Trading is the process of buying and selling. Trading accounts show the results of buying and selling. Trading accounts are a crucial part of primary accounts. At the end of each accounting year, it is prepared as a nominal account.
Accounts or statements prepared by business firms are called trading accounts. Trading accounts reflect gross profits from business operations during a given period.
Trading accounts provide information about gross profits or losses during the accounting period. Preparation of the final accounts is the first step in the process. The net sale is calculated by comparing the cost of goods sold with the net sale.
Format of Trading Account
|To opening stock||By sales|
|To purchase||Less: Returns|
|Less: returns||By Closing stock|
|To direct expenses:|
|Freight & carriage|
|Custom & insurance|
|To Gross profit c/d|
Particulars on Debit Side
Opening stock is the amount of stock on hand at the beginning of the year. Opening stock for the current accounting year is taken from the closing stock of the earlier accounting year.
New businesses do not have opening stock. The stock includes raw materials, work in progress, and finished goods.
The purchases of goods made during the year include both cash purchases and purchases on credit. Purchase returns must be subtracted from the total purchases to reach the net purchases.
When goods are returned to the supplier for any reason, regardless if they were purchased in cash or on credit, they become part of the purchase returns or returns outward.
Direct expenses are those incurred between the point of purchase and the point of making the goods sellable.
Direct costs include transportation costs, freight costs, rent for the office or factory, wages for the workers, electricity expenses, and packaging costs, etc.
Particulars on Credit side
The business sells goods on credit and cash to earn profits. These are categorized under “Sales.” Sales include both credit and cash transactions.
By subtracting sales returns from total sales, net sales are determined. A customer may return a product once it has been sold for several reasons, referred to as sales returns or internal returns.
Stock that remains unsold at the end of an accounting period is referred to as “closing stock.” We refer to the value of the goods left in the trader’s hands at the end of the year in closing stock.
It is not included in the trial balance. The closing stock appears outside the trial balance. An asset’s value is determined either at cost or the net realizable value at the end of an accounting period.
Using a trading account, sales tax authorities can easily verify that a firm has made the correct purchases and made the right sales according to its sales tax return. The management determines the price of the product using a trading account while keeping the competition in mind.
Frequently Asked Questions
What is the process of preparing a trading account?
During a given period, it is normally prepared by a marketing company that buys and sells goods. Buying and selling goods and services are matched according to the costs associated with them.
What type of account is a trading account?
An investment account is a trading account. In most cases, however, it refers to a trading account. The FINRA sets minimum margin requirements and requires personal identification information for trading accounts.
What type of expenses is included in the trading account?
There are only direct revenues and direct expenses considered. Business people prepare trading accounts primarily to determine the profitability of the goods they purchase.