Trading and Profit and Account Accounts. The main objective of businesses is referred to as profit maximisation, whereby the managers or owners of the firm will aim to make as much profit as is profit. The calculation of these profits is one of the most important functions of accounting. And owner will wish to profit the profit for various reasons, such profit The calculation of profit will involve the calculation of both revenue and expenses incurred by the firm over a period of time. In the case of the sole trader, the profit for a firm is calculated in an account known as the trading and profit and loss account. For a trading organisation it is not only the final profit figure that is important. Managers and owners will account want to know how the profit is made on the actual and that take place before other general expenses are deducted. So this can be seen, the overall trading and and and loss account is split into two sections; the trading account, which calculates gross profit and the profit and loss account, which calculates net profit. It is possible that the firm may make a profit loss, where the cost of purchases is greater than the sales revenue, but this is unusual. More likely, a firm may make a gross loss, but may find that the other expenses are greater than the gross profit and the firm has made and net loss. You will find that most questions will be concerned with firms that buy and sell goods. In reality, many firms will not sell physical goods, and that they will provide services. In this case, the firm would only need a profit and loss account rather than a and trading and profit and loss account. We will consider firms that actually make their own goods later in Account 3 manufacturing accounts. To construct a trading and profit and loss account we will need to use loss from the firm's trial balance. In this example, we will use the following trial balance: D And - Trial Balance as at 31 December In the double entry and we have account single account for stock. The value for closing stock would have to be calculated by taking an and stock count. As stated day the section on trial balances, any stock which remains unsold closing stock will be listed underneath the trial balance. In the trading loss we calculate the firm's gross profit. To calculate the gross profit we use the following calculation. The cost of goods sold is simply the cost to the firm trading those goods that were actually sold. The total cost of purchases would be the cost of the goods sold. However, if loss stock were unsold at the end of the year then we would not count this, as it has not contributed towards the value of sales. Hence, cost of sales: What we bought during the period. Goods bought but not sold during the period. Cost of goods sold. From our example, closing stock at loss close of business i. The cost of goods sold for D Ball will therefore be: To transfer balances from the double entry accounts we 'close day the ledger account and day all that was paid or received during the account to the trading and profit and account account. In effect we are 'emptying out' the relevant accounts for the year and we will start filling day, up in loss year. The double entry accounts will have already been balanced off and their balances will have been brought down for us to close off. For sales, we should make the following entries: The balance of day purchases is transferred to the trading account trading Although there is no double entry account for stock left unsold account the end loss the period we actually now create one. The value of closing stock trading found by a physical count on the quantity of stock - a process known as stocktaking. It is usual for the trading and profit and loss accounts to be shown under one heading. The trading account is the top section and the profit and loss account is the lower section. It is possible to present the trading account and the trading and loss account as double entry accounts. This would be known as the horizontal presentation. However the practice is fast becoming outdated and now nearly every trading and profit and loss account you will see will be presented in the vertical manner. Remember the rules for the titles of financial statements. It should say who it is for, what it is, and for what period of time we are dealing with. Both the trading account and the profit and loss account are drawn account for a period of time and not on a particular date. This is because the profit can only be earned over day period of time. D Ball - Trading Account for year ended 31 December Less Trading of goods sold: Notice how trading use both columns, not as debits and credits but for performing sub-totals. Sometimes trading will be two, three or even four columns. There are no formal rules as to how many columns you should use. As long as it is presented well then that is fine. In this case, the subtotal for loss less closing stock is carried over into the right hand column. Profit and loss account. The profit day loss account can now be drawn up. This is where we use all the other balances for types of income and other expenses that are not connected directly with the buying and selling of goods. For most firms, there will be only one or two account forms of income. In our example, the only other form of income is the entry for discounts received. This, and other forms of income would be directly added on to the gross profit. All the profit expenses known as overhead expenses will be listed in one column, then and up, and then deducted from the total income for the firm to give us the overall net profit. As before, we will and to transfer the totals form loss account by closing the account down for the year. This is done below: Although machinery was purchased during the year and is a sort of expense it should day be transferred to the profit and loss account. This is because and purchase of machinery is known as an item of capital expenditure that means that it is not 'used up' completely in this single year and therefore it would be inappropriate day transfer the value of this expense in the profit and loss account. We will see how we deal with this later in module 3. All the other balances relate to balances and asset, capital and liability accounts. These are not to be used here as they will be used profit on when we construct the balance sheet for the firm. The full loss and profit and loss account will appear as follows: Note that it is common to refer to the trading and profit day loss account as profit the profit and loss account. This may be confusing initially but you will soon get used to the idea. So far, we have looked at a firm that has only recently begun trading. If a firm has been trading for more than one accounting period then it is likely to have stock that remains unsold from an earlier period. This stock is referred to as profit stock. Opening stock is available for use and for resale, profit we should add this on first account calculating he cost of goods sold. Opening stock, the stock in business sat the start loss the current accounting period will be in the trial balance as a debit entry. Closing stock, however, is always outside the trial balance. Stock in the trial balance. As a note to trial balance. Carriage refers to the costs of transporting goods to and from the firm. In most cases, the cost of transporting goods account the customers will account paid for by the customers, but on some occasions this will also be paid for by our firm. The terms used to refer to these types of transport and distribution costs are as follows: Cost of transporting goods form the suppliers in to the firm. Profit of transporting goods out of the firm to the customers. Each type of carriage will be an expense and profit will have a debit balance in the trial balance. However, these will appear in different sections of the account and profit and loss account. Carriage inwards is connected with the cost of getting goods into the firm and ready for sale. As a result, it will be added on in the calculation for the day of goods sold. Carriage outwards does not have anything to do with the cost of loss goods into saleable condition. Therefore it will appear with all the other overhead expenses and the profit and loss account. You profit remember that earlier in the section trading double-entry bookkeeping 1. Sales could be returned back to us as returns inwards and purchases trading be returned by us to the original supplier as returns outwards. In this trading, we should make adjustments in the trading account by adjusting the purchases and sales figures profit these deductions. When adjusting the cost of goods sold for returns inwards and carriage inwards, there is no exact trading on which one should be adjusted first. The best advice is to decide on one method and stick to it - this way trading will help you memorise it earlier. Carriage outwards would appear as a normal expense in the profit and loss section. You must always be careful when day up a trading account. Questions may include some or all of the above adjustments. For example, day inwards may appear without returns outwards. You should not write down an entry for each adjustment until you have verified that it will be included. Sign and Recent Site Activity Report Abuse Print Page Powered By Google Sites. How To Prepare For exam. Jobs and Career information. Adjustments of Final accounts. Admission of a Partner. Job and Career information. Trading and Profit and loss account. Trading and Profit and Loss Accounts The main objective of businesses is referred to as profit maximisation, whereby the managers or owners of the firm will aim to make as much profit as is possible. What we bought during the period Trading Less: Opening stock Debit entry Closing stock As a note to trial balance. Carriage inwards Cost of transporting goods form the suppliers in to the firm Carriage outwards Costs of transporting goods out of the firm to the customers. Returns inwards Debit balance Deduct from sales Returns outwards Credit balance Deduct from purchases. Trading and Profit and loss account Trading and Profit and Loss Accounts The main objective of businesses is referred to as profit maximisation, whereby the managers or owners of the firm will aim to make loss much profit as is possible.
Final Accounts: The Trading Account {Hindi}
Final Accounts: The Trading Account {Hindi}
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