Format of Trading Account (T or Account Form):

Trading Account of Ronak Kumar for the year ending 31st March 2020

Dr.
Cr.
To Opening stock ........  By Sales  .........
To Purchases   .........       Less returns  .........  .........
    Less Returns  ......... ........ By closing stock
 .........
To Carriage inwards    .........
To Cartage    ......... By Gross loss transferred
to profit and loss account  .........
To dock charges    .........
To Wages    .........
To Duty    .........
To Freight    .........
To Clearing charges    .........
To Etc. Etc.,    .........
To Gross profit (Transferred
 
to profit and loss account)  .........

     

If credit side exceeds the debit

= Gross profit
side

If debit side exceeds the credit

= Gross loss
side

Trading Accounts Items:

Now we shall discuss the items of trading account one by one.

Opening Stock:

In case of trading concerns it will consist of only finished goods or goods to be sold without
alteration. In manufacturing concerns, the opening stock will consist of three parts
(a). Stock of raw materials.
(b). Stock of partly completed goods or work-in-progress.
(c). Stock of finished goods.

In case of new business there will be no opening stock.

Purchases:

This item includes both cash and credit purchases of goods bought with the object of sales.

Return Outwards or Purchases Returns:

It means the goods returned by a trader to his suppliers from out of his purchases. Return
outwards reduce the purchases. It is shown by way of deduction from purchases in the trading
account.

Sales:

This item includes total of both cash and credit sales of goods in which businessman deals in.

Returns Inwards or Sales Returns:

It means goods returned to a trader by his customers from out of goods sold to them. It is shown
by way of deduction from sales.

Direct Expenses:

Direct expenses are those expenses which are incurred to convert raw-materials into finished
goods or which may be regarded as a part of the cost of purchasing the goods. e.g., wages paid
by a manufacturer to construct furniture out of raw wood, the expenses incurred to bring goods
from the place of purchase to the business place of the trader etc. All the direct expenses are
charged to the trading account. The items usually included in the direct expenses are:

1. Wages: This item usually signifies some hourly, daily or piecework remuneration paid to
laborers. It is direct expenditure and should be charged to trading account.
2. Manufacturing or Productive Wages: This item usually signifies the wages of factory
workmen actually engaged in making or producing something. It is a direct charge on the
cost of manufacturer. It is debited to manufacturing account or trading account.

3. Carriage Inward: Carriage inward is the conveyance expense incurred to bring the
goods purchased in the godown or shop. It is debited to trading account.

4. Cartage: The cartage charges on goods purchased are direct expenses and should be
debited to trading account.

5. Freight: Freight is the charge made for transportation of goods by sea. Freight on goods
purchased is charged to trading account.

6. Customs Duty, Octroi Duty etc: When goods are purchased from a foreign country
import duty will be payable. When goods are received from another city, the municipal
corporation may charge octroi duty. All duties on goods purchased should be debited to
trading account.

7. Excise Duty: It is a tax levied by the government. If the duty is levied on production it
will be treated as manufacturing expenses and debited to trading account.
 8. Stores Consumed: This item stores denote lubricating oil, tallow, grease, cotton and jute
waste, etc., required for running the machinery of manufacturing concern. The amount of
stores consumed is a direct expense and should be charged to trading account.

9. Motive Power: This item includes, coke, gas, water or electric energy consumed in
propelling the machinery. It is debited to manufacturing account in the absence of a
manufacturing account, it is debited to trading account.

10. Royalty: Royalty is an amount paid to a person for exploiting rights possessed by him it
is usually paid to patentee, author, or landlord for the right to use his patent, copyright or
land. If they are productive expenses, they are debited to manufacturing account; but in
the absence of a manufacturing account, they are debited to trading account.
11. Manufacturing Expense: All other expenses such as factory rent, factory insurance,
factory repair etc., are direct expenses and should be charged to trading account.

Closing Stock and its Valuation:

Closing stock represents the value of goods lying unsold in the hands of a trader at the end of a
trading period. The value of closing stock is ascertained by means of compilation of list of
materials, stores and goods actually in possession at the close of the trading period. The closing
stock is valued at cost or market price whichever is lower.

The value of closing stock is taken into consideration only at the time of preparing the trading
account and not before. The trial balance is prepared before the preparation of the trading
account. Hence the closing stock does not appear in a trial balance. It is brought into account by
means of a journal entry debiting stock account and crediting the trading account.

