This is the account constructed for the purpose of finding the gross profit or loss of a business at a particular period. It is prepared to conform to the rules of double-entry. The Trading Account is a revenue account and forms part of the double-entry system. The Trading account contains:
On the debit side
(i) Opening stock
(ii) Add Net Purchases (Purchases less return outwards)
(iii) Add carriage Inward
(iv) Less: Stock at close
(v) Equal to Cost of goods Sold
On the Credit side
(ii) Less: return Inwards
(iii) Credit side less debit side
(iv) Equal to gross profit or gross loss
Note: The Excess of the credit side over the debit side is the gross profit. While the excess of the debit side over the credit is a gross loss. The balance is transfer to the profit and loss account (Income statement).
Period of Account: The Trading account shows the operation of the business over a period of time usually a year.
The heading should be Trading, Profit and Loss account for the year ended….