What is a Trading Account? Meaning, Features, and More.

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In every business there is a surely exchange of goods and services because without exchange of goods and services business cannot run. It is very important for every business to systematically record and manage these transactions because without systematically recording and managing the transactions, related reports cannot be prepared in the business.

All direct income and expense transactions related to trading are recorded in the trading account such as purchases, purchase returns, sales, sales returns, direct expenses etc. A profit and loss account cannot be prepared without preparing a trading account because for this it is necessary to know the gross profit and loss. If a manufacturing account is prepared in a business, then the direct income and expenses related to it are recorded in it.

What is a Trading Account?

Trading account is a summary of the direct income and expenses of a trade (business) and is a financial statement and is used to calculate the gross profit and loss of a trade in a particular period. Only direct income and expense are recorded in the trading account, and it is a nominal account due to which all the expenses are recorded on the debit side and all the income is recorded on the credit side.

Rules applicable in Trading Account

Debit all expenses and losses.
Credit all income and gains.

Before preparing trade account, economic transactions are identified, measured, recorded, classified, etc. and all related accounts are closed so that those accounts can be recorded in it. Preparing a trading account is a time-consuming process due to which it is prepared a certain period of time. Due to technology, preparing a trading account has become much easier than before.

Features of Trading Account

Following are the features of trading account:

1. Financial Statement:

Trading account is a financial statement as it shows the summary of direct income and expenses and it is a part of the financial statements which include Balance Sheet, Profit and Loss Account, Trading Account, Manufacturing Account, Cash Flow Statement, etc. If manufacturing account are not prepared in a trade then it is called the first financial statement.

2. Direct Income and Expenses:

Only direct income and expenses are recorded in the trading account as it is used to calculate gross profit and loss. Gross profit and loss is calculated through trading account only. Direct expenses include purchases, freight inward, wages, import duties, factory rent, factory insurance, etc. and direct income includes sales, etc.

3. Nominal Account:

Trading account is a nominal account due to which all expenses are recorded on the debit side and all income are recorded on the credit side. Only direct expenses are recorded in expense and only direct income are recorded in income. Indirect income and expense are recorded in the profit and loss account.

4. Gross Profit and Loss:

Trading account is used to calculate the gross profit and loss of a trade. After recording all the related transactions in the trading account, when the debit side exceeds the credit side, the business incurs a gross loss, and when the credit side exceeds the debit side, the business incurs a gross profit.

5. Certain Period:

Trading account cannot be prepared whenever one wants as it is a time-consuming process and before it is prepared all the related accounts have to be closed so that they can be recorded in it. It is generally prepared at the end of the financial year, like if the financial year starts from April then it will be prepared taking data till 31st March.

6. Help in Planning:

Trading account helps in planning as it provides data of direct income and expenses incurred in the business. If opening and closing stock is available in the trade then it is also shown in the trading account. With its help, management can make appropriate decisions for the future such as decisions for sales, decisions for purchases, decisions for direct expenses, etc.

Read Also:

• Objectives of Trading Account
• Format of Trading Account
• Contents of Trading Account

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