Q.Explain the purpose of a Memorandum Trading Account. Under what circumstances would an accountant prepare one instead of an ordinary Trading Account?

A Memorandum Trading Account is not a substitute for the real Trading Account — it is a special-purpose working used only when the closing stock figure itself is missing and needs to be estimated. …

Purpose of a Memorandum Trading Account

Under Incomplete Records, closing stock is sometimes not known directly — it may not have been physically counted, or it may have been lost, stolen, or destroyed by fire before it could be verified. In such cases, if the trader's normal rate of Gross Profit (on sales or on cost) is known from past experience, a Memorandum Trading Account is prepared to estimate the missing Closing Stock.

It is prepared exactly like an ordinary Trading Account (Opening Stock, Purchases, Direct Expenses on the debit side; Sales on the credit side), except that Gross Profit — computed by applying the known rate to Sales — is entered as a debit-side item (rather than left to emerge as a balancing figure), and Closing Stock is then found as the amount needed to balance the two sides.

When it is used instead of an ordinary Trading Account

1. When the closing stock was never physically counted because records are incomplete.
2. When stock has been lost, stolen, or destroyed (for example, by fire) before it could be counted, and an estimated stock figure is needed to work out the loss for an insurance claim.
3. Whenever the trader can state a reliable, consistent gross profit rate from past years, making the estimate reasonably trustworthy. …

Students sometimes describe the Memorandum Trading Account as if it replaces the real Trading Account altogether. It does not — it is only a supporting calculation to recover the missing Closing Stock f …