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The trading statement is an expanded version of sales portion of the Income statement. The trading statement's main objective is to determine sales, cost of sales and gross profit.^[1] The trading statement it's part of effective book keeping within the accounting discipline.

Primary formula

Sales - Cost of Sales = Gross Profit

Cost of sales

The main parts of a cost of sales calculation consists of:

• Opening inventories (The amount of inventories that the entity has on hand from the previous year)
• + Purchases (The amount of inventories that the entity purchases over the course of the year)
• = Goods available for sale (Opening inventories + Purchases +/- other items)
• - Closing inventories (Inventory on hand at the end of the year)

Example

• Question:

A business entity purchases £10400 worth of equipment in order to construct computers. During the financial year, £1400 worth of equipment is returned to the entity by its customers as the equipment was determined to be faulty. The previous financial year, the entity had £3000 worth of equipment left over. The entity makes use of a trucking company to deliver all of its goods. The trucking company charges the entity £120 for the year to deliver the equipment. The entity sold £14500 worth of items during the year to various customers. The entity checked its inventory stock levels at the end of the year and determined that there was £2000 worth of inventories left over.

• Solution:

Sales calculation:

Sales = Sales for the year - Returns in (Goods that were returned to the entity during the course of the year)
Sales = £14500 - £1400
Sales = £13100

Cost of sales calculation:

Therefore, Cost of sales = Goods available for sale - Closing inventory
Cost of sales = £13520 - £2000
Cost of sales = £11520

Gross profit calculation: Gross profit = Sales - Cost of sales
Gross profit = £13100 - £11520
Gross profit = £1580

Ratio calculation

Often, information in the trading statement is left out and it is up to the bookkeeper to determine the missing value. This is a very popular bookkeeping examination type question. The best way to go about solving the unknown variable being either sales, cost of sales, or gross profit is to make use of a ratio calculation.

References