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Trading account mainly deals with the calculation of the net profit and loss of a particular trade. Trading account deals with how the goods bought by a business man are sold to make profit. The difference between the selling price and the cost price of the substances is the net profit made from the business. Thus earning can be calculated only if they know the cost of the goods that are sold.
Cost of the goods is generally known to calculate the cost of sales. This includes the purchase cost of goods and everything including the cost incurred to bring the good to the place of selling. Cost of goods can be calculated by deducing the cost of goods in hand from the net cost of the goods. The gross profit of goods is known as cost of sales. This can be calculated by subtracting the cost of goods from the sales taken by that business.
The opening stock, the buying and bringing expenses and purchase expenses all are calculated and kept as the debit expenses. The closing stock as well as the sales is recorded as the credit side. If the credit side crosses the debit side, the difference between the credit and the debit side will make the cost of sales. To calculate the cost of sales, hence the terms opening stock, purchases and buying and manufacturing expenses are essential and important.
The opening stock forms the stock which remains unsold after one year of business is over. This is the most important and the first item needed to calculate the cost of sales. If the business is in the first year, there will be no opening stock for it. Purchases count the cash and the credit purchases made in the business. The expenses incurred in getting the goods come under the buying expenses. This will normally form the important aspect in calculating the cost of sales. It can sum up wages, dock charges and excise duty and many other expenses.
IF the business man has spent money to make the good, this will include the manufacturing expenses. The manufacturing expenses will be generally used in getting gas fuel, factory expenses etc which are used to manufacture the goods. On the other side, the credit side includes the sales made by the business. The sales include the cash and the credit sales. If there is something remaining unsold at the end of accounting year, there will be closed stock.
If this credit side outweighs the debit side, it will be used to calculate the cost of sales generally known as gross profit.
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