Items in Debit side of Trading Account

1. Opening Stock: Closing stock of the previous year becomes the opening stock of the current year which is available on the opening day of new accounting period. However, there will no opening stock in case of newly opened business. It is available in the trial balance that must be debited to the trading account. Opening stock may include the raw materials, work-in-progress as well as finished goods.

2. Purchases and Purchases Returns: Purchases of raw materials or resale goods made during the year are debited to trading account. Both cash and credit purchases are taken into consideration. Purchase returns are deducted from purchases to find out the figure of net purchases.

3. Purchase expenses: All the expenses that are incurred to bring the goods or materials upto warehouses are purchase expenses that are debited to trading account. Carriage inward, cartage, freight inwards, dock charges, clearing charges etc. are some purchase expenses.

4. Manufacturing Expenses: All the expenses relating to the manufacture of goods are manufacturing expenses which are debited trading account. Wages payable to workers engaged in the production of goods and the factory expenses incurred in the operation of factory like, factory lighting, heating, insurance, rent, power, coal, fuel, gas, water etc are examples of manufacturing expenses.

Need or Importance of Trading Account

Some of the objectives of preparing Trading account are as follows:

1. To determine the cost of production which helps to calculate the gross profit or loss of trading activities.
2. To assemble all the direct expenses of bringing the goods in saleable condition.
3. To ascertain the performance of different years of business through the gross profit ratio which is calculated by dividing the gross profit by sales.
4. To help to calculate the ratio of cost of goods sold to sales which is helpful in the fixation of price of the products.
   

Trading Account

Trading account is the first part of the final accounts which is prepared to calculate the gross profit or loss of buying, manufacturing and selling of trading goods for a certain period. Gross profit if the difference between sales and cost of goods sold. If the amount of sales of goods is higher than the cost of goods sold, there is a gross profit. Reversibly, if sales figure is smaller the difference is gross loss. In the words of J.R. Batliboi, "The trading account shows the results of buying and selling of goods therefore, it does not include any items of operating expenses but transactions in goods are included."

Preparation of Final Accounts

The final accounts include trading account, profit and loss account and balance sheet. They are prepared normally with the help of trial balance. Sometime, ledger balances and additional information may be given. While preparing final accounts, we need to mind the relation of trial balance with final account.

1. Debit items of trial balance generally appear either on the debit side of trading or profit and loss account or on the assets side of the balance sheet.
2. Credit items of trial balance generally appear either on the credit side of the trading or profit and loss account or on the liability side of the balance sheet.