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In today’s Business Studies class, We will be learning about Trading Accounts. We hope you enjoy the class!
The Trading Account can simply be defined as an account prepared after the preparation of the trial balance in order to ascertain either the gross profit or gross loss of a trading concern.
Purpose of Trading Account
The purpose of preparing the trading account is to ascertain the profitability or otherwise of the business i.e. to arrive at the gross profit or gross loss of business.
Terminologies Involved in The Preparation of The Trading Account
- Opening Stock: This is the value of the goods in stock at the beginning of a trading period.
- Purchases: This is the value of both cash and credit purchases (i.e. total purchases) during a given trading period.
- Purchases Return or Returns Outwards: This is the value of goods which a business returned to its supplies for one reason or the other.
- Net Purchases: This is equal to total purchases less returns outwards or purchases less purchases returns for a given trading period.
- Cost of Goods Available for Sale: This is arrived at by adding purchases to opening stock and deducting purchases returns (if any) from the above addition.
- Closing Stock: This is the value of goods left unsold at the end of a given trading period.
- Cost of Goods Sold: This is arrived at as follows:-
Opening stock + Purchases – Returns
Outwards – Closing stock or (cost of goods available for sales less closing stock).
- Gross Profit: This is the excess of the net sales over cost of goods sold.
- Gross Loss: This is the excess of the cost of goods sold over the net sales.
- Net Sales: This is equal to sales or sales revenue ie (cash and credit sales) less sales return or returns inwards.
- Returns Inwards or Sales Returns: This is the value of all goods returned by the customers of the business as not acceptable to them due to one reason or the other.
- Sales: This is the total value of all cash and credit sales of a business in a given trading period.
- Carriage Inwards: This is the carriage on purchases
Working Exercise of a Trading Account
Question: From the following trial balance of Diligent Stores Ltd, Draw up the trading account for the year ended 31st December 2009:-
DILIGENT STORES LTD
NOTE: The above trading account is prepared using the conventional or “T” method. The vertical method will be used later.
- Write a short note on trading account
- State the purposes of preparing a profit and loss account.
Business Studies by O.A. Lawal. Pages 72 to 76.
GENERAL REVISION QUESTIONS
- What is a petty cash book?
- Mention three items that can appear in the petty cash book.
- Who keeps the petty cash book?
- Define the imprest system.
- What is the amount of money given to the petty cashier at the beginning of the period called?
- A return outward is __________ Purchases A. added to B. deducted from C. Similar to D.not related to.
- Purchases returns is the same as A. purchases journal B. Returns outwards C. net sale D. Returns outwards journal.
- Which of the following statements is correct? A. Net sales = sale + sale returns B. Cost of goods sold = opening stock + closing stock C. Gross profit = Net sales – cost of goods sold None of the above.
- Which of the following is posted to trading account? A. Carriage outwards B. Carriage inward C. Rent D. Discount received.
- Which of the following equations is correct? A. Net profit = Gross profit + other incomes – total expenses Net sales + closing stock = gross profit C. opening stock + closing stock = cost of sales D. Sales – purchases = Net profit.
- Write short notes on Trading Account
- Prepare a format of a Trading Account showing its items
We have come to the end of this class. We do hope you enjoyed the class?
Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.
In our next class, we will be talking about Profit and Loss Account. We are very much eager to meet you there.
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