TRADING ACCOUNT

A trading account acts as a comprehensive ledger, recording every transaction related

to buying and selling goods. Offering a clear overview of their financial performance,
it serves as a reliable tool for business owners. Consider it as a compass that steers the
business ship through the commercial waters and keeps it headed towards
profitability. The trade account provides a clear picture of the company's path with
each entry, highlighting both its accomplishments and areas for development. It is, in
short, the business's lifeblood, a reflection of its health and vitality in the dynamic
world of trade.
Items in Trading Account Format
A trading account format usually consists of the following components:
• Opening Stock: Shows the total value of products, including work-in-progress,
finished items, and raw materials, that are available for purchase at the start of
the accounting period.
• Purchases: Shows the price of products, whether made with cash or on credit,
that are obtained for resale.
• Purchase Returns, also known as Return Outwards: Lowers the total purchases
by accounting for products returned to suppliers.
• Sales: Shows the total amount of merchandise sold, whether paid for with cash
or on credit.
• Discount on Purchases: Indicates any discounts you may have got from
suppliers for buying products in larger quantities or other means.
• Sales Returns: This category represents products that consumers return, which
lowers the total sales amount.
• Discounts on Your Sales: Take into consideration any discounts you may provide
clients to boost sales.
• Expenses Associated with Purchases and Sales: This category includes direct
costs spent during item production, acquisition, or sale.
• Closing stock is the amount of unsold inventory still in stock after the accounting
period.

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PROFIT & LOSS ACCOUNT
Profit and loss account shows the net profit and net loss of the business for the
accounting period. This account is prepared in order to determine the net profit or net
loss that occurs during an accounting period for a business concern.
Profit and loss account get initiated by entering the gross loss on the debit side or gross
profit on the credit side. This value is obtained from the balance which is carried down
from the Trading account.
A business will incur many other expenses in addition to the direct expenses. These
expenses are deducted from the profit or are added to gross loss and the resulting
value thus obtained will be net profit or net loss.
The examples of expenses that can be included in a Profit and Loss Account are:
1. Sales Tax
2. Maintenance
3. Depreciation

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4. Administrative Expense
5. Selling and Distribution Expense
6. Provisions
7. Freight and carriage on sales
8. Wages and Salaries
These appear in the debit side of Profit and Loss Account while Commission received,
Discount received, profit obtained on sale of assets appear on the credit side.
Net profit can be determined by deducting business expenses from the gross profit and
adding other incomes obtained
Net profit = Gross profit – Expenses + Other income

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BALANCE SHEET
A balance sheet is a financial statement that contains details of a company’s assets or
liabilities at a specific point in time. It is one of the three core financial statements
(income statement and cash flow statement being the other two) used for evaluating
the performance of a business.
A balance sheet serves as reference documents for investors and other stakeholders
to get an idea of the financial health of an organization. It enables them to compare
current assets and liabilities to determine the business’s liquidity, or calculate the rate
at which the company generates returns. Comparing two or more balance sheets from
different points in time can also show how a business has grown.
With this information, stakeholders can also understand the company’s prospects. For
instance, the balance sheet can be used as proof of creditworthiness when the
company is applying for loans. By seeing whether current assets are greater than
current liabilities, creditors can see whether the company can fulfill its short-term
obligations and how much financial risk it is taking.
A balance sheet consists of two main headings: assets and liabilities. Let us take a
detailed look at these components.
Assets
An asset is something that the company owns and that is beneficial for the growth of
the business. Assets can be classified based on convertibility, physical existence, and
usage.
a. Convertibility: This describes whether the asset can be easily converted to cash.
Based on convertibility, assets are further classified into current assets and fixed
assets.
1. Current assets: Assets which can be easily converted into cash or cash
equivalents within a duration of one year. Examples include short-term
deposits, marketable securities, and stock.
2. Fixed assets: Assets which cannot be easily or readily converted to cash. For
example, buildings, machinery, equipment, or trademarks.
b. Physical existence: Assets can be of two types, tangible and intangible.
1. Tangible assets: Assets which you can see and feel, like office supplies,
machinery, equipment, and buildings.
2. Intangible assets: Assets which do not have physical existence, like patents,
brands, and copyrights.

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c. Usage: Assets can be classified as operating and non-operating assets.
1. Operating assets: Assets which are necessary to conduct business operations.
For example, buildings, machinery, and equipment.
2. Non-operating assets: Short-term investments or marketable securities that are
not necessary for daily operations.
Liabilities
Liabilities are what the company owes to other parties. This includes debts and other
financial obligations that arise as an outcome of business transactions. Companies
settle their liabilities by paying them back in cash or providing an equivalent service to
the other party. Liabilities are listed on the right side of the balance sheet.
Depending on context, liabilities can be classified as current and non-current.
1. Current liabilities: These include debts or obligations that have to be fulfilled within
a year. Current liabilities are also called short-term assets, and they include accounts
payable, interest payable, and short-term loans.
2. Non-current liabilities: These are debts or obligations for which the due date is more
than a year. Non-current liabilities, also called long-term liabilities, include bonds
payable, long-term notes payable, and deferred tax liabilities.
Owner’s Equity/ Earnings
Owner’s equity is equal to total assets minus total liabilities. In other words, it is the
amount that can be handed over to shareholders after the debts have been paid and
the assets have been liquidated. Equity is one of the most common ways to represent
the net value of the company. Part of shareholder’s equity is retained earnings, which
is a fixed percentage of the shareholder’s equity that has to be paid as dividends.
The equity value can be positive or negative. If the shareholder’s equity is positive,
then the company has enough assets to pay off its liabilities. If it is negative, then
liabilities exceed assets.

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 BALANCE SHEET AS AT…..
LIABILITIES AMOUNT ASSETS AMOUNT
(Rs.) (Rs.)
Capital Fixed Assets:
ADD: Net Profit Intangible Assets:
Less: Net Loss Goodwill
Less: Drawings Patent & Trademarks
Reserve and Surplus Tangible Assets:
Long – Term Liabilities: Land & Building
Debentures Plant & Machinery
Loan on Mortgage Furniture
Current Liabilities: Investment
Bank Overdraft Current Assets:
Sundry Creditors Closing Stock
Outstanding Expenses Sundry Debtors
Income Received in Advance Prepaid Expenses
Bills Payable Accrued Income
Bills Receivables
Cash in Hand
Cash at Bank