QS Study

Importance of Trading Account

The account which is organized to establish the gross revenue or gross loss of a business apprehension is called trading account. It is comparable to a conventional bank account, holding cash and securities, and is administered by an investment dealer. It is very vital to find out gross earnings or loss for the business to know whether purchasing, manufacturing and sales are adequate for earning or not. The major objectives or significant of trading account are as follows.

  • It helps to know gross earnings or loss.
  • It provides information about the direct expenses.
  • To ascertain the performance of different years of business through the gross profit ratio which is calculated by dividing the gross profit by sales.
  • To help to calculate the ratio of cost of goods sold to sales which is helpful in the fixation of price of the products.
  • It provides safety against possibilities of loss.
  • It helps in comparison of closing stock with last year’s stock.
  • To determine the cost of production which helps to calculate the gross profit or loss of trading activities.

Trading account helps in calculating gross profit or loss rate. This is of a vast significance since this manipulates a firm to decide on their future plans on business strategies to get better their present condition. Any company bears the expenses with a gross profit which is compared with their net sales.