TRADING AND PROFIT AND
LOSS ACCOUNT
Final Accounts are the summaries of ledger
accounts organised in such a manner as to
show the profit or loss of the business for the
accounting year and the financial position of
the business at the end of the accounting
year.
Financial Statements or final accounts, generally refer to
two statements namely:
1. Income Statement or Profit and Loss Statement or
Profit and Loss Account: It is prepared to ascertain
the results of business operations called net profit or
net loss of the business for an accounting year.
2. Balance Sheet or Position Statement: It is prepared
to indicate the financial position ( i.e. the assets,
liabilities and owner’s capital) of a business at the
end of every accounting year.
The Profit and Loss Account is usually divided into
two sections namely:
Trading Account
Profit and Loss Account
These two accounts may be shown separately or
they may be shown as one account called “
trading and Profit and Loss Account”.
However the common practice is to show them
as one account under two sections.
It is an account which shows merely the result
of trading i.e. buying and selling of goods,
called gross profit or gross loss.
It does not take into account the effect the
indirect expenses and indirect incomes of the
business.
Objectives of Trading Account:
To ascertain the gross profit or gross loss as a
result of buying and selling of goods during
the current year.
To provide information about direct expenses
like carriage, freight, wages, other
manufacturing expenses, etc.
To provide information on the cost of goods
sold.
To measure the efficiency or performance of
the business, which is indicated by gross
profit or gross loss.
To facilitate the comparison of the trading
results of the current year with those of the
previous year.
As the trading account shows merely the
result of buying and selling of goods, it is
prepared from only those transactions which
are directly connected with the goods.
Examples of such transactions are :
opening stock of goods,
purchases of goods,
purchase returns,
direct expenses incurred on the goods,
sales of the goods,
sales return and
closing stock.
The items shown in the debit and credit side are
classified as below :
Debit side:
Opening Stock
Purchases
Purchase Returns
Direct Expenses like cartage, carriage and
freight,
marine insurance,
customs duty,
excise duty and octroi duty,
wages,
fuel and power expenses,
factory expenses,
packing materials,etc.
Credit Side:
Sales
Sales Returns
Closing Stock
Particulars Amount Particulars Amount
To Opening Stock By Sales
To Purchases Less: Sales
Less : Purchase Returns
Returns By Closing Stock
To Direct Expenses: By Gross Loss c/d
Carriage Inward
Wages and
salaries
Fuel and power
Water and Gas
Factory lights
Octroi
Import Duty
Custom Duty
Excise Duty
Consumable
stores
Foreman/ Work
Manager’s salary
Factory rent,
rates and taxes
Royalties
To Gross Profit c/d
Opening stock: It refers to the total cost of
goods left unsold at the beginning of the
current accounting period.
Purchases: It refers to the total cost of goods
purchased, both in cash and credit. In case of
purchases returns, first net purchases is
computed by deducting purchases returns
from purchases and the result is then debited
to the Trading account.
Wages: It refers to the amount paid to the
workers for manufacturing, loading and
unloading of goods.
Customs and import duty: It refers to the
amount paid as customs and import duty
when the goods are purchased from outside
the country.
Carriage expenses: It refers to the direct
expenses that are incurred while transferring
the purchased goods from vendor to the
factory. These expenses are also known as
freight in, carriage in or cartage.
Royalty: It refers to the amount paid to the
owner for using his rights.
Manufacturing expenses: It refers to the
expenses spent on gas, electricity, water and
fuel, which are required to run the factory.
Packing expenses: It refers to the amount
spent in packing the purchased goods to
bring them to factory.
Closing stock: It refers to the total cost of the
goods that are left unsold at the end of the
accounting period.
Sales: It refers to the total cost of goods sold,
both in cash and credit.
In case of sales returns, first the net sales is
computed by deducting the sales returns
from total sales and the result is then credited
to the Trading account.
Following figures have been taken from the
trial balance of a trader.
Purchases Rs.30000
Purchases returns Rs. 5000
Sales Rs.40000
Sales returns Rs.5000
Calculate the amount of profit or loss made by
the trader.
Cost of goods sold =
Opening stock +
Net purchases +
Expenses on purchasing goods –
Closing stock
Gross profit =
Net sales – Cost of goods sold
OR Gross profit =
(Net sales + Closing stock) – (Opening
stock + Net purchases + Direct Expenses)
Profit and Loss account shows all incomes
and indirect expenses related to business.
Indirect expenses include those expenses
such as administrative, selling and
distribution expenses that are required for
the operation of business.
Profit and Loss account provides net profit
earned or net loss suffered by the business
Dr Cr
Particulars Rs Particulars Rs
To Gross Loss b/d By Gross Profit b/d
To Administrative By Indirect Incomes:
Expenses: Rent received
Salaries Commission received
Office rent & taxes Discount received
Office lighting & heating Bad debt recovered
Insurance Interest received
Printing & stationary By Net loss transferred to
Postage & telegrams Capital A/c
General charges
Telephone charges
Dr Cr
Particulars Rs Particulars Rs
Audit fees
Legal expenses
Bank charges
To Maintenance
expenses:
Repairs
Depreciation
To selling & distribution
expense:
Advertisement
Travelling expenses
Dr Cr
Particulars Rs Particulars Rs
Cartage, carriage or
freight outwards
Commission paid
Bad debts
To Financial expenses:
Cash discount allowed
Interest on loan taken
Interest on capital
To Miscellaneous
expenses:
Dr Cr
Particulars Rs Particulars Rs
To Net profit transferred
to capital account
To raw materials
consumed: By Cost of Goods
Opening stock of raw Manufactured
materials (transferred to trading
Add: Purchases account)
Less: Closing stock of raw
materials
Less: Purchase Returns
To Direct Wages
To Direct Expenses
To Carriage
To Factory Lighting
To Power and Fuel
To Depreciation on Plant
and machinery
By Closing Work in
To Work in Progress Progress
Less : Sale of Scrap
By Sales
To Opening Stock of By Closing Stock of
Finished Goods Finished Goods
To Cost of Goods
Manufactured
To Gross Profit c/d
To Administrative By Gross Profit b/d
Expenses: By Indirect Incomes
To Selling Expenses and Gains
To Distribution
Expenses
To Financial Expenses
To Maintenance
Expenses
Net Profit Transferred
to Capital Account
