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Published by: Subrahmanya on Apr 19, 2012
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Trading Account:
Learning Objectives:
 1.
 
Define and explain trading account.
 2.
 
What are the items of a trading account.
 3.
 
Prepare the format of trading account.
 4.
 
What are advantages of trading accounting?
 
Definition and Explanation:
A
trading account
is an account which contains, " in summarized form, all thetransactions, occurring, throughout the trading period, in commodities in which he deals"and which gives the gross trading result. In short, trading account is the account which isprepared to determine the gross profit or the gross loss of a trader.
 
Items of Trading Account:
The following items usually appear in the debit and credit sides of the trading account.
 
Debit Side Items:
1.
 
The value of opening stocks of goods (i.e., the stock of goods with which thebusiness was started).
 2.
 
Net purchase made during the year (i.e., purchases less returns).
 3.
 
Direct expenses, if any.
 
Credit Side Items:
1.
 
Total sales made during the period less the value of returns, i.e., net sales.
 2.
 
The value of closing stock of goods.
 
The difference between the two sides of the trading account represents either gross profit orgross loss. Thus if the credit side is heavier that would mean that the trader has earnedgross profit i.e., the excess of selling price of the goods sold over their purchase price. If thedebit side is heavier it would mean that the trader has suffered gross loss i.e., purchaseprice of goods exceeds the selling price.
 
The balance of trading account which represents either gross profit or gross loss istransferred to profit and loss account.
 
Format of Trading Account (T or Account Form):
Trading AccountFor the year ending .......20......
 
 
Dr.
 
Cr.
 
To Opening stock
 
........
 
To purchases .........
 
Less Returns
 
.........
 
........
 
To Carriage inwards
 
.........
 
To Cartage
 
.........
 
To dock charges
 
.........
 
To Wages
 
.........
 
To Duty
 
.........
 
To Freight
 
.........
 
To Clearing charges
 
.........
 
To Etc. Etc.,
 
.........
 
To Gross profit(Transferred to profit andloss account)
 
.........
 
By Sales
 
.........
 
Less returns
 
.........
 
.........
 
By Closing stock
 
.........
 
By Gross loss transferredto 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 withoutalteration. 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. Returnoutwards reduce the purchases. It is shown by way of deduction from purchases in thetrading account.
 
Discount on Purchases:
 
It is also 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 dealsin. It is credited to trading account.
 
Returns Inwards or Sales Returns:
It means goods returned to a trader by his customers from out of goods sold to them. It isshown by way of deduction from sales on the credit side, of the trading account.
 
Discount on Sales:
This account has always a debit balance and is shown by deduction from sales in the tradingaccount.
 
Direct Expenses:
Direct expenses are those expenses which are incurred to convert raw-materials intofinished 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 incurredto bring goods from the place of purchase to the business place of the trader etc. All thedirect expenses are charged to the trading account. The items usually included in the directexpenses are:
 1.
 
Wages:
This item usually signifies some hourly, daily or piecework remunerationpaid 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 directcharge on the cost of manufacturer. It is debited to manufacturing account or tradingaccount.
 3.
 
Carriage Inward:
Carriage means conveyance charges of goods by land. Carriageinward are the conveyance expenses incurred to bring the goods purchased in thegodown or shop. It is debited to trading account. In examination questions when theitem only "carriage" is given and is not expressly stated to be inward or outward, itshould be assumed to be inward and debited to trading account. The reason is thatcarriage on goods is usually paid by the purchaser.
 4.
 
Cartage:
The cartage charges on goods purchased are direct expenses and shouldbe debited to trading account.
 5.
 
Freight:
Freight is the charge made for conveyance of goods by sea. Freight ongoods purchased is charged to trading account.
 6.
 
Customs Duty, Octroi Duty etc:
When goods are purchased from a foreign countryimport duty will be payable. When goods are received from another city, themunicipal corporation may charge octroi duty. All duties on goods purchased shouldbe debited to trading account.
 7.
 
Excise Duty:
It is a tax levied by the government. If the duty is levied onproduction it will be treated as manufacturing expenses and debited to tradingaccount.
 

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