Trading account

A trading account is an account which contains, " in summarized form, all the
transactions, occurring, throughout the trading period, in commodities in which
he deals" and which gives the gross trading result. In short, trading account is the
account which is prepared to determine the gross profit or the gross loss of a
trader.
Items of Trading Account:
The following items usually appear in the debit and credit sides of the trading
account.
Debit Side Items:
The value of opening stocks of goods (i.e., the stock of goods with which the
business was started).
Net purchase made during the year (i.e., purchases less returns).
Direct expenses, if any.
Credit Side Items:
Total sales made during the period less the value of returns, i.e., net sales.
The value of closing stock of goods.
 Gross Profit
• The Trading Account shows the gross profit
(or loss) for the reporting period.

• The gross profit equals the sales revenue

minus the cost of goods sold.

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 The Trading Account: Items
• Sales
• Purchases
• Returns Inwards (Sales Returns)
• Returns Outwards (Purchase Returns)
• Carriage Inwards
• Opening Stock
• Closing Stock

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Advantages of Trading Account:
• The advantages of the trading account are as follows:
• A trader can find out the gross profit and thereby can ascertain the
percentage of profit he has earned on the cost of goods sold. This
percentage of gross profit may serve as his ready guide for the
adjustment of future sale price.
• A trading account help a trader to compare his stock at open with
that at the close. He can further find out whether the purchases he
has made during the period of account have been judicious.
• Once can compare the figure of sales with similar figure of the
previous year and can find out whether business is improving or
declining.
• If the gross profit disclosed by the trading account is less than
expected, an enquiry can be made into the cause responsible for
the decline. And if the gross profit is more than was expected, steps
can be taken to maintain it.
 The Profit and Loss Account
• The Profit and Loss Account is completed
after the Trading Account. It shows the net
profit after all expenses and overheads have
been charged.

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 The Profit and Loss Account
• The Profit and Loss Account starts with the
gross profit figure from the Trading Account.

• It then lists any items of additional revenue

raised by the business, as well as any expenses
incurred by the business not directly linked to
trading.

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 Net Profit
• The Profit and Loss Account shows the net
profit (or loss) for the reporting period.

• The net profit equals the gross profit minus all

expenses and overheads.

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The Profit and Loss Account: Items
• Discounts Received
• Commission Received
• Profit on the Disposal of Assets
• Expenses such as:
– Wages
– Carriage Outwards (Dispatch of Goods)
– Rent
– Rates
– Insurance
– Advertising
– Bad Debts Allowance
– Depreciation
– Stationery

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Some Important and Common Adjustments
are listed below:
• Closing Stock:-
Adjustment Entry:
Closing Stock A/c--------Dr
To Trading A/c

• The Closing Stock is treated in the Final Accounts as follows:-

 On the Credit Side of “Trading A/c”, shown as separate item.
 On the Assets Side of the Balance Sheet, shown as a separate item under
“Current Assets”.

Dr. Cr. Liabilities Amount Assets Amount in

in Rs. Rs.
Particulars Amount Particulars Amount in
in Rs. Rs. Current Assets:
Closing Stock xxxxxxxxxx
By Closing Stock xxxxxxxxxx

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 Adjusted Purchases and Closing Stock

• Sometimes the Closing Stock may be given in the Trial Balance itself.
This would mean that both the Opening and the Closing Stocks have
been adjusted in the Purchases.
• In such a situation, the Opening Stock will not appear in Trial
Balance.
• The Trial Balance will show only the figures of Adjusted Purchases
and Closing Stock.
• The Adjusted Purchases are in fact the Cost of Goods Sold.
• They have been worked out by adding the Opening Stock + Net
Purchases + Direct Expenses – Closing Stock.
• The Adjusted Purchases are shown on the debit side of “Trading
Account”.
• In such a situation there is no need to show “Closing Stock in the
Trading Account” as it already stands adjusted in Purchases.
• It will be shown only on the “Assets side of Balance Sheet”.

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• Outstanding Salaries:-
Adjustment Entry:
Concerned Expense A/c--------Dr
To Outstanding Expenses A/c

• The Outstanding Expenses is treated in Final Accounts as follows:-

 Added to the concerned expenses in the “Trading and Profit and Loss
A/c”.
 Shown on the Liabilities side of the Balance Sheet as a separate item
under “Current Liabilities”.

Dr. Cr. Liabilities Amount in Assets Amount in

Rs. Rs.
Particulars Amount in Particulars Amount in
Rs. Rs. Current
Liabilities:
To Expenses Xxxxxx
Outstanding Exp. Xxxxxx
Add: Xxxxxx
Outstanding
Expenses

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 Outstanding Expenses:-

• Outstanding Expenses are those expenses which have been

incurred during Current accounting year but have not been
paid till the end of the year. They are also called “Accrued
Expenses”.
• The Common examples of such expenses are the Salaries,
Wages and Rent for the last month of the Accounting year
paid in the first month of the Next year.
• Since they remained unpaid as at the end of Accounting year,
no entry might have been passed in the books of account.
• So, they must be taken into account while preparing the
Trading and Profit and Loss A/c, otherwise it will not reveal
the correct amount of Profit or Loss.

