Items Included in Trading Account

Items Included in Trading Account

The trading account contains the items relating to stock, purchases, sales, direct expenses and manufacturing expenses. Trading account is prepared in the form of ledger. Hence, it contains debit and credit sides. The items included in the trading account are as follows: -

Items relating to Debit Side

• Opening stock
  It is the stock which remained unsold at the end of previous year. It always appears inside the trial balance. Generally, it is shown as first item at the debit side of trading account.
  
  

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  Purchase and purchase return
  It is normally second items on the debit side of trading account. Purchase includes cash pruchase as well as credit purchase of goods during the year. Any return outwards ( purchase return ) should be deducted out of purchase to find out net purchase.
  
  
• Purchase related expenses
  All expenses relating to purchase of goods are also debited in trading account. These includes carriage inward, freight, import duty, octroi, cartage, clearing charges, and duck charge.
  
  
• Factory or manufacturing expenses
  The manufacturing expenses which are incurred in the process of converting raw material into finished goods. Factory rent, motive power, gas, fuel, wages, and royalties are some of the examples of manufacturing or factory expenses.

Items relating to Credit Side

• Sales and sales return

  

  
  Sales include cash sales as well as credit sales of goods. Thesales return should be deducted out of sales to find out net sales.
  
  
• Closing stock
  It is the value of stock lying unsold on the last date of accounting period. Normally, closing stock is given outside the trial balance so it is shown in the credit side of trading account.

Procedures for Preparing Trading Account

The trading account is prepared by following certain procedures. It is prepared in the form of the ledger and hence it contains two sides: Debit and Credit. While placing the items in the trading account, opening stock, purchases, purchase related expenses, direct expenses and factory or manufacturing expenses are debited and closing stock and sales revenue are credited. The procedures of preparing the trading account can be explained as follows: -

1. Placing the items in debit side relating to opening stock, purchase, purchase-related expenses, wages and other manufacturing expenses

   • Opening stock
     It is the stock of goods available at the opening day of the accounting period. It is shown in the debit side of the trading account.
     
     

   • 

     Purchase and purchase return
     Purchase includes cash pruchase as well as credit purchase of goods during the year. Any return outwards ( purchase return ) should be deducted out of purchase to find out net purchase.
     
     
   • Purchase related expenses
     A number of expenses relating to purchase like carriage inward, freight, import duty, octroi, cartage, clearing charges, and duck charges are shown on the debit side of the trading account.
     
     
   • Wages and other manufacturing expenses
     The expenses relating to wages and other manufacturing expenses like factory rent, factory lighting, motive power, gas, fuel, cleaning charges, etc. are shown on the debit side of the trading account.

2. Placing the items in credit side relating to sales and closing stock

   • Sales and sales return

     

     
     Sales include cash sales as well as credit sales of goods. Thesales return should be deducted out of sales to find out net sales.
     
     
   • Closing stock
     Closing stock represents the value of goods remained unsold at the end of the accounting period. It is shown on the credit side of the trading account.
     
     

3. Balancing and closing the trading account

   Trading account is determined by balancing the trading account which is prepared to know the amount of gross profit or gross loss. The following procedures are followed for balancing and closing the trading account:
   
   • Find out the heavier side
   • Put the difference amount in lighter side to make total of both sides equal
   • Write the words “To gross profit c/d” if credit total exceeds debit total or “By gross loss c/d” if the debit total exceeds credit total against the difference amount under particulars column.
   • Draw double parallel lines after the total amount of both sides to close the accounts.