What are the objectives (purpose) of preparing trading account?

 Are you curious to know the main objectives (purpose) of preparing a Trading Account in accounting? 

Then, let's dive into it. It is explained in simple words.

Trading Account is the first step in preparing final accounts or financial statements. It is prepared to know the trading activities conducted for any year in the business firm. Also, it is useful to know the gross profit/loss made by a trader during the year. 

what are the objectives (purpose) of preparing Trading Account?

1. To ascertain Gross Profit or Loss for the period

The main objective or purpose is to know the Gross Profit or Gross Loss made by the trading concerns. It is mainly to know the performance in terms of buying and selling of goods and services throughout the year. This would help in determining the actual sales & purchases made, direct expenses incurred along with the closing\opening stock as well. This helps traders to take useful decisions relating to the purchase or sale of goods and services. Also, it helps to enhance gross profit by increasing sales or reducing direct expenses.

2. To increase Sales and reduce Closing Stock

The main objective is to increase sales or reduce closing stock. This helps to boost sales and gross profit. Also, this helps to minimize the piling up of stock at the year-end. In this way, the closing stock will be lower and sales will be higher. This would enhance gross margin of the business enterprise. This could also be achieved by analysing the last year & current year sales. Offering Discounts to the customers to increase sales. This would result in reduction in closing stock & increase in sales

3. To know the Opening & Closing Stock at the year-end

One of the objectives is to know the stock position at the year-end. Generally, closing stock will be ascertained at the year-end. Opening stock is the closing stock of last year. Closing stock of last year will be carried forward to this year. This will be the opening stock for this year. Opening stock will debited and closing stock to credited in trading account

4. To know the net Purchases or Sales made during the year

One of the objectives is to know the purchases made and sales made during the year. This would help to increase sales. This would also help to increase/decrease purchases based upon circumstances. One ideal way to increase purchases is to increase sales and reduce closing stock. This is done by analysing or comparing sales and purchases with the prior period. This would also help us in managing the sales and purchases. 

5. To know Direct Expenses incurred during the year

One of the objectives is to know the direct expenses incurred during the year. Direct expenses are those expenses incurred for the purchase of goods or services. Direct expenses are directly related to the core business operations such as the purchase or sale of goods or services. These expenses form part of the cost of goods sold. Direct expenses include direct labour, wages, packing charges,  freight charges, customs duty, carriage inwards, octroi duty

6.  To determine the Cost of goods sold 

The cost of goods sold is the cost incurred to make the sales. It is the cost of total sales made for any trader. It is determined by deducting closing stock from direct expenses & purchases. All the direct expenses such as direct wages, packing charges, octroi duty, and customs duty form part of cost of goods sold.

 Cost of goods sold = (opening stock+purchases+direct expenses) - closing stock

7. To fix the selling price of the product/service

It also helps to fix the selling price of a product or service. This would be achieved by comparison of last year & current year's sales. This can be achieved by analysing sales with the cost of goods sold. This would help to fix the appropriate selling price, boost sales, and increase gross profit. The selling price of a product or service would also depend on other factors such as demand or supply of the goods or services

8. To make decisions relating to Sales & Purchases

It also helps to make useful decisions relating to sales, purchases, and stock management. For example, sales made last year were very low, This year would be an opportunity to increase sales by offering discounts to customers on prompt payment or immediate cash payment. Closing stock will be low when there is an increment in sales. As a result, gross profit would be high.

9. To make trading concerns lucrative & profitable 

It also helps to make business enterprises profitable. This can be achieved by analysing sales with the cost of goods sold, by determining appropriate selling prices, offering discounts to customers to increase sales, reducing direct expenses, and making the closing stock very low. This would make the business organisation perform well in their core business operations.

Conclusion

We can conclude that the Trading account in accounting is the first step in preparing final accounts or financial statements. It has useful objectives such as stock management and enhanced sales. It is prepared to know the trading activities conducted for any year in the business firm. Also, it is useful to know the gross profit/loss made by a trader during the year