How to Prepare a Trading Account?
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How to Prepare a Trading Account?

How to prepare a Trading Account? Let us now consider the individual items recorded in the Trading Account. (i) Opening Stock : This means the closing stock of the previous year. In the first year of business there will be no opening stock. In a trading concern the opening stock consists of finished goods only. But in a manufacturing concern, it comprises raw materials, work in progress, and finished goods. Opening stock is the first item on the debit side of the Trading account.

How to prepare a Trading Account?

Let us now consider the individual items recorded in the Trading Account.

(i) Opening Stock : This means the closing stock of the previous year. In the first year of business there will be no opening stock. In a trading concern the opening stock consists of finished goods only. But in a manufacturing concern, it comprises raw materials, work in progress, and finished goods. Opening stock is the first item on the debit side of the Trading account.

(ii) Purchases and Purchase Return: Purchases include cash and credit purchase of goods. Purchases are recorded on the debit side of the Trading Account after deducting the Returns outward or Purchase return. Care should be taken to ensure that purchases do not include the amount of goods taken or purchased by the proprietor for his own use, the cost of goods received on consignment, goods in transit, goods purchased on hire purchase basis, goods distributed as free samples. ,

(iii) Direct Expenses: These include manufacturing wages, carriage inward, power and fuel, factory lighting and heating, factory rent and rates, factory insurance, freight, octroi, customs duty on imported materials, royalty on production, etc. These expenses are recorded on the debit side of the Trading Account.

(iv) Sales and Sales Return: Sales include both cash and credit sales. Sales return or Return outward is deducted from total sales and net sales are credited to the Trading Account. Care should be taken to ensure that sales do not include sale of any fixed assets, goods sent on consignment and goods sold on approval.

(v) Closing Stock: It means the goods which remain unsold at the end of the accounting year. Closing stock is valued on the principle of cost or market price whichever is lower. It is exposed on the credit side of the Trading Account. Closing stock is also shown, as an asset in the Balance Sheet.

While preparing the Trading Account, adjustment entries are made for expenses outstanding and expenses paid in advance, if any. For example, a part of the direct wages or factory rent may be outstanding. Similarly, factory insurance might have been paid in advance for some months of the next year. Expenses outstanding are added to while expenses paid in advance are deducted from the expenses shown on the debit side of the Trading Account.

Note : Carriage outwards, packing charges for goods sold, export duty, cash discount on sales pill appear in Profit and Loss Account, because these are all selling expenses.

 

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