Trading account is prepared to determine the profit or gross loss in a particular business period. The gross profit or loss is the different between sales and cost of goods sold. Business prepares trading, profit and loss account to ascertain the financial position of a business at the end of the year.
Table of Contents
Contents of Trading Account
- Opening stock – is a usually the stock at the beginning of the period.
- Closing stock – is the stock hot used up at the end of the business period.
- Returned outward – are goods bought but return to the owner due to one reason or the other e.g. defective or substandard.
- Return inward – are goods sold to the customers but returned due to one reason to the other.
- Carriage inward – is the cost of carrying goods bought into an organisation.
- Cost of goods available for sales – is the summation of opening stock , purchases, carriage inward and deduct goods returned.
- Gross profit – is the excess of sales over the cost of goods sold.
- Net sales – is the sales less return inward.
Simple Layout Of Trading Account
Opening stock *** sales ***
Add: purchases *** less: sales return **
*** Net sales ***
Less: return outward **
Cost of goods available ***
Less : closing stock ***
Cost of goods sold ***
Gross profit c/d ***
Profit and Loss Account
After the preparation of trading account is the profit and losss account. we ought to prepare it together but for learning :we have to separate them.
Profit and loss account is prepared to determine the net profit or net loss of the business.
Simply Layout Of Profit and Loss Account
Wages and expenses *** gross profit b/d ***
General expenses *** add discount receive ***
Advertising *** ***
Electricity *** ***
Office expenses ***
Discount allowed ***
net profit ***
Assignment : prepare trading, profit and loss account of babasuwe Nig. Ltd at 31st Dec. 2008, use the following information.
Discount allowed 200
Discount received 400
Opening stock 2000
Closing stock 1000
Rent expenses 500
Return outward 100
Return inward 150