Trading Account

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Trading Account:-

   Preparation of Trading Account is the first stage in the financial accounts. Trading Account is prepared by the trader for ascertaining the gross profit or gross loss.  This account is prepared to find out the difference between the actual cost of the goods sold and the sale proceeds. 

    It shows the profit or loss made by purchase and sale of goods without taking into account all the items of business expenditure such as general, distributive and administrative expenses. Therefore, in the trading Account it is necessary to include all items of charge directly affecting the cost of goods sold.

    Gross profit is said is be made when the sale proceeds exceed the cost of goods sold. When sale proceeds are less than the cost of the goods sold, gross loss to incurred. The following is the usual from of a Trading Account.




Note:

* When Credit side of the Trading Account is more than the debit side the difference represents gross profit.


* When the debit side of the Trading Account is more than the Credit side, the difference represents gross loss.


* Expenses relating to the trading period should be taken into consideration.

Advantages:-

1) Trading Account shows the gross profit or gross loss made after buying and selling goods. Trading Account reveals the result of the Trading operations.


2) it enables the comparison of sales, purchases and direct expenses of the period with another period. The comparative study helps the management to control the affairs of the business and take sound decisions.


3) it helps to ascertain and compare the percentage of gross profit or gross loss to the turnover of current year with previous year. The steady increase in the percentage indicates the soundness of the business and a steady decrease in the percentage indicates the bad state of affairs of the business.


4) it gives us the information about the proportion of gross profit or gross loss to the direct expenses. This study helps the management in arresting the unnecessary expenditure on any time.


5) The selling price of the goods is fixed in such a way by taking the ratio of goods profit to turnover ratio.


6) it helps the trader to compare his opening and closing stocks in order to ascertain whether the purchases have been judicious.


7) in helps to check the direct expenses.

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