what is Trading account In accounting

The account prepared by the trader to get the information about the gross profit or gross loss from the business within a certain period (such as one year or six months) is called ‘trade account’. In fact, the meaning of trading account is such an account from which gross profit or loss is known through the purchase and sale of goods.

Acording to J.R. Batliboi — The Trading Account shows the results of buying and selling of goods. In preparing this account, the general establishment change are ignored and only the transaction in good anr included.

This explains the meaning of trading account.
According to this definition, trading account can also be called Goods Account, because only transactions related to goods are accounted for in it, such as- (i) opening stock, (ii) purchase of goods, (iii) Purchase returns, (iv) Sales of goods, (v) Sales returns, (vi) Closing stock, (vii) Cost of manufacturing the goods, (viii) Cost of purchasing the goods and bringing them to the place of business.

1. whatisTradingaccountInaccounting
whatisTradingaccountInaccounting
Theaccountpreparedbythetradertogettheinformationaboutthegrossprofitorgrossloss
fromthebusinesswithinacertainperiod(suchasoneyearorsixmonths)iscalled‘trade
account’.Infact,themeaningoftradingaccountissuchanaccountfromwhichgrossprofit
orlossisknownthroughthepurchaseandsaleofgoods.
AcordingtoJ.R.Batliboi—TheTradingAccountshowstheresultsofbuyingandsellingof
goods.Inpreparingthisaccount,thegeneralestablishmentchangeareignoredandonlythe
transactioningoodanrincluded.
Thisexplainsthemeaningoftradingaccount.
Accordingtothisdefinition,tradingaccountcanalsobecalledGoodsAccount,becauseonly
transactionsrelatedtogoodsareaccountedforinit,suchas-(i)openingstock,(ii)purchase
ofgoods,(iii)Purchasereturns,(iv)Salesofgoods,(v)Salesreturns,(vi)Closingstock,(vii)
Costofmanufacturingthegoods,(viii)Costofpurchasingthegoodsandbringingthemto
theplaceofbusiness.
PurposeorObjectoftradingAccount
Themainpurposeofpreparingatradingaccountistofindoutthegrossprofitorgrossloss
oftheenterpriseinaparticularperiod.
GrossProfitorGrossLoss–Grossprofitorgrosslossisthedifferencebetweenactualsales
receiptsandcostofgoodssold.
•Ifthenetamountofsaleismorethanthegoodspurchasedbythetraderandtheexpenses
incurredonit,thenthedifferenceiscalledGrossProfit.
Grossprofit=Saleproceeds–CostofGoodsSold
•Iftheamountofsaleislessthantheamountofpurchaseandexpensesincurredonit,then
thedifferenceiscalledgrossloss.

2. GrossLoss=CostofGoodSold–Saleproceeds
FeaturesofTradingAccount
1.ItisanominalaccountandformspartoftheProfitandLossAccount.
2.Thisisthefirststepinthepreparationoffinalaccountsofthebusinessconcern.
3.Inthisthedirectcostsofgoodssoldandsalesareaccountedfor.
4.Thebalanceofthisaccountrepresents‘GrossProfit’or‘GrossLoss’.
5.Thebalanceofthisaccounti.e.grossprofitorgrosslossistransferredtotheprofitand
lossaccount.
6.Itispreparedforaparticularaccountingperiodandusuallyattheendofthatperiod.
NeedandImportance(Advantages)ofTradingAccount
Followingaretheimportanceorbenefitsofcreatingatradingaccount:
(1)Itprovidesinformationongrossprofitorgrossloss.
(2)Thetradingaccountprovidesinformationonnetpurchasesandbalances.
(3)Ithelpsindeterminingtheratioofdirectexpensestogrossprofit.
(4)Therelationshipbetweenpurchasesanddirectexpensescanbedeterminedfromthe
tradingaccount.
(5)Thecostofgoodssoldcanbecalculatedfromthetradingaccount.

