Note on Trading Account

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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. Stock of goods
    Stock of goods
    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
    Factory expenses
    Factory 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: -

Specimen of Trading Acount
Specimen of Trading Account

  • Trading account is the first step of final accounts.
  • Trading account is prepared with a view to determine the amount of gross profit or gross loss made by the business during the given period of time.
  • Trading account provides the information of opening stock as well as the value of closing stock.
  • The expense, which incur in connection with the purchases and wages, are called direct expenses. 
.

Very Short Questions

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

  1. To know the gross profit or gross loss
    It is prepared to find out the amount of gross profit or gross loss made by the business during the particular period of time. It is determined by making a comparison between merchandise income and merchandise expense. It enables the businessman to make a comparison of gross profit or gross loss of the current year with those of previous years.

  2. To provide information about stock
    The trading account provides the information of opening stock as well as the value of closing stock. The information helps the business for making purchasing plans and policies.

  3. To provide information about net purchases and net sales
    It provides the information relating to total purchase as well as a net purchase. The information of net purchase is obtained by deducting purchase return from the total purchase. Similarly, it provides the information of total sales as well as net sales. The amount of net sales is determined by deducting sales return from total shares.

  4. To provide information about factory expenses
    The expense, which incur inside the factory for the production of goods is called factory expenses. Factory rent, factory insurance, factory manager’s salary, heating and lighting and coke and coal are some of the examples of factory expenses. It provides such information, which helps to determine the percentage of the expenses on sales. It helps to control the expenses in the process of manufacturing the product.

  5. To make comparison
    The trading account helps to compare the amount of sales and gross profit of the current year with those of previous years. Such comparison helps in evaluating the progress of the business.

  6. To measure efficiency
    The trading account helps in measuring the working efficiency of the business. Such working efficiency is measured by making a comparison between the amount of sales and merchandise expenses.

  7. To provide information about direct expenses
    The expense, which incur in connection with the purchases and wages, are called direct expenses. Purchase, carriage inward, excise duty, custom duty and wages are some examples of direct expense. A trading account provides information of such expenses, which help to make a comparison of the cost of the current year with previous years.

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. It helps to determine the amount of gross profit or gross loss made by the business during the particular period of time.
  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.
  7. It helps to judge the trading efficiency of the business organization.

Solution:

Trading Account of Ridan Enterprises

Dr.

For the year ended 31st Chaitra

Cr.

Particulars

Amt (Rs.)

Particulars

Amt (Rs.)

To opening stock

To purchases

Less: purchase return

To wages

To carriage inwards

To gross profit c/d

3,75,000

45,000

22,500

3,30,000

93,750

10,000

1,06,250

By sales

Less: sales return

By closing stock

5,62,500

50,000

5,12,500

50,000

5,62,500

5,62,500

Trading Account

Dr.

For the year ended 31st May

Cr.

Particulars

Amt (Rs.)

Particulars

Amt (Rs.)

To opening stock

To purchases

Less: purchase return

To wages

To carriage inwards

To factory rent

To factory insurance

To clearing charges

To coal and coke

To lighting

To custom duty

To gross profit c/d

2,12,000

2,000

31,000

2,10,000

52,000

5,600

6,000

5,000

1,400

1,000

2,000

1,600

1,23,456

By sales

Less: sales return

By closing stock

4,14,600

4,000

4,10,600

28,456

4,38,456

4,38,456

0%
  • Trading account is the first step of ______.

    trial balance
    final accounts
    government accounting
    balance sheet
  • Which one of them is not the objective of trading account?

    To provide information about factory expenses


    To provide information about stock


    To provide information about net purchases and net sales


    To provide information about direct incomes


  • The expense, which incur in connection with the purchases and wages, are called ______.

    indirect expences
    outstanding expenses
    direct expenses
    accured expenses
  • Trading account is prepared at the end of the accounting period to know the amount of ______.

    only net loss
    gross profit or gross loss
    only gross profit
    net profit or net loss
  • The expense, which incur inside the factory for the production of goods is called ______.

    direct expenses


    outstanding expenses


    factory expenses


    office expenses


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