TRADING ACCOUNT

The first stage in process of preparing final accounts

Shows Gross Profit or Gross Loss during an
accounting year.
Main components are sales and services rendered in
the credit side and cost of such services rendered in
the debit side
The balance is transferred to P&L Account
 Format of Trading Account
Trading Account
for the year ending…
Dr. Cr.
Particulars Rs Particulars Rs

To Opening Stock By Sales …..  

To Purchase …..
Less : Sales Return/Return Inward …..

Less : Purchase Return/Return Outward ….. By Closing stock

To Direct Expenses By Gross Loss transferred to P&L A/C
To wages and Salaries
To Freight Inward  
To Carriage Inward  
To Cartage Inward  
To Gross Profit transferred to P&L A/C  
   
   
Contents of Trading Account
DEBIT SIDE
• Opening Stock – consists of raw materials, work-in-
progress and finished good.
• Purchase or Adjusted Purchase and Purchase Return
(Adjusted Purchase = Net Purchase + Opening Stock –
Closing Stock)
• Direct Expenses – incurred on the goods purchased till
they are brought to the place of business for sale
Example – Carriage Inward, wages and salary, Power and
fuel, factory lighting, factory rent, duty on purchase,
royalty to acquire patents, consumable stores.
• Gross Profit
Contents of Trading Account
CREDIT SIDE
Sales and Sales Return
Closing Stock
Gross Loss
Problem
Prepare a Trading Account for the year ending March 31, 2009 from the
following balances as at March 31, 2009.

  Rs   Rs

stock (1st April, 2008) 10000Purchases 100000

wages 5000Carriage Inward 1000

Sales 155000Return Inward 5000

Return Outward 8000Power & Fuel 2500

Freight 500

Closing Stock as on March 31, 2009 was valued at Rs 20000

Solution
Trading Account
for the year ending March 31, 2009
Dr. Cr.
Particulars Rs Particulars Rs
To Opening Stock 10000 By Sales 155000  
To Purchase 100000   less : Return Inward 5000 15000 
Less : Return Outward 8000
92000  
To Wages 5000 By Closing Stock 20000
To Carriage Inwards 1000
To Freight 500    
To Power & Fuel 2500    
To Profit and Loss Account (Gross Profit) 59000    
       
  170000   170000
       
PROFIT AND LOSS ACCOUNT
“A profit and loss account is an account into which all
gains and losses are collected in order to ascertain the
excess of gains over the losses or vice versa.”
- Prof. Carter
FEATURES
It is the second stage in the preparation of final accounts
It relates to a particular accounting period and is prepared
at the end of that period.
Accrual basis of accounting is followed in the preparation of
this account.
This account is credited with gross profit and income from
other sources and debited with indirect expenses and losses.
The balance of this account is net profit or net loss
The capital of the owner is increased or decreased by the
balance of this account.
 Profit and loss Account
for the year ending on ….
Dr. Cr.
Particulars Rs Particulars Rs
To Gross loss transferred from trading By Gross profit transferred from trading
A/C   A/c  
To Salaries   By Rent  
To Rent, Rates and Taxes   By discount received  

FORMAT
To Stationary and Printing   By commision earned  
To postage and Telegram   By interest  
To Audit Fees   By bad debts recovered  
To Legal Charges   By income from investment  
To telephone expenses   By dividend on share  
To Insurance Premium   By miscellaneous revenue gains  
To business promotion expenses   By income from any other source  
To repairs and renewals   By net loss (transferred to capital A/C)  
To Depreciation      
To Interest      
To sundry Trade Expenses      
To conveyance      
To charity      
To Bank Charges      
To Office Expenses      
To establishment Expenses      
To General Expenses      
To loss in exchange      
To license fees      
To Brokerage      
To car running and maintenance      
To office lighting      
To loss by fire, theft      
To commission      
To advertisement      
To freight and carriage outward      
To discount allowed      
To packing expense      
To travelling expense      
To distribution expense      
To bad debts      
Contents of Profit & loss
Account
Expenses and Losses
 Administration and Office Expenses – establishment expenses, printing and
stationary, postage and telephone, legal expenses, audit fees, general or trade
expenses.
 Selling and Distribution Expenses – salesman salaries and commission,
commission of agents, advertising, warehouse expenses, packing expenses,
freight and carriage on sales, export duties, maintenance of vehicles for
distribution of goods and their running exp, insurance , bad debts
 Financial Expenses – interest on loan, interest on capital, discount allowed,
 Abnormal Losses – loss by fire, loss on sale of fixed assets, loss by theft,
Contents of Profit & loss Account
INCOMES
 Income from Main business – gross profit, profit on
consignment, profit on joint venture, commission
receivable
Financial and other Incidental incomes – interest on
fixed deposit, income from investment, rent received,
interest on drawing, discount received,
Single Step
Multi-step
BALANCE SHEET
“A statement which sets out the assets and liabilities
of a firm or an institution as at a certain date”

