Explanation

When manufactured goods are transferred to the trading account at market price instead of cost price, the difference (manufacturing profit or loss) is credited to the profit and loss account.

Some companies choose to transfer goods to trading at market price to measure the efficiency of their manufacturing department. If market price exceeds production cost, there is a manufacturing profit. If production cost exceeds market price, there is a manufacturing loss.

This profit is credited to the profit and loss account because it represents an internal gain from efficient manufacturing. However, it is often shown separately as “unrealized profit” since the goods have not yet been sold to external customers.

The trading account receives the goods at market price. The manufacturing account shows the production cost. The balance sheet shows assets and liabilities. Only the profit and loss account is credited with the difference between market price and cost.