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 • Prepaid Expenses:-
Adjustment Entry:
Prepaid Expenses A/c--------Dr
To Concerned Expense A/c

• The Prepaid Expenses will be treated in Final Accounts as follows:-

 Subtracted from the Concerned Expense in the “Trading and Profit and Loss
A/c”.
 Shown on the Assets side of the Balance Sheet as a separate item under
“Current Assets”.

Dr. Cr. Liabilities Amount in Assets Amount in

Rs. Rs.
Particulars Amount in Particulars Amount in Current Assets:
Rs. Rs.
Prepaid Xxxxxx
Expenses
To Expense A/c Xxxxxx
Less: Prepaid Exp. Xxxxxx

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 Prepaid Expenses:-

• Sometimes, the benefit of some Expenses will be

available not only in the Current Accounting year but
also in the Next year.
• That Portion of expense the benefit of which yet to be
received is called “Prepaid Expense” (or) “Unexpired
Expense”.
• Examples of such expenses are Unexpired Insurance,
Interest paid in Advance, etc.
• In such situations it is necessary to find out the
Unexpired Portion and adjust it in the concerned
expense.

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 • Accrued Income:-
Adjustment Entry:
Accrued Income A/c---------Dr
To Concerned Income A/c

• The Accrued Income is treated in final accounts as follows:-

 Added to the concerned income in the Profit and Loss Account and
 Shown on the Asset Side of the Balance Sheet as a separate item under
“Current Assets”.

Dr. Cr. Liabilities Amount in Assets Amount in

Rs. Rs.
Particulars Amount in Particulars Amount in
Rs. Rs.
Current Assets:
By Income Xxxxxx Accrued Income Xxxxxx
Add: Accrued Xxxxxx
Income

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 Accrued Income:-

• Accrued Incomes are those incomes which have been

earned during the Current Accounting year but have not
been received till the end of the year.
• Accrued Income is also called as “Outstanding
Incomes” (or) “Incomes earned but not yet received”.
• Examples of such incomes are Commission Receivable,
Income on Investments due but not yet received, etc.

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 • Income Received in Advance:-
Adjustment Entry:
Concerned Income A/c---------Dr
To Income received in advance A/c

• The Unearned Income is treated in the Final Accounts as follows:-

 Deducted from the Concerned Income in the Profit and Loss Account, and
 Shown on the Liabilities side of the Balance Sheet as a separate item under
Current Liabilities.

Dr. Cr. Liabilities Amount Assets Amount in

in Rs. Rs.

Particulars Amount in Particulars Amount in

Rs. Rs. Current Liabilities:
Income received in Xxxxxx
By Income Xxxxxx advance
A/c Xxxxxx
Less:
Income
received in
Advance

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 Income Received in Advance:-

• Any Income which belongs to the next accounting year

but has been received during the current accounting
year is called “Income Received in Advance” (or)
“Unearned Income”.
• It is the income in respect of which the service is yet to
be provided.
• Examples of such incomes are Rent received in
advance, Interest received in advance, etc.
• In such a situation, the unearned portion of the income
will have to be adjusted while preparing the Final
Accounts.

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 Illustration 1:-

Show how you will record the following items in the Profit and Loss Account and the Balance
Sheet.

The Trial Balance showed the following balances

Particulars Amountasinon
Rs.December 31, 1987:

Salaries 10000=00
Wages 20000=00
Rent Received 6600=00
Commission Received 2000=00
Interest on 6000=00
Investments

Additional Information:
1. Salaries amounting to Rs.2,000 are Outstanding.
2. Wages include Rs.1,500 paid in Advance.
3. Interest on Investment include Rs.1,200 for the months of January, February and March,
1988
4. Rent for the month of December amounting to Rs.600 is not yet received.
Gross Profit for the year is Rs.40,000 and other expenses amounted to Rs.10,000.

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 Profit and Loss Account for the year ended December 31, 1987

Dr. Cr.

Particulars Amount in Amount in Rs. Particulars Amount in Amount in Rs.

Rs. Rs.

To Salaries 10,000 By Gross Profit 40,000

Add: Outstanding 2,000 b/d
------------- 12,000
To Wages 20,000 By Rent Received 6,600
Less: Prepaid 1,500 Add: Outstanding 600
------------- 18,500 ------------ 7,200
By Commission
To Other 10,000 Received 2,000
Expenses
By Interest on 6,000
To Net Profit Investments
13,500
(Transferred to Less: Received in
Advance 1,200
Capital A/c) ------------ 4,800

___________ ___________
54,000 54,000
___________ ___________

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 Balance Sheet as on December 31, 1987

Liabilities Amount in Rs. Assets Amount in Rs.

Current Liabilities: Current Assets:
Salaries Outstanding 2,000 Wages Prepaid 1,500
Interest Received in 1,200 Rent Outstanding 600
Advance

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