TRADING ACCOUNT - COMPLETE TUTORIAL
Understanding Trading Account in Financial Statements
TABLE OF CONTENTS
1. WHAT IS TRADING ACCOUNT?
2. TRADING ACCOUNT FORMAT
3. KEY FORMULAS
Cost of Goods Sold (COGS):
Gross Profit:
Gross Profit Margin:
4. COMPLETE EXAMPLE WITH ENTRIES
BUSINESS: ABC TRADERS (Cement Trading)
STEP 1: OPENING BALANCES (01-Jan-2026)
STEP 2: PURCHASES DURING JANUARY
STEP 3: SALES DURING JANUARY
STEP 4: CLOSING STOCK (31-Jan-2026)
5. TRADING ACCOUNT - ABC TRADERS
6. COST OF GOODS SOLD (COGS) CALCULATION
7. GROSS PROFIT CALCULATION
8. SUMMARY OF ACCOUNTS
9. KEY POINTS TO REMEMBER
What goes in TRADING ACCOUNT:
Direct vs Indirect Expenses
Closing Stock Treatment
10. REAL ESTATE TRADING ACCOUNT
11. PRACTICE EXERCISE
SOLUTION:
CONCLUSION
TRADING ACCOUNT - COMPLETE
TUTORIAL
Understanding Trading Account in
Financial Statements
Prepared for: Apex Group
Date: January 2026
TABLE OF CONTENTS
1. What is Trading Account?
2. Trading Account Format
3. Key Formulas
4. Complete Example with Journal Entries
5. COGS Calculation
6. Gross Profit Calculation
7. Direct vs Indirect Expenses
8. Real Estate Trading Account
9. Practice Exercise
1. WHAT IS TRADING ACCOUNT?
Trading Account shows: - How much you SOLD (Revenue) - How
much it COST you to make those sales (Cost of Goods Sold - COGS) -
Your GROSS PROFIT (Revenue - COGS)
Purpose: - To determine Gross Profit or Gross Loss - To calculate Cost
of Goods Sold (COGS) - To understand trading efficiency
2. TRADING ACCOUNT FORMAT
TRADING ACCOUNT
For the period ended: [Date]
DEBIT SIDE (Costs) CREDIT SIDE (Revenue)
Opening Stock XXX,XXX Sales Revenue
XXX,XXX
ADD: Purchases XXX,XXX Less: Sales Returns
(XX,XXX)
Less: Purchase Returns (XX,XXX) Net Sales
XXX,XXX
Net Purchases XXX,XXX
ADD: Closing Stock
XXX,XXX
Freight Inward XX,XXX
Direct Expenses XX,XXX
(Carriage, Wages, etc.)
─────────────────────────────────────────────────────────────────
TOTAL XXX,XXX TOTAL
XXX,XXX
GROSS PROFIT (balancing) XXX,XXX
─────────────────────────────────────────────────────────────────
GRAND TOTAL XXX,XXX GRAND TOTAL
XXX,XXX
3. KEY FORMULAS
Cost of Goods Sold (COGS):
COGS = Opening Stock
+ Purchases
- Purchase Returns
+ Freight Inward
+ Direct Expenses
- Closing Stock
Gross Profit:
Gross Profit = Net Sales - COGS
Where:
Net Sales = Sales - Sales Returns
Gross Profit Margin:
Gross Profit % = (Gross Profit / Net Sales) × 100
4. COMPLETE EXAMPLE WITH ENTRIES
BUSINESS: ABC TRADERS (Cement Trading)
Period: January 2026
STEP 1: OPENING BALANCES (01-Jan-2026)
Opening Stock of Cement: 500 bags @ PKR 800 = PKR 400,000
Entry:
No entry needed - this is opening balance
Already in Stock account from previous period
STEP 2: PURCHASES DURING JANUARY
Transaction 1: Purchase from Supplier A (05-Jan-2026)
Details: - Cement purchased: 1,000 bags @ PKR 850 = PKR 850,000 -
Payment: Cash PKR 300,000, Credit PKR 550,000
Entry:
BILL ENTRY
Debit: Purchases Account 850,000
Credit: Cash 300,000
Credit: Accounts Payable 550,000
─────────────────────────────────────────────────────────
Total: 850,000 850,000
