Unit-7 Final Accounts I

In this unit you will learn about the basic framework of final accounts including their presentation in vertical form.

What is the purpose of preparing a Trading Account?

Answer

The Trading Account is prepared for ascertaining the gross profit or gross loss. The gross profit is defined as the excess of sales revenue over cost of goods sold, This can be presented in the form of an equation as follows.
Gross Profit = Net Sales - Cost of Goods sold
Where i) Net Sales =Total sales - Sales Return, ii) Cost of Goods Sold = Opening stock + Net Purchases 4 - Direct Expenses - Closing stock
The terms 'Opening Stock' and 'Closing Stock' refer to the value of unsold goods as at the beginning of the year and at the end of the year respectively.
Such stock may also include the semi-finished goods and raw materials. In order to arrive at the cost of goods sold the opening stock is added to the net purchases while the closing stock is deducted.
The term 'Direct Expenses' refer to those expenses which are incurred on the goods purchased till they are brought to the place of business for sale.
These include expenses such as freight, insurance, import duty, dock dues, clearing charges, octroi duty, carriage, cartage, etc.
The administrative expenses, selling and distribution expenses, interest paid, etc. are termed as indirect expenses and, therefore, are excluded from the cost of goods sold.