Which of the following is determined in the Trading Account?

Answer Details

The trading account is the first section of the final accounts of a trading business. It brings together net sales for the period with the cost of the goods actually sold, which is calculated as opening stock plus purchases (adjusted for carriage inwards and returns) less closing stock. The difference between sales and this cost of goods sold gives the gross profit, which is then carried down to the profit and loss account.

Cost of goods sold is therefore determined directly within the trading account; it is the figure the account is built around. Net profit is a different, later figure, arrived at only after the profit and loss account deducts operating expenses (and adds other income) from the gross profit brought down from the trading account. Prime cost and factory overheads belong to manufacturing accounting: prime cost is the direct cost of production (direct materials, direct labour, and direct expenses), and factory overheads are the indirect costs of running the factory; both are computed in a manufacturing account, which feeds its finished output cost into the trading account of a manufacturing business, rather than being computed in the trading account itself.

Examination reminder: keep the sequence straight: manufacturing account (prime cost, factory overheads) feeds into the trading account (cost of goods sold, gross profit), which feeds into the profit and loss account (net profit).