unit-14-trading-account

Unit-14 Trading Account

In this unit you will learn what Gross Profit is, how it is ascertained and how a Trading Account is prepared.

Name any two items appearing on the debit side of a Trading Account


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Learning Pundits Content Team

Written on Jun 26, 2019 11:40:47 AM

Items on the Debit Side :

1.Opening Stock:

We have seen that the closing stock of a particular year becomes the opening stock for the next year. Thus, the item Opening Stock refers to the goods lying unsold at the end of the previous year and brought into the current year for sale. Note that there will be no opening stock in the first year of working. 

2.Purchases:

This item refers to the goods purchased for resale, e.g., cloth purchased by a cloth dealer, stationery purchased by a stationery dealer, etc. It includes both cash and credit purchases. Purchases of assets such as machinery, furniture, etc., should not be included in the purchases of goods. If any, are shown by way of deduction from the total purchases and only the net purchases are shown in the outer column.

3.Direct Expenses:

As stated earlier, these are the expenses incurred on the goods purchased till they are brought to the place of business for sale. When goods are imported from a foreign country. expenses such as freight, insurance, import duty, dock dues, clearing charges, carriage, etc., have to be incurred. All these expenses are termed as direct expenses. 

Similarly, in connection with local purchases, expenses like freight, octroi duty, carriage or cartage are' normally paid for bringing the goods to the place of business. All these expenses are treated as direct expenses and shown on the debit side of the Trading Account. Freight and carriage paid in relation to purchases are also called 'Freight Inwards' and ‘Carriage Inwards' respectively. The administrative expenses, selling and distribution expenses, interest paid, etc., are called indirect expenses and so excluded from the Trading Account. These are to be shown in the Profit and Loss Account. 






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