Page 130 - Account 10

i. Finding Out Gross Profit or Loss
A trading A/c ascertains the gross profit/loss resulting from the sales and cost of
goods sold of a business concern during each accounting period. This helps to measure
the profitability of the goods bought or manufactured and sold. If gross loss has accrued,
then it will suggest the entrepreneur to close down the business line temporarily till the
improvement of the conditions.

ii. Helpful in Fixation of Selling Price
Generally, a businessman determines the selling price of his products by adding a
certain percentage of profit on their cost. Since a trading A/c enters all the direct costs and
factory/manufacturing indirect expenses of the products, a certain percentage of profit
can be calculated on such a cost and selling price can be easily determined.

iii. Maintaining Efficiency
Trading A/c helps to compare the projected profit and the actual profit and helps
to analyse the reason for the differences, if any. Then the necessary improvements can be
done if the actual profit is less than the projected one. Similarly, when the actual profit is
more than the projected one, efforts can be made to maintain it in the future. In this way
efficiency can be maintained.

iv. Comparison of Figures
It provides the important figures like net purchases, net sales, gross profit, opening
stock and closing stock etc. Thus, a businessman can see a ratio of gross profit to sales,
compare the purchase and sales and make an appropriate valuation of stocks, which can
be compared with that of the previous years.
v. Control Over the Expenses and Losses

It provides the information about all direct expenses and factory/manufacturing
indirect expenses under separate headings. Thus, necessary control can be made over
them by eliminating wastage and leakage and minimizing overheads. It also helps to
ascertain the percentage of direct expenses over sales.

Points to Remember

i. Finding out gross profit or loss ii. Helpful in fixation of selling price iii. Maintaining efficiency
vi. Comparison of figures v. Control over the expenses and losses

Debit Side Items of Trading A/c

i. Opening Stock
The term ‘stock’ refers to the stock of goods. Generally goods may be found in three
forms - raw materials, semi raw materials i.e. work in progress and finished goods. Thus,
there may be stock of raw materials, semi-raw materials or finished goods. The opening
stock is the stock of unused materials or unsold goods remained at the end of the previous
accounting year and brought forward to the beginning of the current accounting year.

130 Aakar’s Office Practice and Accountancy - 10 Final Accounts 131