Preparation of Trading Account
The following items usually appear in a Trading Account
Both Cash and Credit sales are included. Net Sales is recorded after deducting Sales returns (Return inwards).
The closing stock of the previous accounting year is taken as the Opening stock for the present year. If there is no Opening Stock then no entry is made. Opening stock is derived by balancing the Stock Account and bringing down its balance to the next period.
Purchases include all the Cash and Credit purchases of goods made by the business during the year.
Purchase returns (Return outwards) is deducted from the Purchases to arrive at Net Purchases.
Direct ExpensesAll expenses which are incurred in purchasing the goods and bringing them to the trading place are recorded under this category.
- Wages e.g. Warehouse worker wages.
- Carriage Inwards i.e. the cost of transport of goods to the trading place. The expense is usually borne by the buyer.
- Duty on purchases, for example, Import duty or excise duty.
All the goods which remain unsold at the end of the year are known as ‘Closing stock’.
The closing is stock is valued at Cost price or Market price, whichever is lower.
The reason for taking the lower value of the two is in accordance with the ‘Prudence Principle’.
Normally, ‘Closing stock’ is given outside the Trial Balance. This is so because its valuation is made after the accounts have been closed.
Note: Sometimes, the ‘Closing Stock’ may be given inside the Trail Balance. This means that the entry to incorporate the closing stock in the books has already been passed and it has already been deducted from the Purchases Account. In this case, ‘Closing Stock’ will not be shown in the Trading Account will only appear in the Asset side of Balance Sheet’.
Cost of goods sold
This means the finding the cost of only those goods which have been sold during the year. It can be calculated as follows:
(Net Purchases+Opening Stock) - Closing Stock
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