Page 166 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes (iii) Packing expenses which are incurred for packing the goods for resale, are
direct expenses and to be shown in Trading account, but if packing is done for
sending goods to the customer’s address, such expenses are realized from the
customers, hence are not direct expenses.
4. Sales: Total amount of sales, cash sales and credit sales, is shown on the credit side of the
trading account and if there is any sales-return (return inwards) is to be deducted from
such sales.

Notes
1. If some assets is sold then it is not a revenue receipt but it is a capital receipt to be
shown by way of deduction from total assets.

2. Sometimes sales had taken place, but goods are not delivered, then such goods
should not be included in the closing stock but be kept separately.
3. Similarly goods are sent on consignment or sale or return basis or hire purchase
basis, cannot be included in the sales because the buyer is free to return.

5. Closing Stock: The second item of the credit side of trading account is the closing stock.
The goods which could not be sold during a fixed period, are termed as closing stock. This
item is not shown in the trial balance because its valuation is done at the end after closing
of all the accounts. That is why it is shown as a footnote beneath the trial balance, but when
purchases are adjusted with opening and closing stock, then the balance of closing account
is debit, hence it is shown as an asset in the Balance Sheet. Valuation of closing stock poses
a number of problems such as cost price or market price, but as per convention stock is
always valued at cost or market price whichever is less. This rule is based on the principle
of probable losses which are taken into account, but not the probable gains. It is also
necessary to be careful while valuing closing stock correctly. Otherwise gross profit, thus
ascertained, would not be correct one, if it is not followed strictly then the Gross profit
would be incorrect and misleading. Journal entries to be passed for closing stock & opening
stock.
S. No. Particulars L.F. Amount (Dr.) Amount (Cr.)
( ) ( )
(i) Closing stock A/c Dr.
To trading A/c
(Closing stock shown on the credit side of Trading
A/c)
(ii) if closing stock A/c Dr.
To purchases A/c
(If closing stock is transferred to purchases A/c,
then it cannot be shown in the trading A/c, but to
be shown in the Balance Sheet only.)
(iii) Trading A/c Dr.
To opening stock
(Opening stock transferred)

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