3. (6)Grossprofitratiocanbecalculatedfromtradingaccountandwiththehelpofgrossprofit
ratio,theperformanceofthebusinesscanbeassessed.Efficiencycanbeassessed.
(7)Theefficiencyofthesalesdepartmentcanbeassessedonthebasisofthesalestrend
overseveralyears.
(8)Ithelpsinanalysingtheconditionoftheoccupants.
(9)Thepercentageofgrossprofithelpsintheevaluationandcomparativestudyofthe
successofbusinessoperations.
PreparationofTradingAccount
•ATradeAccountisaNominalAccount.
•OpeningStockisshownonthedebitsideoftheTradingAccount.
•Allthoseexpenseswhicharerelatedtothepurchaseormanufactureofgoodsareshown
onthe‘debit’(or‘creditor’)sideofthetradingaccount.
•Sales(bothcashandcredit)and‘closingstock’areshownonthecredit(or‘deposit’or
‘rich’)sideofthetradingaccount.Rememberhere‘sale’meanssaleofgoods.Theamount
receivedfromthesaleofassetsisnotincludedinthis.Ifthereis‘SalesReturns’,itwillbe
deductedfromsalesandcreditedtotradingaccountfromnetsales.
•Ifthesumofthecreditsideofthetradingaccountisgreaterthanthesumofthedebitside,
thentherewillbe‘grossprofit’andifthesumofthedebitsideisgreaterthanthesumofthe
creditsidethenitwillbecalled‘grossloss’.
•Tocreateatradingaccountortradingaccount,firstenterthetitleofthetradingaccountand
belowthatmentiontheyearforwhichthetradingaccountisbeingcreated.
HeadingofTradingA/c
(1)TradingA/cof……(NameoftheFormornameofthetrade)Fortheyearending…..(
Thedateonwhichaccountingyearcloses)
ImportantNot::
Ason31stDecemberorAsat…….shouldneverbewrittenundertheheadinginTradingA/c
andProfit&LossA/c.Itisincorrect
Toberemembered-Itemsrelatingtocostofsalesareonthedebitsideofthetrading
accountandthoserelatingtosaleproceedsareonthetradingaccount.areshownonthe
creditside
FormatofTradingAccount

4. TradingAccountof……
FortheYearending……..
Particular Amount.₹Particular Amount.₹
ToOpeningStock
ToPurchase…….
Less:Purchases
Returns/orReturn
outward/Return(Cr.)…….……….
BySales…….
Less:ReturnInward/Sales
Return/Return(Dr.)…..………..
ByClosingStock ……….
ToCarriage ……… ByGrosslosstransferredto
profit&lossA/c ……….
ToCarriageInward………
ToCarriageonPurchase………
ToRailwayFreighton
Purchases ………
ToCoolie&Cartage………
ToWages ……….
ToImportDuty ……….
ToCrossProfittransferred
toProfit&LossA/c……….
………. ……….
ExplanationofsomeImportantItemsofTradingAccount
ItemsAppearingonDebitsideofTradingA/c
(1)OpeningStock—Atthebeginningofthebusinessyear,theunsoldgoodsofthe
previousyeararecalledopeningstockoropeningstock.Inthiswaytheclosingstockofthe
previousyearbecomestheopeningstockatthebeginningofthecurrentyear.Itisobvious
thattherewillbenoamountofopeningbalanceintheyearinwhichthebusinessisbeing
started.OpeningStockiswrittenatthetopofthedebitsideofthetradingaccount.
(2)Purchases—Thesumofbothcashandcreditpurchasesforbusinessiswrittenonthe
debitsideofthebusinessaccount.Itshouldbereducedbythefollowingamounts,ifany:
(i)PurchasesReturnsorReturnsOutward–ThisisCr.Livesontheside,
(ii)Drawingsofgoodsforpersonalusebytheownerofthebusiness,

