Match each accounting item related to the preparation of a sole trader's Trading Account with its correct accounting treatment.
- Carriage InwardsAdded to purchases to determine net cost of purchases in the Trading Account
- Returns OutwardsDeducted from gross purchases to obtain net purchases
- Closing InventoryDeducted from cost of goods available for sale to determine cost of goods sold
- Carriage OutwardsExcluded from the Trading Account and charged as an operating expense in the Profit and Loss Account
Answer
Carriage Inwards matches with 'Added to purchases to determine net cost of purchases in the Trading Account', Returns Outwards matches with 'Deducted from gross purchases to obtain net purchases', Closing Inventory matches with 'Deducted from cost of goods available for sale to determine cost of goods sold', and Carriage Outwards matches with 'Excluded from the Trading Account and charged as an operating expense in the Profit and Loss Account'.
Each trading account item is classified according to its role in deriving cost of goods sold or operating expenses. Carriage inwards adds to purchase costs, returns outwards reduce gross purchases, closing inventory reduces goods available for sale to derive cost of goods sold, and carriage outwards is treated as an operating expense in the profit and loss account.
Step-by-Step Solution
Key Concept
Classification and treatment of items in the Trading Account