Trading Account means an account which prepare for calculation of gross profit of the business by its trading activities.
so firstly you classify the entries in direct and indirect natute.
Those accounts which are in the nature of Nominal Account Firstly classify them.
Than choose those nominal account which are in Direct nature means directly related to Business trading activities like purchase of goods, sales of goods, wages paid for purchase of goods, purchase returns, sales returns, Opening stock of goods, closing stock of goods, Any other Direct exp. which are directly related to business and any othe direct income of business which are related directly to business.
Trading account has two part left side and right side
left side is called Debit side or expenses side.
Right side is called credit side or receipt side.
opening stock and Any direct exp. is shown in left side or debit side or expenses side.
any direct receipt of business and closing stock of that period is shown in credit side of the trading A/c.
list of enteries that is made in trading A/c
- opening stock
- Purchase less puchase return
- fuel & power
- excise duty
- factory rent
- heating & lighting
- Factory rent & insurance
- work manager salary
- Sales less sales return
- clsoing stock
important items of trading account
1 stock stocks refers to the goods lying unsold on a particular date. It can be of two types:
(a) opening stock and (b) clsoing stock
(a) opening stock: refers to the value of goods lying unsold at the beginning of the accounting year. it is shown on the debit side of the trading account. in the first year of business there is no opening stock.
(b) clsoing stock: It is the value of goods lying unsold at the end of the accounting year. It is valued at the cost price or market price whichever is less. It is shown on the credit side of the trading Account.
Purchases: purchases mean total items purchased for resale during the year. It can be both in cash and on crdit. purchases are shown on the debit side of the trading account. these are always shown as net purchases i.e. amount of purchases returned ( Purchases return or return outwards) is deducted from the total amount of purchses made. goods received on consignment basis are never treated as purchases. similarly, goods received on 'sale or return' basis ar never treated as purchase.
Sales: sales refer to the total revenue from sale of goods of the business enterprises for which the trading account is being prepared. it includes both cash sales and credit sales. these are recorded on the credit side of the trading account. sales are shown at their net value i.e. sales return or return inward si deducted from the total sales. cash sales plus credit sales minus sales return constitute net sales. Goods sent on 'sale or approval' are not part of sale until approval is received.
Gross profit / Gross loss
it is the excess of net sales revenue over cost of goods sold. Gross profit is equal to net sales minus cost of goods sold. If total of the credit side exceeds the total of debit side the excess amount is termed
as ‘gross profit’ and is shownon the debit side of Trading Account. On the other hand if debit side is more
than the credit side, the difference in amount is called gross loss and is shown on the credit side of the Trading Account.
Gross profit = Net sales – Cost of goods sold
Gross loss = Cost of goods sold – Net sales