TRADING ACCOUNT

The first stage in process of preparing final accounts

Shows Gross Profit or Gross Loss during an accounting

year. Main components are sales and services rendered in the credit side and cost of such services rendered in the debit side The balance is transferred to P&L Account

Format of Trading Account

Trading Account for the year ending Dr. Particulars To Opening Stock Cr. Rs . Particulars By Sales .. Rs

To Purchase

.. . . . . . . . .

Less : Sales Return/Return Inward .. By Closing stock By Abnormal Loss of Stock By Gross Loss transferred to P&L A/C

. . . .

Less : Purchase Return/Return Outward .. To Direct Expenses To wages and Salaries To Freight Inward To Carriage Inward To Cartage Inward To Gross Profit transferred to P&L A/C

Contents of Trading Account

DEBIT SIDE Opening Stock consists of raw materials, work-inprogress and finished good. Purchase or Adjusted Purchase and Purchase Return (Adjusted Purchase = Net Purchase + Opening Stock Closing Stock) Direct Expenses incurred on the goods purchased till they are brought to the place of business for sale Example Carriage Inward, wages and salary, Power and fuel, factory lighting, factory rent, duty on purchase, royalty to acquire patents, consumable stores. Gross Profit

Contents of Trading Account

CREDIT SIDE Sales and Sales Return Closing Stock Gross Loss

Problem
Prepare a Trading Account for the year ending March 31, 2009 from the following balances as at March 31, 2009.

Rs stock (1st April, 2008) wages Sales (Inclusive of Sales Tax) Return Outward Freight 10000 Purchases 5000 Carriage Inward 170000 Return Inward 8000 Sales Tax Paid 500 Octroi duty

Rs 100000 1000 5000 15000 2500

Closing Stock as on March 31, 2009 was valued at Rs 20000

Solution
Trading Account for the year ending March 31, 2009 Dr. Particulars To Opening Stock To Purchase Less : Return Outward Cr. Rs Particulars 170000 15000 155000 Rs 10000 By Sales 100000 less : Sales Tax 8000 92000

To Wages To Carriage Inwards To Freight To Octroi Duty To Profit and Loss Account (Gross Profit)

5000 less : Return Inward 1000 By Closing Stock 500 2500 59000
170000

5000 150000 20000

170000

PROFIT AND LOSS ACCOUNT

A profit and loss account is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice versa. - Prof. Carter

FEATURES
It is the second stage in the preparation of final accounts
It relates to a particular accounting period and is prepared

at the end of that period. Accrual basis of accounting is followed in the preparation of this account. This account is credited with gross profit and income from other sources and debited with indirect expenses and losses. The balance of this account is net profit or net loss The capital of the owner is increased or decreased by the balance of this account.

Profit and loss Account for the year ending on . Dr. Particulars To Gross loss transferred from trading A/C To Salaries To Rent, Rates and Taxes To Stationary and Printing To postage and Telegram To Audit Fees To Legal Charges To telephone expenses To Insurance Premium To business promotion expenses To repairs and renewals To Depreciation To Interest To sundry Trade Expenses To conveyance To charity To Bank Charges To Office Expenses To establishment Expenses To General Expenses To loss in exchange To license fees To Brokerage To car running and maintenance To office lighting To loss by fire, theft To commission To advertisement To freight and carriage outward To discount allowed To packing expense To travelling expense To distribution expense To bad debts Cr. Rs Particulars By Gross profit transferred from trading A/c By Rent By discount received By commision earned By interest By bad debts recovered By income from investment By dividend on share By miscellaneous revenue gains By income from any other source By net loss (transferred to capital A/C) Rs

FORMAT

Contents of Profit & loss Account

Expenses and Losses
Administration and Office Expenses establishment expenses, printing and stationary, postage and telephone, legal expenses, audit fees, general or trade expenses. Selling and Distribution Expenses salesman salaries and commission,

commission of agents, advertising, warehouse expenses, packing expenses, freight and carriage on sales, export duties, maintenance of vehicles for distribution of goods and their running exp, insurance , bad debts Financial Expenses interest on loan, interest on capital, discount allowed, Abnormal Losses loss by fire, loss on sale of fixed assets, loss by theft,

Contents of Profit & loss Account

INCOMES Income from Main business gross profit, profit on consignment, profit on joint venture, commission receivable Financial and other Incidental incomes interest on fixed deposit, income from investment, rent received, interest on drawing, discount received,

BALANCE SHEET
A statement which sets out the assets and liabilities of a firm or an institution as at a certain date
A balance Sheet is a screen picture of the financial position of a going business at a certain moment

BALANCE SHEET
It is a statement which reports the property owned by

the enterprise and the claims of the creditors and owners against these properties. The purpose is to ascertain the financial position of a business i.e. what the business owes and what it owns on a certain date. It tells if the firm is solvent or not if the assets exceeds liability the firm is solvent, otherwise insolvent.

FORMAT
Balance Sheet of . as at Liabilities Sundry or Trade Creditors Bill Payable Bank Overdraft Employees Provident Fund Loans (Cr.) Mortgage Reserves or Reserve Fund Capital Add: Interest on Capital Net Profit Less: Drawings Income Ta x
..

Rs

Assets

Rs
.. .. .. .. .. .. .. .. ..

.. Cash in hand including petty cash .. Cash at bank .. Bill Receivable .. Sundry Debtors .. Loans (Dr.) .. Closing Stock .. Loose Tools ..
..

Investments Furniture and Fittings Plant and Machinery land and Building Freehold/leasehold land Business Premises

.. ..

..
.. .. .. .. .. ..

.. .. .. ..

Interest on Drawings Net Loss

Patents and Trademarks .. .. Goodwill

..

DISTINCTION BETWEEN BALANCE SHEET AND TRIAL BALANCE

Balance Sheet The purpose is to portray the financial position It provides information as to the profitability and financial position of the firm Trial Balance

The purpose is to establish the arithmetical accuracy of the books of account

No such information is possible

It is essential to prepare balance sheet to complete the Though desirable, it is possible to dispense with its accounting process preparation Two sides are headed as assets and liabilities Two columns are headed as debit and credit

only personal and real accounts appear in the balance all accounts must be written, no account can be left sheet out closing stock appears in the balance sheet normally a closing stock does not figure in the Trial Balance It is normally prepared every month and whenever desired

It is prepared at the end of the trading period

DISTINCTION BETWEEN TANGIBLE ASSETS AND INTANGIBLE ASSETS

Tangible Assets Intangible Assets
Assets having a physical existence e.g. land & building, Fixed assets having no physical existence e.g. plant & machinery etc. Goodwill, Patent, Trademark, etc. Tangible assets can be fixed or current, e.g. stock Fixed tangible assets are depreciated These assets may be lost due to fire Lender accepts such assets as security for providing loan Intangible assets fall in the category of fixed assets Intangible assets are amortized These assets cannot be lost due to fire lenders do not accept these assets as security for loan

Problem
Prepare the Trading and Profit & Loss Account and Balance Sheet

of Mr. Jagat Shah as on 31st March, 2009 from the following balances:
Capital Machinery Sales Purchase Sales Return Stock on April 1, 2008 Drawings Wages Carriage Inward 3600 700 8200 4000 100 1000 400 1000 50 Salaries General Expenses Rent Purchase Returns Debtors Cash Carriage Outwards Advertising Creditors 600 200 500 50 3000 400 200 200 500

Closing stock was valued at Rs 2000