5. (iii)GoodsgiveninCharity,
(iv)Goodsgivenasfreesamples,
(v)DiscountonPurchases,
(vi)Iftheamountofanypropertyorstationeryisincludedinthepurchase,itshouldbe
deducted.
Sometimestheadjustedpurchaseandclosingstockandopeningstockaregivenseparately
inthetrialbalance.Inthiscase,theAdjustedPurchasesintheTradingAccountareshownin
thedebitsideoftheTradingAccountandtheOpeningStockandClosingStockarenot
shownintheTradingAccount.
Thus,
AdjustedPurchase=NetPurchase+OpeningStock–ClosingStock
NetPurchases=Purchases–PurchasesReturns
PurchaseReturn/PurchaseOutward—
Purchasereturnsincludegoodsreturnedtothesuppliersofgoodswhichpertaintothe
accountingyear.Atthetimeofpreparationoffinalaccountsitisclosedbytransfertotrading
account:
PurchasesReturnsA/c. Dr.
ToTradingA/c
Butitisnotshowninthecreditsideofthetradingaccount,butisdeductedfromthe
purchasesinthedebitsideofthetradingaccounttogetthenetpurchasesoftheaccounting
period.
CostofGoodsSold—Costofgoodssoldreferstothesumofadjustedpurchasesand
directexpenses(expensesthataredirectlyrelatedtothepurchaseofgoodsandbringing
themintosalablecondition).
InthepreparationofTradingAccount,thecostofgoodssoldisreconciledwiththesales
proceedsresultingingrossprofitandtransferredtotheProfitandLossAccount.
ImportantNot::
Attheendoftheyear,thePurchasesAccountistransferredtotheTradingAccount.

6. Entry::
TradingA/c Dr.
ToPurchaseA/c
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whatisTradingaccountInaccounting
whatisTradingaccountInaccounting
whatisTradingaccountInaccounting
Theaccountpreparedbythetradertogettheinformationaboutthegrossprofitorgrossloss
fromthebusinesswithinacertainperiod(suchasoneyearorsixmonths)iscalled‘trade
account’.Infact,themeaningoftradingaccountissuchanaccountfromwhichgrossprofit
orlossisknownthroughthepurchaseandsaleofgoods.
AcordingtoJ.R.Batliboi—TheTradingAccountshowstheresultsofbuyingandsellingof
goods.Inpreparingthisaccount,thegeneralestablishmentchangeareignoredandonlythe
transactioningoodanrincluded.
Thisexplainsthemeaningoftradingaccount.
Accordingtothisdefinition,tradingaccountcanalsobecalledGoodsAccount,becauseonly
transactionsrelatedtogoodsareaccountedforinit,suchas-(i)openingstock,(ii)purchase
ofgoods,(iii)Purchasereturns,(iv)Salesofgoods,(v)Salesreturns,(vi)Closingstock,(vii)
Costofmanufacturingthegoods,(viii)Costofpurchasingthegoodsandbringingthemto
theplaceofbusiness.
TableofContents
PurposeorObjectoftradingAccount
PurposeorObjectoftradingAccount
FeaturesofTradingAccount
NeedandImportance(Advantages)ofTradingAccount
PreparationofTradingAccount
HeadingofTradingA/c
FormateofTradingAccount
ExplanationofsomeImportantItemsofTradingAccount

7. ItemsonCreditSideofTradingA/c
BalancingofTradingAccount
Typesofopeningandclosingstock
Stockincludesthefollowing:
CostofGoodSold(COGS)orCostofSales
Whatistradingaccountinaccountingwithexample
FrequentlyAskedQuestions
PurposeorObjectoftradingAccount
Themainpurposeofpreparingtradingaccountistofindoutthegrossprofitorgrosslossof
theenterpriseinaparticularperiod.
GrossProfitorGrossLoss–Grossprofitorgrosslossisthedifferencebetweenactualsales
receiptsandcostofgoodssold.
•Ifthenetamountofsaleismorethanthegoodspurchasedbythetraderandtheexpenses
incurredonit,thenthedifferenceiscalledGrossProfit.
Grossprofit=Saleproceeds–CostofGoodsSold
•Iftheamountofsaleislessthantheamountofpurchaseandexpensesincurredonit,then
thedifferenceiscalledgrossloss.
GrossLoss=CostofGoodSold–Saleproceeds
FeaturesofTradingAccount
whatisTradingaccountInaccounting
whatisTradingaccountInaccounting
1.ItisanominalaccountandformspartoftheProfitandLossAccount.
2.Thisisthefirststepinthepreparationoffinalaccountsofthebusinessconcern.
3.Inthisthedirectcostsofgoodssoldandsalesareaccountedfor.
4.Thebalanceofthisaccountrepresents‘GrossProfit’or‘GrossLoss’.
5.Thebalanceofthisaccounti.e.grossprofitorgrosslossistransferredtotheprofitand
lossaccount.
6.Itispreparedforaparticularaccountingperiodandusuallyattheendofthatperiod.
NeedandImportance(Advantages)ofTradingAccount
Followingaretheimportanceorbenefitsofcreatingatradingaccount:
(1)Itprovidesinformationongrossprofitorgrossloss.
(2)Thetradingaccountprovidesinformationonnetpurchasesandbalances.
(3)Ithelpsindeterminingtheratioofdirectexpensestogrossprofit.

