Trading Account help us to determine the gross profit or total loss of business concerns, created strictly from trading activities. Trading involves buying and selling activities.
In the Trading Account, the cost of goods sold is subtracted from the net sales for that period to calculate the gross profit.
Only direct income and direct costs are considered.
The difference between the selling price and the cost of sales is the profit of the businessman, also called the Gross Profit.
Gross Profit = Selling Price – Cost of sales
Net income, on the other hand, means all revenue minus all costs.
For instance including cost of goods sold, selling, general and administrative expenses, and non-operating expenses.
The transaction Profit and Loss Account consist of two separate accounts in the general ledger.
- Trading Account
- Profit and Loss Statement
Trading Account Formula
The transaction account shows the gross profit, which is determined by subtracting the cost of goods sold from the net sales of the business.
Gross Profit = Net sales – Cost of Goods Sold
Please note that outward shipping charges should not come in your trading account.
The cost of goods sold used in this formula can be expanded using the following formula:
Cost of Goods Sold = Net purchases + Beginning inventory – Ending inventory
Trading Account items
- Details of opening stock of raw materials, semi-finished products and finished products.
- Close inventory details for raw materials, semi-finished products, and finished products.
- The total purchase price of the product minus the purchase returns.
- Total sales of merchandise minus sales returns.
- All direct costs associated with the purchase or sale or manufacture of goods.
Items on the income (Cr.) Side
- Total sales of merchandise minus sales returns
- Close the product inventory.
- Expenditure item (doctor) side
- Open product inventory
- Total purchase price of the product minus purchase returns
- Lastly all direct costs such as freight and freight costs, warehouse or factory rent, electricity and electricity costs, worker and supervisor wages, packaging costs, etc.
Note
- Firstly, The closing price will not be displayed in the trial balance. However, you must first display the closing price on the revenue side of your trading account. Next, you need to show it on the balance sheet of your current assets.
- Secondly, The closing price always values at the lower of cost or market price.
- More ever we need to evaluate the physically available closing stock on the trading account creation date.
- Lastly, although you can create a trading account in horizontal format, the contents will not change.
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