Introduction and Preparation

of Trading Account

Financial Management and Cost

Accounting (DBM-422)

A K JHA
 Financial Statement
Financial Statements are prepared to get
an idea of profit or loss as well as the
financial position of the firm or business.
It is prepared at the end of the financial
year.
The financial statements are useful for
the users in understanding the position
and status of business and making
decisions accordingly.
A set of financial statements includes
◦ a Balance Sheet
◦ a Profit and Loss Account
◦ Schedules and notes forming part of balance
sheet, and Profit and Loss Account.
 Financial Statement
 Financial Statements are prepared from the Trial
Balance to get an idea of:
◦ How much profit was earned in a particular period? Profit
and Loss Account shows the profit earned during the year.
◦ What is financial position of the business at the end of a
particular period? Balance Sheet is a position statement
that shows the financial position on a particular date.
 Balance sheet and Profit and Loss Accounts are the
‘Final Statements or Accounts’. They are the end
product of Financial Accounting.
 Income statement is the summary of accounts that
affects the profit or loss of an enterprise.
 An Income Statement has two parts:

1. Trading Account: It reveals gross profit or gross

loss
2. Profit and Loss Account: It reveals net profit and
 Trading Account
Meaning:
Trading Account is prepared to know profitability of business
due to buying and selling or manufacturing and selling. It
shows the profit from the main business; buying and selling
other than the business isn’t included in Trading Account.
 Trading Account is the first stage in preparing a final
account. It shows the gross profit or gross loss during an
accounting year.
 Its includes sales, services rendered in the credit side and
cost of such sales and services rendered in the debit side.
Features of Trading Account
1. It is the first stage in preparation of final accounts.
2. It records only net sales and direct cost of goods sold.
3. The balance of this account discloses the gross profit or
gross loss.
4. The balance of this account is transferred to the Profit and
Loss Account.
 Purpose of Trading
Account
It is prepared to find out the gross
profit or gross loss during the
accounting year.
It is based on matching the selling
price of goods and services with
the cost of goods sold and services
rendered.
 Contents of Trading Account
1. Opening Stock refers to the closing balance
of the previous year.
◦ It is generally put as first item on the debit side of
the Trading account
◦ In case of trader, the opening stock consists of
different types of finished goods.
◦ For manufacturing, the opening stock consists of
raw materials, work in process and finished goods

2. Purchases and Purchase Returns

◦ The purchase account shows a debit balance,
showing the gross amount of purchases made of
the materials.
 This refers to the goods purchased, both cash and credit
purchases for resale.
 The purchase of assets meant for permanent use in
business such as furniture, machinery are not included
 The Purchase Returns Account shows a credit
balance showing the returns of materials to the
suppliers.
 On the debit side of the trading account, the net
amount is shown as: Rs
To Purchase 3,00,0
Less: Purchases 00
Returns 10,000
2,90,0
 Apart from the purchases returns, 00 following
entries should also be deducted
 Goods taken by the proprietor for his personal
use.
 Goods given as charity.
 Goods given as samples.
Items shown on the Credit Side of the Trading
3. Direct Expenses
◦ those expenses which are incurred on the
goods purchased till they are brought to the
place of business for sale e.g. Freight inward,
insurance, import duty, etc.
◦ In manufacturing business wages, power and
fuel, factory rent, etc. are also direct
expenses.
Stores consumed during the last year =
Opening Balance in Stores + Purchase of
Sores during the year – Closing Balance
of Stores
 Balancing of Trading Account

Gross Profit or Gross Loss

 After recording the above items in the
respective sides of the Trading Account,
the balance is calculated to ascertain
Gross Profit and Gross Loss.
 If the total of the credit side is more than
that of debit side, the excess is Gross
Profit.
 If the total of the debit side is more than
that of credit side, the excess is Gross
Loss.
 Advantage of Trading Account
1. The various items of trading can
be known separately.
2. Over stocking or under stocking
can be known
3. The result of trading can be known
separately.
4. The progress can be studied on
the basis of gross profit ratio, year
by year
 Name of the Firm
Trading Account
Dr. For the year ended on 31 st
March Cr.
Particulars Amount Particulars Amount
To Opening stock By Sales less
To Purchase less return Returns
To Wages By Closing
To Carriage Stock
To Freight Balancing
To Fuel figure
To Stores consumed Gross loss
To Royalty (transferred to
To Manufacturing Expenses P and L A/c)
To Profit and Loss A/c
Balancing figure
Gross Profit (transferred to
P and L A/c)
 Example1. Prepare a Trading Account for the year
ending March 31, 2019 from the following balances as
Particulars at March 31, 2019 Amount (Rs)
Opening stock :Raw material 20000
Finished Goods 35000
Purchase 90000
Sales 175000
Returns: Purchase 2500
Sales 1500
Wages 32500
Factory Expenses 22500
Freight : In wards 5000
Out wards 7500
At the period of the concerned period the stock on 17500
hand were: 5000
Raw Material 27500
Work in progress
Finished Goods
 Name of the Firm
Trading Account
For the year ending March 31, 2019
Dr. Cr.
Particulars Amount Particular Amount
(Rs) (Rs)
To Opening Stock: 20000 By Sales: 173500
Raw Material 35000 175000 17500
Finished goods 87500 Less :Return 5000
To Purchases 90000 32500 1500 27500
Less Return 2500 22500 By Closing
To Wages 5000 Stock:
To Factor Expenses 21000 Raw Materials
To Freight Inwards Work in process
To Gross Profit Finished goods
Total 223500 223500