8. (4)Therelationshipbetweenpurchasesanddirectexpensescanbedeterminedfromthe
tradingaccount.
(5)Thecostofgoodssoldcanbecalculatedfromthetradingaccount.
(6)Grossprofitratiocanbecalculatedfromtradingaccountandwiththehelpofgrossprofit
ratio,theperformanceofthebusinesscanbeassessed.Efficiencycanbeassessed.
(7)Theefficiencyofthesalesdepartmentcanbeassessedonthebasisofthesalestrend
overseveralyears.
(8)Ithelpsinanalysingtheconditionoftheoccupants.
(9)Thepercentageofgrossprofithelpsintheevaluationandcomparativestudyofthe
successofbusinessoperations.
PreparationofTradingAccount
•TradeAccountisaNominalAccount.
•OpeningStockisshownonthedebitsideoftheTradingAccount.
•Allthoseexpenseswhicharerelatedtothepurchaseormanufactureofgoodsareshown
onthe‘debit’(or‘creditor’)sideofthetradingaccount.
•Sales(bothcashandcredit)and‘closingstock’areshownonthecredit(or‘deposit’or
‘rich’)sideofthetradingaccount.Rememberhere‘sale’meanssaleofgoods.Theamount
receivedfromthesaleofassetsisnotincludedinthis.Ifthereis‘SalesReturns’,itwillbe
deductedfromsalesandcreditedtotradingaccountfromnetsales.
•Ifthesumofthecreditsideofthetradingaccountisgreaterthanthesumofthedebitside,
thentherewillbe‘grossprofit’andifthesumofthedebitsideisgreaterthanthesumofthe
creditsidethenitwillbecalled‘grossloss’.
•Tocreateatradingaccountortradingaccount,firstenterthetitleofthetradingaccount
andbelowthatmentiontheyearforwhichthetradingaccountisbeingcreated.
HeadingofTradingA/c
(1)TradingA/cof……(NameoftheFormornameofthetrade)Fortheyearending…..(The
dateonwhichaccountingyearcloses)
ImportantNot::
Ason31stDecemberorAsat…….shouldneverbewrittenundertheheadinginTradingA/c
andProfit&LossA/c.Itisincurrect

9. Toberemembered-Itemsrelatingtocostofsalesareonthedebitsideofthetrading
accountandthoserelatingtosaleproceedsareonthetradingaccount.areshownonthe
creditside
FormateofTradingAccount
TradingAccountof……
FortheYearending……..
Particular Amount
₹ Particular Amount
₹
ToOpeningStock………
ToPurchase…….
Less:PurchasesReturns/orReturnoutward/Return(Cr.)……. ……BySales…….
Less:ReturnInward/SalesReturn/Return(Dr.)…..……
ByClosingStock ……..
ToCarriage……….. ByGrosslosstransferredtoprofit&lossA/c………
ToCarriageInward………..
ToCarriageonPurchase ………..
ToRailwayFreightonPurchases………..
ToCoolie&Cartage……….
ToWages ………..
ToImportDuty………
ToCrossProfittransferredtoProfit&LossA/c …….
……. ………..
ExplanationofsomeImportantItemsofTradingAccount
ItemsAppearingonDebitsideofTradingA/c
(1)OpeningStock—Atthebeginningofthebusinessyear,theunsoldgoodsoftheprevious
yeararecalledopeningstockoropeningstock.Inthiswaytheclosingstockoftheprevious
yearbecomestheopeningstockatthebeginningofthecurrentyear.Itisobviousthatthere
willbenoamountofopeningbalanceintheyearinwhichthebusinessisbeingstarted.
OpeningStockiswrittenatthetopofthedebitsideofthetradingaccount.
(2)Purchases—Thesumofbothcashandcreditpurchasesforbusinessiswrittenonthe
debitsideofthebusinessaccount.Itshouldbereducedbythefollowingamounts,ifany:
(i)PurchasesReturnsorReturnsOutward–ThisisCr.Livesontheside,
(ii)Drawingsofgoodsforpersonalusebytheownerofthebusiness,
(iii)GoodsgiveninCharity,
(iv)Goodsgivenasfreesamples,
(v)DiscountonPurchases,

