Trading account example

The trading profit and loss account is made up of two separate accounts within the general ledger.

Other income refers to any income other than that included in sales revenue such as interest received.

Trading profit and loss account

The trading profit and loss account is made up of two separate accounts within the general ledger.

The trading account

The profit and loss account

The purpose of the two accounts is to separately identify the gross profit and net profit of the business. The trading account is the top part of the trading profit and loss account and is used to determine the gross profit. The profit and loss account is the lower part of the trading profit and loss account and is used to determine the net profit of the business.

Both the trading account and the profit and loss account form part of the double entry as they are used to close off the temporary accounts at the end of an accounting period.

The trading and profit and loss accounts are discussed in more detail below.

The trading account

The trading account is particularly useful for a merchandising business or trading business involved in the buying and selling of finished products. The account allows the merchandiser to easily determine its overall gross profit and gross profit percentage which are important indicators of how efficiently a business is buying and selling its products.

Trading account formula

The trading account shows the gross profit which is determined by deducting the cost of goods sold from the net sales revenue of the business.

The gross profit is calculated using the trading account formula.

In the formula net sales is equal to the gross sales of the business less sales returns, allowances, and discounts.

It should be noted that carriage outwards is not included in the trading account. Carriage outwards is an expense included in the profit and loss account discussed below.

The cost of goods sold used in the formula can be expanded using the following formula.

Net purchases is equal to the gross purchases of the business including carriage inwards less any purchase returns, allowances, and discounts.

Preparation of trading account

The trading account is prepared by closing the temporary revenue and purchases accounts and adjusting the inventory accounts using a closing journal entry as shown in the example below.

Trading account closing journal entry

account	debit	credit
sales	105,000
sales returns	5,000
purchases	49,000
purchase returns	3,000
beginning inventory	8,000
ending inventory	9,000
trading account	55,000
total	117,000	117,000

Each account is closed and transferred to the trading account. The credit entry to the trading account of 55,000 represents the gross profit for the period.

Trading account example

After the closing journal entry has been posted the trading account would take the format shown in the example below.

Trading account after closing journal entry

trading account
debit		credit
sales returns	5,000	sales	105,000
purchases	49,000	purchase returns	3,000
beginning inventory	8,000	ending inventory	9,000
balance c/d	55,000
total	117,000	total	117,000
balance b/d	55,000

For clarity, in this example each line item is posted to the general ledger trading account leaving a credit balance brought down of 55,000 which represents the gross profit of the business.

In the example above the trading account has a net credit balance of 55,000 which indicates sales are greater than the cost of goods sold and the business has made a gross profit. If the trading account had a net debit balance brought down it would indicate (unusually) that sales were less than the cost of goods sold and the business had made a gross loss.

Trading account in final accounts

In the final accounts the trading account is usually presented in a more readable format. Assuming the figures relate to the month ended 31 december an example of a trading account might appear as follows.

Trading account for the month ended december 31 2017

net sales	100,000
net purchases	46,000
beginning inventory	8,000
ending inventory	-9,000
cost of goods sold	45,000
gross profit	55,000

Again the trading account shows the gross profit of 55,000 the business made on the products it buys and sells.

In addition since the trading account shows the net sales the gross profit percentage can be easily calculated as follows.

The profit and loss account

The profit and loss account is used to determine the net profit of the business. The starting point for the profit and loss account is the balance carried down from the trading account which is the gross profit of the business.

Profit and loss account formula

The profit and loss account shows the net profit which is the determined by deducting the expenses of the business from the trading account gross profit and adding other income.

The net profit is calculated using the profit and loss account formula.

In the above formula expenses refers to all the costs of the business which are not included in cost of goods sold in the trading account such as wages and salaries, rents, insurance, bank charges etc.

Other income refers to any income other than that included in sales revenue such as interest received.

Preparation of profit and loss account

The profit and loss account is prepared by closing the trading account, expense accounts and other income accounts using a closing journal entry.

