Objectives of Trading Account

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The main objective of setting up a business is to earn profit by selling goods and services for which the business buys and sells goods and services. A business can be profitable only when the income exceeds the expenses, for this various accounting reports are prepared in the business. Each report is helpful in understanding the business. Accounting reports can be prepared only when all economic transactions are systematically recorded and managed.

All direct income and expenses related to trade are recorded in the trading account. If manufacturing account is prepared in any business then the direct income and expenses related to it are recorded in it. Trading Account is prepared before profit and loss account because without it profit and loss account cannot be prepared.

Objectives of Trading Account

Following are the objectives of trading account:

1. Gross Profit and Loss:

The first and main objective of trading account is to calculate gross profit and loss using direct income and expenses of trade transactions. To calculate gross profit and loss all direct expenses are recorded on the debit side and all direct income are recorded on the credit side. When all the transactions are recorded then both the sides are added, if the debit side is more than the credit side then it means gross loss and if the credit side is more than the debit side then it means gross profit.

2. Management of Trading Transactions:

The objective of trading account is also to manage trading transactions because no business can be run without trading transactions. Trading transactions include sales, purchases, sales returns, purchase returns, direct expenses, etc. Only direct income and expenses related to trading are recorded in the trading account. If opening and closing stock is available then it is also recorded in the trading account. All direct expenses and opening stock are recorded on the debit side and all direct income and closing stock are recorded on the credit side.

3. Direct Income and Expenses:

By preparing trading account, direct income and expenses can be seen at one place, hence this is also one of the objectives of trading account. Gross profit and loss in business can be managed by managing direct income and expenses. Direct expenses includes purchases, inward freight, wages, factory rent, import duties, etc. and direct income includes sales, license fees, royalties, etc.

4. Helps in Decision Making:

Helping the management in taking decisions is also an objective of trading account because without data the management cannot take decisions related to trading activities. Trading Account shows a summary of the trading activities taking place in a business over a certain period with the help of which the management can take appropriate decisions such as how to reduce direct expenses, whether to increase sales or not, whether to reduce purchases or not, etc.

5. Price Strategy:

Another objective of trading account is also to help the management in adopting an appropriate pricing strategy for goods and services because without adopting an appropriate pricing strategy the business may suffer losses. Trading account provides direct income-expenses and opening-closing stock data with the help of which the management can adopt an appropriate strategy for pricing. Note: Profit and Loss Account data is also required for appropriate pricing strategy.

6. Helps in Analyzing:

Helping the management in analyzing the trading transactions is also an objective of the trading account because with the help of the analyzed data of the trading transactions the management can take various appropriate decisions. Analysis of trading transactions includes direct expenses, direct income, opening stock, closing stock, direct returns, gross profit and loss, etc. Management can also compare the analyzed data.

Read Also:

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

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