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.

Contents of Trading Account

  1. Opening stock – is a usually the stock at the beginning of the period.
  2. Closing stock – is the stock hot used up at the end of the business period.
  3. Returned outward – are goods bought but return to the owner due to one reason or the other e.g. defective or substandard.
  4. Return inward – are goods sold to the customers but returned due to one reason to the other.
  5. Carriage inward – is the cost of carrying goods bought into an organisation.
  6. Cost of goods available for sales – is the summation of opening stock , purchases, carriage inward and deduct goods returned.
  7. Gross profit – is the excess of sales over the cost of goods sold.
  8. Net sales – is the sales less return inward.

Simple Layout Of Trading Account

       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.

Sales                                                                                                                10000

Purchases                                                                                                        2000

Discount allowed                                                                                            200

Discount received                                                                                           400

Opening stock                                                                                                 2000

Closing stock                                                                                                  1000

Rent expenses                                                                                                    500

Insurance                                                                                                            600

Return outward                                                                                                  100

Return inward                                                                                                    150

Electricity                                                                                                           300

See also






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