Silly yet crucial doubt

Dear, Opening Stock appears in Dr. side because the sale item as appearing in Cr. side may consist of (i)sale of purchases made in the year or

(ii) may be of earlier year purchases(i.e. sale ofrom opening stock).

As far as Closing Stock is concerned it will appear in Dr. side because the Op stock+Purchases(Goods avaiable for sale)  you are showing in Dr. side is not fully sold by you. So as Sales it will appear in Cr. side. 

Hmm i am not clear on this Saurabh... Didnt understand it....

Hi Mohit,

Opening Stock indicates the stock we have already purchased and is in hand

Closing Stock indicates the portion of opening stock which is left in hand after we have made some sales

Say 

Opening Stock     120 

Closing Stock       21 

This tells of the cost of goods sold 99  (Opening Stock - Closing Stock)

Now Suppose Sales amt is 160

The cost of goods we have derived will help us arrive at Gross Profit figure (160-99=61) which is the ultimate aim of preparing Trading Account

For More Clarity,

Opening Stock (Given)      120                                         Sales (Given)                                    160

Gross Profit (Bal. Fig.)        61                                         Closing Stock (Given)                       21

Total                                       181                                        Total                                                    181

Hope this satisfies ur Query

Hmm still not very clear Mandar...  Basically what does the difference of Opng and Closing stock signify.. Ig Opng is 10, closing is 8 dosen't that mean we have sold 2? Will this 2 not be included in Sales?? Could someone explain the whole Audit Trail with Journal Entries (i.e from Purchase of goods to ultimate selling - which all will be cost, which will be inventory etc)... Really confusing this seems to be... And also what exactly does Cost of Sales mean? Will be obligied if somebody clarifies the same with a simple example.

Any article on the basics of Trading Account if someone could share would be great.

See Debit and Credit gets Net Off 

See Opening 10 (Cost of earlier year's purchases) and closing 8 (Cost of Remaining Items of earlier year's purchases) tells us the cost of goods sold out of earlier year's purchases that is 2 ( Opening stock and closing stock nets off to give us Cost of goods sold)

Now this 2 is already included in sales figure say 5 because while selling we add GP Margin to our cost

and just because of that we can get our GP figure thats (5-2) Rs 3

If u r stil not clear I would suggest u to refer to 11th 12th standard text books of accounts to get fundas clear (NO OFFENCE just guiding u)

Cool thanks Mandar... I guess I ll just read 12th Book on this to get the concept right.. Thanks for the help anyways :)

It is due to matching concept of accounting. That is to say we match the expense to the incomes.

First, Cost of sales must be matched up with current year’s revenue and as the inventory at the end of the period has not been sold and thus should not be accounted against sales revenue, therefore it must be deducted from cost of sales. That is the conceptual reason why we deduct closing stock from the total of opening inventory and purchases.

Second, in order to account for the inventory at the year end in the trading account, closing entry is passed and due to this closing entry closing stock appears at the credit side of trading account

Hope this is clear.

Hi Mohit,

I just want you to draft Trading account from below information to clear ur doubt.

For example,

On 1st April Opening stock qty is 2000 of Rs. 4000

On 31st March Sold qty 2000 for Rs.6000

Assume there were no any other transaction durin the year.

In above expl, it should be understand that Sales can be made out of opening stock with out current year purchase. Now we cannot say Sales Rs.6000 itself Gross profit. Cost of sales should be deduct to find out gross profit.

Regards

Anand

Thanks Anand.. I guess your example has made it clear... Thank you :)