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Incidental Trading Activity

Last updated date: 29th Feb 2024
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Trading Activities

Trading activity on the financial market forefront is widely seen as a reflection of the health of the world's economies. People are quite inquisitive about trade, or about trading successes or failures. Generally, it is common to come across the word trade in conjunction with other words such as free trade, which was in the news in 2016 when Britain decided to vote itself out from the EU.

Trading activities are very much of a need to boost the nation’s economy overall. In our next section, we will know about Incidental Trading Activity which is also relevant for our study. 

Incidental Trading Activity

This Incidental Trading activity is also known as incidentals, these are the gratuities and the fees or costs which are incurred in addition to the main item, service or event paid for during the trading pursuits.

Trading pursuits like a hospital or a chemist shop or even a beauty parlour or canteen, all these places can also in use to furnish certain provisions to the members or public. In this scenario, the trading A/c has to be drawn to determine the outcome of this incidental pursuit. The profit from these trading pursuits is solicited to accomplish the primary objectives which satisfy the cause for which the establishment was set up, then it is being transferred to the Income and Expenditure A/c. 

In Relation to the Above, the following are the Details:

  • The trading A/c has to be outlined to ascertain either profit or the loss due to incidental commercial pursuit. All these costs and revenues in a straight way and principally are associated with such pursuits, are documented in the trading A/c. After this, the Balance of the trading A/c is being transferred to the Income and Expenditure A/c

  • Income and Expenditure A/c documents, also the trading profit (or loss), all other incomes and expenses are not documented in the Trading A/c. Surfeit or deficit is disclosed by the Income and Expenditure A/c as is being transferred to the capital or general fund.

What do You Need to Know about Trade?

Generally, we wonder what is meant by trade, what exactly and how much do we need to know about the term is the point of discussion here. 

Trade is the transfer of goods or services from one person or one organization to another person or organization. Trades are possible often in exchange for money. A network that importantly facilitates trade is called a market.

We all have read about the ‘Barter Trading System’ which was actually the first form of trading things without the use of money, this involved the direct exchange of goods and services for yet other goods and services. 

Today, the traders usually negotiate through a medium of exchange, ‘money’. The invention of money, paper money, credit, and non-physical money massively simplified the procedure of trade.

Bilateral trade is one where two traders trade among themselves. While trade between more than two traders is known as multilateral trade. Trade has expanded internationally as well. International trade relationships have helped to develop the global economy, but the introduction of lower tariffs to promote free trade has at times been disadvantageous to markets for local products in developing countries.

What Are Incidental Expenses (IE)?

Incidental expenses, shortly known as incidentals, are the gratuities and other minor fees or costs that are incurred in addition to the main service, item, or event that is paid for during business activities.

Incidental expenses are ancillary to the costs of transportation, meals, and lodging. These are common when an employee travels for business purpose. An employee who takes a taxi from the airport to a hotel will face expenses for taxis and hotels and, if it is locally customary, he will incur incidental expenses of tips to the taxi driver and the hotel staff. 

Company Procedures for Incidentals

Incidental expenses are to be defined, as business or personal, and limited to the quantity, quality, or dollar amount. Company procedures for the reimbursement may require incidental expenses to be paid by the employees out of pocket or by a company credit card or petty cash.

These procedures are to facilitate the tracking of incidental expenses for accounting and tax purposes. Employees are required to keep detailed records of all the purchases. Employees should summarize these records in an expense report backed by the actual receipts evidencing payment and submit them to the company. Incidental expenses paid by the employees' personal funds are to be reimbursed by stand-alone checks so that this is clear that the payments are reimbursements and not the income to the employees.

FAQs on Incidental Trading Activity

Q1. Explain Free Trade?

Ans. Free trade, also known as laissez-faire, a policy by which the government does not discriminate against imports or exports by applying tariffs or subsidies. A free-trade policy will not necessarily imply, however, that a country that abandons all control and the taxation of the imports and exports.  

This theoretical case is suggested by Adam Smith, this argument based on the division of labour among the countries that leads to specialization and greater efficiency and aggregate production. Free trade increases the prosperity for the Americans and all other citizens who are the participating nations. This will allow consumers to buy more, better-quality products at lower costs. This drives economic growth, enhanced efficiency, increased innovation, and greater fairness which accompanies a rules-based system.

Q2. Define Income and Expenditure Account.

Ans. This income and expenditure account is prepared by the non-trading entities which determine the surplus or deficit of income over the expenditures for a particular time frame. This is prepared as a portion of the final accounts of the non-trading entities which are equal to the profit and loss account that is outlined by the profit business entities.

This nature is similar to the Profit and Loss Account as is made by the profit concerns. This is the opposite of the Receipts and Payments Account, which does not start with the opening balance and which ends with the closing balance. This strictly follows the accrual basis of accounting.

Q3. Define Money.

Ans. 'Money is that which money does’ is a famous quote. 'Money is as money does…this means the term money is to be used to include anything that performs the functions of money, like, medium of exchange, measure of value, unit of account, etc.