Page 20 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 2: Understanding Corporate Financial Statements

2.2.1 Trading and Profit & Loss Account Notes

In the Trading and Profit & Loss Account all those accounts are disclosed which affect the profi t
or loss of the business. In other words, all the nominal accounts of the Trial Balance are used to
prepare the Trading and Profit & Loss Account. In the left hand side, all the expenses incurred

during a period and in the right hand side all the incomes earned during a period are disclosed.

Did u know? What are the capital and revenue expenditure?

The expenditure incurred for acquiring a fixed asset or which results in increasing the
earning capacity of the business is known as Capital Expenditure. For example, acquisition
of a fi xed asset.
An expenditure incurred in the course of regular business transactions of a concern is
availed during the same accounting year is known as Revenue Expenditure. For example,
expenditure incurred on the purchase of raw materials.
This account contains two parts:
1. Trading Account

2. Profit & Loss Account
Trading Account

This is fi rst financial statement prepared by the owner of the enterprise to determine the gross

profit during the year, through the matching concept of accounting. The gross profi t of the
enterprise is calculated through the comparison of purchase expenses, manufacturing expenses,
and other direct expenses with the sales.
It is prepared normally for one year in accordance with accounting period concept, i.e. operating
cycle of the enterprise, which should not exceed 15 months with reference to the Companies Act
1956. The proforma of Trading Account is given below:
Proforma of Trading Account
In the Books of …………….
Trading Account
(for the year ending …………….)

To Opening Stock XXXX By Cash Sales XXXX
To Cash Purchases XXXX Add Credit Sales XXXX
Add Credit Purchases XXXX By Total Sales XXXX
To Total Purchases XXX Less Sales Return XXX
Less Purchase Return XXX By Net Sales XXXX
To Net Purchases XXXX By Closing Stock XXXX
To Wages XXXX By Gross Loss C/d** XXXX
To Carriage Inward XXXX
To Factory lighting XXXX
To Fuel, coal, oil XXXX
To duty on Import of Materials XXXX
To Octroi duty XXXX
To Gross Profi t* C/d XXXX

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