Another sample of a trading account

 .
Trading Account of XYZ Co for the year ended 31st March 2020

 Dr.          Cr.  
    Rs       Rs
To Opening stock       By Sales -----  
To Purchases -----     Less returns ----- -----
Less returns ----- -----      
      By Closing Stock   -----
By Gross loss
To Carriage inward   -----   (Transferred to P&L   -----
A/C)
To Wages   -----        
To Insurance in transit   -----        
To Custom duty   -----        
To Clearing charges   -----        
To Freight inward   -----        
To Transportation inward   -----        
To Excise duty on goods   -----        
To Royalty   -----        
To Dock charges   -----        
To Coal, Coke, Gas, fuel   -----        
To Motive power   -----        
To Oil, water   -----        
To Gross profit
(Transferred to P&L   -----        
A/C)
             
             
Example:

The following are some ledger balances taken out from the trial balance of XYZ Company on
31st March 2020.

  Rs     Rs
Dr.Returns
Dr.Stock on 1.4.2019 60,000   16,000
outwards/purchase returns
Cr.Returns inwards/ sales
Dr.Purchases 360,000   30,000
return
Dr.Carriage inwards 24,000   Cr.Sales 500,000
Dr.Custom duty 12,000      

The closing stock is valued at Rs 1,00,000.

Required:

Prepare a trading account for the year ended 31st March 2020.

Solution:

Trading Account of XYZ Co.for the year ended 31.03.2020

 Dr.          Cr. 
    Rs      Rs
To Opening Stock   60,000  By Sales 500,000  
Less: sales 470000(net
To Purchases 3,60,000     30,000
returns sales)
Less: purchase 3,44,000(net
16,000     
returns purchases)
By Closing
        100,000
Stock
To Carriage inward   24,000       
12000
To Custom duty         
440000
 To Gross profit
  130,000       
(transf. to P&L A/C)
        
    570,000      570,000
        

Credit>debit=gross profit By Gross profit b/d 130000

Format of the Profit and Loss Account:

Profit and Loss Account of XYZ Ltd for the year ended ..............

To Gross Loss b/d xxxx By Gross Profit b/d Xxxx

To Salaries xxxx By Interest Received Xxxx
To Rent xxxx By Discount Received Xxxx
To Rent and Rates xxxx By Commission Received Xxxx
To Discount Allowed xxxx By Other Receipts Xxxx
To Commission Allowed xxxx By Etc., Etc. Xxxx
To Insurance xxxx  
To Bank Charges xxxx By Net Loss (transferred to
To Legal Charges xxxx capital account of the trader) Xxxx
To Repairs xxxx    
To Advertising xxxx    
To Trade Expenses ex.    
To Office Expenses xxxx    
To Bad Debts xxxx    
To Traveling Expenses xxxx  
To Etc., Etc. xxxx    
(office expenses, selling and    
distribution expenses)    
     
xxxx
To Net Profit c/d (transferred to  
capital account of the trader)  
 
 

Explanation of Certain Items of Income Statement/Profit and Loss Account:

Income from sales: The total of all charges to customers for goods sold, both for cash and on
credit, is reported in this section. Sales returns are deducted from the gross amount to yield net
sales. Discount allowed on sales is debited to the P & L Account.

Salaries: these include salaries paid to office, godown and warehouse staff and should be shown
in Profit and Loss Account being indirect expenses. If the amount is given as ‘Salaries & Wages’
then it should be taken in the P&L Account. If the amount is given as ‘Wages & Salaries’ then it
should be taken in the Trading Account.
Rent, Rates & Taxes: These include indirect expenses like office and warehouse rent, municipal
rates and taxes to be shown in the P&L Account. However factory rent, rates and taxes should be
debited to the Trading account. Rent received is shown on the credit side of the P&L Account as
it is an indirect expense.

Interest: Interest paid on loans, overdrafts and bills overdue are indirect expenses and should be
debited to the P&L Account. Similarly interest received should be shown on the credit side of the
P&L Account. Interest on capital is shown separately on the debit side of the P&L Account as it
is an expense of the business and Interest on drawings is to be shown on the credit side of the
same as it is an income of the business.

Commission: Commission received for doing the work for other firms is credited to P&L as a
gain and commission paid is shown on the debit side as an expense.

Repairs: Repairs and small renewals or replacement relating to the P&M, fixtures, fittings and
utensils etc. are generally debited to the P&L Account.

Depreciation: It is an expense due to wear and tear, lapse of time and exhaustion of assets used in
business. It is a loss incurred on fixed assets and should be debited to the P&L Account.