Profit and loss account closing journal entry

account	debit	credit
trading account	55,000
expense accounts	48,000
other income	5,000
profit and loss account	12,000
total	60,000	60,000

Each account is closed and transferred to the profit and loss account in the general ledger. The credit entry to the profit and loss account of 12,000 represents the net profit for the period.

Profit and loss account example

After the closing journal entry has been posted the profit and loss account would take the format shown in the example below.

Profit and loss account after closing journal entry

profit and loss account
debit		credit
gross profit b/d	55,000
expenses	48,000	other income	5,000
balance c/d	12,000
total	60,000	total	60,000
balance b/d	12,000

Again for clarity, in this example each line item is posted to the general ledger profit and loss account leaving a credit balance brought down of 12,000 representing the net profit of the business.

In the example above the profit and loss account has a net credit balance of 12,000 which indicates sales and other income are greater than the cost of goods sold and expenses and the business has made a net profit. If the profit and loss account had a net debit balance brought down it would indicate that sales and other income were less than the cost of goods sold and expenses and the business had therefore made a net loss for the accounting period.

Profit and loss account in the final accounts

The profit and loss account starting with gross profit is not usually shown as a separate statement and is normally combined with the trading account and shown as a combined trading profit and loss account format shown later in this post.

For the sake of completeness, assuming the figures relate to the month ended 31 december, a separate profit and loss account starting with gross profit might appear as follows.

Profit and loss account for month ended december 31 2017

gross profit	55,000
expenses	48,000
other income	5,000
net profit	12,000

Again the profit and loss account shows the net profit of 12,000 the business has made for the accounting period.

Using the net sales from the trading account the business can quickly calculate the net profit percentage as follows.

Trading profit and loss account format

The trading account and the profit and loss account can be combined into a single summary known as a trading profit and loss account.

An example trading profit and loss account format is shown below.

Trading profit and loss account format – month ended december 31 2017

net sales	100,000
net purchases	46,000
beginning inventory	8,000
ending inventory	-9,000
cost of goods sold	45,000
gross profit	55,000
expenses	48,000
other income	5,000
net profit	12,000

By using the trading profit and loss account the merchandising business can clearly see both the gross and net profit of the business and can quickly calculate the gross and net profit percentages based on net sales.

About the author

Chartered accountant michael brown is the founder and CEO of double entry bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with deloitte, a big 4 accountancy firm, and holds a degree from loughborough university.

Trading account:

Learning objectives:

Define and explain a trading account.

What are the benefits of preparing a trading account?

Definition and explanation:

The account which is prepared to determine the gross profit or gross loss of a business concern is called trading account.

It should be noted that the result of the business determined through trading account is not true result. The true result is the net profit or the net loss which is determined through profit and loss account. The trading accounting has the following features:

It is the first stage of final accounts of a trading concern.

It is prepared on the last day of an accounting period.

Only direct revenue and direct expenses are considered in it.

Direct expenses are recorded on its debit side and direct revenue on its credit side.

All items of direct expenses and direct revenue concerning current year are taken into account but no item relating to past or next year is considered in it.

If its credit side exceeds it represents gross profit and if debit side exceeds it shows gross loss.

Purpose of preparing trading account:

The profit or loss determined by a trading account is the gross result of the business but not the net result. If so, then a question arises - what is the use of preparing a trading account? This account is necessary because of the following advantages.

Gross profit of a business is very important data, since all business expenses are met out of it. So the amount of gross profit should be adequate to meet the indirect expenses of a business concern.

The amount of net sales can be determined through this account. Gross sales can be ascertained from sales account in the ledger, but net sales cannot be so obtained. The true sales of a business is net sales - not gross sales. Net sales are determined by deducting sales returns from gross sales in trading account.

The success or failure of a business can be ascertained by comparing net sales of the current year with that of the last year. It should be noted that an increase in the amount of net sales of the current year over the last year may not be regarded as a sign of success, since sales may increase because of rise in price level.