10. (vi)Iftheamountofanypropertyorstationeryisincludedinthepurchase,itshouldbe
deducted.
Sometimestheadjustedpurchaseandclosingstockandopeningstockaregivenseparately
inthetrialbalance.Inthiscase,theAdjustedPurchasesintheTradingAccountareshownin
thedebitsideoftheTradingAccountandtheOpeningStockandClosingStockarenot
shownintheTradingAccount.
Thus,
AdjustedPurchase=NetPurchase+OpeningStock–ClosingStock
NetPurchases=Purchases–PurchasesReturns
PurchaseReturn/PurchaseOutward—Purchasereturnsincludegoodsreturnedtothe
suppliersofgoodswhichpertaintotheaccountingyear.Atthetimeofpreparationoffinal
accountsitisclosedbytransfertotradingaccount:
PurchasesReturnsA/c.Dr.
ToTradingA/c
Butitisnotshowninthecreditsideofthetradingaccount,butisdeductedfromthe
purchasesinthedebitsideofthetradingaccounttogetthenetpurchasesoftheaccounting
period.
CostofGoodsSold—Costofgoodssoldreferstothesumofadjustedpurchasesanddirect
expenses(expensesthataredirectlyrelatedtothepurchaseofgoodsandbringingthem
intosalablecondition).
InthepreparationofTradingAccount,thecostofgoodssoldisreconciledwiththesales
proceedsresultingingrossprofitandtransferredtotheProfitandLossAccount.
ImportantNot::
Attheendoftheyear,thePurchasesAccountistransferredtotheTradingAccount.
Entry::
TradingA/cDr.
ToPurchaseA/c
ThepurchasefiguresareadjustedforCashSubsidies,DutyDrawbacksandModvatable
ExciseDuty.DutyDrawbackandSubsidiesaredeductedfromthepurchase.Similarly
ModvatableExciseDuty(onrawmaterialpurchased)isdeductedfromthecostofpurchase.

11. DirectExpenses—Directexpensesareexpensesthataremadefromthephaseof
purchasinggoodstothegoodsandmakingthemsellable.Alldirectexpendituresareshown
inthedebitsideofthebusinessaccount.Theexpenditurerelatedtothepurchase
purchasesexpenses—Theexpenditurerelatedtothepurchaseisrelatedtopurchasing
andbringingittogoods.Theexpenditurerelatedtothepurchaseconsistsofdirect
expenses.Theseexpensesareshowninthedebitsideofthebusinessaccount.Examples
ofexpenditurerelatedtopurchasingareasfollows:
(i)FreightandFreight(Input)–Thefreightexpensesincurredorfreight(external
expenditure)paidinbringingthepurchasedgoodsarekeptinthiscategory,suchas:
(a)RailwayFreightonPurchases,
(b)Freight,
(c)Carriage&Freight,
(d)CarriageInward,
(e)Carriage,
(f)Collie&Cartage.
Note-CarriageOutwardisshownonthedebitsideofProfit&LossA/candnotinthe
TradingAccount.
Similarly,CarriageonPurchasesisshowninTradingA/candCarriageonSalesisshownin
debitsideofProfit&LossA/c.Rentonfixedassetisdebitedtotheassetaccount.
(ii)Octroi,ImportDuty,CustomDuty,ExciseDuty,etc..
(a)Octroi–Thefeeleviedbythemunicipalityormunicipalcorporationatthetimeof
bringingthepurchasedgoodstoitsplaceiscalledOctroi.
(b)Importtax–Importtaxisleviedongoodsimportedfromothercountries.
(c)Excisetax–Taxesleviedattheoriginareexcisetaxes.
(d)CustomsDutyandDockTax-Whengoodspurchasedfromothercountriesenterthe
borderoftheircountry,dutyhastobepaidforit.Dockduesarecollectedforunloadingthe
goodsfromtheshipandkeepingthemonthedock.
(iii)Wages–Thewagespaidforbringingthepurchasedgoodsandmanufacturingthe
goodsarewritteninthedebitsideofthetradingaccount.Itmayhavethefollowingnames:
Wages,Productivewages,factorywages,wagesandSalary,labourcost,DirectLabour,
etc….

