Trading Account gives the overall result of trading. i.e., purchasing and selling of goods. In other words, it explains whether purchasing of goods and selling them has prbved to be ,rofitable for the business or not. It takes into account on the one hand the cost of goods sold and on the other the value for which they have been sold away. In case the sales value is higher than the cost of goods sold, there will be a profit, while in a reverse case, there will be a loss. The profit disclosed by the Trading Account is termed as Gross Profit. Similarly the loss disclosed by the Trading Account is termed as Gross Loss.
Equation for Preparing Trading Account
On the basis of the Illustrations given in the preceding pages, the following equation can be derived for preparing Trading Account
Gross Profit = Sales — Cost of goods sold
Cost of goods sold = Opening Stock + Purchases + Direct Expenses – Closing Stock Therefore, Gross Profit = Sales – (Opening Stock + Purchases + Direct Expenses – Closing stock) Or Gross Profit = (Sales i- Closing Stock) – (Opening Stock + Purchases + Direct Expense)
The term “Direct Expenses” include those expenses which have been incurred in purchasing the goods, bringing them to the business premises aud making them fit for sale. Examples of such expenses are carriage charges, octroi, import duty, expenses for seasoning the goods, etc.