Trading accounts and manufacturing accounts are two very different accounts but are used together in manufacturing companies. The balance from a manufacturing account is used to calculate the balance of a trading account.
A summary of all transactions from a period is placed into an account called a trading account. This account is used to determine a company’s gross profit or gross loss during a specified period.
All costs of manufacturing are placed into a manufacturing account. This account is a complete record of all costs of production.
Trading Account Computation
When calculating the balance in a trading account, an accountant finds the difference between the selling price of all manufactured goods minus the total cost of all goods. This number is found in the manufacturing account. When these two amounts are subtracted, it tells the company’s gross profit or gross loss.
Manufacturing Account Computation
When calculating the balance in a manufacturing account, an accountant places all costs of production into this account. This includes raw materials, direct labor, indirect costs and overhead. This amount represents the total cost of goods manufactured. This number is used in the trading account to find gross profit.
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