Format of Trading Account (T or Account Form):

Trading Account
For the year ending .......20......

Dr.
Cr.
To Opening stock ........ By Sales .........

To Purchases ......... Less returns ......... .........

Less Returns ......... ........ By Closing stock .........

To Carriage inwards ......... By Gross loss

transferred to profit
To Cartage ......... 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) .........
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.

Closing Entries for Trading Account:

Closing entries are those which are passed at the end of each financial period for
the purpose of transferring the various revenues items to the trading and profit and
loss account and thus the nominal accounts are closed. Example:

Trading Account Dr.

To Purchases Account
To Returns Inwards Account
To Direct Expenses Account (wages, carriage etc.)
(Being the transfer of the latter accounts to the former.)
 1. Sales Account
Returns Outward Account
To Trading Account
(Sales etc., transferred to trading account)

2. Closing Stock Account

To Trading Account
(Being to record closing stock)

XYZ co.
Trading Account for the year ended 31.12.2011

Rs Rs

Stock (Opening) Sales -----

Purchases ----- Less returns ----- -----

Less returns ----- -----

Stock (closing) -----

Gross loss (Transferred

Carriage inward ----- -----
to P&L A/C)

Wages -----

Insurance in transit -----

Custom duty -----

Clearing charges -----

Freight inward -----

Transportation inward -----

Excise duty on goods -----

Royalty -----
 Dock charges -----

Coal, Coke, Gas, fuel -----

Motive power -----

Oil, water -----

Gross profit (Transferred to

-----
P&l A/C)

If credit side exceeds the Gross

=
debit side profit

If debit side exceeds the

= Gross loss
credit side

Example:
Example:
The following are some ledger balances taken out from the trial balance of XYZ company on
31st December 2011.

Rs Rs

Stock on 1.12005 60,000 Returns outwards 16,000

Purchases 360,000 Returns inwards 30,000

Carriage inwards 24,000 Sales 500,000

Custom duty 12,000

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

Required:

Prepare a trading account for the year ended 31st December 2011. Show the journal entries
to close the above account (closing entries).
Solution:
xyz co.
Trading Account for the year ended 31.12.2011

Rs Rs

Stock 1.1.2011 60,000 Sales 500,000

Purchases 3,60,000 Less returns 30,000 470000

Less returns 16,000 3,44,000

Stock (closing) 100,000

Carriage inward 24,000

Custom duty 12000

Gross profit (transf. to P&L

130,000
A/C)

570,000 570,000

Closing Entries:

Date L/F Amount (Rs) Amount (Rs)

Description
2011

Dec.31 Trading account 486,000

Stock (opening) account 60,000

Purchase account 360,000

Returns inwards account 30,000

Carriage inwards account 24,000

Custom duty 12,000

(Being transferred of above A/C to trading account)

 Dec.31 Sales account 500,000

Returns outwards account 16,000

Trading account 516,000

(Being transferred of above A/C to trading account)

Dec.31 Stock (closing) account 100,000

Trading account 100,000

(Being closing stock taken into account)

Dec.31 Trading account 130,000

Profit and loss account 130,000

(Being gross profit transferred to P&L account)

Format of the Profit and Loss Account:

Profit and Loss Account of XYZ Ltd
For the year ended ..............
To Gross Loss xxxx By Gross Profit 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 Xxxx
capital account of the trader)
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

To Net Profit (transferred to

capital account of the trader) xxxx

Closing Entries for Profit and Loss Account:

The following usual entries are passed at the end of each trading period.

1. Transferring all expenses or losses:

Profit and loss account
To Each of the various expenses or losses
(This entry will close the expenses accounts)

2. Transferring all items of gains etc:

Various nominal accounts (representing gains)
To Profit and loss account
(This entry will close all the remaining nominal accounts)

3. Transferring net gain to capital account:

Profit and loss account
To Capital account
(This entry closes the P & L account)

4. Transferring net loss to capital account:

Capital account
 To Profit and loss account
(This entry closes the P & L account)

Explanation of Certain Items of Income Statement:

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 from Operations: The excess of gross profit on sales over total operating
expenses is called net profit or net profit from operations. If operating expenses should
exceed gross profit, the excess is designated as net loss or net loss from operations.

Prepare trading and profit and loss account and

balance sheet.
Example 1:
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, 2011.

Rs Rs
Stock on 1st January 11,000 Returns outwards 500
Bills receivables 4,500 Trade expenses 200
Purchases 39,000 Office fixtures 1,000
Wages 2,800 Cash in hand 500
Insurance 700 Cash at bank 4,750
Sundry debtors 30,000 Tent and taxes 1,100
Carriage inwards 800 Carriage outwards 1,450
Commission (Dr.) 800 Sales 60,000
Interest on capital 700 Bills payable 3,000
Stationary 450 Creditors 19,650
Returns inwards 1,300 Capital 17,900
The stock on 31st December, 2011 was valued at Rs 25,000.

Solution:

X & Co.
Trading and Profit and Loss Account
For the year ended 31st December, 2011

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

Less
To Purchases 39,000 | 1,300
returns 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
To Stationary 450 | 30,600
profit 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 25,200
capital a/c |

|
30,600 | 30,600
|

X & Co.
Balance Sheet
As at 31st December, 2011

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
|

2. The following balances have been extracted from the books of

Lohiya Brothers & Co. on 31st March 2011. 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