9.4.4 Cost of Goods Sold and Closing Stock–Trading Account Revisited

. . Cost of Goods Sold and Closing Stock–Trading Account Revisited The trading and profit and loss account prepared in figure . presents useful information as to the profitability from the basic operations of the business enterprise.

It is reproduced for further perusal. Trading Account of Ankit for the year ended March , Expenses/Losses Revenues/Gains , Gross profit , Fig. . : An illutrative trading account of Ankit If there is no opening or closing stock, the total of purchases and direct expenses is taken as Cost of goods sold .

In our example, notice that purchases amount to Rs. , and wages amounts to Rs. , . Hence, the cost of goods sold will be computed using the following formula : Cost of Goods Sold = Purchases + Direct Expenses As there is no unsold stock,the presumption here is that all the goods purchased have been sold.

But in practice, there is some unsold goods at the end of the accounting period. In our example, let us assume that out of the goods purchased amounting to Rs. , in the current year, Ankit is able to sell goods costing Rs. , only.

In such a situation, the business will have an unsold stock of goods costing Rs. , in hand, also called closing stock. The amount of cost of