The Essential Guide to Trading Accounts: Formats, Importance, and Examples

Financial Statements

Are the statements prepared at the end of the accounting period to determine the financial performance i.e. profit and loss during the accounting period and also the financial position of the business as on the date. A complete set of financial statement (sole proprietorship)

1. Trading & profit and loss account (Income Statement)
2. Balance Sheet

They are also known as final accounts.

Income statement

Is a summary of accounts that affects the profits or loss of an enterprise. Income statement has two parts

1. Trading account shows gross profit or gross loss
2. Profit and loss account shows net profit or loss

Trading Account

A trading account is an account which contains, " in summarized form, all the transactions, occurring, throughout the trading period, in commodities in which he deals" and which gives the gross trading result. In short, trading account is the account which is prepared to determine the gross profit or the gross loss of a trader.

A trading account is a part of the profit and loss account, as both these accounts are prepared together and divided into two parts. The first part known as a trading account where all the direct expenses and incomes are recorded. The trading account reveals the gross profit earned or gross loss incurred during the accounting period.

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

1. Debited – Opening Stock or inventory, Net Purchase, Direct Expense
2. Credited – Sales, Service rendered & Closing Stock of Inventory.

Balance difference of two gross profit or loss.

Items of Trading Account

The following items usually appear in the debit and credit sides of the trading account.

1. Debit Side Items: The value of opening stocks of goods (i.e., the stock of goods with which the business was started).
• Net purchase made during the year (i.e., purchases less returns).
• Direct expenses, if any.
2. Credit Side Items: Total sales made during the period less the value of returns, i.e., net sales.
• The value of closing stock of goods.
3. Gross Profit - The Trading Account shows the gross profit (or loss) for the reporting period. The gross profit equals the sales revenue minus the cost of goods sold.

According to J.R. Batlibboi "The Trading Account shows the result of buying and selling goods. In preparing this account, the general establishment charges are ignored and only the transactions in goods are included."

“The trading account shows the results of buying and selling of goods in preparing this account, the general establishment charges are ignored and only the transactions in goods are included”

Need and importance of trading account

1. It provides information about gross profit or gross loss.
2. It provides information about the direct expense
3. Comparison of closing stock.
4. It provides safety against possible losses.

Balance Sheet

1. Ascertaining financial position
2. Comparison with previous year
3. Determining solvency position

Format of a Trading Account

Format of a Trading Account is given below:

Particulars Dr.	Amount	Particulars Cr.	Amount
To Opening Stock		By Sales
To Purchases		Less: Returns Inward
Less: Returns Outward		By Scrap Sales
To Wages and Salaries		By Closing Stock
To Direct Expenses		By Abnormal Loss of Stock
To Carriage Inwards		By Gross Loss c/d (Transferred to Profit and Loss A/c)
To Freight and Cartage
To Customs & Insurance
To Gas, Water & Fuel
To Factory Expenses
To Royalty on Production
To Cargo Expenses
To Shipping Expenses
To Import Duty
To Custom Duty
To Dock Charges
To Octroi
To Commission on Purchases
To Gross Profit c/d (Transferred to Profit and Loss A/c)

*Either Gross Profit or Gross Loss will appear.

Feature of Trading Account 

1. Gross profit or loss is transferred to profit & loss account.
2. It based on matching principles, hence revenue from sale of goods or service are matched with the cost of goods sold or service rendered.
3. Cost of goods sold – direct expenses incurred up to sale.

Cost of goods sold = Opening Stock or Inventory + Net Purchase + Direct Expense – Closing stock or inventory.

Items shown in trading account (debit side)

1. Opening stock or inventory - Stock on hand at the beginning of the year is termed as opening stock. The closing stock of the previous accounting year is brought forward as opening stock of the current accounting year. In the case of new business, there will NOT be any opening stock.
2. Purchase & purchase return (Net Purchase) - Purchases made during the year, includes both cash and credit purchases of goods. Purchase returns must be deducted from the total purchases to get net purchases.
3. Direct Expense: Expenses which are incurred from the stage of purchase to the stage of making the goods in saleable condition are termed as direct expenses like;
• Carriage / freight / cartage inwards - It means the transportation charges paid to bring the goods from the place of purchase to the place of business.
• Wages - It means remuneration paid to workers.
• Power (electricity) & fuel
• Factory rent this expense are related to production
• Duty on purchase - Customs duty, dock dues, clearing charges, import duty etc.These expenses are paid to the Government on the goods imported.
• Royalties
• Consumable stores

Items shown in trading account (credit side)

1. Sales and sales return (net sales) - This includes both cash and credit sale made during the year. Net sales are derived by deducting sales return from the total sales.
2. Closing stock or inventory - Closing stock is the value of goods which remain in the hands of the trader at the end of the year. It does not appear in the trial balance. It appears outside the trial balance. (As it appears outside the trial balance, first it will be recorded in the credit side of the trading account and then shown in the assets side of the balance sheet).

Balancing of trading account (different = ???)

Example of trading account

Illustration (without GST) prepare trading account for the year ended 31st March 2025 from the following balances:

Trading Account for the year ended 31st March, 2025

Balances:

Stock (1st April, 2024)	1,00,000
Wages	50,000
Sales	15,50,000
Returns Outward	80,000
Freight	5,000
Purchases	10,00,000
Carriage Inwards	10,000
Returns Inward	50,000

Closing Stock as on 31st March, 2025 was valued at ₹ 2,00,000.

Solution:

Trading Account for the year ended 31st March, 2025

Particulars	Amount	Particulars	Amount
To Opening Stock	1,00,000	By Sales (15,50,000) Less: Returns Inward (50,000)	15,00,000
To Purchases (10,00,000)          Less: Returns Outward (80,000)	9,20,000	By Closing Stock	2,00,000
To Wages	50,000
To Carriage Inwards To Freight To Gross Profit c/d (Transferred to Profit & Loss A/c)	10,000 5,000 6,15,000
	17,00,000		17,00,000

Advantages of Trading Account

The advantages of the trading account are as follows: 

1. A trader can find out the gross profit and thereby can ascertain the percentage of profit he has earned on the cost of goods sold. This percentage of gross profit may serve as his ready guide for the adjustment of future sale price. 
2. A trading account helps a trader to compare his stock at open with that at the close. He can further find out whether the purchases he has made during the period of account have been judicious. 
3. Once can compare the figure of sales with similar figure of the previous year and can find out whether business is improving or declining. 
4. If the gross profit disclosed by the trading account is less than expected, an enquiry can be made into the cause responsible for the decline. And if the gross profit is more than was expected, steps can be taken to maintain it. 

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