“A balance Sheet is a screen picture of the financial

position of a going business at a certain moment”
BALANCE SHEET
It is a statement which reports the property owned by
the enterprise and the claims of the creditors and
owners against these properties.
The purpose is to ascertain the financial position of a
business i.e. what the business owes and what it owns
on a certain date.
It tells if the firm is solvent or not – if the assets
exceeds liability the firm is solvent, otherwise
insolvent.
FORMAT Balance Sheet of ….
as at ……
Liabilities Rs Assets Rs
Sundry or Trade Creditors ….. Cash in hand including petty cash …..

Bill Payable ….. Cash at bank …..

Bank Overdraft ….. Bill Receivable …..
Employees Provident Fund ….. Sundry Debtors …..
Loans (Cr.) ….. Loans (Dr.) …..
Mortgage ….. Closing Stock …..
Reserves or Reserve Fund ….. Loose Tools …..
Capital …..   Investments …..
Add: Interest on Capital …..   Furniture and Fittings …..
Net Profit ….. …..   Plant and Machinery …..
  …..   land and Building …..
Less: Drawings …..   Freehold/leasehold land …..
Income Ta x …..   Business Premises …..
Interest on Drawings …..   Patents and Trademarks …..

Net Loss ….. ….. ….. Goodwill …..

  …..   …..
 DISTINCTION BETWEEN BALANCE SHEET
AND TRIAL BALANCE
Balance Sheet Trial Balance

The purpose is to establish the arithmetical accuracy of

The purpose is to portray the financial position the books of account

It provides information as to the profitability and

financial position of the firm No such information is possible

It is essential to prepare balance sheet to complete the Though desirable, it is possible to dispense with its
accounting process preparation

Two sides are headed as assets and liabilities Two columns are headed as debit and credit

only personal and real accounts appear in the balance all accounts must be written, no account can be left
sheet out

normally a closing stock does not figure in the Trial

closing stock appears in the balance sheet Balance

It is normally prepared every month and whenever

It is prepared at the end of the trading period desired
 DISTINCTION BETWEEN TANGIBLE ASSETS
AND INTANGIBLE ASSETS
Tangible Assets Intangible Assets

Assets having a physical existence e.g. land & building, Fixed assets having no physical existence e.g.
plant & machinery etc. Goodwill, Patent, Trademark, etc.

Tangible assets can be fixed or current, e.g. stock Intangible assets fall in the category of fixed assets

Fixed tangible assets are depreciated Intangible assets are amortized

These assets may be lost due to fire These assets cannot be lost due to fire

Lender accepts such assets as security for providing lenders do not accept these assets as security for
loan loan
Problem
Prepare the Trading and Profit & Loss Account and Balance Sheet
of Mr. Jagat Shah as on 31st March, 2009 from the following
balances:
Capital 3600 Salaries 600

Machinery 700 General Expenses 200

Sales 8200 Rent 500

Purchase 4000 Purchase Returns 50

Sales Return 100 Debtors 3000

Stock on April 1, 2008 1000 Cash 400

Drawings 400 Carriage Outwards 200

Wages 1000 Advertising 200

Carriage Inward 50 Creditors 500

Closing stock was valued at Rs 2000