Trading account Vs Manufacturing Account

Trading Account

A trading account is prepared to find out the results (profit or loss) of trading activities. Cost of goods Sold is deducted from the value of sales to find out the trading result, i.e. gross profit. Cost of Goods Sold is calculated as follows,

Opening inventory                      xxx

Add purchase(less returns)             xxx

Add expenses related to purchases      xxx

                                       xxx                                                                                                                           

Less Closing Inventory                 xxx

Cost of Goods Sold                     xxx

So,

Gross Profit = Sales – Cost of Goods Sold

If cost of goods sold is more than value of sales, it will result in Gross Loss.

Manufacturing Account

It is assumed that a trading account is prepared when the trader undertakes only purchasing and selling. I.e. no manufacturing is under taken.

A manufacturing account is prepared to find out cost of production. That is a manufacturing account is relevant when there is manufacturing activities. Cost of production is calculated as follows,

Direct cost of raw material                           xxx

(Opening stock of r.m + purchases of r.m +expenses related to that purchase – closing stock of r.m)

Direct cost of Labour (wages)                         xxx

Direct expenses                                       xxx

Prime Cost                                            xxx

Add manufacturing overhead                            xxx

(Indirect expenses related to production)
Add opening work in progress                          xxx
Less closing work in progress                        (xxx)

Cost of Production                                    xxx