- Trading and Profit and Loss account
- Balance Sheet
Trading profit and loss account is used to calculate the profit or loss of the operational results for the accounting period. The profit calculated in this manner can be shown in two steps. They are,
- Trading profit/ gross profit
- Net profit/loss
Trading Account
Organisations which are involved in selling goods and services prepare the trading account to calculate the gross profit. It includes two main aspects.
- Sales income
- Cost of sales
Sales Income
Total sales include sales on cash and credit sales. Some of the goods sold on credit may be returned back to the organisation. Goods returned as such will be deducted from the sales of the business. This allows the calculation of net sales to the business.
RS
Example : ¤ Cash sales 145,000
Credit sales 68,000
213,000
Less – Goods returned 3,000
Net sales 210,000
Cost of Sales
Following items are considered when calculating the cost of sales.
Opening stocks
Custom duty
Carriage inwards
Purchases
Closing stocks
Purchases returns
The closing stocks of one period become the opening stocks for the next accounting
period.
Example : The accounting period starts on 01/01/20xx and ends on 31/12/20xx. The opening
stock as at 01/01/20xx is Rs.8000. It is the same as the closing stock of Rs. 8000
as at 31/12/20xx.
An organisationwhich starts business activities newly, will not have an opening stock. But in other organisations when the opening stocks are sold it becomes a part of cost of sales for that accounting period.
The opening stock will not be sufficient for sales for a given accounting period. Therefore the organisations have to purchase new stocks. Goods purchased on cash are known as cash purchases while goods purchased on credit will be termed as credit purchases. Some of these credit purchases may have to be returned from time to time. Such purchase returns will be deducted from the total purchases of the organisation. The net amount calculated is called the net purchases.
Example : ¤ Cash Purchases 78,000 RS
Credit Purchases 46,000 RS
124,000 RS
Less - Purchase returns 4,000 RS
Net Purchases 120,000 RS
When purchases are considered all the expenses that directly relate to purchases have to be considered. There will be a cost of transporting goods to the business which is termed as carriage inwards. Loading charges have to be paid. All such expenses will be included in the cost of sales.
The opening stocks, purchases and related expenses of purchases are included in the cost of goods to be sold. But it is not the cost of sales. To calculate the cost of sales the closing stocks have to be deducted from the cost of goodsto be sold. The remaining stock of the cost of goods to be sold at the end of the accounting period is known as the closing stocks.