Trading Account: Key Questions and Answers
This guide covers essential questions about the Trading Account in financial accounting, clarifying its purpose, components, and calculations.
Purpose and Fundamentals
Q1. What is the primary purpose of preparing a Trading Account?
Answer: (b)
Explanation: The Trading Account summarizes the results of buying and selling goods. Its final balance represents the gross profit or gross loss for the period.
Q9. When is the Trading Account typically prepared?
Answer: (b)
Explanation: The Trading Account is prepared first to determine gross profit or loss. This figure is then transferred to the Profit and Loss Account.
Q10. Which statement about the Trading Account is true?
Answer: (c)
Explanation: The gross profit or loss from the Trading Account is a key input for the Profit and Loss Account, which calculates net profit.
Components and Entries
Q2. Which item is debited to the Trading Account?
Answer: (c)
Explanation: Purchase returns reduce the total cost of purchases. They are debited (subtracted) within the Trading Account.
Q3. Why is closing stock recorded on the credit side?
Answer: (c)
Explanation: Closing stock is an asset. It is credited to the Trading Account to reduce the cost of goods sold, thereby increasing gross profit.
Q7. Where are sales returns recorded?
Answer: (b)
Explanation: Sales returns reduce total sales revenue. They are shown on the credit side of the Trading Account as a deduction.
Q11. On which side is ‘Opening Stock’ recorded?
Answer: (b)
Explanation: Opening stock represents goods available at the start of the period. It is recorded on the debit side of the Trading Account.
Expenses and Exclusions
Q5. Which item is not included in the Trading Account?
Answer: (c)
Explanation: Office rent is an indirect expense. It is recorded in the Profit and Loss Account, not the Trading Account.
Q8. How is carriage inwards classified?
Answer: (b)
Explanation: Carriage inwards is a direct expense for transporting purchased goods. It is debited to the Trading Account.
Q13. How is freight paid on purchased goods classified?
Answer: (a)
Explanation: Freight on purchases (carriage inwards) is a direct expense. It is debited to the Trading Account.
Q14. Which item is not included in a Trading Account?
Answer: (c)
Explanation: Discount received is indirect income. It is recorded in the Profit and Loss Account.
Q16. Which is a direct expense debited to the Trading Account?
Answer: (c)
Explanation: Factory lighting is a direct expense related to production or storage of goods.
Calculations and Outcomes
Q4. What is the standard formula for Cost of Goods Sold (COGS)?
Answer: (a)
Explanation: The COGS formula is: Opening Stock + Purchases (net of returns and including direct expenses) – Closing Stock.
Q6. What does a debit balance higher than the credit side indicate?
Answer: (c)
Explanation: A debit balance means the cost of goods sold exceeds sales revenue, resulting in a gross loss.
Q12. Which action increases the gross profit shown?
Answer: (a)
Explanation: A higher closing stock value reduces the cost of goods sold, which increases the calculated gross profit.
Q15. If a business starts with no opening stock, the Trading Account begins with:
Answer: (b)
Explanation: With no opening stock, the account begins with purchases (plus direct expenses) as the initial cost of goods available for sale.