12. Remember::
(a)IncaseofSalaryandWagesitwillbeshowninDebitSideofProfit&LossA/c,butin
caseofWagesandSalariesitwillbeshowninTradingAccount
(b)Ifwagesarepaidfortheinstallationorinstallationofanymachinery,thesameshallnot
bedebitedtothetradingaccount,butshallbeaddedtothecostofthemachinery.Willbe
shownintheletter.
(iv)Insurance—Insurancepremium,FactoryInsuranceorPremiumonFactoryInsurance,
ofgoodsimportedfromabroadisshownonthedebitsideoftheTradingAccount.
(Vi)FactoryExperience—FactoryRent,Rates&Taxes,FactoryLighting,FactoryRepairs
andOtherFactoryExpenses.
(Vii)ManufacturingExperience—Alltheexpensesrelatedtothemanufactureofgoodsare
shownonthedebitsideofthetradingaccount.Theseexpensesareincurredbythe
manufacturingorganisation.Someexamplesofconstructionexpensesareasfollows:
(a)Gas,Fuel,Light,Power.
(b)Water,Oil,Grease.
(c)Coal,Chemicals,Colour.
OtherExpenses.
RoyaltybasedonProduction—Theconsiderationgivenfortheexerciseofaparticular
typeofrightiscalled‘rightsfee’.Itisakindofrent,likethepublisherofabookpaysroyalty
toitsauthorsandthelesseepaysroyaltytohislandlord.
Theroyaltyonproductioniswritteninthetradingaccountbuttheroyaltyonsaleiswrittenin
theprofitandlossaccount.
StoresConsumed—Storesrefertothoseitemswhicharepurchasedforuseinthefactory.
Under‘Stores’,fuel,coal,chemicalsubstances,paint,differentpartsofmachines,etc.are
included.Thesegoodsareusedinthemanufactureofothergoods.Thesearenotboughtfor
sale.Hencestoresshouldnotbeincludedinthestock.StoresConsumedisshownonthe
debitsideofthetradingaccount.
StoresUsed=(OpeningStockofStores+PurchasesofStores–ClosingStockof
Stores)
ItemsonCreditSideofTradingA/c

13. 1.Sales—Allsales(cash+credit)fortheyear(ortheperiodforwhichthetradingaccount
isbeingprepared)areenteredonthecreditsideofthetradingaccount.Fromthisthe
amountofDiscountonSalesandSalesReturnsorReturnsInwardshouldbededucted.
2.GoodsonSalesorReturnBasis—Itshouldnotbeincludedinsalesbutshouldbe
shownseparatelyonthecreditsideofthetradingaccountandwrittenontheassetssideof
thebalancesheet(B/S).
3.GoodsSentonConsignment—Iftheconsignorsendssomegoodsonconsignment
(i.e.invoiceofgoods)itshouldbeshownonthecreditsideofthetradingaccount;Butitwill
beshownatcostpriceonly.
4.ClosingStock—Attheendoftheyearthevalueoftheclosingstockiscalculated.The
unsoldstockattheendoftheyeariscalledclosingstock.Closingstockisvaluedatcostor
marketvalue,whicheverisless.(Closingstockisvaluedatcostormarketprice,whichever
islower.)Theclosingstockisusuallygivenoutsidethetrialbalance(atthebeginningofthe
questionorattheendofthequestion).Itisshownonthecreditsideoftradingaccountand
ontheassetsideofthebalancesheet.Thusitisaccountedforintwoplaces.
ImportantNot::
(1)Ifthestockisintrialbalance,itwillnotbeaccountedforinthetradingaccountbutwillbe
shownonlyontheassetssideofthebalancesheet.
(2)Ifclosingstocki.e.closingstockisadjustedfrom‘Purchases’thenitwillnotbecredited
toTradingA/c
BalancingofTradingAccount
Thebalanceofthetradingaccountistakenoutfromtherelateditemsofthetradingaccount
sothat‘GrossProfit’or‘GrossLoss’canbeknown.
•GrossProfit–Ifthesumofthecreditsideofthebusinessaccountisgreaterthanthesum
ofthedebitside,thenthedifferencebetweenthetwosideswillbecalledgrossprofit.Itis
shownonthedebitsideofthetradingaccount.
•GrossLoss–Whenthesumofthedebitsideofthetradingaccountismorethanthesum
ofthecreditside,thentheamountofdifferenceiscalledgrossloss.Itisshownonthecredit
sideofthetradingaccount.
Note-Grossprofitandgrosslossaretransferredtoprofitandlossaccount.Grossprofitis
shownonthecreditsideoftheprofitandlossaccountandgrosslossisshownonthedebit
sideoftheprofitandlossaccount.
Typesofopeningandclosingstock

