Trading account is a part of final accounts prepared by a business firm which shows gross profitability of business activities during a particular period. In other words, trading account shows total sales, total purchases and all direct expenses relating to purchase and sales.
Trading account is prepared by manufacturing companies and trading companies only because the sales and purchases of goods are done in these types of business firms only.
Trading Account is like a statement which is divided in two parts i.e. Income part and Expenditure Part.
In income part, we show the following details:-
Sales of goods Less Sales Returns
Closing Stock of goods
In Expenditure part, we show the following accounts:-
Opening stock of goods
Purchases of goods Less Purchase Returns
All direct expenses relating to purchase, sale and manufacturing of goods like Cartage & Freight Expenses, Rent for godown or factory, Electricity and Power expenses, wages of workers and supervisors, Packing expenses etc.