Reading time: 6 minutes
Subscribe

What is the importance of the trading account?

The very first step in preparing final accounts of an organisation is to make a trading account. It records all direct sales and direct expenses related to the production and procurement of goods. This account records sales, purchases, purchase returns and sales returns, wages, octroi, factory rent and lighting and all other expenses a firm incurs in the production of goods. It also records opening stock and closing stock. Also, one can determine gross profit or loss only through this account.

A trading account is an essential step in accounting. Below are the reasons why a this account is necessary.

  • A trading account helps determine the gross profit or gross loss from production and sale of goods. It also helps in estimating the gross profit or gross loss ratio.
  • It gives information on the sales that a firm has done during the year.
  • This account gives information about all direct expenses. Hence a firm would know where to cut down on costs.
  • It gives information about the opening and closing stock and hence can help one tally the stock count.
  • Also, it helps in determining the selling price of goods.
  • A firm can use it to draft policies regarding sales, expenses, inventory by comparing them with previous years trading accounts.
  • It is an indicator of the trading efficiency of a business.

Is online trading safe?

Online trading enables an investor to buy and sell financial securities through an online trading account via the internet. Through online trading, one can place orders and cancel them at the comfort of their home. Online trading is convenient, cheaper, faster, and eliminates the middleman. It also gives investors greater control and understanding of their money.

Nothing is entirely safe in the world and has its pros and cons. Online trading happens on the internet and can have few setbacks concerning online security. However, all brokerages ensure high security for all their customers. They have a section dedicated to explaining the measures they take to protect all the confidential information and transactions made by their customers.

However, as an investor, one can also take measures to ensure their safety. One has to ensure that the website they trade on is using high-end encryption. Encryption is a process that scrambles data so that only the intended user can use it. Higher the number of bits implies the more sophisticated the encryption.

Apart from that, one has to ensure that trading happens on their personal computer and not on a shared system or at any cyber cafes. Log out of the trading account after the trading activity is complete. All personal computers need to have anti-virus to be protected against any computer virus. Also, do not click on remember me on any shared PC.

If a trader ensures that these safety measures are taken care of, then online trading can be as safe as offline trading.

What is a free trading account?

Free trading accounts in India are zero brokerage trading accounts. These accounts do not charge any commission on any exchange or trading segment. All types of trading, including intra-day, delivery trading, and buy today sell tomorrow trading(BTST), across equity, derivatives, currency, and commodity do have any brokerage charges.

However, these accounts make money through a fee for add on services for an advanced trading platform, annual account maintenance fees, call and trade, etc. This accounts best suit frequent traders. Also, these free accounts have the lowest breakeven point.

Is the trading account a nominal account?

Yes, the trading account is a nominal account. The account shows both debit and credit transactions in a financial year. In other words, it records all the sale prices, cost prices and other related expenses. It helps in determining the gross profit gains or losses.

Using this account, the final account, known as the balance sheet, is prepared at the end of the accounting year. Trading accounts is the first step in preparing final accounts. It has two-column, Debit (Dr.) and Credit (Cr.).

The debit side of the trading account records all the direct expenses. While the credit side records all the direct income. Following are the items in a trading account:

Opening stock

Opening stock is the carry forward of the unsold stock from the previous accounting period. It consists of raw materials, work-in-progress inventory and finished goods.

Purchase and purchase returns

Goods and services bought for business purposes are collectively termed as purchases. The goods may be purchased in cash or credit. Also, in instances when the goods are returned to the supplier, it becomes part of returns outward or purchases returns.

Direct expenses

Expenses incurred for performing the business activities are called direct expenses. In other words, these are expenses incurred to the core business operations—for example, wages, power, carriage inward, etc.

Sales and sales returns

Goods that a business sells in cash or credit fall under the head ‘Sales’. Items sold to customers may be returned for various reasons, such returns are called returns inwards or sales returns.

Closing stock

The unsold stock or inventory in hand at the end of the accounting period is recorded under the closing stock. It is valued at cost or net realised value whichever is lower.

Gross profit or gross loss

After all the items in the trading account are arranged, it must be balanced to determine profit or loss.

What is an online trading account?

Online trading account is a mandatory account that one requires to deal in share market transactions. An investor needs to open an online trading account to buy and sell securities while trading. This account became essential after the stock market developed the electronic system. It allows brokers to action the trades on behalf of the investors using the unique account ID.

Demat account holds the shares an investor buys, while the trading account does the actual buying and selling. With an online trading account, all that one has to do is place an order. The rest is taken care of by an online brokerage firm.

Published on November 18, 2020