TRADING ACCOUNT
Trading Account is one of the financial statements prepared by the trading firms at the end of the year. These are prepared to find out the gross profit or gross loss accruing to the firm. This account records all the amounts related to the goods purchased and sold. It helps in providing all the material facts regarding the stock sold or remain unsold.
ACCORDING TO JR BATLIBOI
“The Trading Account shows the result of buying and selling of goods. In preparing this account, the general establishment charges are ignored and only the transactions in goods included.
FEATURES
The features of this account are as follows:
NATURE OF ACCOUNT: It is a Nominal Account. It records all the expenses on purchases on the debit side and income in the nature of the sales on credit side. The rule applies to this account is:
“DEBIT ALL EXPENSES AND LOSSES
CREDIT ALL INCOMES AND GAINS”
TIME OF PREPARATION:It is prepared at the end of the year i.e. as at 31st March, 20__. It is prepared at first before preparing Profit and Loss Account and Balance Sheet.
RESULT: This Account shows the result of Gross Profit or Gross Loss by comparing the both sides Debit and Credit. Increase of debit over credit results in Gross Loss and increase of credit over debit results in Gross Profit.
Debit< Credit= Gross Profit
Debit> Credit= Gross Loss
ITEMS ON DEBIT SIDE: Trading Account records the Opening Stock, Net purchases and Direct Expenses on the debit side of the account. Opening Stock is the stock with the firm at the beginning of the year. Net purchases are the purchases less returns. Direct expenses are those expenses that are directly related to the Purchase, production or Factory. Direct Expenses includes Wages and Salaries, Carriage, Freight, Octroi Duty, Fuel and power, Motive power, Factory rent etc.
ITEMS ON CREDIT SIDE: This Account records the Net sales and closing stock at the credit side of the account. Net sales are calculated by deducting the amount of returns from the sales. Closing stock is the stock remained with the firm at the end of the year. It may be called as unsold stock.
BASIS OF PREPARATION: This Account becomes a base for preparation of Profit and Loss Account. This account is a part of Profit and Loss Account and prepared before it and the gross profit or gross loss resulting out of the trading profit becomes the base for preparation of profit and loss account or Income Statement.
DETERMINE COST OF GOODS SOLD: Trading Account helps in determining the cost of goods sold. It can be calculated as:
COST OF GOODS SOLD= Opening Stock+ Net Purchases+ Direct Expenses- Closing Stock.
OR
COST OF GOODS SOLD= Net sales- Gross Profit.
FORMAT OF TRADING ACCOUNT
*Net Purchases= Purchases- Return Outwards or Purchase Return
*Net Sales= Sales – Return Inwards or Sale Return
IMPORTANCE/ ADVANTAGES OF TRADING ACCOUNT
The following are benefits or relevance of trading account:
HELPS IN DETERMINING GROSS PROFIT OR GROSS LOSS
Trading Account helps in determining Gross Profit or Gross Loss. It helps in finding out the two amounts by comparing the debit side with credit side. Increase of debit over credit results in Gross Loss and increase of credit over debit results in Gross Profit.
Debit< Credit= Gross Profit
Debit> Credit= Gross Loss
HELPS IN DETERMINING THE TRADING PERFORMANCE
Trading Account makes the records of the goods purchased and sold and also records the amount of goods unsold during the year. This helps in determining whether the company has performed better in selling goods or not i.e. the trading performance of the business.
HELPS IN CALCULATING THE COST OF GOODS SOLD
It helps in determining the cost of goods sold. It can be calculated as:
COST OF GOODS SOLD= Opening Stock+ Net Purchases+ Direct Expenses- Closing Stock.
OR
COST OF GOODS SOLD= Net sales- Gross Profit.
HELPS IN STUDYING THE TREND OF SALES
The trading account prepared for the year is compared with the trading account of the previous year. This helps in studying about the trend of sales over a period of time. The increase in sales or decrease in sales is easily captured from the trading account.
HELPS IN COMPARISON
The trading account allows the comparison of the unsold stock, amount of purchases, expenses on purchases, goods sold over a period of time. This comparison forms the basis of future planning.
HELPS IN CONTROLLING EXPENSES
The trading account records all the expenses related to the purchase, production or factory. These expenses include Factory rent, wages and salaries, power and fuel, motive power, octroi duty, carriage on purchases etc. It becomes easy to keep an eye on the unnecessary expenses by preparing this account and to control the over expenditure.
HELPS IN FORECASTING FUTURE
Trading Account gives the current view of the purchases, sales and unsold stock. By studying this, future targets can be set regarding
• Sales to be made
• Amount of goods to be purchased
• Minimum level of stock that must be maintained, etc.