Contents of Trading Account

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It is very important for the management to have information about the economic activities of the business because only with this the management can make appropriate decisions for the business, for which many types of reports or statements are prepared in the business. Every report prepared in a business has its own features and every report is essential for the business. Different data may be required to prepare these reports.

Trading account is the financial statement of a business which is used to calculate gross profit and loss. It is required to calculate the net profit and loss of the business because without it the Profit and Loss Account is not prepared. Trading account is prepared after systematically recording and managing all the transactions. Generally, it is prepared at the end of the year using data from the entire financial year.

Contents of Trading Account

Following are the contents of the trading account:

1. Opening Stock:

Opening stock means the remaining stock of the previous year. When the stock is left at the end of the year it is called closing stock and the same becomes the opening stock for the next year. The opening stock is written on the debit side of the trading account. Opening stock occurs when the quantity purchased in the previous year exceeds the quantity sold. Given below are two formulas which are used in calculating the opening stock.

• Opening Stock = Raw Material Cost + Work in Progress Values + Finished Goods Cost
• Opening Stock = COGS + Closing Stock – Purchases

2. Direct Trading Expenses:

Direct trading expenses means expenses incurred from trading activities. These expenses are necessary for doing trading because without them trading cannot be done. Direct trading expenses include purchases, inward freight, wages, import duties, customs duties, etc. Simply put, it includes all expenses incurred in purchasing and preparing goods and services for business. Direct trading expenses are recorded on the debit side of the trading account.

3. Direct Trading Income:

Direct trading income means income from direct trading activities. This income is very important for the business because without it the business cannot survive. Profit directly depends on direct income as it is the largest source of income in business. Direct trading income includes sales, royalties received, licensing fees, affiliations, etc. Direct trading income is recorded on the credit side of the trading account.

4. Closing Stock:

Closing stock means the stock remaining at the end of the financial year. Closing stock occurs only when the purchase quantity and opening stock quantity exceed the selling quantity. Closing stock is recorded on the credit side of the trading account. The closing stock of this year becomes the opening stock for the next year. Closing stock is also recorded on the asset side of the balance sheet as closing stock is an asset of the business.

5. Gross Profit:

Gross profit means profit from trading activities. It is recorded on the debit side of the trading account. Gross profit occurs when the credit side of the trading account exceeds the debit side. In simple words, when direct income is more than direct expenses then it is called gross profit. Gross profit is very important for business because the business mainly depends on it. Note that gross profit is not the actual profit of the business.

6. Gross Loss:

Gross loss means loss from trading activities. It is recorded on the credit side of the trading account. Gross loss occurs when the debit side of the trading account exceeds the credit side. This can happen due to many reasons like selling at loss, spoilage, damages, etc. In simple words, when direct expenses exceeds direct income, it is called gross loss. Note that gross loss is not the actual loss of the business.

Read Also:

• What is a Trading Account? Meaning, Features, and More.
• Objectives of Trading Account
• Format of Trading Account

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