The Trading AccountThe Trading Account is a financial statement that indicates how much Gross Profit has been made through trading. There is a standard format to the Trading Account as follows: (the dollars are just for an example)
In the above example, the trading account shows that a Gross Profit of $3,500 was made on Sales of $10,000. It is often useful to show the Cost of Sales and Gross Profit as a percentage. Cost of SalesThe term cost of sales can be easily defined by the following example: If a retail business buys a soccer ball that costs $10.00 and sells it for $15.00 then the 'Cost of Sales' is $10.00 and the 'Gross Profit' on that ball is $5.00. But what if the business opens on 1 January, 2007 and during the course of the year it buys 200 soccer balls at $10.00 (total purchases =$2,000) and sells only 100 balls at $15.00 (total sales = $1,500). The business has paid out $2,000 for soccer balls and received only $1,500 - has it made a loss? The answer is no! It still has 100 balls left to sell and the correct calculation of profit must show this. In any trading account, there can be no correct calculation of Gross Profit unless changes in stock levels are also counted. This situation with soccer balls should be written:
Therefore despite the fact that the business is down $500 in cash it has in fact made a gross profit of $500. The purpose of the Trading Statement is to work out how much Gross Profit the organisation has made in given period. The Trading Statement forms part of the Profit & Loss A/c. |