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Debit Balance of Trading Account
I would firstly like to familiarise you with a few significant terms before moving on to the crux 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
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 as 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 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 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.
