The Trading Account is necessary because it has the following advantages.
Gross profit of a business is very important data, since all business expenses are met out of it. So the amount of gross profit should be adequate to meet all the indirect expenses of a business.
The amount of net sale can be determined through this account.The success or failure of a business can be ascertained by comparing net sales of the current year with that of the last year. It should be noted that an increase in the amount of net sales of the current year over the last year may not be regarded as a sign of success, since sales may increase because of rise in price level.
Percentage of gross profit on net sales can be easily determined from Trading A/C. This percentage is very important yardstick for measuring the success or failure of a business. Compared to last year, if the rate increases, it indicates success; on the other hand if the rate decreases, it is an indication of failure.
Percentage of different items of buying expenses on gross profit can be easily determined and by comparing the percentage of the current year with that of the previous year the variations can be ascertained. An analysis of variances will disclose their causes which will help in controlling the amount of expenses.
Gross profit of a business is very important data, since all business expenses are met out of it. So the amount of gross profit should be adequate to meet all the indirect expenses of a business.
The amount of net sale can be determined through this account.The success or failure of a business can be ascertained by comparing net sales of the current year with that of the last year. It should be noted that an increase in the amount of net sales of the current year over the last year may not be regarded as a sign of success, since sales may increase because of rise in price level.
Percentage of gross profit on net sales can be easily determined from Trading A/C. This percentage is very important yardstick for measuring the success or failure of a business. Compared to last year, if the rate increases, it indicates success; on the other hand if the rate decreases, it is an indication of failure.
Percentage of different items of buying expenses on gross profit can be easily determined and by comparing the percentage of the current year with that of the previous year the variations can be ascertained. An analysis of variances will disclose their causes which will help in controlling the amount of expenses.