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).
Trading Account – Format with Example
Related Topic – Difference Between Direct and Indirect Expenses
Items in a Trading Account
Opening Stock – The unsold stock remaining from the previous accounting period is the opening stock of the current accounting period. It consists of raw material, work in progress, and finished goods.
Purchase and Purchase Returns – Goods and services bought for resale are collectively termed as purchases for the business. The goods may have been acquired in cash or credit and once purchased if the goods are returned to the supplier for any reason it becomes a part of purchase returns or returns outward.
Direct Expenses – Expenses incurred while purchasing goods till the time they are brought to a saleable condition are called direct expenses. These are expenses related to the core business operations of a company. For example – Wages, Carriage Inwards, Power, Freight, etc.
Sales and Sales Return – Goods sold in cash and credit by the business to earn profits are included under the head “Sales”. Items once sold may be returned by the customers due to various reasons which are termed as sales returns or returns inward.
Closing Stock – The unsold stock in hand at the end of the current accounting period is placed under the head “closing stock”. It is valued at the end of an accounting period at cost or net realisable value whichever is lower.
Related Topic – What is the Journal Entry for Closing Stock?
Gross Profit or Gross Loss – After all items of trading are arranged in the prescribed trading account format the account must be balanced to determine loss or profit arising out of selling activities.
If sales are higher than purchases i.e. Credit side is bigger than the Debit side then the difference is termed as “Gross Profit“, this is then transferred to the Profit & Loss account.
If purchases are higher than sales i.e. Debit side is bigger than the Credit side then the difference is termed as “Gross Loss“, this is then transferred to the Profit & Loss account.
Short Quiz for Self-Evaluation
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For Accounting Practice