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What is Trading Account? Explain its purpose. |
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Answer» The trading account is an account which shows the results of buying and selling of goods or services. It contains summarized form of all the transactions occurring during a trading period. This account is credited with direct incomes and debited with direct expenses. Trading account is prepared to ascertain the gross result of the business. The gross result of the business is either gross profit or gross loss. If the net sales exceeds cost of goods sold then there is gross profit and if the opposite takes place, there is a gross loss. Gross profit = Net sales – Cost of goods sold Gross Loss = Cost of goods sold – Net Sales Purposes of a trading account are: 1. To ascertain the gross profit or gross loss. 2. To enable the management to make a comparison of gross profit or gross loss with that of the previous year. 3. To ascertain different ratios such as gross profit ratio, ratio of cost of goods sold to sales etc. |
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