Need or Importance and Purpose of Trading Account

Financial statements need to be written after considering certain accounts and trading accounts is one of them. There are some useful purposes of creating this account as:

  • Measuring the current state of any business: A company develops and achieves its goal with the help of gross profit earned after a certain time period. Definite expenses in order to increase sell rates are done from this gross profit. In general, if that ratio is between twenty to thirty percent then these expenses are covered easily. The debit and credit accounts need to be balanced and if the debit account is overflowing then as a result a company will find gross loss rather than gross profit. This is calculated with the help of trading accounts.
  • Inclusive of necessary expenditure to increase production rate: Just buying raw materials doesn’t end a trading account. It also bears those expenses done to increase the quality of goods manufactured. That might require various other materials and expenses. This way a company will have an increased rate of direct expense which will proportionate with manufacturing cost. This is how any new goods will bear an increase both in their production cost and rate.
  • A clear idea on direct expense: Trading account bears all record of direct expenses such as fares, taxes etc. These direct expenses are shown and added as a cost required for production. This way a firm will notice those expenses and their necessity for production. If any of those direct expense have come to bear less importance and can be avoided they can be substituted in their next accounting year.
  • Accounting for sold goods and their cost: The firm needs to calculate their gross profit or loss in order to understand their progress. This is done with the entries of trading account. From the beginning of opening an account and then closing it with mentioning necessary purchases, expenses and calculating cost of manufacturing will help a company decides on its sell price. Only after the deduction of production cost from selling cost, one firm can calculate their gross profit or loss.
  • Toward a better performance: Trading account helps in calculating gross profit or loss rate. This is of a huge importance since this manipulates a firm to decide on their future plans on business strategies to improve their current state. Any company bears the expenses with a gross profit which is compared with their net sales.


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