Trading and Profit and Loss Account
Spil already discussed, very first section of trading and profit and loss account is called trading account. The aim of preparing trading account is to find out gross profit or gross loss while that of 2nd section is to find out netwerk profit or netwerken loss.
Prep of Trading Account
Trading account is ready mainly to know the profitability of the goods bought (or manufactured) sold by the businessman. The difference inbetween selling price and cost of goods sold is the,Five earning of the businessman. Thus ter order to calculate the gross earning, it is necessary to know:
(a) cost of goods sold.
Total sales can be ascertained from the sales ledger. The cost of goods sold is, however, calculated. n order to calculate the cost of sales it is necessary to know its meaning. The ‘cost of goods’ includes the purchase price of the goods plus expenses relating to purchase of goods and brining the goods to the place of business. Te order to calculate the cost of goods ” wij should deduct from the total cost of goods purchased the cost of goods te forearm. Wij can explore this phenomenon with the help of following formula:
Opening stock + cost of purchases – closing stock = cost of sales
Spil already discussed that the purpose of preparing trading account is to calculate the gross profit of the business. It can be described spil excess of amount of ‘Sales’ overheen ‘Cost of Sales’. This definition can be explained te terms of following equation:
Gross Profit = Sales-Cost of goods sold or (Sales + Closing Stock) -(Stock te the beginning + Purchases + Ongezouten Expenses)
The opening stock and purchases along with buying and bringing expenses (ongezouten exp.) are recorded the debit side whereas sales and closing stock is recorded on the credit side. If credit side is Jeater than the debit side the difference is written on the debit side spil gross profit which is ultimately recorded on the credit side of profit and loss account. When the debit side exceeds the credit side, the difference is gross loss which is recorded at credit side and ultimately shown on the debit side of profit & loss account.
Usual Items ter a Trading Account:
1. Opening Stock. It is the stock which remained unsold at the end of previous year. It vereiste have bot brought into books with the help of opening entry, so it always emerges inwards the trial oscilación. Generally, it is shown spil very first voorwerp at the debit side of trading account. Of course, ter the very first year of a business there will be no opening stock.
Two. Purchases. It is normally 2nd voorwerp on the debit side of trading account. ‘Purchases’ mean total purchases i.e. metselspecie plus credit purchases. Any terugwedstrijd outwards (purchases terugwedstrijd) should be deducted out of purchases to find out the netwerk purchases. Sometimes goods are received before the relevant invoice from the supplier. Te such a situation, on the date of preparing final accounts an entry should be passed to debit the purchases account and to credit the suppliers’ account with the cost of goods.
Trio. Buying Expenses. All expenses relating to purchase of goods are also debited te the trading account. Thesis include-wages, carriage inwards freight, duty, clearing charges, dock charges, excise duty, octroi and invoer duty etc.
Four. Manufacturing Expenses. Such expenses are incurred by businessmen to manufacture or to render the goods te saleable condition viz., motive power, gas fuel, stores, royalties, factory expenses, foreman and supervisor’s salary etc.
Tho’ manufacturing expenses are stringently to be taken te the manufacturing account since wij are preparing only trading account, expenses of this type may also be included te the trading account.
1. Sales. Sales mean total sales i.e. contant plus credit sales. If there are any sales comes back, thesis should be deducted from sales. So netwerk sales are credited to trading account. If an asset of the rock hard has bot sold, it should not be included te the sales.
Two. Closing Stock. It is the value of stock lounging unsold te the godown or shop on the last date of accounting period. Normally closing stock is given outside the trial cálculo te that case it is shown on the credit side of trading account. But if it is given inwards the trial cómputo, it is not to be shown on the credit side of trading account but emerges only ter the cómputo sheet spil asset. Closing stock should be valued at cost or market price whichever is less.
Valuation of Closing Stock
The ascertain the value of closing stock it is necessary to make a finish inventory or list of all the items ter the maker own together with quantities. On the fundament of physical observation the stock lists are ready and the value of total stock is calculated on the fundament of unit value. Thus, it is clear that stock-taking entails (i) inventorying, (ii) pricing. Each voorwerp is priced at cost, unless the market price is lower. Pricing an inventory at cost is effortless if cost remains motionless. But prices remain fluctuating, so the valuation of stock is done on the onderstel of one of many valuation methods.
The prep of trading account helps the trade to know the relationship inbetween the costs be incurred and the revenues earned and the level of efficiency with which operations have bot conducted. The ratio of gross profit to sales is very significant: it is arrived at :
Gross Profit X 100 / Sales
With the help of G.P. ratio he can ascertain spil to how efficiently he is running the business higher the ratio, better will be the efficiency.
Closing Entries pertaining to trading Account
For transferring various accounts relating to goods and buying expenses, following closing entries recorded:
(i) For opening Stock: Debit trading account and credit stock account
(ii) For purchases: Debit trading account and credit purchases account, the amount being the et amount after deducting purchases comes back.
(iii) For purchases comes back: Debit purchases comeback account and credit purchases account.
(iv) For comebacks inwards: Debit sales account and credit sales terugwedstrijd account
(v) For meteen expenses: Debit trading account and credit ongezouten expenses accounts individually.
(vi) For sales: Debit sales account and credit trading account. Wij will find that all the accounts spil mentioned above will be closed with the exception of trading account
(vii) For closing stock: Debit closing stock account and credit trading account After recording above entries the trading account will be balanced and difference of two sides ascertained. If credit side is more the result is gross profit for which 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 entry is reversed.
The profit and loss account is opened by recording the gross profit (on credit side) or gross loss (debit side).
For earning nipt profit a businessman has to incur many more expenses ter addition to the rechtstreeks expenses. Those expenses are deducted from profit (or added to gross loss), the resultant figure will be netwerken profit or netwerk loss.
The expenses which are recorded te profit and loss account are ailed ‘zijdelings expenses’. Thesis be classified spil goes after:
Selling and distribution expenses.
Thesis comprise of following expenses:
(a) Salesmen’s salary and commission
(b) Commission to agents
(c) Freight & carriage on sales
(g) Packing expenses
(a) Office salaries & wages
(c) Judicial expenses
(d) Trade expenses
(i) Printing and stationery
(j) Postage and telegrams
(a) Discount permitted
(b) Rente on Hacienda
(c) Rente on loan
(d) Discount Charges on bill discounted
Maintenance, depreciations and Provisions etc.
Thesis include following expenses
(b) Depreciation on assets
(c) Provision or reserve for doubtful debts
(d) Reserve for discount on debtors.
Along with above officieus expenses the debit side of profit and loss account comprises of various business losses also.
On the credit side of profit and loss account the items recorded are: