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Direct Expenses on Goods

The trading account is debited, in addition to the opening stock and net purchases, with the direct expenses which are defined as all those expenses incurred in bringing the goods to the place of business or trade until the goods are placed in a saleable position. The nature of the direct expenses may include: (i) railway freight, or lorry freight, (ii) carriage or carriage inward or on purchase, (iii) transit-insurance, (iv) packing and forwarding expenses by vendor, (v) excise duty. A trader who imports goods, the direct expenses will cover: (i) packing and forwarding charges by the exporters, (ii) export duty if any, (iii) loading charges, (iv) import duty, (v) shipping or air freight, (vi) marine insurance, (vii) custom duty, (viii) clearing charges, (ix) carriage from the docks to the trader’s place of business, (x) octroi, (xi) dock dues. A manufacturer incurs, in addition to these, manufacturing costs such as: (i) wages and salaries, (ii) factory rent, (iii) factory insurance, (iv) factory heating, (v) foreman and supervisor’s salary, (vi) factory maintenance and cleaning, (vii) fuel, coal, gas and water, (viii) power, (ix) factory lighting, (x) royalty on production. It must be noted very carefully that expenses  incurred in selling the goods such as carriage outward, packing material, rent of godowns, packer’s wages etc., are not included in direct expenses and therefore not debited to trading account. When cost of goods sold is more than the net sales revenue, the result is gross loss. The above stated items such as cost of goods sold and net sales are recorded in the trading account in a different form. These items are automatically included when the trading account is debited with: (a) opening stock, (b) net purchases and (c) direct expenses and the credited with: (a) net sales and (b) stock at the end. Closing stock is generally given at the foot of the trail balance. But if it is also given in the trail balance, it will not be show in the credit side of the trading account because it is already deducted from the net purchases. Hence it will be shown only in the assets side of the balance sheet. When the credit side of the trading account exceeds the debit side, the difference is gross profit. The gross profit or gross margin indicates the funds out of which the administrative, selling and distribution expenses will be met. When the debit side exceeds the credit side, the difference is gross loss. Gross profit or gross loss is transferred to the profit and loss account.

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