Debit Side of a Trading Account
The items those usually appear on the debit side of a trading account are shown in the above specimen form of trading account.
These items can be explained as follows:
Opening Stock: This represents the stock of goods in hand at the beginning of the year. This figure is available from the trial balance. In the case of trading concern, the opening stock will be of finished goods only. But in the case of a manufacturing concern, the opening stock will be in three forms viz., (1) stock of raw materials (2) work-in-progress (3) stock of finished goods. If the business is started newly, there will be no opening stock of goods.
Purchases: The purchase account represents the total purchases made during the year. This figure includes credit as will as cash purchases.
Returns Outward: (purchase retums) Sometimes goods are returned to the suppliers owing to some defectin goods or some other reasons. Such returns outwards should be deducted from the amount of total purchases, and only the amount of net purchases is shown in trading account.
Direct Expenses: Direct expenses are the expenses which are either incurred on purchasing of goods or for making goods saleable. Such expenses are to be transferred to the debit side of trading account. Direct expenses also include productive expenses such as manufacturing wages, factory lighting, factory rent and rates.
They may be described as follows:
Freight: Freight paid on goods purchased is chargeable to trading account, It is also called as freight inward. However, if any freight is paid on the purchase of fixed assets like machinery, It should not be charged to trading account. It should be added to the cost of that particular asset.
Carriage Inward: The expenses are to be incurred for carrying the goods purchased to the. warehouse. This expenditure is also treated as expenses incurred on purchasing of goods, and hence debited to trading account.
Carriage Outward: However, carriage outward which is the expenditure incurred on sale of goods is transferred to the profit and loss a/c and not to the trading a/c.
Wages: Wages paid to workers in the factory should be debited to the trading account. Similarly, salaries paid to persons working in the factory will also be debited to the trading account. There is a slight difference between wages and salaries. Wages are usually paid daily whereas salaries are paid monthly.
Octroi and Customs Duty: When goods are brought within municipal limits, octroi duty is to be paid on it. In the case of goods imported form abroad, customs duty, dock charges have to be paid. Since these expenses relate to the purchase of goods, they are shown in the trading account.
Fuel, Power & Lighting: Machines are run either with the help of fuel (coal) or power. These expenses should be debited to the trading account as they are productive expenses. 'Electricity consumed for providing lights in the factory should also be debited to the trading account. If there is a common meter for the office and the factory, the total bill should be suitably apportioned between the two. Portion relating to factory will be debited to the trading account.
Factory Rent and Rates: The rent and the municipal taxes paid for the factory premises are to be charged to the debit side of trading account. Municipal taxes are also called as rates. If the office and the factory are in the same premises, the total rent and rates are divided proportionately and only factory sent is debited to trading account.
Credit Side of a Trading Account
Generally there are only two items appearing on the credit side of a trading account viz.. (1) sales and (2) closing stock of goods.
Sales: Sales account indicates the total sales (cash and credit) during the year, Some customers might have returned the goods sold to them. They are called as returns inwards. Return inwards are deducted form the amount of total sales. Only net sales for the year are shown on the credit side of trading account. If the goods have been sold but not yet dispatched, they should not be shown under sales but should be included in closing stock. Similarly if fixed asset is sold, it will not be treated as sales.
Returns Inward (Sales Returns): The debit balance of returns inward account representing goods returned by customers, is deducted form the sales on the credit side of trading account.
Closing Stock: Closing stock of goods means the value of goods which remain unsold at the end of the financial year. It is to be valued by making a list of all goods in stock which is known as 'stocktaking'. The principle applied for the valuation of stock is "cost or market price whichever is lower". Fixed assets or items like postage stamps or stationery are not to be included in the closing stock.
Balancing of Trading Account: After transferring all the above items to trading account, it is to be closed. If the total, of the credit side of trading account is more than the debit side total, it represents gross profit. In the reverse case, there is a gross loss. Gross profit or gross loss does not represent the true result of the business. It is only a result of purchasing and selling of the goods. The balance of trading account is to be transferred to the next account i.e., profit and loss account.
Gross profit will be transferred to the credit side of profit and loss a/c and gross loss, if any, will be transferred to debit side of profit and loss account.
PROFORMA
Trading Account for the year ending 31st March, 2010
Exercise:
From the following balances, prepare the trading account of Mansuklal for the year ending 31st December 2012.
| Opening stock 1-1-2012 |
7000 |
Carriage |
1280 |
| Purchases |
22000 |
Wages |
3595 |
| Purchase Returns |
500 |
Motive Power |
1375 |
| Sales |
32700 |
Salaries |
2100 |
| Sales Returns |
650 |
Stock 31-12-2012 |
14479 |
Trading Account for the year ending 31st December 2012
