Preparing a trading account is the first stage in of final accounts of a trading concern. It determines the gross profit or gross loss of the concern for that accounting year. For determining the true result or the net result of the business, preparing the Trading and Profit and Loss account is necessary. We prepare these accounts on the last day of the accounting year. We consider only direct revenue and direct expenses in this account.
For preparing a Trading and Profit and Loss Account we need complete information regarding expenses, incomes, assets and liabilities of the concern. In incomplete records, some details are given and some are missing. Thus, we need to ascertain the missing details in an indirect manner by using the logic of double-entry.
In order to calculate the gross profit, it is necessary to know the cost of goods which are sold and its sales figures.
Gross Profit = Sales – COGS (Sales + Closing Stock) – (Stock in the beginning + Purchases + Direct Expenses)
Items that are included on the debit side and on the credit side give the resultant figure which is either gross profit or the gross loss.
A trading account is one that holds both stocks and cash. The main account of a trader is referred to as a trading account. Because investors’ accounts are subject to particular regulation because they often purchase and sell assets, their accounts are subject to special regulation. A trading account’s assets are segregated from those held in a long-term buy-and-hold strategy.
The profit and loss statement, abbreviated as P&L, is a financial statement that summarises revenues, expenditures, and expenses incurred during a specific time period, generally a fiscal year. The P&L statement corresponds to the income statement, which documents a company’s capacity (or inability) to create profit through growing sales revenue, lowering costs, or both. The P&L statement is also known as a profit and loss statement, income statement, statement of operations, and so on.
The most common items that are missing and we have to find out for preparing Trading and Profit and Loss Account are:
As we know that opening capital can be obtained by preparing the statement of affairs at the beginning of the year. For other items that are missing, we can easily obtain them by preparing accounts such as total debtors and total creditors, total bills receivable and total bills payable accounts and summary of cash.
Generally, the credit purchase figure is not available from the incomplete records. It is possible that some other information related to creditors may also be missing. So, we will prepare the total creditors to account so that, credit purchases or any other missing figure related to creditors, as the case may be, can be ascertained as the balancing figure.
Generally, the figure of credit sales is also not available from incomplete records. Some other information which is related to debtors may also be missing. Therefore, we will prepare the total debtors to account so that the number of credit sales or any other missing figure, as the case may be, can be traced out as the balancing figure.
To find out the figure of the bills received during the year, we prepare Bill’s Receivable account. Also, to find out the figure of the bills accepted during the year, we prepare the Bills Payable account.
Sometimes, it is possible that the amount paid to creditors or the amount received from debtors may be missing. Also, the opening or closing cash or bank balance may be missing. So to ascertain any missing item of receipt of payment, we prepare a cash book summary. It shows all receipts and payments during the year and the balancing figure is the amount of missing items.
In case both amounts paid to creditors and that received from debtors are missing. In that case, we will obtain the amount of any one of these first through the total creditors or total debtors account. And the other missing information we will ascertain from the cash book summary. After the missing figures are obtained, we can prepare the final accounts straight away or after the preparation of the trial balance.
| Note no | Current reporting period (Figures) | Figures for the previous reporting period (Figures) |
| Income | ||
| a)revenues from operations | ||
| b) other income | ||
| Total income | ||
| expenses | ||
| a) Cost of materials consumed |
| Company name | |||||
| Balance sheet | |||||
| For the period ended | |||||
| Liabilities | Amount | Amount | Assets | Amount | Amount |
| Capitals and reserves | Fixed assets | ||||
| Opening capital balance | Land | ||||
| Reserves and surplus | Less: Depreciation | ||||
| Less: Drawings | |||||
