Procedure for the Preparation of a Trading Account
All business accounts have to follow the financial year to make the monetary statements and record them as documents. The preparation of the trading account is the initial step they have to execute to make the final record. It is crucial to make the trading account with care as it indicates the level of efficiency of the business. With the help of a trading account, a business organization can observe the actual profit or loss incurred in a financial year. This data helps it to take further decisions of the business and make necessary changes. Here, you can understand how to take a trading account.
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Reasons for Making a Trading Account
When considering why a trading account is prepared, you should know that all costing related particulars are written in it. It helps in the quick and correct analysis of the costs, loss, and profit in gross. The managerial team always checks if all the data match with each other. Furthermore, in case of any abnormality, they can reach up to the specific department and recheck the necessary data.
Trading Account: Features
The key features of a trading account are given below in details:
The trading account acts as a record of the total sales made by an organization in a specific period and the total costs incurred. It shows the company executives if they can make some profit or loss.
The trading account acts as a statement crucial for trading concerns. All organizations should be clear about their trading accounts each year to maintain a high level of credibility in the industry. Moreover, other trading organizations can see the status of profit and loss for any other particular organization.
Most companies make the trading account to check if there is any surplus balance in hand. They tend to transfer the balance to the profit-and-loss statement.
Elements of the Trading Accounts
As per the contents of the trading account, the following things are included in it. These are the elements that are present in the statement.
Details of the Purchase
The purchase amounts are one of the vital data present in the trading account statement. It consists of the list of purchases and amounts on a yearly basis. It can be done both by cash transaction or credit transaction. Moreover, it also comprises the deductions, proprietor drawings and samples.
A trading account is created to find out the amount of open stock present with an organization in a given time. It is derived from the trial balance. All organizations consider the number of finished products as opening stock.
With the help of a trading account, an organization can check if the debit side of the account is smaller than the trading side. If it is so, They can consider it as gross profit. All entities aim to improve the amount of gross profit.
Direct expenses are another type of data present on the trading account. The amount of direct expenses denotes the expenses of the organization for producing the product from a company. The amount the company has to bear as wages or for the octroi comes under the direct expenses.
Gross loss is the complete opposite of the gross profit. Here the debit side of the account is more than the amount present on the credit side.
The closing stock is considered by the business organization on the finished products only. It shows the maximum amount of raiseable value that any organization can raise at a given point in time.
Sales revenue is the total amount of money raised by a company from selling its products to the customers. However, if the customer returns the goods after the purchase, the amount needs to be subtracted from the sales value.
As per organization norms, any products must be considered sold instantly after the final deal is done. It might not depend on when the client pays the cash as many customers have a habit of paying the cash later or in several instalments.
Among the above, the closing Stock, Gross Loss and Sales Revenue are placed on the credit side of the trading account. All other entries are placed on the debit side of the account.