Page 129 - Account 10

Trading Account

3. Introduction
The account, which is prepared by a business concern, at the end of an accounting
year, in order to ascertain the gross profit or gross loss resulting from the sales and the
cost of goods sold, is known as trading A/c. It includes all the direct and factory expenses
on the debit side and sales, closing stock and abnormal loss of stock, if any, on the credit
side to compare the sales revenue and the cost of goods sold. Thus, the difference between
the totals of its debit side and credit side is either gross profit or gross loss. When the total
of credit side i.e. the total of incomes is heavier than the total of debit side i.e. the total
of expenses, gross profit occurs. Otherwise, when the debit total exceeds the credit total,
it results the gross loss. In this way, it tries to ascertain the gross profit or gross loss of
business concern during a certain period, say a year, in its normal production or trading
operation.
This account is mainly prepared to find out the profitability of the goods bought or
manufactured and sold by a business concern. It is the first step of final accounts.

Key Point Trading account is the first step of final accounts prepared to ascertain
profit or loss from its production and trading operation i.e. gross profit or
gross loss of the business.

4. Objectives of Trading Account

There’s a notable importance of trading A/c to the business organizations. Its
importance may be highlighted in terms of the following objectives:
i. To find out the gross profit or gross loss during a year in order to measure the
profitability of the goods bought or manufactured and sold by a business concern.
ii. To find out the gross profit ratio or the gross loss ratio by comparing the gross profit
and sales figures and measure the efficiency by comparing with that of the last years
and taking necessary corrective measures, if required.
iii. To determine the net purchase and sales during the year.
iv. To find out the opening and closing stock for the year.
v. To acquire the knowledge about the direct expenses and factory and manufacturing
overheads and the abnormal losses of stock in trade, if any, and control over them in
an appropriate way.
vi. To provide suggestions to the business authority to determine the price of the
products by providing information about the cost of goods sold. A certain percentage
of projected profit is added in the cost of the products to determine the selling price.

5. Importance and Advantages of Trading Account
A trading A/c is important for a business undertaking. The importance of a trading
A/c can be described in respect to the following advantages:

128 Aakar’s Office Practice and Accountancy - 10 Final Accounts 129