Main benefits or advantages of preparing trading account can be described as follows:
1. Simple And Easy To Prepare
Trading account is very easy and simple to prepare. It needs only simple accounting knowledge to set up trading account of the business.
2. To Ascertain Gross Profit Or Loss
Trading account determines gross profit or gross loss of the business which helps to measure or ascertain profitability position of the company for the specific period.
3. Relation Between Cost Of Goods Sold And Gross Profit
Trading account helps to ascertain cost of goods sold which is necessary to determine gross profit for the period by using following formula:
Gross Profit= Net Sales - Cost Of Goods Sold
4. Calculation Of Gross Profit Ratio
Trading is useful to determine the gross profit ratio of the firm, which can be calculated by using the following formula.
Gross Profit Ratio = Gross Profit / Net Sales
Also Read:
5. Information About Direct Expenses
Trading account provides detailed information regarding direct expenses of the business firm for the specific accounting period.
Trading account also help to measure or determine stock turnover ratio or inventory turnover ration of the business firm as it provides information about stock and cost of goods sold. Inventory turnover ration can be calculated by using following formula.
Inventory Turnover Ratio = Cost Of Goods Sold / Average Inventory
7. Safety Against Loss
Trading account helps to minimize losses by providing information regarding sales, cost of goods sold, direct expenses and closing stock. So, it provides safety against loss to the business firm.
