Page 90 - Office Practice and Accounting 10

Trading account

Meaning
Trading account is the first step in final account. It is prepared mainly to know the
profitability of goods bought or manufactured and sold by a firm or business man.
The difference between the selling price and the cost price of the goods is the gross
result. Here good means the things/goods bought for resale purpose in which assets
should not be included. It includes all those direct and factory expenses on the debit
side, and sales and closing stock on the credit side. If sale proceeds are more than the
cost of goods sold, gross profit is made and if sale proceeds are less than cost of goods
sold, gross loss is incurred. In other words, if total amount of credit side (sales and
closing stock) is greater than amount of debit side (all direct expenses), gross profit
is made and if total amount of debit side is greater than amount of credit side, gross
loss is incurred.

Objectives
Trading account is prepared with the following objectives:
i. To ascertain gross profit made or gross loss incurred during an accounting
period
ii. To know the information about direct expenses and direct income
iii. To determine the cost of goods sold
iv. To facilitate the preparation of profit and loss account
v. To know the efficiency of the firm in respect to direct expenses

Advantages
Advantages or importance of trading account are as follows:
i. It helps to ascertain gross profit made or gross loss incurred during an accounting
period.
ii. It helps to know the efficiency of the firm in respect to direct expenses.
iii. It helps to prepare plan and policies to control the cost.
iv. It provides information to the manager for decision making purpose.
vi. It facilitates the preparation of profit and loss account.

Items to be debited to trading account
1. Opening stock: The value of goods which remains unsold at the end of previous
accounting period.
2. Purchases and return outward: Amount of purchase is direct expenses and it
refers to purchases of raw materials. Net purchase is to be recorded for which
return of purchase is deducted.
3. Carriage or carriage inward: These are the expenses incurred while bringing
goods or raw materials.
4. Labor/Direct wages: Wages paid to workers, who are directly engaged and
contribute of production.

84 Office Practice and Accounting 10