Percentage of gross profit on net sales (gross profit ratio) can be easily determined from trading account. This percentage is very important yardstick for measuring the success or failure of a business. Compared to last year, if the rate increases, it indicates success; on the other hand if the rate decreases, it is an indication of failure.

Percentage of different items of buying expenses (direct expenses) on gross profit can be easily determined and by comparing the percentage of the current year with that of the previous year the variations can be ascertained. An analysis of variances will disclose their cause which will help in controlling the amount of expenses.

Inventory or stock turnover ratio can be determined from trading account. The success or failure of a business can be measured by this rate. Higher rate indicates a favorable sign i.E. Goods are sold soon after their purchase. On the other hand, low rate signifies deterioration, i.E. Goods are sold long after their purchase.

Method of preparation of trading account:

Trial balance is a list of all ledger accounts balances, so all the necessary information for preparation of a trading account is available from the trial balance. As gross profit or gross loss of a particular period is determined through trading account. So it's heading will be as follows:

XYZ co.
Trading account for the year ended 31.12.2005
(if accounting period ends on 31.12.2005)

From the trial balance, the balance of opening stock account, purchases account, returns inwards account and of all direct expenses are transferred on the debit side of the trading account, and the balance of the sales account, returns outwards account, and closing stock account are transferred on the credit side of the trading account. If the credit side of the trading account exceeds the debit side, the result is "gross profit", and if debit side exceeds the credit side, the result is "gross loss". The format of a trading account is shown below:

Name of business
trading account for the year ended .

If credit side exceeds the debit side	=	gross profit
if debit side exceeds the credit side	=	gross loss

Example:

The following are some ledger balances taken out from the trial balance of XYZ company on 31st december 2005.

$	$
stock on 1.12005	60,000	returns outwards	16,000
purchases	360,000	returns inwards	30,000
carriage inwards	24,000	sales	500,000
custom duty	12,000

The closing stock is valued at $10,000.

Prepare a trading account for the year ended 31st december 2005. Show the journal entries to close the above account (closing entries).

Solution :

Xyz co.
Trading account for the year ended 31.12.2005

Examples of trading and profit and loss account and balance sheet

Trading account format and accounting trading and profit and loss account examples in balance sheet. Different solved problems in trading profit and loss a/c in final accounts format for carriage outwards.

Learning objectives:

Prepare trading and profit and loss account and balance sheet.

Example 1:

From the following balances extracted from the books of X & co., prepare a trading and profit and loss account and balance sheet on 31st december, 1991.

$	$
stock on 1st january	11,000	returns outwards	500
bills receivables	4,500	trade expenses	200
purchases	39,000	office fixtures	1,000
wages	2,800	cash in hand	500
insurance	700	cash at bank	4,750
sundry debtors	30,000	tent and taxes	1,100
carriage inwards	800	carriage outwards	1,450
commission (dr.)	800	sales	60,000
interest on capital	700	bills payable	3,000
stationary	450	creditors	19,650
returns inwards	1,300	capital	17,900

The stock on 21st december, 1991 was valued at $25,000.

Solution:

X & co.
Trading and profit and loss account
for the year ended 31st december, 1991

To opening stock	11,000	\|	by sales	60,000
to purchases	39,000	\|	less returns i/w	1,300
less returns o/w	500	\|	58,700
38,500	\|	by closing stock	25,000
to carriage inwards	800	\|
to wages	2,800	\|
to gross profit c/d	30,600	\|
\|
83,700	\|	83,700
\|
to stationary	450	\|	by gross profit b/d	30,600
to rent and rates	1,100	\|
to carriage outwards	1,450	\|
to insurance	700	\|
to trade expenses	200	\|
to commission	800	\|
to interest on capital	700	\|
to net profit transferred to capital a/c	25,200	\|
to net profit transferred to capital a/c	25,200	\|
\|
30,600	\|	30,600
\|

X & co.
Balance sheet
as at 31st december, 1991

Liabilities		$	\|	assets	$
creditors	19,650	\|	cash in hand	500
bills payable	3,000	\|	cash at bank	4,750
capital	17,900	\|	sundry debtors	30,000
add net profit	25,200	\|	bill receivable	4,500
43,100	\|	stock	25,000
\|	office equipment	1,000
\|
65,750	\|	65,750
\|

Example 2:

The following trial balance was taken from the books of habib-ur-rehman on december 31, 19 ….

