As already mentioned, the first section of the trade and profit account is called. The goal of preparing trading accounts is to find out gross profit or gross loss, while in the second section it is to find out net profit or net loss.
Preparation of trade accounts
Trading account is primarily prepared to know the profitability of the goods purchased (or manufactured) sold by the businessman. The difference between sales price and price of goods sold is the businessman’s 5 profits. Therefore, to calculate gross earnings, it is necessary to know:
(a) cost of goods sold.
(b) you go out.
The total sales can be found from the sales book. However, the cost of goods sold is calculated. n To calculate the cost of sales, it is necessary to know its importance. “Cost of goods” includes the purchase price of the goods plus expenses incurred in the purchase of goods and the salting of the goods to the place of business. To calculate the cost of the item, “we need to deduct the total cost of goods purchased by hand. We can study this phenomenon using the following formula:
Opening stock + cost of purchase – final stock = cost of sale
As already discussed, the purpose of preparing a trading account is to calculate the gross profit for the company. It can be described as an excess of the amount of ‘Sales’ over ‘Sales Costs’. This definition can be explained by the following equation:
Gross Profit = Sales Cost of Goods Sold or (Sales + Closing Stock) – (Initial Stock + Buy + Direct Expenses)
The opening inventory and purchases along with purchase and delivery costs (direct exp.) Are recorded on the debit page, while sales and final inventory are recorded on the credit side. If the credit side is Jeater than the debit page, the difference on the debit page is written as gross profit, which is ultimately recorded on the credit side of the income statement. When the debit page exceeds the credit side, the difference is gross losses, which are recorded on the credit side and ultimately appear on the debit side of the income statement and loss account.
Ordinary items in a trading account:
A) Debit page
1. Opening stock. It is the stock that remained unsold at the end of the previous year. It must have been brought into books by means of opening the entrance; so it always appears within the sample balance. Generally, it appears as the first item on the debit side of your trading account. Of course, in the first year of a business, there is no opening stock.
2. Purchasing. This is usually another item on the debit side of the trading account. “Purchase” means total purchase, ie. cash plus credit purchases. Any return (purchase return) must be deducted from purchases to find out net purchases. Sometimes goods are received from the supplier before the relevant invoice. In such a situation, at the date of preparation of the final accounts, an item must be kept to debit the purchase account and credit the suppliers account with the cost of the goods.
3. Purchase of expenses. All purchases of goods are also debited to the trading account. These include salaries, inland freight, freight, customs, clearing costs, dock fees, excise duties, patents and import duties, etc.
4. Production costs. Such expenses are borne by businessmen for manufacture or for making the goods in salable condition, viz. engine power, gas fuel, stores, royalties, factory expenses, manager and manager’s salary, etc.
Although manufacturing costs must, strictly speaking, be included in the manufacturing accounts, since we only prepare a trade account, expenses of this type can also be included in the trading account.
(B) Credit page
1. You go out. Sales means total sales, ie. cash plus credit turnover. If there are any sales returns, these must be deducted from the sale. So net sales are credited to the trading account. If an asset in the business is sold, it should not be included in the sale.
2. Closes stock. It is the value of stock that has not been sold in the godchild or store during the last accounting period. Normally, the end balance is stated outside the trial balance, in which case it is shown on the credit side of the trading account. However, if it is stated in the trial balance, it should not appear on the credit side of the trading account but only appear in the balance sheet as active. The closing stock must be valued at cost or market price, whichever is less.
Valuation of closure
To determine the value of the final inventory, it is necessary to make a complete inventory or list of all the goods contained in the god, along with quantities. On the basis of physical observation, the inventory lists are prepared and the value of the total inventory is calculated on the basis of the unit value. Thus, it is clear that uptake entails (i) inventory, (ii) pricing. Each item is priced at cost unless the market price is lower. It is easy to price an inventory at cost if the costs remain fixed. But prices remain fluctuating; so the valuation of stock is made on the basis of one of many valuation methods.
Creating a trading account helps the trader to know the relationship between costs incurred and the revenue and efficiency level with which the operations have been performed. The ratio of gross profit to sales is very important: it arrives at:
Gross profit X 100 / sale
With the help of G.P. conditions he can ascertain how efficiently he runs the business higher ratio, the better the efficiency.
Closing submissions regarding trade accounts
For the transfer of various accounts relating to goods and purchase expenses, after completed entries:
(i) For Opening Stock: Debit Trading Account and Credit Share Account
(ii) For Purchases: Debit Account and Credit Purchase Account where the amount is an amount less purchase returns.
(iii) For Return Purchase: Debit Buy Return Account and Credit Purchase Account.
(iv) For Inward Returns: Debit Sales Account and Credit Sales Return Account
(v) For direct expenses: Debit account and credit direct expense accounts separately.
(vi) For Sale: Debit Account and Credit Trading Account. We find that all accounts as mentioned above will be closed except for trading account
(vii) To final stock: Debit account and credit trading account After recording the above items, the trading accounts will be balanced and the difference between two sides detected. If the credit side is more, the result is gross profit for which the following entry is recorded.
(viii) For Gross Profit: Debit Trading Account and Credit Profit and Loss Account If the result is gross loss, the above item is reversed.
The income statement is opened by recording gross earnings (on credit page) or gross loss (debit page).
In order to earn a net profit, a businessman must have many more expenses in addition to the direct expenses. These expenses are deducted from profit (or added to gross loss), the resulting figure will be net profit or net loss.
The expenses recognized in the income statement are “indirect expenses”. These are classified as follows:
Sales and distribution costs.
These include the following expenses:
(a) Seller’s salary and commission
(b) the Commission vis-à-vis agents
(c) Freight & transport on sale
(d) Sales tax
(e) Incorrect debt
(g) Package Expenses
(h) Export duties
(a) Office wages and salaries
(c) Legal expenses
(d) Cost of trading
(e) Prices and taxes
(f) Audit Fees
(i) Printing and stationery
(j) Postage and telegrams
(k) Bank charges
(a) Discount allowed
(b) Interest on capital
(c) Interest on loans
(d) Discount charges on discounted bills
Maintenance, depreciation and provisions etc..
These include the following expenses
(b) Depreciation of assets
(c) Provision or reserves for doubtful debts
(d) Reserve for debtors discount.
Along with the above indirect expenses, the debit side of the income statement also includes various business losses.
On the credit side of the income statement, the items that are registered are:
(a) Discount received
(b) The Commission received
(c) Received rent
(d) Interest received
(e) Investment income
(f) Profit on sale of assets
(g) Bad Debt Recovery
(h) Dividends received
(i) Learning Award etc.