The Income Statement, or the Profit and Loss A/c, is prepared in two parts; the Trading Account; followed by the P & L A/c. The Trading Account is designed to assess the GROSS PROFIT on sale of goods. This it does by showing up the relationship amongst the broad features of trading, through demonstrating whether the sales revenue covers the immediate or direct costs substantially so that other expenses can also be covered and, perhaps, a profit is left. The sales revenue, i.e. net proceeds of the sale, are set against (or compared with) the cost of goods sold and service(s) rendered.
In the case of a (purely) trading concern, the cost will comprise the purchase price, freight inwards, introit duty, etc, - i.e. expenses incurred on the goods till it is received into the firm's sales premises.
In the case of a manufacturing concern, the cost will comprise the cost of raw materials, wages and other manufacturing expenses. "Manufacturing Account" is dealt with in Section.
Certain terminology, with self-evident meanings and purport, is used in this context. Opening stock is the stock left with the concern from the last year. Goods remaining unsold through the year is called closing stock.
As is only obvious, the Opening Stock is added to the Purchases and Closing Stock is added to the Sales. [Note : Only additions are permitted in the main columns of accounts, except on rare occasions where deduction would be in order and would be acceptable - but then rather implicitly than explicitly - e.g. entries like Gross Tax Payable; paid till date; now paid at the time of filing the returns.] With these entries, the Trading A/c shows the Gross Profit or Gross Loss.
No comments:
Post a Comment