The format of Trading Account
Trading means buying and selling. The trading account demonstrates the effect of buying and selling of goods. The primary step of final account is a trading account. It is a nominal account which is prepared at the end of the accounting year. Trading account helps to find out gross earnings or gross loss during the accounting time.
Items appearing in the debit side
(1) Opening stock: Stock on hand at the opening of the year is termed as opening stock. The closing stock of the earlier accounting year is brought forward as opening stock of the present accounting year. In the case of new business, there will not be any opening stock.
(2) Purchases: Purchases made during the year, includes both cash and credit purchases of goods. Purchase returns must be deducted from the total purchases to get net purchases.
(3) Direct Expenses: Expenses which are incurred from the stage of purchase to the stage of making the goods in saleable condition are termed as direct expenses. Some of the direct expenses are:
- Wages: It means remuneration paid to workers.
- Carriage or carriage inwards: It means the transportation charges paid to bring the goods from the place of purchase to the place of business.
- Customs duty, dock dues, clearing charges, import duty etc. These expenses are paid to the Government on the goods imported.
- Other expenses: Fuel, power, lighting charges, oil, grease, waste related to production and packing expenses.
Items appearing in the credit side
(i) Sales: This includes both cash and credit sale made during the year. Net sales are derived by deducting sales return from the total sales.
(ii) Closing stock: Closing stock is the worth of goods which remain in the hands of the trader at the end of the year. It does not appear in the trial balance. It appears outside the trial balance. (As it appears outside the trial balance, first it will be recorded in the credit side of the trading account and then exposed in the assets side of the balance sheet).