Trading Account – Detailed Preparation
In this lesson we walk through the full preparation of a Trading Account using a realistic Indian business scenario.
Scenario
XYZ Manufacturing Ltd. – FY 2024‑25
| Item | Amount (₹) |
|---|---|
| Opening Stock | 2,00,000 |
| Purchases | 5,50,000 |
| Purchase Returns | 30,000 |
| Carriage Inwards | 20,000 |
| Direct Wages | 45,000 |
| Total Direct Expenses | 95,000 |
| Net Purchases | 5,20,000 |
| Total Debit (Opening Stock + Net Purchases + Direct Expenses) | 3,15,000 |
| Sales | 8,00,000 |
| Closing Stock | 1,10,000 |
| Total Credit (Sales + Closing Stock) | 9,10,000 |
Steps
- Calculate Net Purchases:
Net Purchases = Purchases – Purchase Returns = 5,50,000 – 30,000 = 5,20,000 - Prepare Debit Side:
- Opening Stock: ₹2,00,000
- Net Purchases: ₹5,20,000
- Direct Expenses (Carriage Inwards + Direct Wages): ₹95,000
- Total Debit: ₹8,15,000
- Prepare Credit Side:
- Sales: ₹8,00,000
- Closing Stock: ₹1,10,000
- Total Credit: ₹9,10,000
- Compute Gross Profit:
Gross Profit = Credit – Debit = 9,10,000 – 8,15,000 = 95,000 - Show Gross Profit on the Credit side (since profit).
Final Trading Account Layout
| Debit | ₹ | Credit | ₹ |
|---|---|---|---|
| Opening Stock | 2,00,000 | Sales | 8,00,000 |
| Net Purchases | 5,20,000 | Closing Stock | 1,10,000 |
| Direct Expenses | 95,000 | Gross Profit | 95,000 |
| Total | 8,15,000 | Total | 9,10,000 |
Key Points to Remember
- Purchase Returns reduce Purchases.
- Direct Expenses are only those directly tied to bringing goods to the place of sale.
- Gross Profit is transferred to the Profit & Loss Account later.
Common Errors
- Forgetting to deduct Purchase Returns.
- Including Indirect Expenses (e.g., rent) in Direct Expenses.
- Misplacing Closing Stock on the Debit side.
Quiz
Test Your Knowledge
Question 1 of 3
1. Net Purchases are calculated as:
💡 Final Wisdom: "A correct Trading Account is the foundation of your profit story – get the numbers right here and the rest of the accounts will fall into place."