To find out whether a business is on the gaining side or is facing a loss, usage of Trading Account is made.
Gross Profit = Sales – Goods Sold
When financial details of a business are concerned, it needs to be checked that expenditure and income are classified into Direct and Indirect categories. The Direct Expenditure is debited to Debit Side of Trading Account, while Indirect Incomes are credited to Credit Side of Trading Account. After a systematic transfer is done, balancing of accounts need to be done and with Balance on Debit Side implying Profits and Balance on Credit Side implying Loss. Based on this Gross Profit and Gross Loss, transfers are made to Profit and Loss Account of Credit or Debit side.
Thus, by balancing of this account, a business graph can be determined.
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