Cash	13,000
sundry debtors	10,000
bill receivable	8,500
opening stock	45,000
building	50,000
furniture and fittings	10,000
investment (temporary)	5,000
plant and machinery	15,500
bills payable	9,000
sundry creditors	20,000
habib’s capital	78,200
habib’s drawings	1,000
sales	100,000
sales discount	400
purchases	30,000
freight in	1,000
purchase discount	500
sales salary expenses	5,000
advertising expenses	4,000
miscellaneous sales expenses	500
office salary expenses	8,000
misc. General expenses	1,000
interest income	1,000
interest expenses	800
2,08,700	2,08,700

Closing stock on december 31, 19 … was $10,000

Required: prepare income statement/trading and profit and loss account and balance sheet from the above trial balance in report form.

Solution:

Habib-ur-rehman
income statement/profit and loss account
for the year ended december 31, 19…..

Gross sales	100,000
less: sales discount	400
net sales	99,600
cost of goods sold:
opening stock	45,000
purchases	30,000
add: freight in	1,000
31,000
less purchase discount	500
net purchases	30,500
cost of goods available fort sale	75,500
less closing stock	10,000
cost of goods sold	65,500
gross profit	34,100
operating expenses:
selling expenses:
sales salary expenses	5,000
advertising expenses	4,000
misc. Selling expenses	500
9,500
general expense:
office salaries expenses	8,000
misc. General expenses	1,000
9,000
total operating expenses	18,500
net profit from operations	15,600
other expenses and incomes:
interest income	1,000
interest expenses	800
net increase	200
net income	15,800

Habib-ur-rehman
balance sheet
as at december 31, 19…..

Trading account

What is a trading account?

A trading account can be any investment account containing securities, cash or other holdings. Most commonly, trading account refers to a day trader’s primary account. These investors tend to buy and sell assets frequently, often within the same trading session, and their accounts are subject to special regulation as a result. The assets held in a trading account are separated from others that may be part of a long-term buy and hold strategy.

Trading account

Basics of trading account

A trading account can hold securities, cash and other investment vehicles just like any other brokerage account. The term can describe a wide range of accounts, including tax-deferred retirement accounts. In general, however, a trading account is distinguished from other investment accounts by the level of activity, purpose of that activity and the risk it involves. The activity in a trading account typically constitutes day trading. The financial industry regulatory authority (FINRA) defines a day trade as the purchase and sale of a security within the same day in a margin account. FINRA defines pattern day traders as investors who satisfy the following two criteria:

Traders who make at least four day trades (either buying and selling a stock or selling a stock sort and closing that short position within the same day) over a five-day week.

Traders whose day-trading activity constitutes more than 6 percent of their total activity during that same week.

Brokerage firms can also identify clients as pattern day traders based on previous business or another reasonable conclusion. These firms will allow clients to open cash or margin accounts, but day traders typically choose margin for the trading accounts. FINRA enforces special margin requirements for investors it considers to be pattern day traders.

Opening a trading account requires certain minimum personal information, including social security number and contact details. Your brokerage firm may have other requirements depending on the jurisdiction and its business details.

FINRA margin requirements for trading accounts

Maintenance requirements for pattern day trading accounts are considerably higher than those of non-pattern trading. The base requirements of all margin investors are outlined by the federal reserve board’s regulation T. FINRA includes additional maintenance requirements for day traders in rule 4210. Day traders must maintain a base equity level of $25,000 or 25 percent of securities values, whichever is higher. The trader is permitted a purchasing power of up to four times any excess over that minimum requirement. Equity held in non-trading accounts is not eligible for this calculation. A trader who fails to meet these requirements will receive a margin call from their broker and trading will be restricted if the call is not covered within five days.

