Introduction and Preparation of Trading Account - PowerPoint Presentation

1. Introduction and Preparation of Trading AccountFinancial Management and Cost Accounting (DBM-422)A K JHA

2. Financial Statement Financial Statements are prepared to get an idea of profit or loss as well as the financial position of the firm or business.It is prepared at the end of the financial year.The financial statements are useful for the users in understanding the position and status of business and making decisions accordingly.A set of financial statements includes a Balance Sheeta Profit and Loss Account Schedules and notes forming part of balance sheet, and Profit and Loss Account.

3. Financial Statement Financial Statements are prepared from the Trial Balance to get an idea of:How much profit was earned in a particular period? Profit and Loss Account shows the profit earned during the year.What is financial position of the business at the end of a particular period? Balance Sheet is a position statement that shows the financial position on a particular date.Balance sheet and Profit and Loss Accounts are the ‘Final Statements or Accounts’. They are the end product of Financial Accounting.Income statement is the summary of accounts that affects the profit or loss of an enterprise.An Income Statement has two parts:Trading Account: It reveals gross profit or gross lossProfit and Loss Account: It reveals net profit and net loss

4. Trading AccountMeaning:Trading Account is prepared to know profitability of business due to buying and selling or manufacturing and selling. It shows the profit from the main business; buying and selling other than the business isn’t included in Trading Account. Trading Account is the first stage in preparing a final account. It shows the gross profit or gross loss during an accounting year.Its includes sales, services rendered in the credit side and cost of such sales and services rendered in the debit side.Features of Trading AccountIt is the first stage in preparation of final accounts.It records only net sales and direct cost of goods sold.The balance of this account discloses the gross profit or gross loss.The balance of this account is transferred to the Profit and Loss Account.

5. It is prepared to find out the gross profit or gross loss during the accounting year. It is based on matching the selling price of goods and services with the cost of goods sold and services rendered.Purpose of Trading Account

6. Opening Stock refers to the closing balance of the previous year.It is generally put as first item on the debit side of the Trading accountIn case of trader, the opening stock consists of different types of finished goods.For manufacturing, the opening stock consists of raw materials, work in process and finished goodsPurchases and Purchase ReturnsThe purchase account shows a debit balance, showing the gross amount of purchases made of the materials. This refers to the goods purchased, both cash and credit purchases for resale.The purchase of assets meant for permanent use in business such as furniture, machinery are not includedContents of Trading Account

7. The Purchase Returns Account shows a credit balance showing the returns of materials to the suppliers.On the debit side of the trading account, the net amount is shown as:Apart from the purchases returns, following entries should also be deductedGoods taken by the proprietor for his personal use.Goods given as charity.Goods given as samples.Items shown on the Credit Side of the Trading AccountSales and Sales ReturnsClosing StockRs To Purchase Less: Purchases Returns3,00,00010,0002,90,000

8. Direct Expensesthose expenses which are incurred on the goods purchased till they are brought to the place of business for sale e.g. Freight inward, insurance, import duty, etc.In manufacturing business wages, power and fuel, factory rent, etc. are also direct expenses. Stores consumed during the last year = Opening Balance in Stores + Purchase of Sores during the year – Closing Balance of Stores

9. Balancing of Trading AccountGross Profit or Gross LossAfter recording the above items in the respective sides of the Trading Account, the balance is calculated to ascertain Gross Profit and Gross Loss.If the total of the credit side is more than that of debit side, the excess is Gross Profit.If the total of the debit side is more than that of credit side, the excess is Gross Loss.

10. Advantage of Trading Account1. The various items of trading can be known separately.2. Over stocking or under stocking can be known3. The result of trading can be known separately.4. The progress can be studied on the basis of gross profit ratio, year by year

11. ParticularsAmountParticularsAmountTo Opening stockTo Purchase less returnTo WagesTo CarriageTo FreightTo FuelTo Stores consumedTo RoyaltyTo Manufacturing ExpensesTo Profit and Loss A/cBalancing figureGross Profit (transferred to P and L A/c)By Sales less ReturnsBy Closing StockBalancing figureGross loss (transferred to P and L A/c)Name of the FirmTrading AccountFor the year ended on 31st MarchDr.Cr.

12. ParticularsAmount (Rs)Opening stock :Raw materialFinished GoodsPurchaseSalesReturns: PurchaseSalesWagesFactory ExpensesFreight : In wardsOut wardsAt the period of the concerned period the stock on hand were:Raw MaterialWork in progressFinished Goods2000035000900001750002500150032500225005000750017500500027500Example1. Prepare a Trading Account for the year ending March 31, 2019 from the following balances as at March 31, 2019

13. ParticularsAmount (Rs)ParticularAmount (Rs)To Opening Stock:Raw MaterialFinished goodsTo Purchases 90000Less Return 2500To WagesTo Factor ExpensesTo Freight InwardsTo Gross Profit2000035000875003250022500500021000By Sales: 175000Less :Return 1500By Closing Stock:Raw MaterialsWork in processFinished goods17350017500500027500Total223500223500Name of the FirmTrading Account For the year ending March 31, 2019Dr.Cr.