Calculation of Operating Results of a Business Organisation

The stake holders of any organisation are more concerned about the final product of accounting. It is the final accounts of the company. Following two financial statements are most important among them.

• 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.