Manufacturing and Trading Account

Trading account is the important part of the Statement of Profit or Loss. It is the first stage in the final account which is prepared to know the trading result of gross profit or loss during a particular period. In other word, it is the summary of the purchase and sales of a business or production cost of goods sold and value of sales, the difference between the elements establishes the gross profit or loss which is then carried forward to the Statement of Profit or Loss for calculation of net profit and loss. Accordingly, if the sales revenue is higher than the cost of good sold, the difference is known as ―Gross Profit. Similarly, if the sales revenue is less than the cost of goods sold the difference is known as ― Gross Loss.

The main objective of preparing Trading Account is to ascertain gross profit or gross loss of a business during the accounting year. Another important function of the trading account is that it enables the owner of the business to compare the gross profit of a current period with the results attained in the previous periods. It is pertinent that, the component in the trading account do not vary in any material effect from previous and subsequent account. This therefore mean that the trading account should be standardized so that same item should appear in similar form in the successive final account so that effective comparision may be made of one trading period with other.

The actual item in the trading account of different classes of enterprises or business will necessarily vary depending on the nature of the nominal account in the respective business for example custom duty, licenses fee, freight and insurance on inward of raw material will be essential items in the trading account of manufacture company but these particular item would not appear in the trading account of a retail or trading company

Specimen Profoma of Trading Account