when a trader sells goods on credit, he prepares which contains the name of the party to whom goods are sold, the rate, quantity and the total amount of the sale *
Cash memo
Invoice
Debit note
Receipt
Answers
Answer:
Preparation of Trading Account
Trading account is the first step in the process of preparing final accounts. It helps in finding out the gross profit or gross loss during an accounting year, which is an important indicator of business efficiency.
It is normally prepared by a merchandising concern which purchases and sells the goods during a particular period.
The trading account shows the gross profit or gross loss during the accounting period. Trading account is based on matching the selling price of goods and services with the cost of goods sold and services rendered.Features of Trading Account
It is the first stage in the preparation of financial accounting statement of a trading concern.
It records only the net sales and direct cost of goods sold.
The balance of this account discloses the gross profit and gross loss.
We transfer the balance of the trading account to the profit and loss account.
Read more about Recording Transaction here in detail
Contents of a Trading Account
Trading Account Statement include
Opening Stock
Purchases
Direct expenses
Gross profit
Opening Stock
In the case of trading concern, the opening stock means the finished goods only. We take the amount of opening stock from Trial Balance.
Purchases
The amount of purchases during the year includes cash as well as credit purchases. The deductions from purchases are purchase return, drawings of goods by the proprietor, distribution of goods as free samples, etc.
Direct expenses
It means all those expenses which are incurred from the time of purchases to making the goods in suitable condition. This expense includes freight inward, octroi, wages etc.
Gross profit
If the credit side of Trading A/c is greater than the debit side of Trading A/c gross profit will arise.
The following are the items appearing in the credit side of Trading Account
Sales Revenue
Closing Stock
Gross Loss
Sales Revenue
The sales revenue i.e. the income earned from the main business activity or activities. When goods or services are sold to customers then the income is earned.
If there is any return, it should be deducted from the sales value. As per the accrual concept, income should be recognized as soon as it is accrued and not necessarily only when the cash is paid for.
The Accounting standard 7 (in case of contracting business) and Accounting standard 9 (in other cases) define the guidelines for revenue recognition.
The essence of the provisions of both standards is that revenue should be recognized only when significant risks and rewards (vaguely referred to as ownership in goods) are transferred to the customer.
Example, if an invoice is made for the sale of goods and the term of sale is door delivery, and then recognition of sale can be done only on getting proof of delivery of goods at the door of the customer.
And if such proof is pending at the end of the accounting period, then we can not treat this transaction as sales but will have to treat it as unearned income.
Closing Stock
In the case of trading business, there will be closing stocks of finished goods only. According to the convention of conservatism, the stock is valued at cost or net realizable value whichever is lower.
Gross Loss
When the debit side of Trading A/c is greater than the credit side of Trading A/c, the gross loss will appear.
Format of Trading Account
A general format of the trading account
Explanation: