The following are the items included in debit side of trading account:

• Opening stock
  It is the stock of goods available at the opening day of the accounting period. It is the stock of goods, which remained unsold at the end of the previous accounting period. The closing stock of the previous year is considered as the opening stock of the current year.
  
  
• Purchase and purchase return
  Purchase includes cash purchases as well as credit purchases of goods during the year. The amount of net purchase (purchase less purchase return) is shown on the debit side of the trading account.
  
  
• Purchase related expenses
  When the goods are purchased, a number of expenses are incurred in transit. Such expenses are known as purchase-related expenses. Carriage inward, freight, import duty, octroi, cartage, clearing charges, and duck charge are some the examples of purchase-related expenses.
  
  
• Factory or manufacturing expenses
  The expenses, which are incurred inside the factory for the production of the goods, are known as factory or manufacturing expenses. These expenses are incurred in the process of converting raw material into finished goods. Factory rent, motive power, gas, fuel, wages, and royalties are some of the examples of manufacturing or factory expenses.

The following are the items included in credit side of trading account:

• Sales and sales return
  Sales includes cash sales as well as credit sales of goods. The net sale (sales less sales return) is shown in the credit side of the trading account.
  
  
• Closing stock
  It represents the value of the stock remained unsold at the end of the accounting period. The closing stock is recorded on the asset side of the balance sheet as well as on the credit side of the trading account. It is valued at cost price or market price whichever is less. If it is given inside the trial balance, it is recorded only on the asset side of the balance sheet.

The expenses, which are incurred inside the factory for the production of the goods, are known as factory or manufacturing expenses. Factory rent, motive power, gas, fuel, wages, and royalties are some of the examples of manufacturing or factory expenses.

The trading account is prepared by following certain procedures. It is prepared in the form of the ledger and hence it contains two sides: Debit and Credit. While placing the items in the trading account, opening stock, purchases, purchase related expenses, direct expenses and factory or manufacturing expenses are debited and closing stock and sales revenue are credited. The procedures of preparing the trading account can be explained as follows: -

1. Placing the items in debit side relating to opening stock, purchase, purchase-related expenses, wages and other manufacturing expenses

   • Opening stock
     It is the stock of goods available at the opening day of the accounting period. It is shown in the debit side of the trading account.
     
     
   • Purchase and purchase return
     Purchase includes cash purchase as well as credit purchases of goods during the particular period of time. The amount of purchase is shown on the debit side of the trading account. The amount of purchase return is deducted to obtain the amount of net purchase.
     
     
   • Purchase related expenses
     A number of expenses relating to purchase like carriage inward, freight, import duty, octroi, cartage, clearing charges, and duck charges are shown on the debit side of the trading account.
     
     
   • Wages and other manufacturing expenses
     The expenses relating to wages and other manufacturing expenses like factory rent, factory lighting, motive power, gas, fuel, cleaning charges, etc. are shown on the debit side of the trading account.

2. Placing the items in credit side relating to sales and closing stock

   • Sales and sales return
     Sales includes cash sales as well as credit sales of goods. The amount of sales is shown on the credit side of the trading account. The amount of sales return is deducted to obtain the amount of net sales.
     
     
   • Closing stock
     Closing stock represents the value of goods remained unsold at the end of the accounting period. It is shown on the credit side of the trading account.
     
     

3. Balancing and closing the trading account

   Trading account is prepared to know the amount of gross profit or gross loss. It is determined by balancing the trading account. The following procedures are followed for balancing and closing the trading account:
   
   • Find out the heavier side
   • Put the difference amount in lighter side to make total of both sides equal
   • Write the words “To Gross profit c/d” if credit total exceeds debit total or “By Gross loss c/d” if the debit total exceeds credit total against the difference amount under particulars column.
   • Draw double parallel lines after the total amount of both sides to close the accounts.