Trading Account: Meaning, Format and Examples

Meaning of Trading Account: –

Trading account is prepared to find out the gross profit of the business for the particular accounting period. It is calculated by comparing the net sale with the cost of goods sold(COGS).

Gross Profit/Loss =  Net Sale – COGS 

Net Sale =  Total Sale (Cash sale + Credit Sale) – Sale Returned/Returned Inward

Cost of Goods Sold = Opening Stock + Net Purchase + Direct Expenses – Closing Stock.

• Opening Stock = Stock we have in hand at the start of the accounting year.
• Net Purchase =  Total Purchase (Cash Purchase + Credit Purchase ) – Purchase Returned/Returned Outward
• Direct Expenses = All expenses which are directly related to purchasing of goods and converting them into saleable condition.
• Closing Stock = Stock we have in hand at the end of the accounting year.

It shows the only gross profit it is not actual earning of the business. We will get know the actual earning in the Profit/Loss account after making the adjustment of all expenses (i.e. Direct and Indirect Expenses).

The feature of Trading Account: –

1. Trading Account shows the total revenue of the business for the current financial year.
2. It shows Gross Margin(Profit) or Loss for the current financial year.
3. It will be prepared at the end of each accounting or financial year.
4. Only Direct Expenses posted on the Debit side and Direct revenue are posted on the credit side.
5. Excess of credit side over the Debit side represents the Profit of the year and Excess of Debit side over Credit side represents the loss for the year.
6. Help in comparison with the closing stock with an opening stock
7. Help in fixation of the Selling price for the product in trading Business.

The Need for Trading Account: –

Gross Profit:- 

We need the trading account to ascertain the gross profit for the year. Gross profit is playing a vital role in every business because the business has to meet all its expenses(i.e. Direct and Indirect expenses) from it.

Calculation of Gross Profit Ratio: –

It helps us to calculate GP ratio by providing us with the net sale and Gross Profit/Loss.  (GP Ratio =  Gross Profit / Net sale)

Stock or Inventory Turnover: –  

It helps us to calculate the Stock or Inventory turnover ratio by providing us with the net sale and Closing stock.  (Stock or Inventory turnover ratio =  Closing stock / Net sale)

Net Sales: –

We got total sales and sales returns from the ledger accounts but the amount of net sale can be determined from this account.

The trend of Direct Expense and Direct Incomes:- 

It helps in determining the trend of the Direct expenses and Direct income involved in the cost of goods sold and sales respectively. With the help of tread, top management takes a future decision for setting up the price of the products.

Preparation of Trading Account:- 

For preparing Trading Accounts, we have to close the ledger of direct expenses or direct income. for this we have to post following closing journal entries in the Journal Proper: –

Closing Journal Entries: –

1. For closing all the Debit accounts of Direct expenses and Opening Stock: –

Trading Account        Dr.

To Opening Stock Account

To Purchase Account

To Wages Account

To Carriage inward Account

To Freight inward Account

(Being all expenses and Opening Stock related to Trading Account transferred)

2. For closing all the Credit accounts related to the Trading A/c: –

Sales Account        Dr.

Closing Account    Dr.

To Trading Account

(Being all Income and Closing Stock related to Trading Account transferred)

3. For the recording of Purchase Return and Sales Return in Trading A/c: –

(i) In case of Purchase return or return outwards

Purchase Return Account        Dr.

To Purchase Account

(Being balance of purchase return account transferred to purchase account)

(ii) In the case of Sale return or return inwards

Sales Account        Dr.

To Sales Returns Account

(Being balance of Sale return account transferred to Sale account)

4. For the recording of goods withdrawal by the owner for personal use not recorded yet transferred in Trading A/c: –

Drawing Account        Dr.

To Purchase Account

(Being goods withdrawal by the owner not recorded yet transferred to purchase account)

5. For the recording of goods distributed as sample or Donation not recorded yet transferred in Trading A/c: –

Donation     Dr.

To Purchase Account

(Being goods distribute as Donation not recorded yet transferred to purchase account)

6. For the transfer of gross profit/loss to Profit and Loss Account: –

(i) In the case of Gross Profit

Trading A/c               Dr.

To Profit/Loss A/c

(Being gross profit transferred to profit/loss account )

(i) In the case of Gross loss

Profit/Loss A/c           Dr.

To Trading A/c

(Being gross loss transferred to profit/loss account )

The format of Trading Account:-

Note : –
if the total of Credit side excess over Debit side = Gross Profit
if the total of Debit side excess over Credit side = Gross Loss

1. Illustration: –

Prepare trading account for the year ending March 31, 2018, in the books of Tutorstips Ltd. from the following balances as on March 31, 2018.

Also, show the closing entries.

Solution: –

Tutorstips Ltd.

Journal book 

Tutorstips Ltd.

Trading Account as on March 31, 2018

Or 

If you want to download the above illustration please download this following image: 

2. Illustration: –

Prepare trading account for the year ending March 31, 2018, in the books of Aman Enterprise Ltd. from the following balances as on March 31, 2018.

Also, show the closing entries.

Firstly solve it by yourself then saw the solution. 

Solution: –

Aman Enterprise Ltd.

Journal book 

Aman Enterprise Ltd.

Trading Account as on March 31, 2018

Or 

If you want to download the above illustration please download this following image: 

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