Trading means buying and selling. The trading account demonstrates the effect of buying and selling of goods. The primary step of final account is the trading account. It is nominal account which is prepared at the end of accounting year. Trading account helps to find out gross earnings or gross loss during the accounting period. A trading account is alike to a traditional bank account, holding cash and securities, and is administered by an investment trader. The account is held at a financial organization and administered by an investment dealer that the account holder uses to employ a trading strategy rather than a buy-and-hold investment strategy.
Trading account consists of two sides ‘debit and credit’. All direct expenses are debited and direct incomes are credited in trading account. Trading account contains mostly purchase of goods, sale of goods and expenses relating to the daily operation of factory.
Need
At the end of each year, it is essential to determine the net earnings or net loss. For this reason, it is primary required to know the gross income or gross loss. The trading account is arranged to determine this. The dissimilarity between the selling price and the cost price of the goods is the gross earning of the business apprehension. Such gross earning is called as gross earnings. However, when the selling price is less than the cost of goods purchased, the consequence is gross loss.