Stable Expenses: These are incurred for the fodder/food of the horse and wages paid to persons
looking after stable. Being indirect expenses they should be debited to the P&L Account.

Trade Expenses: They are expenses of a varied nature and hence it is not worthy to open separate
accounts. They are put together under trade or general or sundry or petty expenses and are
debited to the P&L Account.

Samples: samples of goods manufactured by the business concerns are often distributed free of
charge to push up sales and hence are debited to the P&L Account.

Advertisement: all sums spent on advertisement being indirect expenses should be charged to the
P&L Account. If a large amount is paid under a contract covering two or three years,
proportionate part should be charged to P&L Account and the balance should appear as asset in
the Balance Sheet.

Apprentice Premium: this is amount charged from a person to whom training is given by the
business. It is a gain and should be shown on the credit side of the P&L Account.

Abnormal Losses: Loss on sale of fixed assets, cash defalcation, stock destroyed by fire not
covered by insurance etc. may arise during the accounting period. Such losses are taken as extra
ordinary expenses and debited to the P&L Account.

All incomes and gains other than sales will be shown on the credit side of the P&L Account.

Gross Profit: The excess of the net income from sales over the cost of goods sold is also called
gross profit on sale or trading profit because all other expenses for the period must be deducted
from it to obtain the net profit or net income of the business.

Net Profit: The excess of gross profit on sales over total operating expenses is called net profit.
If operating expenses should exceed gross profit, the excess is designated as net loss.
Example
From the following balances extracted from the books of X & Co., prepare a trading and profit
and loss account and balance sheet on 31st December, 2019.

  Rs   Rs
t.Stock on 1st January 11,000 tReturns outwards 500
Bills receivables(A) 4,500 pTrade expenses 200
tPurchases 39,000 Office fixtures(A) 1,000
tWages 2,800 Cash in hand(A) 500

p.Insurance 700 Cash at bank(A) 4,750

Sundry debtors(A) 30,000 pRent and taxes 1,100

tCarriage inwards 800 pCarriage outwards 1,450
pCommission (Dr.) 800 tSales 60,000
pInterest on capital 700 Bills payable(L) 3,000
pStationary 450 Creditors(L) 19,650
tReturns inwards 1,300 Capital(L) 17,900

The stock on 31st December, 2019 was valued at Rs 25,000.

NOTE: if closing stock given out side the trial balance

Treatment:

1) Put in the credit side of trading account

2) Put in the balance sheet asset side as a current asset

NOTE: If closing stock given within the trial balance with other accounts

Treatment:

1. Put in asset side in the balance sheet

Solution:

Trading and Profit and Loss Account of X & Co for the year ended 31st December 2019

To Opening stock   11,000 |By Sales 60,000  

 Less returns
To Purchases 39,000   | 1,300  
i/w
 Less returns o/w 500   |  58,700
By Closing
  38,500 |   25,000
stock
To Carriage inwards   800 |     
To Wages   2,800 |     
To Gross profit c/d   30,600 |     
    |   
    83,700 |    83,700
    |   
By Gross profit
To Stationary   450 |   30,600
b/d
To Rent and rates   1,100 |     
To Carriage
  1,450 |     
outwards
To Insurance   700 |     
To Trade expenses   200 |     
To Commission   800 |     
To Interest on
  700 |     
capital
To Net profit |
transferred to capital   25,200      
a/c |
    |   
    30,600 |    30,600
    |   

Balance Sheet as on 31st December 2019

Liabilities Rs | Assets Rs
Creditors   19,650 |Cash in hand 500
Bills payable   3,000 |Cash at bank 4,750
Capital 17,900   |Sundry debtors 30,000
Add Net profit 25,200   |Bill receivable 4,500
  43,100 |Stock 25,000
      |Office equipment 1,000
    | 
    65,750 |  65,750
    | 

A=L+C

Solve
The following balances have been extracted from the books of Lohiya Brothers & Co. on 31st
March 2019. You are required to prepare the Trading & Profit and Loss Account and a Balance
Sheet as on that date:

Stock on April 1st 500

Commission received 200

Bills Receivable 2,250

Purchases 19,500

Returns Outward 250

Trade Expenses 100

Wages 1,400

Insurance 550

Office Fixtures 500

Cash in hand 250

Cash at Bank 2,375

 Sundry Debtors 15,000

Carriage Inwards 400

Commission (Dr) 400

Interest on capital 350

Stationery 225

Returns Inward 650

Rent & Taxes 550

Carriage Outward 725

Sales 25,000

Bills Payable 1,500

Creditors 9,825

Capital 8,950