Trading account is an account which indicates the result of trading activities,

such as purchase and sale of products.

In the income statement, trading account represents the first part, which is
prepared to know the gross result, i.e. profit (loss) for the period. The account
shows the outcome of trading activities, i.e. the profit earned or loss suffered
on purchase or sale of goods.

The account consists of two sides; debit side indicates direct expenses and
credit side is for direct incomes. Direct expenses which are incurred by the
organization, to bring goods into the condition, fit for sale. Such expenses
include fuel, power, freight, insurance, carriage inward, consumption of
stores, etc. On the other hand, direct incomes refers to income from the
activities that are earned from the sale of goods.

This account is the first account prepared as a final account, it is prepared to

ascertain gross profit or gross loss incurred during an accounting period. On the
debit side i.e. the LHS of the trading account items such as opening stock, purchases,
and all direct expenses are shown.

During the period-end closing process of a company, all the financial

statements are prepared and finalized. Trading account is the first step in the
process of preparing the final accounts of a company. As the name suggests it
includes all the trading activities conducted by a business to ascertain the Gross
Profit/Loss.

Trading account is a nominal account in nature. Activities which generate revenue

for the business such as Sales of Services or Goods, Closing Stock are shown
on the credit side (Right) whereas activities which are a part of the Cost of Goods
Sold such as the purchase of raw material, opening stock, direct expenses, etc. are
shown on the debit side (Left).

Purpose of Preparing Trading Account:

The profit or loss determined by a trading account is the gross result of the business but
not the net result. If so, then a question arises - what is the use of preparing a trading
account? This account is necessary because of the following advantages.

1. Gross profit of a business is very important data, since all business expenses are
met out of it. So the amount of gross profit should be adequate to meet
the indirect expenses of a business concern.
2. The amount of net sales can be determined through this account. Gross sales can
be ascertained from sales account in the ledger, but net sales cannot be so
obtained. The true sales of a business is net sales - not gross sales. Net sales are
determined by deducting sales returns from gross sales in trading account.
 3. The success or failure of a business can be ascertained by comparing net sales of
the current year with that of the last year. It should be noted that an increase in
the amount of net sales of the current year over the last year may not be
regarded as a sign of success, since sales may increase because of rise in price
level.
4. Percentage of gross profit on net sales (gross profit ratio) can be easily
determined from trading account. This percentage is very important yardstick for
measuring the success or failure of a business. Compared to last year, if the rate
increases, it indicates success; on the other hand if the rate decreases, it is an
indication of failure.
5. Percentage of different items of buying expenses (direct expenses) on gross profit
can be easily determined and by comparing the percentage of the current year
with that of the previous year the variations can be ascertained. An analysis of
variances will disclose their cause which will help in controlling the amount of
expenses.
6. Inventory or stock turnover ratio can be determined from trading account. The
success or failure of a business can be measured by this rate. Higher rate
indicates a favorable sign i.e. goods are sold soon after their purchase. On the
other hand, low rate signifies deterioration, i.e. goods are sold long after their
purchase.

Purpose of the trading account is prepared to know the gross profit or gross loss during the
accounting period. The account is based on matching the selling price of goods and sevice
with the cost of goods sold and services rendered

Meaning of Trading Account:

Trading accounting is the first step of final account. The main objective of preparing trading
account is to find out gross profit earned or loss suffered during an accounting period. Since, it is
a nominal account, all direct expenses are debited and direct incomes are credited. It includes
opening stock, purchase and expenses relating to purchase and factory expenses in the debit
side. Similarly, sales and closing stock are included in the credit side. When the credit side is
heavier than debit side, gross profit appear and vice versa.

Importance or Objective of Trading Account

it is necessary for a business to know the result of buying or manufacturing and sales during a
particulars period of time. Hence, it is necessary to ascertain the gross profit or loss.
The main importance or objectives of preparing a trading account are below:
1. To know gross profit or gross loss
2. To provides safety or gross loss
3. To provides information about the direct expenses
4. To have comparison stock with the stock of last years.

Advantages of Trading Account

The main advantages of trading account are:
1. It shows the relationship between gross profit and sales which help to measure profitability
position of the business.
2. It also show the ration between costs of goods sold and gross profit.
3. It provides the information regarding efficiency of trading activities.
4. It make easier to compare between sales, cost of goods sold and gross profit.
5. It helps to provide information regarding closing stock, sales and cost of goods sold.

It is very important to find out gross profit or loss for the business to know whether
purchasing, manufacturing and sales are sufficient for earningor not.The main
objectives or important of trading account are as follows.
1.Trading account helps to know gross profit or loss.

2.Trading account provides information about the direct expenses.

3.Trading account provides safety against possibilities of loss.

4.Trading account helps in comparison of closing stock with last year's stock

Some of the objectives of preparing Trading account are as follows:

1. To determine the cost of production which helps to calculate the gross profit or loss of
trading activities.
2. To assemble all the direct expenses of bringing the goods in saleable condition.
3. To ascertain the performance of different years of business through the gross profit ratio
which is calculated by dividing the gross profit by sales.
4. To help to calculate the ratio of cost of goods sold to sales which is helpful in the fixation
of price of the products.