Financial Accounting Concepts

Closing Entries to Prepare Trading Account

Closing Entries

Before preparing the Trading account, various accounts need to be closed and transferred to the trading account at the end of the accounting period.

Real accounts are transferred to the balance sheet and nominal account’s balances are transferred either to Profit and Loss A/c or Trading account.

We need to pass some journal entries to transfer these balances. These entries are called closing entries.

The following closing entries will be required to be passed in respect of the trading account:

For opening stock

Trading A/c Dr

To Opening Stock

For purchases returns:

Returns Outward A/c    Dr

To Purchases Account

For returns inward:

Sales A/c                    Dr

To Returns Inwards Account

(Account information is generally given both in respect of gross sales, and purchases and the respective returns)

For purchases account:

Trading A/c               Dr

To Purchases A/c

(The amount being the net amount after returns)

For expenses

Trading A/c               Dr

To Expenses

(Account and credit the respective expenses accounts individually)

For transfer of sales

Sales A/c                                Dr

To Trading Account

For closing stock

Stock A/c                                Dr

To Trading A/c

(The Stock Account will be carried forward to the next year)

Entries mentioned above, the other entries are usually summarised as follows

(1)       Trading Account Dr.

To Opening Stock Account

To Purchases Account

To Wages Account

To Freight on Purchases Account, etc.

(2)       Sales Account Dr.

Closing Stock Account Dr.

To Trading Account

At this stage, the Trading Account will reveal the gross profit if the credit side is greater or gross loss if the credit side is lesser. The gross profit will be transferred to the Profit and Loss Account by the Entry:

Trading Account Dr.

To Profit and Loss Account

The entry for gross loss, if there be any is:

Profit and Loss Account Dr.

To Trading Account

Illustration 2

From the information pass necessary closing entries in the journal proper Of M/s. XYZ Traders.


Opening Stock                        100,000

Purchases                                672,000

Carriage Inwards                     30,000

Wages                                     50,000

Sales                                        1,100,000

Returns inward                        100,000

Returns outward                      72,000

Closing stock                           200,000


Dec 31Return outward A/cDr    72,000 
 To Purchases A/c   72000
 (Being the transfer of goods returned)    
,,Sales A/cDr. 100000 
 To Return Inward A/c   100000
 (Being the transfer of returns to sales)    
Sales A/cDr. 1000000 
 To Trading A/c   1000000
  (Being transfer of the balance of sales to Trading A/c)    
Trading A/cDr.    780000 
 To Opening Stock   100000
 To Purchases A/c   600000
 To Wages A/c   50000
 To Carriage Inwards A/c   30000
  (Being transfer of opening balances)    
,,Closing Stock A/cDr. 200000 
 To Trading A/c   200000
 (Being closing stock transferred to Trading A/c)    
Trading A/cDr. 420000 
 To Gross Profit   420000
 (Being the amount of gross profit)    
Gross ProfitDr. 420000 
 To Profit and Loss A/c   420000
 (Being the transfer of gross profit to Profit and Loss A/c)    
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