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Trading Account – Introduction

The Trading Account is the first step in preparing Final Accounts for a trading (manufacturing/merchandising) business.

Why do we need a Trading Account?

  • To determine Gross Profit (or Gross Loss)
  • Shows how efficiently the business bought and sold goods
  • Helps in pricing decisions and inventory control

When is it prepared?

  • At the end of the accounting period (usually a year) before the Profit & Loss Account.

Structure of a Trading Account

SideItems
DebitOpening Stock, Purchases, Direct Expenses (e.g., Carriage Inwards)
CreditSales, Closing Stock

Formula:

Gross Profit = (Sales + Closing Stock) – (Opening Stock + Purchases + Direct Expenses)

Key Terms

TermMeaning
Opening StockValue of inventory at the beginning of the period
Closing StockValue of inventory at the end of the period
Direct ExpensesCosts directly related to bringing goods to the place of sale (e.g., carriage inwards)
Gross ProfitProfit before deducting indirect expenses (administrative, selling)

Example (Indian Context)

ABC Traders – FY 2024-25

ItemAmount (₹)
Opening Stock1,20,000
Purchases4,50,000
Carriage Inwards15,000
Total Debit5,85,000
Sales7,00,000
Closing Stock80,000
Total Credit7,80,000
Gross Profit7,80,000 – 5,85,000 = 1,95,000

Steps to Prepare

  1. List Opening Stock at the top of the Debit side.
  2. Add Purchases and Direct Expenses.
  3. On the Credit side, write Sales and Closing Stock.
  4. Calculate Gross Profit and show it on the Credit side (if profit) or Debit side (if loss).

Common Mistakes

  • Forgetting Closing Stock (leads to understated profit)
  • Including Indirect Expenses (should be in P&L)
  • Not adjusting Purchase Returns (should reduce Purchases)

Quiz

Test Your Knowledge

Question 1 of 4

1. Gross Profit is calculated as:

Sales – Purchases
(Sales + Closing Stock) – (Opening Stock + Purchases + Direct Expenses)
Opening Stock – Closing Stock
Sales – Direct Expenses

💡 Final Wisdom: "Trading Account tells you if your core business of buying and selling is profitable. If you can’t make a profit here, the rest won’t matter!"

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