Explore trading account features, purpose, items, format, and contents.

Financial Statement

Financial Statements are prepared to get an idea of profit or loss as well as the financial position of the firm or business. It is prepared at the end of the financial year. The financial statements are useful for the users in understanding the position and status of business and making decisions accordingly.

In simple terms, Are the statement prepared at the end of the accounting period to determine the financial performance i.e., profit & loss during the accounting period and also the financial position of the business as on the date.

Set of financial statements includes

Balance Sheet
Trading and Profit & Loss Account

Schedules and notes forming part of balance sheet, and Profit & Loss Account.

Financial Statements are prepared from the Trial Balance to get an idea of:

How much profit was earned in a particular period? Profit and Loss Account shows the profit earned during the year.
What is financial position of the business at the end of a particular period? Balance Sheet is a position statement that shows the financial position on a particular date.

Balance sheet and Profit and Loss Accounts are the ‘Final Statements or Accounts’. They are the end product of Financial Accounting. Income statement is the summary of accounts that affects the profit or loss of an enterprise.

Objective or need or importance of financial statements

Trading and profit & loss account (Income statement)

Determine gross and net profit & loss
Comparison with previous year’s profits
Details of expenses and income
Reserves
Ratios (gross profit ratio and net profit ration etc.)

Balance sheet

Ascertaining financial position
Comparison with previous year
Determining solvency position

They are also known as final accounts.

An Income Statement has two parts:

Is a summary of accounts that affects the profit or loss of an enterprise. Income statements two parts

Trading account – show gross profit and loss for the accounting period
Profit and loss account – show net profit and loss for the accounting period.

Trading Account

Trading account is the first part of this account, and it is used to determine the gross profit that is earned by the business while the profit and loss account is the second part of the account which is used to determine the net profit of the business.

Trading account is used to determine the gross profit or gross loss of a business which results from trading activities. Trading activities are mostly related to the buying and selling activities involved in a business. Trading account is useful for businesses that are dealing in the trading business. This account helps them to easily determine the overall gross profit or gross loss of the business. The amount thus determined is an indicator of the efficiency of the business in buying and selling.

It is the financial statement which shows result of buying and selling of goods & services during an accounting period.

Debited – opening stock or inventory, Net purchase and direct expense
Credited – Sales, service rendered and closing stock of inventory

Difference in two sides – Gross profit and loss

The formulae for calculating gross profit are as follows:

Gross profit = Net sales – Cost of goods sold
Where Net sales = Gross sales of the business minus sales returns, discounts and allowances.

The trading account considers only the direct expenses and direct revenues while calculating gross profit. This account is mainly prepared to understand the profit earned by the business on the purchase of goods. Items that are seen in the debit side includes purchases, opening stock and direct expenses while credit side includes closing stock and sales.

Features of Trading Account

It is the first stage in preparation of final accounts.
It records only net sales and direct cost of goods sold.
The balance of this account discloses the gross profit or gross loss.
The balance of this account is transferred to the Profit and Loss Account.
It is based on matching principle, hence revenue from sale of goods and service are matched with the cost of goods sold and service rendered.
Cost of goods sold direct expenses incurred up to sale.

Purpose of Trading Account

It is prepared to find out the gross profit or gross loss during the accounting year.
It is based on matching the selling price of goods and services with the cost of goods sold and services rendered.

Items shown in Trading Account

Items shown in trading account – Debit Side

Opening stock or Inventory
Purchase and Purchase Return (Net Purchase)
Direct Expense

Carriage or freight or cartage inwards
Wages
Power (electricity) & fuel
Factory rent
Duty on purchase
Royalties
Consumable stores

Items shown in trading account – Debit Side

Sales and sales return (net sales)
Closing stock or inventory

Balancing of trading account

After recording the above items in the respective sides of the Trading Account, the balance is calculated to ascertain Gross Profit and Gross Loss.

If the total of the credit side is more than that of debit side, the excess is Gross Profit.
If the total of the debit side is more than that of credit side, the excess is Gross Loss.

Format of a Trading Account

Format of a trading account is given below:

Trading Account for the year ended …

Dr. Cr.
Particulars		Amount	Particular		Amount
To Opening Stock		xxx	By Sales	xxx
To Purchase	xxx		Less – Return inward	(xxx)	xxx
Less – Return Outward	(xxx)	xxx	By Scarp sales		xxx
To Wages and salaries		xxx	By Closing stock		xxx
To Direct expenses		xxx	By Abnormal loss of stock		xxx
To Carriage inwards		xxx	(Transferred to profit and loss a/c)
To Freight and cartage		xxx
To Factory power and fuel		xxx
To Gross profit c/d
(Transferred to profit and loss a/c)

Either gross profit or gross loss will appear

For Example

Prepare trading account for the year ended 31^st March 2023 from the following balances.

Stock (1^st April 2022)	1,00,000	Purchase	10,00,000
Wages	50,000	Carriage Inwards	10,000
Sales	15,50,000	Return inwards	50,000
Returned outward	80,000
Freight	5,000

Closing stock as on 31^st March 2023 was valued at 2,00,000.

Solution

Trading Account for the year ended 31st March 2023

Dr. Cr.
Particulars		Amount	Particular		Amount
To Opening Stock		1,00,000	By Sales	15,50,000
To Purchase	10,00,000		Less – Return inward	(50,000)	15,00,000
Less – Return Outward	(80.000)	9,20,000	By Closing stock		2,00,000
To Wages		50,000
To Carriage inwards		10,000
To Freight		5,000
To Gross profit c/d		6,15,000
		17,00,000			17,00,000

Contents of Trading Account

Opening Stock

Opening Stock refers to the closing balance of the previous year. It is generally put as first item on the debit side of the Trading account. In case of trader, the opening stock consists of different types of finished goods. For manufacturing, the opening stock consists of raw materials, work in process and finished goods

Purchases and Purchase Returns

The purchase account shows a debit balance, showing the gross number of purchases made of the materials. This refers to the goods purchased, both cash and credit purchases for resale. The purchase of assets meant for permanent use in business such as furniture, machinery is not included.

The Purchase Returns Account shows a credit balance showing the returns of materials to the suppliers. On the debit side of the trading account, the net amount is shown as:

To Purchase	3,00,000
Less –Purchase return	10,000
	2,90,000

Apart from the purchases returns, following entries should also be deducted

Goods taken by the proprietor for his personal use.
Goods given as charity.
Goods given as samples.

Items shown on the Credit Side of the Trading Account

Sales and Sales Returns
Closing Stock

Direct Expenses

Those expenses which are incurred on the goods purchased till they are brought to the place of business for sale e.g., Freight inward, insurance, import duty, etc.

In manufacturing business wages, power and fuel, factory rent, etc. are also direct expenses.
Stores consumed during the last year = Opening Balance in Stores + Purchase of Sores during the year – Closing Balance of Stores

FAQ's

What is Trading Account?

A record of the goods or services that were traded by a business during traded by a business during the previous trading period.

What Cost of Sales?

The total amount it cost the firm to produce the goods they actually sold. (Opening stock + purchase +carriage inwards + import duty) – Closing stock

What is Cost of goods available for sale?

The total amount it cost the firm to produce the goods they actually sold + stock not sold yet. (Opening stock + purchase + carriage inwards + import duty) or (Cost of sales + closing stock)

What is import or custom duties?

Any taxes which the firm had to pay on goods they purchased from certain other countries.