock should be valued at cost or market price whichever is lower.

Evaluation of closing stock

Determine the value of the securities closing, you must make a complete inventory or list of all the elements in their God together with the quantities. Based on physical observation of photo lists are prepared and the total stock value is calculated on the basis of unit value. Thus, it is clear that the inventory involves (i) inventory, (ii) prices. Each article is available at cost, unless the market price is lower. Charging the cost of inventory is easier if the cost remains fixed. But prices remain volatile, so the valuation of stocks is carried out based on an evaluation of different methods.

The preparation of trading account trade helps to know the ratio of costs to be incurred and revenue earned and the level of efficiency with which operations were conducted. The ratio of gross margin on sales is very significant: it comes to:

X 100 Gross Profit / Sales

With the help of G.P. ratio can occur for the efficiency that is running the activity the higher the ratio, the better the efficiency.

Items related to the closure of the trading account

For the transfer of various accounts regarding the purchase of goods and expenses, after closing entries recorded:

(I) For the opening Stock: Debit trading account and stock account credit

(Ii) for purchases: Debit trading account and credit account purchases, the amount is the total return on net purchases et al.

(Iii) For returns purchases: buying back debt account and credit account purchases.

(Iv) To return to the internal sales account debit and credit sales return account

(V) for the direct costs: trading account debt and the direct cost of credit accounts individually.

(I) For sales: sales account debit and credit account trading. Find that all of the accounts, as indicated above will be closed with the exception of trading account

(Vii) For closing stock: debt stock account closing and negotiating on behalf of Credit After recording the items on the trading account will be balanced and the difference of two sides established. If the side of the credit is more the result is the gross profit for which you record the following entry.

(Viii) the gross profit: debt trading account and credit the profit and loss account if the result is gross loss the previous item is inverted.

Income

The profit and loss account is opened by recording the gross profit (on credit) or gross loss (debit side).

For the realization of profit for many an entrepreneur has to bear extra costs in addition to direct costs. These expenses are deducted from income (or added to the gross loss), the resulting figure is net income or net loss.

The costs that are recorded in the profit and loss are plagued indirect costs. "These are classified as follows:

Selling and distribution.

These expenses include the following:

(A) of the salary and commission merchants

(B) Commission to agents

(C) goods and transportation sales tax

(D) sales tax

(E) Bad debts

(F) Advertising

(G) the costs of packaging

(H) of export duties

Administrative costs.

These include:

(A) Office salaries and wages

(B) Insurance

(C) legal fees

(D) trade costs

(E) Rates and taxes

(F) expenses audit

(G) Insurance

(H) Rent

(I) printing and stationery

(J) Postage and telegrams

(K) Bank charges

Borrowing Costs

These include:

(A) Discount allowed

(B) Interest on capital

(C) Interest on loans

(D) discount charges on bills discounted

Maintenance, depreciation and provisions, etc.

These expenses include the following

(A) Repairs

(B) depreciation of assets

(C) provision or reserve for bad debts

(D) Provision for discount on debtors.

Together with the above indirect costs debt side of the profit and loss includes the loss of business.

To the credit of the profit and loss items are recorded:

(A) discount received

(B) the Commission has received

(C) Rent received

(D) Interest received

(E) Income from investments

(F) Profit on sale of assets

(G) Bad debts recovered

(H) Dividends received

(I) Apprenticeship Award, etc. ......