In a trading account what expenses do you include?

Question

I am doing a trading account (uni work), I was told that you include direct costs in the trading account..I know that wages and administration is a direct cost...but I'm not sure what the term direct costs mean? Also what are examples...eg insurance etc?

Answer 1

Okay a direct expense is an expense that can easily be attributable or traced to a product or service.

Admin is an indirect expense cos it does not add direct value to the product and is not easily traced to the product.

Wages, is generally not a direct expense , but it depends on the context in which it is used, ask yourself if it is directly traced to the product or service being offered, if yes, then it is direct if not then it is indirect.

Expenses that you could add to trading could be transportation costs of delivery raw materials or stock, this can be added to the trading account because it is traceable to the product delivered, if the stock was not transported to the site ( office premises) then the stock can not be sold in the first place, hence it is direct. Try and apply this principle to the wages you are referring too.

Sales returns and purchases returns are also included in the trading account.

Use the direct and indirect principle above to question whether an expense should be put in trading account or not, but generally, expenses are found in the income statement or profit and loss account.