Trading Account

Trading account is the first step of final accounts. Itis nominal account which is prepared at the end of accounting year. Trading account helps to find out gross profit or gross loss during the accounting period. Trading account consists of two sides 'debit and credit' . All directexpenses are debited and direct incomes arecredited in trading account.Trading account contains mainly purchase of goods , sale of goods and expenses relating to the daily operation of factory.

The trading account includes mainly four items. These are as follows: -

1. Opening and closing stock
2. Net purchase and sale of goods
3. All expenses relating to purchase of goods, and
4. All expenses relating to the day-to-day operation of the factory like wages, factory rent, factory lighting, factory insurance, work manager’s salary, etc.

Objectives of Trading Account

The trading account is prepared to achieve certain objectives, which are as follows: -

1. To know the gross profit or gross loss
   Trading account shows the relationship between gross profit and gross loss. This helps to measure profitability position. It prepares gross profit and gross loss by comparing between merchandise income and merchandise expense. Business comparies gross profit and loss with those of pervious years through trading account.
   
   

2. 

   To provide information about stock
   The trading account provides the information regarding stocks and cost of good sold. It helps business to make plans and policies by providing infromation about opening stock and closing stock.
   
   
3. To provide information about net purchases and net sales
   It provides the information relating to total purchase as well as a net purchase by deducting purchase return from the total purchase. Similarly, it provides the information of total sales as well as net sales by deducting sales return from total sales.
   
   
4. To provide information about factory expenses
   The trading accoount provides the information about the factory expenses like Factory rent, factory insurance, factory manager’s salary, heating and lighting and coke and coal . This infromation helps to control the expenses in the process of manufacturing the product.
   
   
5. To make comparison
   The trading account helps to evaluate the progress of the business by comparing the amount of sales and gross profit of the current year with those of previous years.
   
   
6. To measure efficiency
   The trading account compares between the amount of sales and merchandise expenses. Such comparision helps in measuring the working efficiency of the business.
   
   
7. To provide information about direct expenses

   

   
   A trading account provides information of direct expenses like Purchase, carriage inward, excise duty, custom duty and wages. This infromation help to make a comparison of the cost of the current year with previous years.

Importance and Advantages of Trading Account

Trading account is essential to determine the trading result of a business. It helps to examine the trading efficiency of the business organization. The importance and advantages of trading account are as follows: -

1. Trading account helps to know gross profit or loss.
2. It helps to know the amount of purchases, expenses relating to purchases and manufacturing expenses.
3. It helps to know the percentage of gross profit and sales.
4. It helps to determine the percentage of direct expenses on sales.
5. It helps to determine the selling price of the goods.
6. It helps to prepare plans and policies by making a comparative study of stock, purchases, sales and direct expenses with those of last year.
7. It helps to judge the trading efficiency of the business organization.

Ruling or Specimen of Trading Account

All trading organizations prepare trading account as the first step of final accounts. It is prepared at the end of the accounting period to know the amount of gross profit or gross loss. The specimen of trading account is as follows: -