TRADING

ACCOUNT
 Trading Account
After the preparation of trial balance, the next step is to prepare Trading Account. Trading
Account is one of the financial statements which shows the result of buying and selling of
goods and/or services during an accounting period.

The main objective of preparing the Trading Account is to ascertain gross profit or gross loss
during the accounting period.

Gross Profit is said to have made when the sale proceeds exceed the cost of goods sold.
Conversely, when sale proceeds are less than the cost of goods sold, gross loss is incurred.
For the purpose of calculating cost of goods sold, we have take into consideration opening
stock, purchases, direct expenses on purchasing or manufacturing the goods and closing
stock. The balance of this account i.e. gross profit or gross loss is transferred to the Profit
and Loss Account.
 Income Statement
Income Statement reports on all the different types of incomes and expenses
transactions during a particular length of period as opposed to Balance Sheet which
relates to particular day. That is the reason the title of Income Statement is: “Income
Statement for the period ended ______________”

Income Statement is generally divided in two sections:

Gross profit calculation: this section reports on revenues and costs incurred on main
trading operations of the business e.g. sale and purchase of inventory.
Net profit calculation: this section reports on connected expenses that helped carry
out business e.g. admin and selling expenses and other incidental gains and losses
that are not really actual activity of the business e.g. gain on sale of non-current
asset.

Income Statement help users in understanding by how much equity has increased or
decreased as a result of trading activities of the business in the form of profits or losses
respectively.
Thanks