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Trading Account

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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 the given period of time. It shows the result of buying and selling of merchandise goods for a particular accounting period. It is prepared in the form of ledger. The difference between debit and credit sides shows either gross profit or gross loss. If the credit total exceeds the debit total, the balancing figure is considered as gross profit, and if the debit total exceeds the credit total, the balancing figure is considered as the gross loss.

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: -

  1. 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.

  2. 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.

  3. 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 sales.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

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: -

  1. It helps to determine the amount of gross profit or gross loss made by the business during the particular period of time.
  2. It helps to know the amount of purchases, expenses relating to purchases and manufacturing expenses.
  3. It helps to know the percentage of gross profit and sales.
  4. It helps to determine the percentage of direct expenses on sales.
  5. It helps to determine the selling price of the goods.
  6. It helps to prepare plans and policies by making a comparative study of stock, purchases, sales and direct expenses.
  7. It helps to judge the trading efficiency of the business organization.

Procedures of Preparing Trading Account

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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 include 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.



  • 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 is prepared to find out the amount of gross profit or gross loss made by the business during the particular period of time.  
  • The trading account contains the items relating to stock, purchases, sales, direct expenses and manufacturing expenses.
  • Opening stock is the stock of goods available at the opening day of the accounting period. 
  • The expenses, which are incurred inside the factory for the production of the goods, are known as factory or manufacturing expenses. 
  • The closing stock is recorded on the asset side of the balance sheet as well as on the credit side of the 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. 
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Very Short Questions

The trading account is prepared to achieve certain objectives, which are as follows: -

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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: -

  1. It helps to determine the amount of gross profit or gross loss made by the business during the particular period of time.
  2. It helps to know the amount of purchases, expenses relating to purchases and manufacturing expenses.
  3. It helps to know the percentage of gross profit and sales.
  4. It helps to determine the percentage of direct expenses on sales.
  5. It helps to determine the selling price of the goods.
  6. It helps to prepare plans and policies by making a comparative study of stock, purchases, sales and direct expenses.
  7. It helps to judge the trading efficiency of the business organization.

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  • Trading account is the first step of ______.

    balance sheet
    final accounts
    government accounting
    trial balance
  • Which one of them is not the objective of trading account?

    To provide information about direct incomes


    To provide information about net purchases and net sales


    To provide information about factory expenses


    To provide information about stock


  • The expense, which incur in connection with the purchases and wages, are called ______.

    accured expenses
    outstanding expenses
    indirect expences
    direct expenses
  • Trading account is prepared at the end of the accounting period to know the amount of ______.

    only gross profit
    gross profit or gross loss
    only net loss
    net profit or net loss
  • The expense, which incur inside the factory for the production of goods is called ______.

    direct expenses


    office expenses


    outstanding expenses


    factory expenses


  • The trading account contains the items relating to ______.

    stock
    direct expenses and manufacturing expenses
    all the options are correct
    purchases and sales
  • Trading account is prepared in the form of ______.

    ledger
    journal voucher
    journal
    trial balance
  • ______ is the stock of goods, which remained unsold at the end of the previous accounting period.

    Closing stock


    Amortization


    Opening stock


    Average inventory


  • The expenses, which are incurred inside the factory for the production of the goods, are known as ______.

    factory or manufacturing expenses


    selling expenses


    preliminary expenses


    purchase related expenses


  • ______ is the example of manufacturing or factory expenses.

    Motive power
    Royalties
    Factory rent
    All the options are correct
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