Trading Account

Trading account is prepared to determine the gross profit or loss that an organization has incurred during a period. It is termed as first part of the final accounts for trading concern and second part of the final accounts for manufacturing concern. In other words, trading account gives details of total sales, total purchases and direct expenses relating to purchase and sales. Direct sales and direct expenses like wages etc which are related to the production or purchase of a product are taken into account while preparing the Trading account. Majorly, it is prepared by manufacturing or trading entities while service providers do not prepare this type of accounts.

Characteristics of Trading Account

The main features of a trading account are as follows:

1. It is the first stage of the final accounts for a trader and the second stage of accounts for a manufacturer.
2. It is prepared at the end of the accounting year 
3. In a trading account, only those transactions which are of a revenue nature are recorded. 
4. There is no opening balance in the trading account but in the case of a manufacturing concern, it starts with the balance of the manufacturing account.
5. The Debit side of the trading account includes all costs of goods sold and the expenses incurred in the purchase of goods and the credit side includes the sale proceeds of goods. 
6. The balances of the trading account give the gross profit or gross loss of an entity during a particular period. If there is a credit balance, it means the entity has gross profit, while a debit balance represents a gross loss. This gross profit or gross loss is further transferred to the profit or loss account.

Benefits of Preparing Trading Account 

1. It helps in determining the total cost involved in trading a particular product which helps entities in taking decisions on whether to continue or discontinue the product. 
2. It also helps management in deciding the price of the product after keeping in mind the market competition. 
3. Through this account, sales tax authorities can easily match the purchases and sales of an entity submitted in sales Tax returns and recorded in the trading accounts. 
   

Gross Profit Formula

In order to calculate the gross profit, it is necessary to know the cost of goods sold and the sales figures.

Gross Profit = Sales – COGS (Sales + Closing Stock) – (Opening Stock + Purchases + Direct Expenses)

The difference between the debit side and credit side of the Trading account gives us the gross profit or gross loss during the said period.

Trading Account Format

Particulars	Amount	Particulars	Amount
To Opening Stock		By Sales
To Purchases		Less: Returns
Less: Returns		By Closing Stock
To Direct Expenses:
Freight and Carriage
Custom and Insurance
Wages