Importance of the Trading Account

Importance of the Trading Account

Trading Account provides the following information to a businessman regarding his business:

I. Gross Profit disclosed by the Trailing Account tells him the upper limit within which he should keep the operating expenses of the business besides saving something for himself. The cost of purchasing and the price at which he can sell the goods are governed largely by market factors over which he has no control. He can control only his operating expenses. For example, if the cost of purchasing an article is Rs 10 and it can be sold ii’ the market at Rs 10 per unit, the gross margin available on each article is Ps 5. In case a businessman proposes to sell 1,000 units of that article in a year, his gross profit or gross margin will be Rs 5,000. His other expenses should therefore be less than Rs 5,000 so that he can also save something for himself.

2. He can calculate his Gross Profit Ratio1 and compare his performance year after year. A fall in the Gross Profit Ratio means increase in the cost of purchasing the goods or decrease in the selling price of the goods or both. In order to maintain at least same figure of gross profit in absolute terms, he will have to push up the sales or make all out efforts to obtain goods at cheaper prices. Thus, he can prevent at least fall in the figure of his gross profit if can not bring any increase in it;

3. Comparison of stock figures of one period from another will help him in preventing unnecessary lock-up of funds in inventories.

4. In case of new products, the businessman can easily fix up the selling price of the products by adding to the cost of purchases, the percentage gross profit that he would like to maintain. For example, if the trader has been so far maintaining a mte of gross profit of 20% on sales and he introduces a new product in the market having a cost of Rs 100, he should lix the selling price at Its 125 in order to maintain the same nile of gross profit (i.e., 20% on sales).