14. Stockincludesthefollowing:
(1)RawMaterialStock
(2)Semi–FinishedGoods
(3)Work–in–Progress
(4)FinishedGoods
CostofGoodSold(COGS)orCostofSales
Costofgoodssoldorcostofsalesistheamountthatrepresentsthecostofsupplyinggoods
orprovidingservicesbytheorganisation,excludingadministrativeandothergeneral
overheads.
Inabusinessconcern,itisequaltoopeningstockatthebeginningoftheaccountingyear+
‘purchases’fortheperiod+directexpenditure–closingstockattheendoftheaccounting
period.Thus
COGS=OpeningStock+NetPurchases+DirectExpenses–ClosingStock
•Inamanufacturingorganisation,the‘Productioncostoffinishedgoods’willbetakeninto
accountinplaceof‘Purchases’fortheperiod.
•Inaserviceprovidingorganisation,thecostofsaleswillbecalculatedasadirectcost,
whichwillbeadjustedbythevalues​​ofthebeginningandendingunfinishedgoods
(Word-in-progress).
•TocalculatetheGrossProfit,thecostofgoodssold(COGS)willbesubtractedfromthe
SalesRevenueieSalesProceeds.
•Ifgrossprofitandsalesaregiveninthequestion,thencostofgoodssoldwillbeworked
outasfollows-

15. CostOfGoodsSold=(Net)Sales–GrossProfit.
Whereas,
NetSales=Sales–SalesReturnsorReturnsInward
Whatistradingaccountinaccountingwithexample
Qs1.PrepareTradingAccountofMr.SatishSahfortheyearending31March,2017:
Stock(1.1.2016)10,000.
Purchases50,000.
PurchasesReturn2,000
Sales75,000
SalesReturns3,000
Wages1,500
Machinery10,000
Furniture1,000
RailwayFreight1,000
carriageInward100
FactoryExpenses600
ManufacturingExpenses1,300
Octroi100
ClosingStock(31.3.2017)₹10,000
Solution::
TradingAccountofMr.SatishSah
Particular Amount.₹Particular Amount. ₹
ToStock(1.4.2016)
ToPurchases50,000
10,000 BySales75,000
Less:SalesReturns

16. Less:Returns2,00048,00003,000 72,000
ToWages .1,500 ByClosingStock10,000
ToRailwayfreight1,000
ToCarriageInward100
ToFactoryExpenses600
ToManufacturing
Expenses
1,300
ToOctroi 100
ToGrossProfittransferred
toProfit&LossA/c
.19,400
82,000 82,000
FrequentlyAskedQuestions
Qs1.Whatarethetwomaintypesoftrading?
Ans.The2maintypeoftradingisShort-termandLong-term
Qs2.Whatismeantbytradingaccount?
Ans.AnInvestmentAccount.
Qs3.Isatradingaccountarealaccount?
Ans.TradingaccountisaNominalAccount
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