Trading account is the first step of final accounts. It is prepared with a view to determine the amount of gross profit or gross loss made by the business during he given period of time.
This note has information about 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: -
Opening and closing stock
Net purchase and sale of goods
All expenses relating to purchase of goods, and
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: -
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.
Stock of goodsTo 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.
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.
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.
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.
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.
To provide information about direct expensesFactory 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: -
Trading account helps to know gross profit or loss.
It helps to know the amount of purchases, expenses relating to purchases and manufacturing expenses.
It helps to know the percentage of gross profit and sales.
It helps to determine the percentage of direct expenses on sales.
It helps to determine the selling price of the goods.
It helps to prepare plans and policies by making a comparative study of stock, purchases, sales and direct expenses with those of last year.
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 Account
Things to remember
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.
It includes every relationship which established among the people.
There can be more than one community in a society. Community smaller than society.
It is a network of social relationships which cannot see or touched.
common interests and common objectives are not necessary for society.
Trading account is the first step of final accounts, which is prepared in the form of a ledger in order to determine the amount of gross profit or loss.
The trading account is prepared to achieve certain objectives, which are as follows: -
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.
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.
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.
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.
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.
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.
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: -
It helps to determine the amount of gross profit or gross loss made by the business during the particular period of time.
It helps to know the amount of purchases, expenses relating to purchases and manufacturing expenses.
It helps to know the percentage of gross profit and sales.
It helps to determine the percentage of direct expenses on sales.
It helps to determine the selling price of the goods.
It helps to prepare plans and policies by making a comparative study of stock, purchases, sales and direct expenses.
It helps to judge the trading efficiency of the business organization.
