Introduction
The major purpose of preparing the Trading Account is to ascertain the Gross Profit or Gross Loss in trading within the given accounting period.
Items of a Trading Account
1. Opening Stock: This is the estimated monetary value of the business inventory on the first day of the business/accounting period.
2. Closing Stock: This is the estimated monetary value of the business inventory on the last day of the business/accounting period.
3. Purchases: This is sum total of purchases of goods (business inventory) made within the given business year. This includes both cash purchases and credit purchases.
4. Sales: This is sum total of sales of goods (business inventory) made within the given business year. This includes both cash sales and credit sales.
5. Carriage Inwards: This is the cost of transporting purchased goods to its business premises. It is usually added to purchases to arrive at Net Purchases in the Trading Account.
6. Returns Outwards: This is the sum total value of goods the business returned back to the suppliers, from the goods purchased within the given accounting year. Returns Outwards is usually deducted from Purchases to arrive at the Net Purchases in the Trading Account.
7. Returns Inwards: This is the sum total value of goods customers returned back to the business, from the goods sold to them within the given accounting year. Returns Inwards is usually deducted from Sales to arrive at the Net Sales in the Trading Account.
Practical Accounting Entries in the Trading Account
Watch this video for a practical guide on how to prepare a Trading Account.
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