As already mentioned, the first part of the trading and income statement is called trading account. The purpose of preparing trading accounts is to find gross profit or gross loss, while in the second section it is to determine net income or net loss.
Trade Account Preparation
Trading accounts are prepared mainly to know the profitability of goods purchased (or manufactured) sold by the businessman. The difference between the selling price and the cost of sold goods is the 5 serving businessman. In order to calculate gross earnings, it is therefore necessary to know:
(a) the cost of goods sold.
The total sales can be found from the sales manager. However, the cost of goods sold is calculated. In order to calculate the sales costs, it is necessary to know its meaning. "Cost" includes the purchase price of the item plus the cost of purchasing goods and burns the goods to the place of business. In order to calculate the cost of the goods, "we should deduct the total cost of commodity purchased price at hand. We can study this phenomenon using the following formula:
Opening stock + purchase price – closed stock = sales cost
As already mentioned, the purpose of This account can be explained by the following equation:
Gross profit = Sales price of items sold or (Sales + Balance) – (In stock in the sales account), you can calculate the gross profit of the company. This can be described as an excess of "Sales" above "Sales. Beginning + Buy + Direct Costs)
Opening Inventory and Purchase with Purchase and Sales Cost Billing (Direct Exp.) records the debtor's page while the sales and final holdings are recorded on the credit side. If the credit side is Jeater than the Debtor side, then the difference is recorded on the debtor side as gross profit which are ultimately recorded on the credit side of the income statement. When they bitor page exceeds the credit side, the difference is gross loss recorded on the credit side and ultimately shown on the debtor side of the income statement.
Common Items on a Trading Account :
A) Debit Page
1. Opening Stock. It is the stock that remained unsold at the end of the year before. It must have been brought into books by opening entry; so it always appears within the test balance. In general, it is shown as the first item on the billing page of the trade account. Of course, in the first year of a company there will be no open stock.
2nd Purchase. This is usually another item on the debit side of the trading account. "Buy" means total purchase, ie. cash plus credit purchases. Any return return (purchase return) must be deducted from purchase to find out the net purchases. Sometimes goods are received before the supplier's relevant invoice. In such a situation, at the date of preparation of the final account, a post should be entered for debit of the purchase account and crediting the supplier's account with cost of goods.
3rd Purchase Expenses. All costs associated with the purchase of goods are also charged on the trading account. These include salaries, freight inland freight, customs duties, clearing charges, port charges, excise duties, patents and import taxes etc.
4th Manufacturing Expenses. Such expenses are borne by businessmen to manufacture or make the goods in a marketable condition, for example. Engine power, petrol fuel, stores, royalties, factory expenses, managers and supervisor's salary etc.
Although production costs are strictly included in the manufacturing accounts, as we only prepare trading accounts, expenses of this type can also be included in the trading account.
(B) Credit Page
1. Sales. Sales means total sales, ie. cash plus credit sales. If there is a sales return, these should be deducted from sales. Then net sales are credited to trading account. If an asset in the company is sold, it should not be included in the sale.
2nd Connect portfolio. It is the value of shares that are unsold in the city or store at the last date of the accounting period. Normally closing stocks are given outside the trial balance, in which case it appears on the trading page for the credit account. However, if it is given within the trial balance, it should not appear on the account of the trading account, but will only appear in the balance as active. The closing paper should be valued at cost or market price, if it is smaller.
Valuation of closing inventory
In order to determine the value of the closing inventory, it is necessary to compile a complete inventory or list of all the goods in the god's own together with quantities. Based on physical observation, the stock lists are prepared and the value of the total stock is calculated on the basis of unit value. It is thus clear that the inventory involves (i) inventory, (ii) pricing. Each product is priced at cost, unless the market price is lower. Pricing a statement at cost is easy if the costs remain fixed. But prices remain fluctuating; so valuation of shares is performed on the basis of one of many valuation methods.
The trading account creation helps to understand the relationship between cost and revenue and the effectiveness with which operations have been completed. The relationship between gross profit and sales is very important: It has arrived at:
Gross profit X 100 / Sale
Using G.P. Relationship he can figure out how efficiently he runs the business higher relationship, better will be the efficiency.
Trade Account Settlement Notes
In the case of transfers of different accounts relating to goods and purchase costs, the following entries are included:
(i) For opening of inventory: Debt account and credit bond account
(ii) For purchase: Debt account and credit purchase account, where the amount is an amount after deduction of return on investment.
(iii) For Purchase Return: Debit Purchase Purchase Account and Credit Purchase Account.
(iv) For return inward: Debit sales account and credit sales return account
(v) For direct costs: Debit trading account and credit direct expenses accounts individually.
(vi) For sale: Debit sales account and credit trading account. We find that all accounts as mentioned above will be closed with the exception of trading account
(vii) To close stock: Debit account and credit trading account After the above entry, the trade balance and the deviation of two pages are stated. If the credit page is more, the result is gross profit for which the following item is registered.
(viii) For gross profit: Debt account and credit profit and loss account If the result is gross loss, the above item is reversed.  Profit and loss account
The profit and loss account is opened by registering gross profit (on credit) or gross loss (debit page).
In order to earn a net profit, a businessman also has to incur many more costs for direct costs. These expenses are deducted from profits (or added to gross losses). The result will be net income or net loss.
The expenses recognized in the income statement are recognized as "indirect costs". These are classified as follows:
Sales and Distribution Costs .
These consist of the following expenses:
a) Salaries and commissions of sales members
b) Commission for agents
) Freight and transport on sale
(d) Revenue tax
] f) Advertising
g) Packaging Costs
(h) Export Customs
a) Office Salaries and Salaries
(c) Legal Expenses
(d) Trade Expenses
(f) Auditing Fees
] (g) Insurance
(i) Printing and Stationery
(j) Postage and Telegrams
(b) Interest on capital
(c) Interest on loans
(d) Discounted bills discounted
] Maintenance, depreciation and provisions, etc.
These include the following expenses
(b) Depreciation of assets
(c) Receivables or reserves for doubtful receivables
Together with the above-mentioned indirect costs, the debtors side of the income statement also consists of various business losses.
On the credit side of the income statement are the registered items:
(a) Discount received
b) The Commission received
c) Rental received
d) Interest received
e) Revenue from Investments
f) Profits on Assets Sales
g) Repayment Amount
(h) Dividend Received
(i) Employee Premium, etc.
Source by Anil Kumar Gupta