Trading account (cost of sales) format

The standard format

1. Revenue less returns inwards
2. Opening inventory
3. Add: purchases less returns outwards, plus carriage inwards
4. Less: closing inventory
5. Cost of sales and then gross profit

Filled example

Notes

• Carriage inwards is part of cost of sales; carriage outwards is not.
• Closing inventory is deducted and also shown as a current asset.
• Gross profit is revenue less cost of sales, before other expenses.

Building and reading this format

The trading account answers a narrow question: how much profit did the business make just from buying and selling goods, before any running expenses? It follows the flow of trade. Start with what customers paid.

Work out what the goods cost. The difference is gross profit.

Begin with revenue, which is sales for the period less returns inwards (sales returns). If sales are RM180,000 and returns inwards are RM4,000, net revenue is RM176,000. Goods that came back were never truly sold, so leaving them in would overstate trade.

Now build cost of sales. You cannot use purchases alone, because some goods bought are unsold at the year end, and some goods sold came from last year's inventory. Start with opening inventory, say RM20,000.

Add purchases, less purchases returns (returns outwards), and add carriage inwards, which is the cost of bringing goods into the business. This gives the cost of goods available for sale. Suppose it comes to RM140,000, because purchases and carriage inwards net of returns are RM120,000.

Subtract closing inventory, say RM24,000. Those goods are still unsold, so their cost belongs to next period.

Cost of sales is 140,000 − 24,000 = RM116,000. This is the matching concept: set the cost of goods against the revenue they earned.

Gross profit is net revenue minus cost of sales: 176,000 − 116,000 = RM60,000. Compare gross profit with revenue to see how much margin the goods carry. A large rise in closing inventory may mean goods are not selling.

Rising carriage inwards may mean supply is getting more expensive. The trading account is kept apart from wages, rent and other expenses so that you see trading performance on its own.

Marks are mostly lost by putting items in the wrong place. Carriage inwards belongs here as part of cost of sales. Carriage outwards, the cost of delivering to customers, is a selling expense and must not appear here.

Returns inwards come off sales, and returns outwards come off purchases. Reversing them corrupts both figures.

Forgetting opening and closing inventory leaves a cost based on purchases alone, which is wrong. Label the cost of sales subtotal so the reader can see how you reached gross profit.

If cost of sales questions keep giving you the wrong gross profit, we can help. One of our teachers can work through a few past-paper examples with you and show you where the figure goes astray. Book a trial class

Related how-to

• How to calculate cost of sales
• How to value closing inventory

These formats are standard accounting practice with our own figures. Check your board's exact requirements on the exam boards page.