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Trading Account | Objectives, Importance

The trading account is the first step of the final account which is prepared to ascertain the amount of gross profit or gross loss of a firm for a certain period of time. It is prepared on T form of ledger. Left hand side is debit side and right hand side is credit side. It includes opening stock , net purchase, purchase-related and factory-related expenses on debit side likewise net sales and closing stock on credit side. 

Trading account with calculator and pen


The difference between the debit total and free total shows either gross profit or gross loss. If the debit side is heavier than the credit side, the result is gross loss, and if the credit side is heavier than decide the result is gross profit. The gross profit or gross loss should then be transferred to the profit and loss account.

» Items included in Trading Account.

The objective of trading account

The objective of the trading account is as follows:

  1. To find the gross profit or gross loss of concern for a given period.
  2. To provide information about the opening stock as well as closing stock.
  3. To provide information about the net purchase and net sales during the period.
  4. To show the process and factory-related expenses of a certain period.
  5. To show the amount of purchase return and sales return of a period.
  6. To facilitate the preparation of profit or loss account by calculated in gross profit or gross loss.
  7. Index for computing various ratios related to gross profit, purchase, health direct expenses, etc.

Importance and advantages of trading account

The importance of a trading account is as follows:

  1. It provides information about the gross profit made or gross loss that occurred in a business during a given period of time.
  2. It helps to know the amount of purchase, sales, purchase return, sales return of a certain period.
  3. It helps to determine the selling price of the goods produced.
  4. It helps to prepare different plans and policies of the firm by supplying reliable information.
  5. Management to compute various ratios.
  6. It helps to find the percentage of direct expenses on sales.
  7. Its facilities the preparation of profit and loss accounts by calculating gross profit or gross loss.

Procedures of preparing trading account

Certain procedures are followed while preparing a trading account. They are follows

  1. A proper format should be drawn and the name of the company and the data should be maintained at the top.
  2. The world ' To' is used on the debit side and ' By' on the credit side.
  3. Opening stock and direct expenses are entered on the debit side and sales and closing stocks are entered on the credit side.
  4. The total debit and credit amount should be compared to calculate gross profit and gross loss.

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