format of trading account and profit and loss account
Answers
Answer:
A business needs to prepare a trading and profit and loss account first before moving on to the balance sheet. Trading and profit and loss accounts are useful in identifying the gross profit and net profits that a business earns.
The motive of preparing trading and profit and loss account is to determine the revenue earned or the losses incurred during the accounting period.
The trading and profit and loss account are two different accounts that are formed within the general ledger. The two parts of the account are:
1. Trading Account
2. Profit and Loss Account
Trading account is the first part of this account, and it is used to determine the gross profit that is earned by the business while the profit and loss account is the second part of the account which is used to determine the net profit of the business.
Let us know more about these accounts in detail
1. Trading Account
Trading account is used to determine the gross profit or gross loss of a business which results from trading activities. Trading activities are mostly related to the buying and selling activities involved in a business. Trading account is useful for businesses that are dealing in the trading business. This account helps them to easily determine the overall gross profit or gross loss of the business. The amount thus determined is an indicator of the efficiency of the business in buying and selling.
The formulae for calculating gross profit is as follows:
Gross profit = Net sales – Cost of goods sold
Where
Net sales = Gross sales of the business minus sales returns, discounts and allowances.
The trading account considers only the direct expenses and direct revenues while calculating gross profit. This account is mainly prepared to understand the profit earned by the business on the purchase of goods.
Items that are seen in the debit side includes purchases, opening stock and direct expenses while credit side includes closing stock and sales.
Closing entries for Gross Loss or Gross Profit
The following entries are passed
In case of Gross Loss
Profit and Loss A/c Dr.
To Trading A/c
In case of Gross Profit
Trading A/c Dr.
To Profit and Loss A/c
Preparing Trading Account
Trading account is prepared by closing all the temporary purchases and revenue accounts and making adjustments in the inventory accounts by the use of a closing journal entry
Explanation:
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