Forex trading examples

Forex trading example

Forex trading allows you to speculate on price movements in the global foreign exchange market. Currency values rise and fall in relation to each other and in response to national and international economic, financial and political events.

When trading forex, you would buy a currency pair if you believed that the base currency will strengthen against the counter currency. Alternatively, you would sell a currency pair if you believed that the base currency will weaken in value against the counter currency.

You can choose to trade FX through cfds, spot FX and spread bets.

Learn more about the type of FX trades available here.

Selling (going short) GBP/USD as a spread bet

Traders are bracing themselves for brexit. You expect the pound to depreciate against the US dollar, i.E. The US dollar will strengthen against the pound, and decide to sell (go short) £5 a point at 1.22262.

Note: in this example the margin as well as the p&l are calculated in pounds.

The winning trade

You were right about your suspicions, and the pound drops against the dollar. The rate drops to 1.22045, at which point you close your trade, netting 108.5 in profit.

The losing trade

You market didn’t move as you expected, and instead brexit has revitalized the pound and pushed it higher. The pound climbs to 1.22489 before you decide to close your position.

Buying (going long) GBP / USD as a CFD trade

The jobs market in the US appears to be stalling and you expect the level on non-farm payrolls to come in below analyst’s estimates.

You believe that the US dollar will weaken and the british pound will strengthen against the US dollar, and decide to buy (go long) 1 CFD (per 0.0001) on GBP/USD at 1.2300.

Margin and profit/loss are calculated (and denominated) in the second, or counter currency of the pair.

The winning trade

Good news, non-farm payrolls came in weaker than expected and the dollar slumped sending GBP/USD higher. GBP/USD is now trading at 1.2380 / 1.2382 and you decide to sell to close at 1.2380.

You bought at 1.2300 and sold at 1.2380, a rise of 80 pts. This gives you a profit of $80

City index automatically converts trading P&L into the client’s denominated account currency at the prevailing market rate at the time that the trade is closed.

Losing trade

Let’s look at what would have happened if the actual non-farm payroll data had come in better-than-expected, the US dollar would have strengthened against the pound, sending GBP/ USD lower.

If GBP/USD fell and you sold to close at 1.2250 you would lose $50.

A sell trade (going short) on EUR / USD as a spot FX trade

Investors are concerned about the upcoming elections across europe and you expect the euro to fall against the US dollar. You decide to sell (go short) €20,000 at 1.0650.

In forex trading, the trade size is in units of the first, or base, currency in the pair

EUR/USD has a margin factor of 3.33%

The margin as well as the p&l are calculated in dollars, the counter currency of the pair.

Winning trade

The euro drops against the dollar as political event risk increases and you decide to buy €20,000 at 1.0570 to close your trade with a profit of $160.

City index automatically converts trading P&L into the client’s denominated account currency at the prevailing market rate at the time that the trade is closed.

Losing trade

Supposing a weaker dollar across the board pushes the euro up by 50 points and you buy to close at 1.0700 you would have lost $100.

Note: in this example the margin as well as the p&l are calculated in pounds.

Chapters

Want to test what you've learned?

Topics

Introduction to financial markets

Spread betting

CFD trading

Forex trading

Trading with city index

Trading strategies

Technical analysis

Fundamental analysis

Trading academy series

Video library

Cfds are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading cfds with this provider. You should consider whether you understand how cfds work and whether you can afford to take the high risk of losing your money.

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† 1 point spreads available on the UK 100, germany 30, france 40 and australia 200 during market hours on daily funded trades and cfds (excluding futures).

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Trading account and demat account meaning

In this article, we will discuss trading account and demat account meaning and how they are related to the stock market. Many beginners think that trading account and demat account is the same thing. But the trading account is a different thing and demat account is different. So let’s know what are the differences between them.

What are the trading and demat account?

Whenever a person becomes interested to participate in the stock market, he or she needs to open an account with a broker, this is called a trading account and demat account. Trading account is the place where you buy or sell your shares. And demat account is the place where your purchased shares are kept.

