Debit Balance of Trading Account I would firstly like to familiarise you with few significant terms before moving onto the crux (i.e., the main) part of the question. The Debit Balance of Trading Account shows Gross Loss. Debit Balance During the preparation of accounts, if the debit side of an accoRead more
Debit Balance of Trading Account
I would firstly like to familiarise you with few significant terms before moving onto the crux (i.e., the main) part of the question. The Debit Balance of Trading Account shows Gross Loss.
Debit Balance
During the preparation of accounts, if the debit side of an account exceeds the credit side of an account then the difference amount is called a debit balance. Generally, the assets and expenses show a debit balance.
Trading Account
Trading account is prepared based on matching the net sales proceeds during the year and services rendered with the cost of goods sold and all direct expenses. It is considered as the first stage in the preparation of financial statements. Trading account is an important indicator used by the various concerns to know the overall business performance and efficiency.
Moving onto the main part of the question i.e., the meaning of debit balance of the trading account-
The debit balance of the trading account is known as Gross Loss. It takes place when the debit side say the expense side (such as net purchases, direct expenses) of the organization exceeds the credit side say the income side (such as net sales, closing stock).
Hence the amount of Gross Loss is calculated as the difference between the expense side and the income side of the trading account, placed on the credit side as a part of the balancing the amount.
Gross Loss = Net sales proceeds < (Cost of Goods sold + All Direct Expenses).
Placement in Trading Account
Conclusion
We can conclude that the debit balance of the trading account shows gross loss and the balancing amount is transferred to and placed on the debit side of the profit & loss account.
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Before answering the question you should first understand the meaning of debit and credit accounts. The images below might be of some help In the above equation, all the accounts covered on the left-hand side of the equation are classified as debit accounts and on the right-hand side are classifiedRead more
Before answering the question you should first understand the meaning of debit and credit accounts.
The images below might be of some help
In the above equation, all the accounts covered on the left-hand side of the equation are classified as debit accounts and on the right-hand side are classified as credit accounts.
Surplus, gains and revenue are credit accounts and expense, losses or deficits are credit accounts.
Generally, All the debit accounts like plant and machinery, loan granted, sundry debtors, cash and the bank have a debit balance i.e they are most of the time positive.
Similarly, all the credit accounts like the loan from a bank, sundry creditors, bills payable have a credit balance i.e they are most of the time negative as these accounts most of the time receive just credits.
here we are simply analysing it based on numbers.
Positive Debit Balance
In simple terms, while balancing the ledger when the Debit side total > Credit side total the difference = Debit Balance. Most of the time, it maintains a “positive balance”.
This is because when you add a debit to a debit it gives you a debit i.e when you add a positive number with another positive number you get a higher positive number and when you add a credit to debit it reduces the debit balance. But in most of the cases, it remains positive.
We take up another example of a machinery account even though we credit the depreciation from that account the balance remains positive.
Negative Credit Balance
In simple terms, while balancing a ledger Credit side total > Debit side total the difference = credit balance. All the credit accounts at most of the time maintain a credit balance i.e it has a “negative balance”.
This is because when you add a credit to another credit you get a higher balance of credit similarly when you debit the credit account it reduces the credit balance. But most of the time it still gives a credit balance i.e remains negative. But you do not put a negative sign while you account for it.
The below-given ledger might be of some help to understand this better –
I hope you got your answer.
Aastha Mehta.
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