Trading Account – Quick Revision Notes for JKSSB Accounts Assistant (Finance)
These notes provide a structured, easy-to-revise guide to the Trading Account, a fundamental part of Final Accounts. The content is tailored for the JKSSB Accounts Assistant (Finance) exam, focusing on clarity, key points, and common pitfalls.
1. What is a Trading Account?
A Trading Account is a nominal account and the first step in preparing Final Accounts.
Definition & Purpose
- Definition: It is prepared to ascertain the Gross Profit or Gross Loss from the core trading activities of a business.
- Purpose: It shows the result of buying and selling goods before deducting indirect expenses. The Gross Profit/Loss figure is transferred to the Profit & Loss Account.
Applicability
It is used by trading concerns (merchandisers, manufacturers). Pure service organizations typically use a Receipts & Payments or Income & Expenditure account instead.
2. Position in Final Accounts
The Trading Account is the first of three key statements.
| Step | Statement | What It Shows |
|---|---|---|
| 1 | Trading Account | Gross Profit / Gross Loss from purchase and sale of goods. |
| 2 | Profit & Loss Account | Net Profit / Net Loss after all indirect expenses and incomes. |
| 3 | Balance Sheet | Financial position (Assets = Liabilities + Capital). |
The Gross Profit from the Trading Account becomes a line item in the Profit & Loss Account.
3. Standard Format (Columnar Style)
| Dr. (Debit Side) – Expenses / Costs | Cr. (Credit Side) – Incomes / Revenues |
|---|---|
| Opening Stock | Sales (Net Sales) |
| Purchases (Net Purchases) | Closing Stock |
| Less: Purchase Returns | Less: Sales Returns |
| Carriage Inwards | |
| Wages (Direct Labour) | |
| Fuel, Power, Electricity (direct) | |
| Factory Rent, Insurance (direct) | |
| Other Direct Expenses | |
| Gross Loss (Balancing Figure) | Gross Profit (Balancing Figure) |
Note: The balancing figure on the debit side is Gross Loss; on the credit side, it is Gross Profit.
4. Items Explained: What Goes Where?
| Item | Side | Reason |
|---|---|---|
| Opening Stock | Dr. | Stock at the period’s start; part of the cost of goods available for sale. |
| Purchases | Dr. | Cost of goods bought for resale/production. |
| Purchase Returns | Deduct from Purchases (Dr.) | Goods returned to suppliers reduce the purchase cost. |
| Carriage Inwards | Dr. | Freight to bring goods to the business; part of the purchase cost. |
| Wages (Direct) | Dr. | Labour directly involved in production. |
| Sales | Cr. | Revenue from selling goods. |
| Sales Returns | Deduct from Sales (Cr.) | Goods returned by customers reduce sales revenue. |
| Closing Stock | Cr. | Unsold stock at year-end, valued at the lower of cost or market price. |
5. Step-by-Step Preparation with Example
Illustrative Data (Year ended 31-Mar-2025)
| Particulars | Amount (₹) |
|---|---|
| Opening Stock | 50,000 |
| Purchases | 3,00,000 |
| Purchase Returns | 20,000 |
| Carriage Inwards | 15,000 |
| Wages (Factory) | 40,000 |
| Fuel & Power (Factory) | 10,000 |
| Factory Rent | 12,000 |
| Sales | 5,00,000 |
| Sales Returns | 30,000 |
| Closing Stock | 70,000 |
Calculations
- Net Purchases = 3,00,000 – 20,000 = 2,80,000
- Net Sales = 5,00,000 – 30,000 = 4,70,000
- Debit Total (excl. GP) = 50,000 + 2,80,000 + 15,000 + 40,000 + 10,000 + 12,000 = 4,07,000
- Credit Total (excl. GP) = 4,70,000 + 70,000 = 5,40,000
- Since Credit > Debit: Gross Profit = 5,40,000 – 4,07,000 = 1,33,000
Completed Trading Account
| Dr. | ₹ | Cr. | ₹ |
|---|---|---|---|
| To Opening Stock | 50,000 | By Sales | 5,00,000 |
| To Purchases | 3,00,000 | Less: Sales Returns | (30,000) |
| Less: Purchase Returns | (20,000) | By Net Sales | 4,70,000 |
| To Carriage Inwards | 15,000 | By Closing Stock | 70,000 |
| To Wages | 40,000 | ||
| To Fuel & Power | 10,000 | ||
| To Factory Rent | 12,000 | ||
| To Gross Profit (c/d) | 1,33,000 | ||
| Total | 5,40,000 | Total | 5,40,000 |
6. Key Adjustments & Special Treatments
| Adjustment | Where to Post | Effect |
|---|---|---|
| Outstanding Direct Wages | Add to Wages on Dr. side. | Increases cost, lowers Gross Profit. |
| Prepaid Factory Rent | Deduct from Rent on Dr. side. | Lowers cost, raises Gross Profit. |
| Goods for Personal Use (Drawings) | Deduct from Purchases or Closing Stock. | Reduces cost of goods available. |
| Sale of Scrap/Waste | Credit to Trading A/c (as income). | Increases credit side, raises Gross Profit. |
| Insurance Claim for Stock Loss | Credit to Trading A/c. | Increases credit side, raises Gross Profit. |
| Goods in Transit | Include in Purchases if ownership transferred. | Affects cost of goods available. |
Mnemonic for Adjustments (W-P-F-S-C): Wages outstanding, Prepaid, Free samples, Scrap sale, Claim received.
7. JKSSB Exam Tips & Key Formulas
- Gross Profit Formula: Net Sales + Closing Stock – (Opening Stock + Net Purchases + Direct Expenses).
- Net Sales = Sales – Sales Returns.
- Net Purchases = Purchases – Purchase Returns.
- Direct Expenses are costs incurred until goods are ready for sale (e.g., carriage inwards, factory wages).
- Indirect Expenses (office rent, selling costs) go to the Profit & Loss Account.
- Closing Stock is on the credit side, valued at lower of cost or net realizable value.
- Trade Discount is never recorded; only Cash Discount is (in P&L).
Quick Check: Debit Total + Gross Profit = Credit Total (or vice-versa for Gross Loss).
8. Common Mistakes to Avoid
| Mistake | Correct Approach |
|---|---|
| Putting Carriage Outwards in Trading A/c | It’s an indirect selling expense → P&L A/c. |
| Including Office Salaries | Only factory/direct wages belong in Trading A/c. |
| Adding Closing Stock to Debit Side | Closing stock is an asset → Credit side only. |
| Mixing Sales Returns & Purchase Returns | Sales Returns reduce Sales (Cr.). Purchase Returns reduce Purchases (Dr.). |
| Forgetting Outstanding Direct Wages | Add to the Wages amount on the Debit side. |
9. Helpful Memory Aids (Mnemonics)
| Concept | Mnemonic | Explanation |
|---|---|---|
| Debit Side Items | O-P-C-W-F-R | Opening Stock, Purchases, Carriage Inwards, Wages, Fuel/Power, Rent (factory). |
| Credit Side Items | S-C-G | Sales, Closing Stock, Gross Profit. |
