Trading and profit and Loss catalogue
Trading Account
Trading and profit and Loss catalogue
As already discussed, first section of trading and profit and loss inventory is called trading account. The aim of preparation trading inventory is to find out gross profit or gross loss while that of second section is to find out net profit or net loss.
Preparation of Trading Account
Trading inventory is prepared generally to know the profitability of the goods bought (or manufactured) sold by the businessman. The difference in the middle of selling price and cost of goods sold is the,5 earning of the businessman. Thus in order to calculate the gross earning, it is indispensable to know:
(a) cost of goods sold.
(b) sales.
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 indispensable 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. In order to calculate the cost of goods " we should deduct from the total cost of goods purchased the cost of goods in hand. We can study this phenomenon with the help of following formula:
Opening stock + cost of purchases - closing stock = cost of sales
As already discussed that the purpose of preparation trading inventory is to calculate the gross profit of the business. It can be described as excess of estimate of 'Sales' over 'Cost of Sales'. This definition can be explained in terms of following equation:
Gross profit = Sales-Cost of goods sold or (Sales + closing Stock) -(Stock in the beginning + Purchases + Direct Expenses)
The opening stock and purchases along with buying and bringing expenses (direct exp.) are recorded the debit side whereas sales and closing stock is recorded on the reputation side. If reputation side is Jeater than the debit side the difference is written on the debit side as gross profit which is finally recorded on the reputation side of profit and loss account. When the debit side exceeds the reputation side, the difference is gross loss which is recorded at reputation side and finally shown on the debit side of profit & loss account.
Usual Items in a Trading Account:
A) Debit Side
1. opening Stock. It is the stock which remained unsold at the end of old year. It must have been brought into books with the help of opening entry; so it always appears inside the trial balance. Generally, it is shown as first item at the debit side of trading account. Of course, in the first year of a enterprise there will be no opening stock.
2. Purchases. It is commonly second item on the debit side of trading account. 'Purchases' mean total purchases i.e. Cash plus reputation purchases. Any return outwards (purchases return) should be deducted out of purchases to find out the net purchases. Sometimes goods are received before the relevant invoice from the supplier. In such a situation, on the date of preparation final accounts an entry should be passed to debit the purchases inventory and to reputation the suppliers' inventory with the cost of goods.
3. Buying Expenses. All expenses relating to purchase of goods are also debited in the trading account. These include-wages, carriage inwards freight, duty, clearing charges, dock charges, excise duty, octroi and import duty etc.
4. Manufacturing Expenses. Such expenses are incurred by businessmen to design or to render the goods in saleable health viz., motive power, gas fuel, stores, royalties, facility expenses, foreman and supervisor's salary etc.
Though manufacturing expenses are strictly to be taken in the manufacturing inventory since we are preparation only trading account, expenses of this type may also be included in the trading account.
(B) reputation Side
1. Sales. Sales mean total sales i.e. Cash plus reputation sales. If there are any sales returns, these should be deducted from sales. So net sales are credited to trading account. If an asset of the firm has been sold, it should not be included in the sales.
2. closing Stock. It is the value of stock lying unsold in the godown or shop on the last date of accounting period. commonly closing stock is given covering the trial equilibrium in that case it is shown on the reputation side of trading account. But if it is given inside the trial balance, it is not to be shown on the reputation side of trading inventory but appears only in the equilibrium sheet as asset. closing stock should be valued at cost or store price whichever is less.
Valuation of closing Stock
The ascertain the value of closing stock it is indispensable to make a faultless inventory or list of all the items in the god own together with quantities. On the basis of physical observation the stock lists are prepared and the value of total stock is calculated on the basis of unit value. Thus, it is clear that stock-taking entails (i) inventorying, (ii) pricing. Each item is priced at cost, unless the store price is lower. Pricing an inventory at cost is easy if cost remains fixed. But prices remain fluctuating; so the valuation of stock is done on the basis of one of many valuation methods.
The preparation of trading inventory helps the trade to know the relationship in the middle of the costs be incurred and the revenues earned and the level of efficiency with which operations have been 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 as to how efficiently he is running the enterprise higher the ratio, good will be the efficiency.
Closing Entries pertaining to trading Account
For transferring discrete accounts relating to goods and buying expenses, following closing entries recorded:
(i) For opening Stock: Debit trading inventory and reputation stock account
(ii) For purchases: Debit trading inventory and reputation purchases account, the estimate being the et estimate after deducting purchases returns.
(iii) For purchases returns: Debit purchases return inventory and reputation purchases account.
(iv) For returns inwards: Debit sales inventory and reputation sales return account
(v) For direct expenses: Debit trading inventory and reputation direct expenses accounts individually.
(vi) For sales: Debit sales inventory and reputation trading account. We will find that all the accounts as mentioned above will be finished with the exception of trading account
(vii) For closing stock: Debit closing stock inventory and reputation trading inventory After recording above entries the trading inventory will be balanced and difference of two sides ascertained. If reputation side is more the corollary is gross profit for which following entry is recorded.
(viii) For gross profit: Debit trading inventory and reputation profit and loss inventory If the corollary is gross loss the above entry is reversed.
Profit and Loss Account
The profit and loss inventory is opened by recording the gross profit (on reputation side) or gross loss (debit side).
For earning net profit a businessman has to incur many more expenses in increasing to the direct expenses. Those expenses are deducted from profit (or added to gross loss), the resultant outline will be net profit or net loss.
The expenses which are recorded in profit and loss inventory are ailed 'indirect expenses'. These be classified as follows:
Selling and distribution expenses.
These consist of of following expenses:
(a) Salesmen's salary and commission
(b) Commission to agents
(c) Freight & carriage on sales
(d) Sales tax
(e) Bad debts
(f) Advertising
(g) Packing expenses
(h) Export duty
Administrative Expenses.
These include:
(a) Office salaries & wages
(b) Insurance
(c) Legal expenses
(d) Trade expenses
(e) Rates & taxes
(f) Audit fees
(g) Insurance
(h) Rent
(i) Printing and stationery
(j) Postage and telegrams
(k) Bank charges
Financial Expenses
These comprise:
(a) discount allowed
(b) Interest on Capital
(c) Interest on loan
(d) discount Charges on bill discounted
Maintenance, depreciations and Provisions etc.
These consist of following expenses
(a) Repairs
(b) Depreciation on assets
(c) Provision or keep for doubtful debts
(d) keep for discount on debtors.
Along with above indirect expenses the debit side of profit and loss inventory comprises of discrete enterprise losses also.
On the reputation side of profit and loss inventory the items recorded are:
(a) discount received
(b) Commission received
(c) Rent received
(d) Interest received
(e) revenue from investments
(f) profit on sale of assets
(g) Bad debts recovered
(h) Dividend received
(i) Apprenticeship selected etc.
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