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Advantages of Trading Account

(a)    It is possible to calculate separately the profit from the sale and purchase transactions only. It is termed as gross margin or gross profit which indicates the extent to which the administrative, selling and distribution, maintenance and depreciation expenses can be absorbed. In this manner, the management can exercise control over operating expenses in order to maintain a certain level of net profit.

(b)    The amounts or purchases and sales, direct expenses and stock in hand may be compared with the corresponding amounts of the previous year so as to find out the defects, if any, of the trading policy. A stock turnover ratio will show the efficiency or otherwise of the firm.

(c)    Trading account is helpful in establishing the relationship the relationship between the gross profit and direct expenses with the help of direct expenses are reasonable and adequate.

(d)    The success of trading activity can be worked out by calculating gross profit ratio, i.e., gross profit divided by net sales. Gross profit ration is compared with the standard ratio for performance evaluation.

(e)    Cost of goods sold can be ascertained from the information given in the trading account and is used to calculate the gross margin when deducted from sales.

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