What Is Trading Account – To ascertain the profit or loss from business activities, the account which we prepare firstly, is called Trading Account. Gross profit or gross loss from business is ascertained from this account. If the sales exceeds the sum of goods purchased and direct expenses thereon, the amount of difference will be gross profit. In reverse situation, it will be gross loss. In direct expenses, all those expenses are included which are incurred for manufacturing the goods for saleable and for bringing them to trading place.
Trading Account Format
for the year ended ….
|To Opening Stock||By Sales|
|To Purchases||Less: Sales Return or Return Outward|
|Less: Purchases Return or |
|By Closing Stock|
|To Wages & Salaries|
|To Manufacturing Expenses|
|To Productive Expenses|
|To Carriage Inward|
|To Carriage on Purchases|
|To Coal, Gas and Power|
|To Freight, Octroi and Cartage|
|To Custom Duty or Import Duty|
|To Excise Duty|
|To Dock and Clearing Charges|
|To Factory Lighting&Factory Rent|
|To Other Direct Expenses|
|To Gross Profit Transferred to Profit & Loss A/c (Balancing Figure)||By Gross Profit Transferred to Profit & Loss A/c (Balancing Figure)|
Need And Importance
1. To know the Gross Profit or Gross Loss : Trading account is helpful to the trader in knowing that how much gross profit or loss he has from the purchases or sales of goods during a particular period . This profit can be compared with the profits of previous years by calculating the percentage of it on the total sales. Thus, this account provides records for making the comparative study and future predictions.
2. Complete knowledge of Direct Expenses: Direct expenses are those expenses which are incurred for purchasing the goods, manufacturing the goods and making the goods ready for sale.All these expenses are shown on the debit side of trading account. The comparision of these expenses can be made with the expenses of previous years by calculating the percentage of these on total sales and if these are found more in the current year than these can be controlled by taking appropriate action.
3. Comparative study of Closing Stock: The value of closing stick is shown on the credit side of trading account. The comparative study of current year stock with that of last year helps in knowing weather the current year’s stock is more or less. After this, the reasons of its more or less can be known.
4. Helpful in preparing the Profit and Loss Account: Gross Profit or Gross Loss is known from the trading account which helps in preparing the profit and loss account because this amount is necessary to be shown in the profit and loss account.