The Price-Earnings Ratio For A Stock Investment Is Calculated As Trading and Profit and Loss Account

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Trading and Profit and Loss Account

Trading account

As already mentioned, the first section of the trading account and the profit and loss account is called the trading account. The purpose of preparing the trading account is to find out the gross profit or gross loss, while the purpose of the second section is to find out the net profit or net loss.

Preparation of a trading account

A trading account is prepared mainly to know the profitability of goods purchased (or produced) that a businessman sells. The difference between the selling price and the cost of goods sold is 1.5 times the entrepreneur’s salary. Therefore, to calculate the gross salary, you need to know:

(a) cost of goods sold.

(b) sales.

The total amount of sales can be found in the sales ledger. However, the cost of goods sold is calculated. In order to calculate the cost of the products sold, it is necessary to know its value. “Cost of Goods” includes the purchase price of the Goods plus the costs associated with the purchase of the Goods and the delivery of the Goods to the place of business. In order to calculate the cost of the goods, we must subtract the cost of the goods in hand from the total cost of the purchased goods. We can study this phenomenon using the following formula:

Beginning Inventory + Purchase Cost – Ending Inventory = Sales Cost

As already mentioned, the purpose of preparing a trading account is to calculate the gross profit of the business. This can be described as the excess of “Sales” over “Cost of Sales”. This definition can be explained using the following equation:

Gross profit = sales-cost of goods sold or (sales + ending inventory) (beginning inventory + purchases + direct costs)

Beginning inventory and purchases together with purchasing and shipping costs (direct exp.) are debited and sales and ending inventory are credited. If the credit side is greater than the debit side, the difference is recorded on the debit side as gross profit, which is ultimately recorded on the credit side of the profit and loss account. If the debit side exceeds the credit side, the difference is the gross loss, which is recorded on the credit side and ultimately shown on the debit side of the profit and loss account.

Common items on a merchant account:

A) Debit side

1. Opening of stocks. These are stocks that remained unsold at the end of last year. It must have been brought into the books by discovery; so it always appears inside the trial balance. It usually appears as the first item on the debit side of a trading account. Of course, there will be no initial stock in the first year of business.

2. Shopping. This is usually the second item on the debit side of the merchant account. “Purchases” means all purchases, ie. cash purchases plus credit purchases. Any returns (purchase returns) must be subtracted from purchases to determine net purchases. Sometimes the goods arrive before the corresponding invoice is issued by the supplier. In such a situation, on the date of drawing up the final report, an entry should be made in the debit account of purchases and in the credit of suppliers of the cost of goods.

3. Purchase costs. All costs related to the purchase of goods are also debited from the trading account. This includes wages, freight, duties, clearance fees, dock fees, excise duties, excise duties and import duties, etc.

4. Production costs. Such expenses are borne by entrepreneurs for the production or bringing goods into marketable condition, namely: motive power, gas fuel, stocks, license payments, factory expenses, wages of foreman and manager, etc.

Although production costs are strictly accounted for in the production bill, as we prepare only the trade bill, this type of expenditure can also be included in the trade bill.

(B) Credit Side

1. Sales. Sales means total sales ie. cash sales plus credit sales. If there are any sales returns, they should be deducted from the sales. Therefore, net sales are credited to the trading account. If an asset of the firm has been sold, it should not be included in the sale.

2. Contact stock. This is the value of the inventory lying unsold in the store or at the last date of the accounting period. Usually, the closing stock is shown outside the trial balance, in which case it is shown on the credit side of the trading account. But if it is entered in the trial balance, it will not appear on the credit side of the trading account, but will only appear on the balance sheet as an asset. Ending inventory should be valued at cost or market, whichever is lower.

Closing stock valuation

In order to determine the value of ending stocks, it is necessary to make a complete inventory or list of all the goods in the possession of the god, together with the quantity. On the basis of physical observation, lists of goods are compiled, and the cost of total inventory is calculated on the basis of unit cost. Thus, it is clear that inventory involves (i) inventory, (ii) pricing. Each item is valued at cost, unless market value is lower. Determining the price of inventory at cost is easy if the cost remains fixed. But prices remain volatile; therefore, stock valuation is based on one of many valuation methods.

The preparation of a trading account helps traders to know the relationship between the expenses incurred and the income received and the level of efficiency of operations. The ratio of gross profit to sales is very significant: it is:

Gross profit X 100 / Sales

With the help of the GP ratio, he can determine how efficiently he is running the business, the higher the ratio, the better the efficiency.

Closing entries relating to the trading account

The following closing entries are recorded for the transfer of various accounts related to goods and purchase costs:

(i) For Stock Opening: Debit Trading Account and Credit Stock Account

(ii) For Purchases: Debit Account for Trade and Credit Account for Purchases, the amount being the second amount after deducting the return of purchases.

(iii) For Purchase Returns: Debit Purchase Returns Account and Credit Purchases Account.

(iv) For Inward Returns: Debit Sales Account and Credit Sales Returns Account

(v) For Direct Expenditure: Debit Trading Account and Credit Direct Expenditure Accounts separately.

(vi) For Sales: Debit Sales Account and Credit Trading Account. We will find that all the accounts mentioned above will be closed except for the trading account

(vii) For closing stock: debit closing stock account and credit trading account. After recording the above entries, the trading account will be balanced and the difference between the two sides will be revealed. If the credit side is greater, the result is gross profit, for which the next entry is made.

(viii) For Gross Profit: Debit Trading Account and Credit Profit and Loss Account. If the result is a gross loss, the entry above is reversed.

Profit and loss account

A profit and loss account is opened by recording gross profit (credit) or gross loss (debit).

In order to make a net profit, a businessman has to bear much more expenses than direct ones. These costs are deducted from the profit (or added to the gross loss), the resulting figure will be net profit or net loss.

Costs that are recorded on the income statement are called “indirect costs.” They are classified as follows:

Selling and distribution costs.

They consist of the following costs:

(a) Salaries and commissions of salespeople

(b) Agent’s Commission

(c) Sales freight and transportation

(d) Sales Tax

(e) Bad debts

(f) Advertising

(g) Packaging Costs

(h) Export duty

Administrative expenses.

These include:

(a) Office Salary

(b) Insurance

(c) Court costs

(d) Trading Expenses

(e) Rates and Taxes

(f) Audit Fees

(g) Insurance

(h) Rent

(i) Printing and stationery

(j) Postage and telegrams

(k) Bank Charges

Financial costs

They include:

(a) Discount Allowed

(b) Interest on capital

(c) Interest on Loan

(d) Discounted Account Discounts

Maintenance, depreciation and provision etc.

This includes the following costs

(a) Repairs

(b) Depreciation of assets

(c) Allowance or provision for doubtful debts

(d) Reserve for Discount on Debtors.

Along with the above indirect costs, the debit side of the profit and loss account also includes various business losses.

The following items are recorded on the credit side of the profit and loss account:

(a) Discount received

(b) Commission Earned

(c) Rent received

(d) interest earned

(e) Investment income

(f) Gain on sale of assets

(g) Collected Bad Debts

(h) dividends received

(i) Tuition Award etc.

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