What is a Trading Account?
Table of Contents
If your business is willing to succeed in the UK, the ability to sell goods and/or services to your customers is vital for your long-term sustainability. It’s an aspect that you can’t afford to take for granted and must be monitored on a regular basis. This begs the question ‘Does your revenue outweigh the cost of your trading activities?’ One way of ascertaining this and making sure you’re aware of any issues which may affect your cash flow is by creating a Trading Account for your business. But what is a Trading Account and what exactly does it say about your business?
What is a Trading Account?
A Trading Account is, in essence, a summary of how successful your trading activities have been during a certain period of time, and is vital for developing a Final Account. Its primary purpose is to help you determine your business’ Gross Profit and Gross Losses. Yet, in order to achieve this and offer you a greater understanding of your trading activities, Trading Accounts takes into account a variety of factors including goods/services sold, the cost of goods/services sold, returns, opening/closing stock and customs duty.
How is a Trading Account different to a Profit and Loss Account?
A misconception that many businesses make is to believe that Trading Accounts and Profit and Loss (P&L) Accounts are one and the same, but this isn’t the case. Although they are both great accounting tools which inform you of how well you’re performing financially, they measure and assess your business’ activities in different ways. So to help you understand both a Trading Account and Profit and Loss Account, here are the key differences which you need to be aware of:
| Trading Account | Profit & Loss account | |
|---|---|---|
| Purpose of the account | The sole purpose of a Trading Account is to measure the success of your business’ trading activities. | A Profit and Loss Account takes into account your Total Profits and Losses, providing an overall representation of your financial performance. |
| Area of concern | Your business' direct trading revenue and trading expenses. | Your total operating and non-operating income/expenses for a concerned period. |
| Treatment/Preparation | Trading Accounts calculate your business' Gross Profit (profits after deducting trading expenses) and Gross Losses (trading expenses). | Profit and Loss Accounts calculate your business' Net Profit (actual profits after deducting total operating expenses) and Net Loss (if your total expenses exceed your total revenue). |
How to calculate a Trading Profit and Loss Account
In order to make key decisions for your business, gathering all the relevant pieces of information is essential for choosing an appropriate course of action, especially when it involves your finances. That’s why calculating your Trading Profit and Loss Account is yet another important responsibility to maintain. This is the culmination of your business’ Trading Accounts and Profit and Loss Accounts, which exist as two separate entities. Nevertheless, if you are to access the required information, knowing how to develop a Trading Profit and Loss Account Sheet is crucial.
The first section of the sheet will deal with your business’ Trading Account and works around the following formula:
Gross profit = Net sales – Cost of goods/services sold
(with the cost of goods/services sold using: Cost of goods sold = Net purchases + Beginning inventory – Ending inventory)
So, for example, if you were to do this manually in Excel, it may appear something like this:
| Net Sales | £150,000 |
| Net Purchases | £52,500 |
|---|---|
| Beginning Inventory | £12,000 |
| Ending Inventory | £9,500 |
| Cost of goods/services sold | £54,500 |
| Gross Profit | £95,500 |
Following on from Gross Profit, the lower section of the sheet now works around your business’ Profit and Loss Account and now uses another formula which can be represented as:
Total Revenue – Total Expenses = Net Profit
Therefore, it may appear as:
| Gross Profit | £95,500 |
| Expenses | £73,000 |
| Other sources of income (eg, capital gifts and interest paid to your business | £25,000 |
| Net Profit | £47,000 |
Need help supporting your business?
Keeping a close eye on your business revenue is vital for making sure that you’re able to maintain your bottom line and spot any potential issues before lasting damage is committed. This is why creating a Trading Account is so important. However, your revenue will often vary from month to month, making it difficult to manage bottom lines and ensure there is cash available to support your goals and operating expenses. But rather than letting the situation develop into something much worse, you can take action now by applying for Cashflow Finance and gain access to a variety of finance solution such as Merchant Cash Advance, Invoice Finance, Overdraft Replacement, and Asset Refinance. All you need to do is choose an appropriate finance solution from a lender you can trust, which is where we can help.
At Rangewell, we’re an Access to Finance specialist working with over 350 lenders to offer you a comprehensive overview of more than 23,000 finance products for your business. Our services are free to use for business owners and their advisors and we’ll also guide you through the application process. Need help supporting your business’ bottom line, apply for Cashflow Finance today or find out more with Rangewell.
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