Session 14 - Preparation of Trading Account

Session Plan : Preparation of Trading Account

Introduction (5 min): Explain meaning, objectives, and format of Trading Account.

Concepts (10 min): Discuss debit side (opening stock, purchases, direct expenses) and credit side (sales, closing stock).

Illustration (15 min): Solve a problem on Trading A/c from a given Trial Balance.

Class Activity (10 min): Students prepare a Trading A/c with provided data.

Recap & Q/A (5 min): Summarize importance of Trading A/c in determining Gross Profit/Loss.

Lecture Material : (PDF, PPT)

Trading_Account.pptx 

Learning Material (IV Quadrant Approach)

(Q1) : Text and Image based Content (PDF/Image Formats)

A Trading Account is a fundamental financial statement prepared to determine the gross profit or gross loss of a business resulting from its core trading activities—buying and selling goods. It serves as the first step in the preparation of final accounts, providing insights into the direct costs and revenues associated with the production or procurement of goods.

Trading Account Format

The Trading Account is typically presented in a T-format, comprising two sides:

• Debit Side (Dr.): Records all direct costs associated with the production or purchase of goods.

• Credit Side (Cr.): Records all direct revenues from the sale of goods.

The balancing figure between the two sides represents the gross profit (if the credit side is higher) or gross loss (if the debit side is higher).

Components of a Trading Account

Debit Side (Dr.):

• Opening Stock: Value of inventory at the beginning of the accounting period.

• Purchases: Total goods bought for resale during the period.

• Add: Direct Expenses: Costs directly associated with the production or procurement of goods, such as wages, carriage inwards, and manufacturing expenses.

• Less: Purchase Returns: Value of goods returned to suppliers.

Credit Side (Cr.):

• Sales: Total revenue from goods sold during the period.

• Less: Sales Returns: Value of goods returned by customers.

• Add: Closing Stock: Value of inventory at the end of the accounting period.

Example: Trading Account Preparation

Given Data:

• Opening Stock: ₹60,000

• Purchases: ₹2,50,000

• Purchase Returns: ₹15,000

• Direct Expenses (Wages + Freight): ₹35,000

• Sales: ₹3,80,000

• Sales Returns: ₹10,000

• Closing Stock: ₹85,000

Trading Account for the Year Ended 31st December 2024:

Dr. (₹) Cr. (₹)

Opening Stock: ₹60,000 Sales: ₹3,80,000

Purchases: ₹2,50,000 Less: Sales Returns: ₹10,000

Add: Direct Expenses: ₹35,000 Net Sales: ₹3,70,000

Less: Purchase Returns: ₹15,000 Add: Closing Stock: ₹85,000

Net Purchases: ₹2,35,000 Gross Profit: ₹1,30,000

Total: ₹3,30,000 Total: ₹3,30,000

Calculation:

• Net Purchases: ₹2,50,000 - ₹15,000 = ₹2,35,000

• Net Sales: ₹3,80,000 - ₹10,000 = ₹3,70,000

• Gross Profit: Net Sales + Closing Stock - (Opening Stock + Net Purchases + Direct Expenses)

• Gross Profit: ₹3,70,000 + ₹85,000 - (₹60,000 + ₹2,35,000 + ₹35,000) = ₹1,30,000

This gross profit figure is then carried forward to the Profit and Loss Account to determine the net profit or loss by accounting for indirect expenses and incomes.

 Importance of the Trading Account

• Determines Gross Profit/Loss: Helps assess the profitability of core trading activities.

• Foundation for Profit and Loss Account: Provides the starting point for calculating net profit or loss.

• Financial Analysis: Assists in evaluating operational efficiency and cost management.

For a visual walkthrough of preparing Trading and Profit & Loss Accounts, you might find this tutorial helpful:

(Q2) : Video Based Content (Youtube): www.youtube.com/watch?v=k3S1N8u-Qtc&list=PLLhSIFfDZcUXEs3UhIv5tMn6AAU1GNnPr&index=24 

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform):

forms.fillout.com/t/42mscgi6Yxus