You cannot deny the importance of trading account in accounting and to be more precise in preparing final account statement. Final account statement which is prepared by every business at the end of accounting year basically consists of 3 steps listed as:
- Trading account
- Profit and loss account
- Balance sheet
At the end of every year, final account statement is prepared to know exactly that where the business stands i.e. if business is generating revenues or else is incurring loss. Preparation of final account begins with the first step which includes trading account. Trading account shows the gross profit or gross loss at the end of fiscal year from trading activities in any business. In this case need of trading account homework, answers arise, and you can get a complete idea.
When you will talk from investment’s point of view, then also trading account playscrucialrole. Trading account is also same as widely used bank accounts, which is used to hold money and securities and is directed by investment dealer.
Earlier it was believed that the trading account only holds stock, however a trading account can also hold money, foreign money, securities and different type of investments. Because of this reason people, as well as organizations, open trading account to perform trade activities including purchasing and selling of financial tools like stocks, derivatives, commodities, etc.
It is important her to mention that investors can open multiple accounts as per their requirements and for opening a trading account, investors either can prefer opening it online or else can also go for brokerage firm.
What is the need of preparing trading account?
As from the discussion it is clear that trading account only provides information about gross profit or gross loss instead of net profit or net loss, which is later determined in profit and loss account statement.
So, here the question arises that if trading account doesn’t give information about net profit or net loss, then what is the significance of trading account in final account statement? Why should you prepare trading account?
To clear your doubt here, I am illustrating some crucial points which will make you understand the advantages of trading account in final account statement. Let’s have a look.
- Trading account though determines the gross profit, but gross profit also is a major factor for any business as all the costs of doing business are confronted out of this gross profit only. That is why the measure of gross profit should be enough to meet the indirect costs of business. With need of trading, account homework answers your conceptual clarity will increase to a great extent.
- The measure of net sales can be resolved through this trading account. Gross sales can be determined by the sales account but net sales cannot be determined. The genuine sales are net sales of business not gross sale, which can be obtained by subtracting sales returns from gross sales.
Net sales = Gross sales – sales return
- To know exactly about the position of business that whether it is heading toward success or failure, net sales of the business for the current year is compared with the net sales of previous If net sales of current year surpass the net sales of previous year show success rate and vice versa.
- The importance of trading account also lies in the fact it is used to find the gross profit ratio,Determining this ratio is an important step if you want to figure out the success or failure of business. If there is increase in the rate as compared to last year,it means success and if the rate decreases, it means failure.
- Trading account is also useful in computing Inventory turnover ratio, which can give information about success or failure of business. Higher the rate signifies success of business and on the other hand lower rate signifies decline.
Henceforth, with these points, it is easy to understand the benefits of preparing trading account so far. Businesses prepare trading account to know what will be the future of their business, whether it is going to be successful or not.
Obstacles faced in need of trading account homework answers
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