| Capital balance | Building | ||||
| Less: Depreciation | |||||
| Secured loans | |||||
| Long term debt | Investments | ||||
| Other long term liabilities | Long term investments | ||||
| Unsecured loans | Current assets loans and advancements | ||||
| Cash credit payable | Inventory | ||||
| Cash and cash equivalents | |||||
| Current liabilities | Other current assets | ||||
| Trade payables | |||||
| Accrued interest | Prepaid expense | ||||
| Other current liabilities | Miscellaneous expenditure | ||||
| Total liabilities | Total assets |
| Company name | |||
| Balance sheet | |||
| Particulars | Note no | Figures (as per end of the current reporting period) | Figures (as per end of the previous reporting period) |
| Equity and liabilities | |||
| 1) Shareholders funds |
a) Share capital
b) Reserves and surplus
c) Money received against share warrants
a) Long term borrowings
b) Deferred tax liabilities
c) Other long term liabilities
a) Short term borrowings
b) Trade payables
c) Other current liabilities
1) Tangible assets
2) Intangible assets
3) Capital work in progress
4) Intangible assets under development
b) Non-current investments
c) Deferred tax assets
d) Long term loans and advances
a) Current investments
c) Trade receivables
d) Cash and cash equivalents
e) Short term loans and advances
f) Other current assets
Q: Miss Krati started business on 1 st January 2017, with cash of ₹ 25,000, furniture of ₹ 5,000, goods of ₹ 1,000, and machinery worth ₹ 10,000. During the year she further introduces the capital of ₹ 10,000 by opening a bank account. From the following information extracted from her books required for preparing Trading and Profit and Loss Account and Balance Sheet
| Receipt from debtors | 28,750 |
| Cash sales | 22,500 |
| Cash purchases | 12,500 |
| Wages | 2,500 |
| Salaries | 8,750 |
| Trade expenses | 3,250 |
| Electricity bill of factory | 3,750 |
| Drawings | 1,500 p.m. |
| Cash paid to creditors | 21,000 |
| Discount allowed | 600 |
| Discount received | 1,500 |
| Bad debts written off | 650 |
| Closing cash balance | 10,000 |
Miss Krati used goods worth ₹ 1,250 for the private purpose, which is not recorded by her in the book. Charge depreciation on furniture @10% and on machinery @20% p.a. On 31 st March 2018, debtors, creditors, and stock in trade were valued as ₹ 35,000, ₹ 17,500, and ₹ 12,500 respectively.
| Particulars | Amount (₹) | Particulars | Amount (₹) | |
| To opening stock | 10,000 | By Sales | ||
| To Purchases: | Cash sales | 22,500 | ||
| Cash purchase | 12,500 | Credit sales(WN2) | 65,000 | 87,500 |
| Credit purchase(WN3) | 40,000 | By Closing stock | 12,500 | |
| Less: Drawings of goods | (1,250) | 51,250 | ||
| To Wages | 2,500 | |||
| To Electricity bill of factory | 3,750 | |||
| To Gross profit | 32,500 | |||
| 1,00,000 | 1,00,000 | |||
| To Salaries | 8,750 | By Gross profit | 32,500 | |
| To Trade expenses | 3,250 | By Discount received | 1,500 | |
| To Discount allowed | 600 | |||
| To Bad debts | 650 | |||
| To Depreciation: | ||||
| Furniture @10% 500 | ||||
| Machinery @20% 2,000 | 2,500 | |||
| To Net profit | 18,250 | |||
| 34,000 | 34,000 |
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Capital (WN1) | 50,000 | Cash in hand | 10,000 |
| Add: Net profit | 18,250 | Cash at the bank(WN4) | 6,500 |
| Add: Additional capital | 10,000 | Stock | 12,500 |
| Less: Drawings | (1,250) | Debtors | 35,000 |
| Cash | (18,000) | Furniture 5,000 | |
| Goods | 59,000 | Less: depreciation (500) | 4,500 |
| Creditors | 17,500 | Machinery 10,000 | |
| Less: depreciation (2,000) | 8,000 | ||
| 76,500 | 76,500 |
1] Statement of Affairs as on 31 st December 2017
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Capital (balancing figure) | 50,000 | Cash | 25,000 |
| Stock | 10,000 | ||
| Furniture | 5,000 | ||
| Machinery | 10,000 | ||
| 50,000 | 50,000 |
2] Debtors Account
3] Creditors Account
| Date | Particulars | Amount(₹) | Date | Particulars | Amount(₹) |
| To Cash | 21,000 | By Balance b/d | NIL | ||
| To Discount received | 1,500 | By Purchases credit | 40,000 | ||
| To Balance c/d | 17,500 | (balancing figure) | |||
| 40,000 | 40,000 |
4] Summary of Cash
| Receipts | Amount(₹) | Payments | Amount(₹) |
| To Balance b/d | 25,000 | By Purchases | 12,500 |
| To Capital introduced (bank) | 10,000 | By Wages | 2,500 |
| To Debtors | 28,750 | By Salaries | 8,750 |
| To Sales | 22,500 | By Trade expenses | 3,250 |
| By Electricity bill for factory | 3,750 | ||
| By Creditors | 21,000 | ||
| By Drawings (1,500 p.m.) | 18,000 | ||
| By Balance c/d – cash | 10,000 | ||
| By Cash at Bank (Bal. fig.) | 6,500 | ||
| 86,250 | 86,250 |
