Trading Account

In practice trading accounts is not prepared as a separate account unless the examination problem so requires. It is in fact the first section of Trading and Profit and Loss Account. Trading Account is prepared to know whether the firm has made gross profit or suffered gross loss. Gross profit or gross margin is the excess of net sales revenue over cost of goods, that is: Gross Profit = Net Sales Revenue – Cost of goods Sold:
Where:

Net Sales Revenues    =    Cash sales plus Credit sales minus Sales Returns (Return Inwards)
               ______________
Cost of Goods Sold    =    Opening Stock + Net Purchases – Stock at the end + Direct Expenses.

Net Purchases    =    Cash Purchases+Credit Purchases – Purchases Returns (Return Outwards)

When goods purchased are still in transit, the same should not be included in the purchases. Instead the entry is:

    Goods-in-transit Account    Dr.
        To Suppliers Account
Goods in transit, therefore will be shown in the assets side of the balance sheet
On actual receipt of goods at a later date, the entry is:
    Purchases Account        Dr.
        To Goods-in-transit Account

Goods received on consignment basis are never treated as purchases. Similarly, goods received on sale or return basis are never treated as purchases. Stock includes the raw materials, work-in-progress and finished goods depending upon the nature of business, that is, trading or manufacturing business.

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