What is Trading Account? Trading account is a part of final accounts prepared by a business firm which shows gross profitability of business activities during a particular period. In other words, trading account shows total sales, total purchases and all direct expenses relating to purchase and sales.

Who prepares Trading Account? Trading account is prepared by manufacturing companies and trading companies only because the sales and purchases of goods are done in these types of business firms only.

What are the benefits of preparation of Trading Account?

  • Trading Account is a very important statement from the point of view of cost coverage of the goods in which business firm is dealing. By preparing the Trading Account a business firm can take the decision for continuing or discontinuing a particular product or can do some modification in any product to earn maximum profit or reduce the losses.
  • Sale Tax Authorities also need Trading Account to assess the correct purchases and correct sales as per the sales tax return submitted by a business firm.
  • Trading Account helps the Excise Authorities  to assess the excise duties of business firms.
  •  With the help of Trading Account, the price of the product can be decided by the management after keeping in mind the market competition.

Note: No Trading Account is prepared by any service provider firm.

When a Trading Account is Prepared? It can be prepared by a business firm on any particular date. It can be prepared on monthly basis or quarterly basis or half yearly basis or yearly basis according to its requirement. For example all the companies registered with stock exchanges furnish monthly details relating to sale, and profits. Therefore these companies have to prepare the Trading account on monthly basis. But if we talk in general then it is prepared at the end of the financial year.

Contents of Trading Account:- A Trading Account shows the following details:-

  • Opening Stock of  raw material, semi-finished goods and finished goods.
  • Closing Stock of  raw material, semi-finished goods and finished goods.
  • Purchases of goods Less Purchase Returns
  • Sales of goods Less Sales Returns
  • All direct expenses which are directly related to purchases or sales or manufacturing of goods.

How a Trading Account is prepared? Trading account is prepared with the help of Trial Balance. Trading Account is like a statement which is divided in two parts i.e. Income part and Expenditure Part.

In income part, we show the following details:-

  • Sales of goods Less Sales Returns
  • Closing Stock of goods

In Expenditure part, we show the following accounts:-

  • Opening stock of goods
  • Purchases of goods Less Purchase Returns
  • All direct expenses relating to purchase, sale and manufacturing of goods like Cartage & Freight Expenses, Rent for godown or factory, Electricity and Power expenses, wages of workers and supervisors, Packing expenses etc.

Example of Trading Account

From the following trial balance we shall prepare trading account:-

TRIAL BALANCE OF M/S ABC ENTERPRISES AS ON 31.03.2016

PARTICULARS AMOUNT AMOUNT
DR. CR.
OPENING STOCK OF GOODS

250000

PURCHASES

500000

SALES

900000

FUEL EXPENSES FOR MACHINERY

50000

ELECTRICITY EXPENSES – FACTORY

60000

ELECTRICITY EXPENSES – OFFICE

10000

WAGES TO WORKERS

100000

SALARIES

30000

PACKING CHARGES

5000

TELEPHONE EXPENSES

3000

PRINTING & STATIONERY EXPENSES

2000

BANK OF INDIA

15000

CASH IN HAND

12000

SUNDRY DEBTORS

40000

SUNDRY CREDITORS

77000

MACHINERY A/C

30000

CRATGE & FREIGHT EXP.

6000

BANK CHARGES

500

BANK INTEREST

12500

ADVERTISEMENT EXP.

10000

SALES PROMOTION EXP.

15000

CONVEYANCE EXP.

12000

VEHICLE MAINTENANCE EXP.

30000

CAPITAL A/C

216000

 Total

1193000

1193000

CLOSING STOCK AS ON 31.03.16 WAS RS. 224000/=

M/S ABC ENTERPRISES

TRADING A/C AS ON 31.03.2016

INCOME AMOUNT CR.
SALES

900000

CLOSING STOCK

224000

TOTAL

1124000

OPENING STOCK

250000

PURCHASES

500000

FUEL EXPENSES FOR MACHINERY

50000

ELECTRICITY EXP. – FACTORY

60000

WAGES TO WORKER

100000

PACKING CHARGES

5000

CARTAGE & FREIGHT EXP.

6000

GROSS PROFIT

153000

TOTAL

1124000

Notes:

  1. Closing stock is never shown in Trial Balance. The amount of closing stock, first, is shown in income side of Trading Account, secondly, it is shown in balance sheet under current asset.
  2. In Maximum cases, the value of closing stock is done at the cost or market price whichever is less.
  3. Only physical Closing stock is taken on the date of preparation of trading account.
  4. Presentation of Trading Account can be done in horizontal form also but the contents remain same.

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