What is the meaning of credit balance of trading account?

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Credit Balance of Trading Account

I would firstly like to familiarise you with a few key terms before moving onto the crux (i.e., the main) part of the question. The Credit Balance of the Trading Account shows Gross Profit.

Credit Balance

During the preparation of accounts, if the credit side of an account exceeds the debit side of an account then the difference is called a “credit balance”. Generally, the incomes, capital and liabilities show a credit balance.

Credit Balance

 

Trading Account

The 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 the first stage in the preparation of financial statements. A 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 the credit balance of the trading account

The credit balance of the trading account is known as Gross Profit. It takes place when the credit side say the income side (such as net sales, closing stock) of an organization exceeds the debit side say the expense side (such as net purchases, direct expenses).

Hence the amount of Gross Profit is calculated as the difference between the income side and expense side of the trading account, placed on the debit side as a part of balancing the account.

Gross Profit = Net sales proceeds > (Cost of Goods sold + All Direct Expenses)

 

Placement in Trading AccountTrading account

Conclusion

We can conclude that the credit balance of the trading account shows gross profit and the balancing amount is transferred to and placed on the credit side of the profit & loss account.