Trading and Profit and Loss Account
As already discussed, the first section of the profit and loss account is called an operating account. The objective of preparing a trading account is to calculate gross profit or gross loss, while the objective of the second section is to discover net profit or net loss.
Preparation of the trading account
The trading account is prepared mainly to know the profitability of the goods bought (or manufactured) sold by the entrepreneur. The difference between the sale price and the cost of the goods sold is 5 profits for the entrepreneur. Therefore, to calculate the gross profit, it is necessary to know:
(a) cost of goods sold.
Total sales can be determined from the sales book. The cost of goods sold, however, is calculated. To calculate the cost of sales, it is necessary to know its meaning. The cost of goods & # 39; it includes the purchase price of the goods plus the expenses related to the purchase of goods and the shipment of the goods to the workplace. To calculate the cost of the goods "we must deduct from the total cost of the purchased goods the cost of the goods in hand." We can study this phenomenon with the help of the following formula:
Opening stock + cost of purchases – stock Closing = cost of sales
As already discussed, the purpose of preparing a trading account is to calculate the gross profit of the business, which can be described as an excess of the amount of & # 39; Sales & # 39; envelope & # 39; Cost of sales & # 39; This definition can be explained in terms of the following equation:
Gross profit = Sales-Cost of goods sold or (Sales + Closing stock) – (Stock at the beginning + Purchases + Expenses direct)
The opening stock and purchases together with the purchase and the expenses (direct expenses) are recorded on the debit side, while the sales and final stocks are recorded on the credit side. of the credit is Jeater, the difference was registered a on the debit side as a gross profit that is finally recorded on the credit side of the profit and loss account. When the debtor side exceeds the credit, the difference is the gross loss recorded on the credit side and is finally shown on the debit side of the profit and loss account.
Common elements in a commercial account :
A) Debit Side
1. Opening stock. It is the stock that was not sold at the end of the previous year. It must have been taken to the books with the help of the opening of the entrance; so it always appears within the trial balance. In general, it is shown as the first item on the debit side of the business account. Of course, in the first year of a business there will be no opening stock.
2. Purchases Usually, it is the second item on the debit side of the trading account. & # 39; Shopping & # 39; means total purchases, that is, cash plus credit purchases. Any return (return of purchases) must be deducted from purchases to know the net purchases. Sometimes the goods are received before the corresponding invoice from the supplier. In such a situation, on the date of preparation of the final accounts, an entry must be made to debit the purchase account and credit the suppliers' account with the cost of the goods.
3. Purchase expenses. All expenses related to the purchase of goods are also charged to the commercial account. These include: salaries, internal transportation of goods, customs duties, compensation rights, berthing rights, special taxes, tariffs and import duties, etc.
4. Manufacturing expenses. Businessmen incur such expenses to manufacture or have the goods sold: motor energy, gas fuel, stores, royalties, factory expenses, salary of foreman and supervisor, etc.
Although manufacturing expenses must be strictly taken into account in manufacturing since we are preparing only one trading account, expenses of this type can also be included in the trading account.
(B) Credit Side
1. Sales Sales means total sales, that is, cash plus credit sales. If there are sales returns, these must be deducted from sales. Then the net sales are credited to the commercial account. If an asset of the company has been sold, it should not be included in sales.
2. Closing. It is the value of the shares that are not sold in the operation or purchase on the last date of the accounting period. Normally, the closing actions are given outside the test balance, in that case, they are shown on the credit side of the trading account. But if it is provided within the trial balance, it will not be shown on the credit side of the trading account, but will only appear in the balance sheet as an asset. Closing stocks must be valued at cost or market price, whichever is lower.
Closing stock valuation
To determine the value of the closing stock, it is necessary to make a complete inventory or a list of all items of the god together with amounts Based on physical observation, stock lists they are prepared and the value of the total stock is calculated on the basis of the unit value. Therefore, it is clear that the inventory involves (i) inventories, (ii) pricing. Each item has a cost price, unless the market price is lower. Setting an inventory at cost is easy if the cost remains fixed. But prices continue to fluctuate; Then the valuation of the actions is done on the basis of one of many valuation methods.
The preparation of the operations account helps the trade to know the relationship between the costs incurred and the income obtained and the level of efficiency with which the operations have been carried out. The ratio of gross profit to sales is very significant: you get to:
Gross Profit X 100 / Sales
With the help of G.P. relationship that can determine how efficiently the business is executing a greater proportion, the better the efficiency.
closing entries pertaining to the commercial account
For the transfer of several accounts related to goods and purchase expenses, after the closing closing entries:
(i) For the opening Stock: account debit and credit account
(ii) For purchases: Debit account and credit purchase account, the amount and amount being deducted after the purchase returns.
(iii) Purchase Returns: debit account, return account and credit purchases account.
(iv) For inward refunds: Debit account and credit return account
(v) For direct expenses: Debit account and direct credit expenses accounts individually.
(vi) For sales: Debit account and credit trade account. We will find that all the accounts mentioned above will be closed with the exception of the commercial account
(vii) For the final stock: Debit inventory account and credit operations account After recording the previous entries, the trading account will be balanced and the difference of two sides checked. If the credit side is more, the result is gross profit for which the next entry is recorded.
(viii) For gross profit: debit account and credit loss account If the result is a gross loss, the previous entry is reversed.  Profit and Loss Account
The profit and loss account is opened by recording the gross profit (on the credit side) or the gross loss (on the debt side).
To obtain net profits, an entrepreneur has to incur many more expenses besides direct expenses. These expenses are deducted from the benefit (or added to the gross loss), the resulting figure will be the net profit or the net loss.
The expenses that are recorded in the profit and loss account are accounted for as & # 39; indirect expenses & # 39 ;. These are classified as follows:
Selling and distribution expenses .
These include the following expenses:
(a) Salaries and commission of sellers
(b) Commission to agents
(c) Freight and transportation on sales
(d) Tax a sales
(e) Uncollectible debts
(g) Packing costs
(h) Export duties
Administrative expenditure .
(a) Salaries and wages of the office
(c) Legal expenses
(d) Commercial expenses
(e) Prices and taxes
(f) Audit fees
(i) Printing and stationery
(j) Postage and telegrams
(k) Expenses banking
(a) Discount allowed
(b) Interest on capital
(c) Interest on loans
(d) Discount of charges on invoices discounted  Maintenance, depreciation and provisions etc. .
These include the following expenses
(b) Depreciation of assets
(c) Provision or reserve for doubtful debts
(d) Reserve for debtors' discount.
Along with the above indirect expenses, the debit side of the profit and loss account also includes several commercial losses.
On the credit side of the profit and loss account, the items recorded are:
(a) Discount received
(b) Commission received
(c) Income received
(d) Interest received
(e) Income from investments
(f) Profit from the sale of assets
(g) Recovered uncollectible debts
(h) Dividends received
(i) Apprenticeship premium, etc. .