The Trading Account
A business’s performance can be assessed through a trading account, a profit and loss account, and a balance sheet. A trading account shows the sales for a period, the cost of goods sold, and the gross profit.
Turnover (Sales)
Turnover is the total sales of a business for a given period. Ways to increase it include advertising, price reduction, offering credit sales, opening more branches, introducing self-service, and stocking a wider variety of goods.
Cost of Goods Sold
Cost of goods sold = Opening stock + Purchases − Closing stock.
Example: opening stock 250,000frs, purchases 31,000,000frs, closing stock 500,000frs. Cost of goods sold = 250,000 + 31,000,000 − 500,000 = 30,750,000frs.
Rate of Turnover (Stock-Turn)
Rate of Turnover = Cost of goods sold ÷ Average stock, where Average stock = (Opening stock + Closing stock) ÷ 2.
Turnover Period
The average time stock is held before being sold, e.g. in months = 12 ÷ Rate of Turnover.
Worked example (1-year trading period): opening stock 500,000frs, purchases 1,400,000frs, closing stock 300,000frs.
- Cost of goods sold = 500,000 + 1,400,000 − 300,000 = 1,600,000frs.
- Average stock = (500,000 + 300,000) ÷ 2 = 400,000frs.
- Rate of turnover = 1,600,000 ÷ 400,000 = 4 times.
- Turnover period = 12 ÷ 4 = 3 months.
Why a High Rate of Turnover Matters
Perishable and fashionable goods must be sold quickly before they spoil or go out of fashion, slow-moving stock is more at risk of theft (pilferage) and damage, and a lower turnover generally means lower profit.
