Read this article to learn about the journal entries, items on debit and credit side in preparation of trading account.

For preparing Trading Account, closing entries shall be made in the Journal Proper. Through these entries, items of revenue and expenses related to Trading Account are closed by transferring their balances to Trading Account.

The accounts of Opening Stock, Purchases and Direct Expenses such as wages, carriage inward etc. are closed by transferring to the debit side of the Trading Account. Similarly, accounts of Sales and Closing Stock are closed by transferring to the credit side of the Trading Account.

Journal Entries:

The following journal entries shall be passed:

(i) For Closing all Debit Accounts Related to Direct Expenses:


Trading Account                                                 Dr.

  To Opening Stock Account

  To Purchases Account

  To Wages Account


  To Carriage Inwards Account

  To Factory Rent Account

(ii) For Closing all Credit Accounts Related to Direct Income:

Sales Account                                                  Dr.

Closing Stock Account                                 Dr.


  To Trading Account

(iii) For Recording Purchases Return and Sales Return:

(a) In case of purchases return or return outwards:

Purchases Returns Account                      Dr.

  To Purchases Account


(b) In case of sales return or return inwards:

Sales Account                                                Dr.

  To Sales Returns Account

(iv) For Dosing the Trading Account:

(a) In case credit side exceeds the debit side (i.e., gross profit):


Trading Account                                            Dr.

  To Profit and Loss Account

(b) In case debit side exceeds the credit side (i.e., gross loss):

Profit and Loss Account                             Dr.


  To Trading Account

There are two formats for preparing Trading Account. Horizontal Format (‘T’ form) or Vertical Format.

Trading Account

Items on Debit Side of Trading Account:

(i) Opening Stock:

Opening stock is the stock of goods which we have in hand at the beginning of the accounting year. It is not possible that all the items of goods produced or purchased for the purpose of sale could be sold during the same accounting year in which those goods were produced or purchased and some items of goods were lying unsold at the end of the accounting year.


The value of this unsold stock of goods remains unaffected during the next accounting year so this should be brought forward to the next accounting year and termed as ‘opening stock’. The opening stock appears in the trial balance as a debit balance.

This stock may include stock of raw material, stock of semi-finished goods and stock of finished goods. It is the part of cost of sales for the current accounting year; hence, it is mentioned on the debit side in the Trading Account.

(ii) Purchases:

The total purchases shown in the trial balance include both cash purchases as well as credit purchases made during the year. Net purchases, after adjusting purchases returns are to be debited in the Trading Account. Purchases returns are the items of goods which are returned to the suppliers.

This is shown in the form of deduction from purchases as under:

Net Purchases = Total Purchases – Purchases Returns


(iii) Direct Expenses:

Direct expenses are the expenses incurred by trading concerns on purchases of goods and bringing them to saleable conditions. In the case of manufacturing concerns, direct expenses also include the cost of conversions of raw material into finished products.

Direct expenses include:

(a) Wages / Direct Wages/ Productive Wages/Wages and Salaries

(b) Carriage / Cartage / Freight / Carriage Inwards / Cargo Expenses / Shipping

(c) Import Duty / Customs Duty / Dock Charges

(d) Octroi

(e) Fuel / Motive Power / Gas / Water

(f) Royalty

(g) Packaging Material and packaging charges

(h) Commission on Purchases etc.

(iv) Gross Profit:

Gross profit is the excess of sales revenue over cost of goods sold.

Items on Credit Side of Trading Account:

(i) Sales:

Sales shown in the trial balance is the total sales which include both cash sales and credit sales made during an accounting year. This item is to be mentioned on the credit side of the Trading Account. In this item, only net sales are to be taken. For calculating net sales, returns inwards are to be deducted from the gross sale.

Net Sales = Total Sales – Sales Returns

(ii) Closing Stock:

Sometimes, it is not possible that all items of goods produced or purchased could be sold in the same accounting year in which those goods have been produced or purchased. At the end of the accounting period, the value of such unsold goods lying in the stock is the closing stock. A list of the items that are not sold is prepared at the end and its value is put. As per Accounting Standard -2 (Revised), the value of closing stock is lower of cost or net realizable value.

It is important to mention here that the closing stock is usually appearing at the foot of the trial balance. In some cases, it may given in the trial balance then it should not be shown on the credit side of the Trading Account because it should have been already adjusted from the purchases. It is worth mentioning here that in those cases even the opening stock will not be separately shown in the Trading and Profit & Loss Account.

To add further it should be noted that the opening and closing stocks are adjusted through purchases, the trial balance does not show any opening stock. But in either case, it should be shown on the assets side of the Balance Sheet.

(iii) Gross Loss:

Gross loss is the excess of cost of goods sold over net sales revenue.

Gross Loss