Transaction 2: Purchase from Supplier B (12-Jan-2026)
Details: - Cement purchased: 800 bags @ PKR 820 = PKR 656,000 -
Freight charges paid: PKR 15,000 - Payment: Full credit
Entry:
BILL ENTRY
Debit: Purchases Account 656,000
Debit: Freight Inward 15,000
Credit: Accounts Payable 671,000
─────────────────────────────────────────────────────────
Total: 671,000 671,000
Transaction 3: Purchase Return (18-Jan-2026)
Details: - Returned 50 damaged bags to Supplier A - Value: 50 × PKR
850 = PKR 42,500
Entry:
JOURNAL ENTRY
Debit: Accounts Payable 42,500
Credit: Purchase Returns 42,500
─────────────────────────────────────────────────────────
Total: 42,500 42,500
STEP 3: SALES DURING JANUARY
Transaction 4: Sale to Customer X (08-Jan-2026)
Details: - Cement sold: 600 bags @ PKR 1,200 = PKR 720,000 -
Payment: Cash PKR 200,000, Credit PKR 520,000
Entry:
INVOICE ENTRY
Debit: Cash 200,000
Debit: Accounts Receivable 520,000
Credit: Sales Revenue 720,000
─────────────────────────────────────────────────────────
Total: 720,000 720,000
Transaction 5: Sale to Customer Y (15-Jan-2026)
Details: - Cement sold: 800 bags @ PKR 1,150 = PKR 920,000 -
Payment: Full credit
Entry:
INVOICE ENTRY
Debit: Accounts Receivable 920,000
Credit: Sales Revenue 920,000
─────────────────────────────────────────────────────────
Total: 920,000 920,000
Transaction 6: Sales Return (22-Jan-2026)
Details: - Customer X returned 30 bags (damaged in transit) - Value:
30 × PKR 1,200 = PKR 36,000
Entry:
JOURNAL ENTRY
Debit: Sales Returns 36,000
Credit: Accounts Receivable 36,000
─────────────────────────────────────────────────────────
Total: 36,000 36,000
Transaction 7: Direct Labor (25-Jan-2026)
Details: - Loading/unloading wages paid: PKR 25,000 - Paid in cash
Entry:
JOURNAL ENTRY
Debit: Direct Wages 25,000
Credit: Cash 25,000
─────────────────────────────────────────────────────────
Total: 25,000 25,000
STEP 4: CLOSING STOCK (31-Jan-2026)
Physical Stock Count:
Opening Stock: 500 bags
Add: Purchases: 1,800 bags (1,000 + 800)
Less: Purchase Returns: (50) bags
Less: Sales: (1,400) bags (600 + 800)
Add: Sales Returns: 30 bags
──────────────────────────────
Closing Stock: 880 bags
Value at cost: 880 × PKR 830 (average) = PKR 730,400
Entry:
JOURNAL ENTRY (Closing Stock Adjustment)
Debit: Closing Stock (Asset) 730,400
Credit: Trading Account 730,400
─────────────────────────────────────────────────────────
Total: 730,400 730,400
5. TRADING ACCOUNT - ABC TRADERS
For the month ended: 31-Jan-2026
PARTICULARS Amount (PKR) | PARTICULARS
Amount (PKR)
To Opening Stock 400,000 By Sales
1,640,000
(720,000 + 920,000)
To Purchases 1,506,000
(850,000 + 656,000) Less: Sales Returns
(36,000)
──────────
Less: Purchase Returns (42,500) By Net Sales
1,604,000
─────────
Net Purchases 1,463,500 By Closing Stock
730,400
To Freight Inward 15,000
To Direct Wages 25,000
To GROSS PROFIT (bal) 431,900
──────────
──────────
TOTAL 2,334,400 TOTAL
2,334,400
6. COST OF GOODS SOLD (COGS)
CALCULATION
Opening Stock 400,000
Add: Purchases 1,506,000
Less: Purchase Returns (42,500)
─────────
