Trading Account

Trading Account is prepared to find out Gross Profit (or Loss) due to operation of business. The gross profit (or loss) is calculated by deducting the cost of goods sold from net sales. Cost of goods sold is ascertained as follows :

Cost of goods sold = Adjusted Purchases + Direct expenses Where adjusted purchases =

Opening Stock + Net Purchase – Closing Stock + Direct expenses

Gross profit is said to be made when the sale process exceed the cost of goods sold. Conversely, when sale proceeds are less than the cost of goods sold, Gross Loss is incurred.

Direct expenses means all expenses directly connected with purchase of goods and bringing them in saleable condition. Trading account is a nominal account and is closed by transferring gross profit (or loss) to the Profit and Loss Account. Proforma of Trading Account appears as follows:Advantages of Trading Account: Preparation of Trading account involves following advantages:

•Provide information about gross margins

•Information about net purchase and stocks

•Direct expense ratio

•Efficiency of sales department

•Analysis of stocks

•Trading Account for the year ending.......................
 

Trading Account Items
 

Debit Side:
Opening Stock: In case of trading business the opening stock consists of different types of goods. In case of manufacturing concern opening stock consists of raw materials, work in progress and finished goods. The amount of opening stock is available in the Trial Balance. Purchases: Purchases account in the trial balance shows gross total purchases. Purchases figure is adjusted for duty drawbacks, cash subsidies and modvatable excise duty. All these are subtracted from purchases to arrive at net purchase figure.
 

Purchase Return: Purchase return is the goods returned to the suppliers and the amount of purchase return is subtracted from purchases account.

Direct Expenses: The expenses directly attributable to the purchase of goods or to bring them to the saleable condition are known as direct expenses.

Credit Side

Sales: The balance of the sales account as shown in the trial balance shows the total sales. In case the sales tax is included in sales the same is to be subtracted from sales.

Sales Return: Sales return account in trial balance shows the value of the goods returned by the customers during the year. Instead of recording it on the debit side of the trading account, it is deducted from sales account on the credit side to provide information about net sales during the period.

Closing Stock : Normally, closing stock does not appear in trial balance.Value of the stock at the end of the year is given in the question and generally appears outside the trial balance. In case the closing stock is in trial balance it implies that the purchase figure has been adjusted for the closing stock and is called adjusted purchase and the closing stock will not be included on the credit side of the trading account, but will be recorded on the asset side of the balance sheet. In case the closing stock is appearing outside the trial balance the same is to be recorded on the credit side of the trading account. The closing stock has to be valued at the lower side of the cost price or market price.