Trading account is ready to ascertain the Gross Profit and Loss of a firm; here Gross Profit is the excess of total revenue over cost of goods sold as the credit side of the trading account exceeds the debit side. Likewise, Gross Loss is the excess of cost of goods sold over net revenue as the debit side of the trading account exceeds the credit side.
Gross Profit = Net Sales Revenue - Cost of Goods Sold
Gross Loss = - (Net Sales Revenue - Cost of Goods Sold) Where:
Net Sales Revenue = Cash Sales + Credit Sales - Sales Returns
Cost of Goods Sold = Opening Stock + Net Purchases + Direct Expenses - Closing Stock
Net Purchase = Cash Purchases + Credit Purchases - Purchases Returns.
Trading Account is usually prepared in 'T' form. In such case, opening stock, purchases and direct expenses are demonstrated on the debit side and sales and closing stock in the credit side of the trading account. The system of the Trading Account is illustrated with the format of Profit and Loss Account.