Short Notes — Ch 12 Trading Account
⚡ Ch 12 — Trading Account
FAA 2022 = the real Finance Account Assistant paper, 6 Mar 2022 — FAA-2022-paper 2024 = the FAA paper of 28 Jan 2024 — 2024-paper PAA 2020·A = the Panchayat Accounts Assistant paper of 10 Nov 2020 — a different post, kept as practice. These were previously mislabelled "2022"; see Four-Paper-Comparison.
PYQ: 3 questions — 2022·Q94, Q103, Q110. MCQ bank: 20 questions (Q142–149 · Q380–391 shared with Ch 14). Part of the Final Accounts block (Ch 12–14) = 6 marks in 2022. Volatile but heavy when it lands.
1️⃣ The core
Trading Account shows the result of buying and selling goods — it produces GROSS PROFIT / GROSS LOSS.
Gross Profit = Net Sales − Cost of Goods Sold COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock ⭐ Sales − Gross Profit = COGS (the 2022 question, rearranged)
Net Sales = Sales − Sales Returns · Net Purchases = Purchases − Purchases Returns
2️⃣ ⭐ The format — what goes on which side
| DEBIT side (Dr.) | CREDIT side (Cr.) |
|---|---|
| To Opening Stock | By Sales (less Sales Returns) |
| To Purchases (less Purchase Returns) | By Closing Stock |
| To Direct Expenses | By Gross Loss → transferred to P&L |
| To Gross Profit → transferred to P&L |
Left = what it cost you · Right = what you sold + what's left.
⭐ Direct vs Indirect expenses — the classic trap
| DIRECT → Trading A/c | INDIRECT → P&L A/c |
|---|---|
| Carriage INWARD | Carriage OUTWARD |
| Wages | Salaries |
| Freight/cartage inward | Advertising |
| Fuel, power, lighting (factory) | Rent, office expenses |
| Import duty, octroi | Discount allowed |
| Manufacturing expenses | Bad debts |
⭐ INward = IN the Trading A/c · OUTward = OUT to the P&L. Also: Wages → Trading · Salaries → P&L. (If it says "Wages and Salaries" → Trading; "Salaries and Wages" → P&L.)
3️⃣ ⭐ Closing Stock — the rule that decides everything
| Where closing stock appears | Treatment |
|---|---|
| In the Adjustments (outside the trial balance) | Credit of Trading A/c AND asset in the Balance Sheet (two places) |
| ⭐ In the Trial Balance itself | Balance Sheet ONLY — it is already adjusted in purchases |
Valuation: ⭐ cost price OR market price, whichever is LOWER — this follows the Conservatism / Prudence concept.
Adjusted Purchases = Opening Stock + Net Purchases + Direct Expenses − Closing Stock = the COGS itself. When the trial balance shows Adjusted Purchases, opening stock will not appear separately.
4️⃣ Deductions from Purchases
Purchases are reduced by:
- Purchase Returns (returns outward)
- Goods withdrawn by the proprietor for personal use (drawings)
- Goods distributed as free samples
- ⭐ Goods given as charity (→ 2022·Q96 — credit Purchases)
5️⃣ 🎯 PYQs from this chapter
PAA 2020·A · Q103 — The balance remaining after deducting gross profit from sales is called
a) Cost of Goods Sold b) Net Sales c) Gross Sales d) Liabilities → Ans: A Just the formula rearranged: Sales − GP = COGS.
PAA 2020·A · Q110 — Which is excluded from the cost of stock?
a) Carriage inward b) Import duties c) Purchases of raw material d) Salary of Purchasing staff → Ans: D Inventory cost = purchase price + carriage inward + import duties. Staff salary is a period cost, not part of stock.
PAA 2020·A · Q94 — Basis for allocating Carriage inward between pre- and post-incorporation periods
a) Time b) Sales c) Purchases d) Credit Sales → Ans: C Carriage inward varies with purchases, so it is apportioned on the purchases ratio.
PAA 2020 · Q82 — What is the basic of allocation of carriage inward cost Among pre and post incorporation period?
a) Time · b) Sales · c) Purchase · d) Credit Sales → Ans: C Carriage inward is apportioned pre/post incorporation on the basis of purchases.
PAA 2020 · Q94 — Which of the following is excluded from the cost of stock?
a) Carriage inward · b) Import duties · c) Purchases of RAW Material · d) Salary of purchasing staff → Ans: D Salary of purchasing staff is INDIRECT → excluded from the cost of stock. Carriage inward and import duties are included.
PAA 2020 · Q105 — The balance remaining after deducting gross profit from Sales is called
a) Cost of goods Sold · b) Net sales · c) Gross Sales · d) Liabilities → Ans: A Sales − Gross Profit = COGS.
PAA 2020 · Q107 — Goods given as charity should be
a) Credited to Purchases account · b) Debited to purchases Account · c) Not recorded in purchase account · d) Credited to sales account → Ans: A Goods given as charity are credited to Purchases (i.e. deducted from purchases).
6️⃣ Worked example — the standard sum
Sales ₹4,00,000 · COGS ₹3,10,000 · Direct expenses ₹60,000 → Gross Profit?
GP = Sales − COGS = 4,00,000 − 3,10,000 = ₹90,000 ⚠️ Direct expenses are already inside COGS — do not subtract them again. (MCQ Q144 — the ₹60,000 is the distractor.)
7️⃣ High-frequency MCQ traps
| MCQ | Point |
|---|---|
| Q142 / Q390 | Crediting closing stock to Trading A/c follows the Conservatism concept |
| Q143 | Not part of stock cost = administrative/selling items |
| Q144 | GP = Sales − COGS (don't double-count direct expenses) |
| Q145 | Account showing Gross Profit = Trading Account |
| Q146 | Debit side of Trading A/c = Direct expenses |
| Q147 | ⭐ Carriage OUTWARD = Indirect expense (P&L) |
| Q378 | ⭐ Carriage INWARD → Trading Account |
| Q149 | Business is in profit when income exceeds expenditure |
| Q381 | Drawings in the trial balance → subtracted from purchases (if goods) / capital |
| Q382 | Salaries → debit of P&L, not Trading |
| Q387 | Closing stock = cost or market price, whichever is LOWER |
8️⃣ If you remember nothing else
GP = Net Sales − COGS · COGS = Opening Stock + Net Purchases + Direct Expenses − Closing Stock · Sales − GP = COGS · Carriage INWARD → Trading, OUTWARD → P&L · Wages → Trading, Salaries → P&L · Closing stock at cost OR market, whichever is LOWER (Conservatism) · closing stock already in the trial balance → Balance Sheet only · charity/samples/drawings are deducted from Purchases
🔗 Related
- Full notes: L-12-TRADING ACCOUNT · MCQs Q142–149, Q380–391 in MCQs
- Prev: SN-11-Financial-Statements · Next: Ch 13 — Profit & Loss Account (pending your go-ahead)