Net Purchases 1,463,500
Add: Freight Inward 15,000
Add: Direct Wages 25,000
─────────
Cost of Goods Available for Sale 1,903,500
Less: Closing Stock (730,400)
─────────
COST OF GOODS SOLD (COGS) 1,173,100
=========
7. GROSS PROFIT CALCULATION
Sales 1,640,000
Less: Sales Returns (36,000)
─────────
Net Sales 1,604,000
Less: Cost of Goods Sold (COGS) (1,173,100)
─────────
GROSS PROFIT 431,900
=========
Gross Profit Margin: 26.9% (431,900 / 1,604,000)
8. SUMMARY OF ACCOUNTS
ACCOUNT NAME DEBIT CREDIT BALANCE
Opening Stock 400,000 400,000 Dr
Purchases 1,506,000 1,506,000 Dr
Purchase Returns 42,500 42,500 Cr
Freight Inward 15,000 15,000 Dr
Direct Wages 25,000 25,000 Dr
Sales Revenue 1,640,000 1,640,000 Cr
Sales Returns 36,000 36,000 Dr
Closing Stock 730,400 730,400 Dr
9. KEY POINTS TO REMEMBER
What goes in TRADING ACCOUNT:
Included: - Opening Stock - Purchases - Purchase Returns - Sales -
Sales Returns - Direct Expenses (Freight, Wages, Carriage) - Closing
Stock
NOT Included: - Indirect Expenses (Rent, Salaries, Advertising) -
These go to P&L - Financial Expenses (Interest, Bank charges) - These
go to P&L
Direct vs Indirect Expenses
DIRECT EXPENSES (Trading Account): - Freight inward (bringing
goods in) - Carriage inward - Loading/unloading wages - Factory
wages - Raw material costs
INDIRECT EXPENSES (Profit & Loss): - Office rent - Salaries -
Electricity - Advertising - Depreciation
Closing Stock Treatment
Closing Stock appears in: 1. Credit side of Trading Account 2. Asset
side of Balance Sheet
Why? - It’s an asset (stock in hand) - Reduces COGS (not sold yet)
10. REAL ESTATE TRADING ACCOUNT
For real estate businesses like Apex Group, the Trading Account is
slightly different:
REAL ESTATE TRADING ACCOUNT
DEBIT SIDE: CREDIT SIDE:
Land Cost Sales Revenue
Construction Materials (Properties sold)
Labor Charges
Direct Construction Costs Closing Inventory
(Unsold properties)
Opening WIP
Less: Closing WIP
GROSS PROFIT
11. PRACTICE EXERCISE
Try this example:
Given: - Opening Stock: 100 units @ PKR 500 = PKR 50,000 -
Purchases: 400 units @ PKR 520 = PKR 208,000 - Sales: 350 units @
PKR 800 = PKR 280,000 - Freight: PKR 5,000 - Closing Stock: 150
units @ PKR 520 = PKR 78,000
Calculate: 1. COGS 2. Gross Profit 3. Gross Profit %
SOLUTION:
1. COGS Calculation:
Opening Stock 50,000
Add: Purchases 208,000
Add: Freight 5,000
────────
Cost of Goods Available 263,000
Less: Closing Stock (78,000)
────────
COGS 185,000
2. Gross Profit:
Sales 280,000
Less: COGS (185,000)
────────
Gross Profit 95,000
3. Gross Profit %:
(95,000 / 280,000) × 100 = 33.9%
CONCLUSION
The Trading Account is the first step in preparing financial
statements. It helps you:
1. Calculate Cost of Goods Sold (COGS)
2. Determine Gross Profit
3. Understand trading efficiency
4. Make pricing decisions
Remember: - Trading Account deals with DIRECT costs and revenues
only - Gross Profit from Trading Account goes to Profit & Loss Account
- Always verify that Debit Total = Credit Total
End of Tutorial
Prepared by: Claude AI
For: Apex Group Accounting Education
Date: January 2026