Before many years, till the late ’90s, the shares used to be in physical paper formats on which the shareholder’s name, date of birth, other details, etc were mentioned. It was also mentioned on the physical share certificates that the shareholder has been given with X number of shares. Check the image below for a sample physical format share certificate.

But on the late ’90s, the physical share certificates have been converted into electronic form. As we know that our money can be in 2 forms – one which is kept in our wallet or the one which is kept in our bank. The money that is kept in the bank is in electronic form. You can send or receive money in electronic form. For that, you don’t need to send or receive any physical money to anyone. Similarly, the physical share certificates were also converted to the electronic form which created immediate ease in buying or selling of shares.

Previously it was a hectic job to sell a share which needed transferring the name of shareholders. So the process of dematerialization evolved which simplified this process of share buying and selling and shares were now kept in demat form in a custody. When someone buys some shares they are transferred to the custody and when he sells those shares are transferred from that custody. That custody is called a demat account. So the basic concept of trading account and demat account meaning is clear now.

Trading account and demat account meaning in simple example:

Suppose ravi runs a shop where he sells various items. Ravi also has a godown, where the warehouses the items that he sells from the shop. He purchases the items and keeps them in the godown and whenever he sells any item that is delivered from the godown through the shop. So, in simple terms, demat account is just like a godown and trading account is like a shop. These shops and godowns must be established at the same time to run a business. Similarly, whenever you think of trading in the market you need to open trading and demat account at the same time.

The trading account remains under control of a broker, who charges some small brokerage and in return buys or sells your shares, because you can’t buy or sell your shares directly. If you don’t have a trading or demat account already, you can open a trading and demat account instantly online using aadhar card. To open a trading and demat account you need to provide some basic KYC documents like your PAN card, aadhar card, bank statement, photograph, canceled cheque, etc.

Difference between the two

The main difference in the trading account and demat account meaning is when you purchase a share for a few days or few months or a few years, they are not kept in the trading account. Rather the shares are transferred to the demat account. So they are kept in the godown.

These godowns are maintained by two government companies, NSDL or CDSL who are called as the central depository participants. Our brokers account with these government organizations and they finally offer the demat service to us.

So, you have understood that whenever you will buy a share it will be transferred to the godown or demat account and whenever you will sell the share it will be taken from the godown or demat account and will be given to the share buyer. And you don’t need to do all these jobs, your broker will do this for you whenever you will buy or sell a share. For all these jobs the broker will charge a small fee from you, that is called brokerage charge.

The other difference between the trading account and demat account meaning is that in the trading account you can buy or sell stocks or shares, futures or options, commodities as well as currencies. But in the demat account, only the shares or whom you have taken delivery, they will be stored. Delivery shares are taken back from the demat account and given to the buyer.

Trading account and demat account FAQ

Trading account is like an investment account through which investors or traders place buy-sell orders in the stock market. Simply, the trading account is traders’ primary account. It is compulsorily required for buying and selling of shares from the market.

Demat account is as same as a bank account. The only difference is, instead of holding money, demat account holds shares. Securities are held in the dematerialized (electronic) form in the demat account. After buying-selling of shares, they deposited in the demat.

Yes, of course, it is compulsory to open a trading account with demat account. Through the trading account, only execution of buying-selling of shares happen. This is the only work of a trading account. So, after purchasing share, there should be a separate account where those shares need to be deposited. Demat accounts hold those shares, work like bank accounts.

Yes, of course, you can have two or multiple demat accounts using the same PAN card. But the thing is, you cannot open multiple accounts using same PAN card under a single broker. In that case, you have to open accounts under multiple brokers.

Yes, anyone who have PAN card and mobile linked aadhar card, can open demat account online. After the e-sign process, you need to sign and submit POA (power of attorney) in physical format. This has to be done as per the regulatory guidelines.

