By – Ms.

Shivani Arora

BBA 105: Financial Accounting & Analysis

Unit 2
Format of Trading Account
TRADING ACCOUNT
Dr For the period ending …. Cr

Particulars Amount (Rs) Particulars Amount (Rs)

To opening stock …………… By sales .……….
To purchases …………. Less: return inward ……….. …………….
Less: return outward ...………. …………… By closing stock …………….
To freight & carriage inwards …………… By gross loss* …………….
To direct expenses ……………
To gross profit* ……………

Formulae
1. Cost of goods sold = net purchases – closing stock
2. Gross profit = net sales – cost of goods sold
3. Cost of goods sold = opening stock + net purchases + direct expenses – closing stock
4. Gross profit = sales – (opening stock + net purchases + direct expenses – closing stock)
5. Gross profit = (sales + closing stock) – (opening stock + purchases + direct expenses)

Important points regarding Trading Account

1. Stock – The following journal entry is passed in the Journal Proper to record the amount of
closing stock:
Closing stock A/c Dr
To trading A/c
The amount of closing stock is shown on the credit side of the Trading Account & as an asset in
the balance sheet.
The opening stock is sown on the debit side of the trail balance.
Valuation of closing stock – The closing stock is valued on the basis of “cost or market value
whichever is less” principle.
2. Purchases – includes both cash & credit purchases of goods.
3. Sales – includes both cash & credit purchases of goods.

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 By – Ms. Shivani Arora

Sales have to recorded at net realisable value excluding sales tax i.e., Sales excluding sales tax –
cost incurred necessarily to make the sale. E.g.: item sold for Rs 50 + sales tax 10% (Rs 5). The
sales should be recorded at realisable value Rs 45.
4. Freight, carriage & cartage inwards are direct expenses and outwards are indirect expenses.
5. Royalty – Amount paid to the owner for using his rights is the direct expense and if royalty is
based on sales, it is indirect expense.
6. Packaging materials used for packaging goods purchased for bringing them to the shop are
direct expenses.
The closing entries are passed in the Journal Proper.
1. Trading A/c Dr.
To Stock A/c (opening)
To Purchases A/c
To Sales return A/c
To carriage A/c
To customs duty A/c

2. Sales A/c Dr.

Purchase return A/c Dr.
Stock A/c (closing) Dr.
To Trading A/c

Format of Profit & Loss A/c

Dr. PROFIT & LOSS ACCOUNT Cr.
For the year ending ………….

Particulars Rs Particulars Rs
To gross loss b/d* ………. By gross profit b/d* ………..
To salaries a/c ………. By discount received ………..
To rent a/c ………. By net loss transferred to capital ………..
To commission a/c ………. a/c*
To advertisements a/c ……….
To bad debts a/c ……….
To discount a/c ……….
To net profit transferred to capital a/c* ………..

Note:
1. Manager’s commission – the manager of a firm may be given a certain percentage of net
profit. This percentage may be before or after charging of such commission.
• Manager’s commission 10% of Net profit before charging the commission if Net profit is
Rs10,000.
Manager’s commission can be computed as = 10,000 * 10/100 = Rs 1,000
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 By – Ms. Shivani Arora

• Manager’s commission 10% of Net profit after charging the commission if Net profit is
Rs10,000.
Manager’s commission can be computed as = 10,000 * 10/110 = Rs 909
Net profit before charging commission = Rs 10,000
Less: Manger’s commission = Rs 909
Net profit after charging commission = Rs 9,091

Format of Manufacturing A/c – a person who purchases or sells goods from the point of view of a
trade. He may manufacture goods by himself for selling them a profit.
Dr. MANUFACTURING ACCOUNT Cr.
For the year ending ………….

Particulars Rs Particulars Rs
To work in progress (opening) ……... By work in progress (closing) ………..
To raw materials consumed: By sales of scrap ………..
Opening stock ………. By cost of production of finished
Add: purchases of raw material ..……. goods during the period
Less: closing stock ……… transferred to the trading account ………..
To direct or productive wages ………..
To factory overheads:
Power & fuel ………
Repairs of plant ………
Depreciation on plant ………
Factory rent ………

The Trading A/c in case of a manufacturer will appear as follows:

TRADING ACCOUNT
Dr For the period ending …. Cr

Particulars Rs Particulars Rs
To opening stock of finished goods …………… By sales .……….
To cost of production of finished goods Less: return inward ……….. …………….
transferred from manufacturing a/c …………… By closing stock of finished goods …………….
To purchases …………. By gross loss* …………….
Less: return outward ...………. ……………
To carriage charges on goods purchased ……………
To gross profit* ……………

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 By – Ms. Shivani Arora

Important points regarding Manufacturing A/c

1. Stock – can be of 3 types:
• Stock of raw materials – unsold goods
• Stock of work in progress – semi-finished goods
• Stock of finished goods – completely processed & are lying unsold.
2. Raw material consumed – the value of raw materials consumed for manufacturing goods
during a particular period. This is computed as follows:

Opening stock of raw material ……….

Add: Purchases of raw materials ……….
Total ………..
Less: Closing stock of raw materials ………..
Raw material consumed ………..

3. Carriage inwards – bringing the raw material to the factory or duty paid by the manufacturer
will charge to manufacturing a/c.
4. Sale of scrap – unavoidable. It will be credited to manufacturing a/c.