Meaning of Trading Account

Meaning of Trading Account: The very first financial statement prepared by an enterprise is a Trading Account. It is an account that is prepared to ascertain the trading results of a firm in form of gross profit earned or gross loss incurred during an accounting period. It is a nominal account in which all expenses or losses are debited and all incomes or gains are credited. On the debit side of this account purchases, opening stock, and all the direct expenses are shown. While on the credit side Sales and closing stock is shown. An important point to be noted here is that Trading Account records only direct expenses. These are those expenses that are directly related to the manufacturing and production of goods and services. The excess of credit side over its debit side is regarded as Gross Profit.

On the other hand, excess of debit side over its credit side is regarded as Gross Loss. The net result of this account i.e. gross profit or loss is transferred to the Profit and Loss Account. In the case of gross profit, it is transferred to the credit side of the Profit and Loss Account. In contrast, the gross loss is transferred to the debit side of the Profit and Loss Account.

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