Example

Suppose you are selling state bank of india 100 shares, the shares were lying in your demat till that day. On or within the next 2 days after the trade date, those shares will be taken out of your demat. It will be credited to the buyers’ demand. This TRADE DATE + 2 DAYS, is known as T+2 settlement. The money that you were to get by selling the shares will be credited to your trading account on or within that T+2 settlement date. Once again you need not worry about all the steps as these steps are automatically managed by brokers.

The trader needs to buy-sell the shares in his trading account and the rest will be automatically managed. No signature is necessary, no physical headache. This is the power of demat account. If you still are not clear about demat account opening procedure you can check this post. You can check the video below to understand the trading account and demat account meaning in more details.

I hope that trading account and demat account meaning is now clear to you. There are many brokers who can offer you trading account and demat account. There can be some full-service brokers and some discount brokers. We recommend you to open an account with zerodha, india’s leading discount stockbroker.

Trading securities

What is trading securities?

Trading securities are investments in the form of debt or equity that the management of the company wants to actively purchase and sell to make profit in the short term with securities they believe are going to increase in price, these securities can be found on the balance sheet at the fair value on the balance sheet date.

For example, let’s say that the management of a company invests a certain amount of money in debt or equity (meaning in a particular bond or a stock) for a short period. The purpose of doing this is to buy and sell that particular bond or the stock within a short while to make money.

As we note from starbucks SEC filings, trading securities include equity mutual funds and exchange-traded funds.

There are three classifications of securities as per accounting – trading securities, held to maturity securities, and available for sale securities.

We will understand more about the securities that are trading in detail.

Understand trading securities in detail

Trading securities in the balance sheet are the fastest moving securities among all three.

The reason these securities are the fastest moving is that these securities are traded regularly (even daily) in the open market. And these securities are managed directly by the management of the company to see whether these securities can bring in more profits for the current period or not.

As per the accounting system, such securities are placed in the balance sheet of a company at a fair value. It is done so that the economic benefit (or loss) can be shown on the financial statements of a company during that period.

Since the company will most probably sell off the investments, these investments are considered as the current assets of the company for the period.

The market value of securities changes every day. That’s why the securities must be shown at the fair value.

But the question remains what would we do till the time the investments are not sold? The treatment for this is to create a temporary account to which we can transfer the unrealized gain or loss. And whenever the selling is done, we can write off the temporary account and transfer the amount to the income statement.

Journal entries example

United co. Has kept aside $100,000 for short-term investment purposes. This amount won’t be used for any operational purpose or working capital. This money would purely be used for making a quick gain on the short-term investment.

The management of united co. Has seen that grow & lead corporation has been doing extremely well for the last couple of years. And united co. Decided to invest the entire amount into the stocks of the grow & lead corporation. The market price of each stock of grow & lead corporation was $5 per stock.

In the first year of investment, grow & lead corporation has paid out a cash dividend of $0.50 per share. At the end of the year, the value of shared purchased by united co. Reached $125,000.

Later in the next year, when the shares were sold, the amount received was $120,000.

How would we report these transactions assuming that the management of united co. Had invested $100,000 for trading securities?

First of all, we will treat each one transaction separately and would see how each transaction would get reflected in the books of united co.

The first transaction was to invest $100,000 in trading securities of grow & lead corporation. At $5 per share, united co. Had bought 20,000 shares. And the following would be the entry in the books of accounts of united co. –

This journal entry was passed so that we can create a current asset called “investments in trading securities” and record it in the balance sheet of united co. And cash is credited since united co. Has to let go of the other current asset “cash” to invest in the securities.

The next transaction would be related to the cash dividend. Since grow & lead corporation has declared a cash dividend of $0.50 per share, here’s the journal entry for that particular transaction –

We passed this entry to reflect the income received in the income statement. We have debited cash account because united co. Has been receiving cash in the form of the dividend. If the asset increases, we debit the asset. At the same time, we have credited divided revenue because when income increases, we credit the account. And the same dividend revenue can be reflected in the income statement of the books of accounts of united co.

Finally, the major transaction of the above example of trading securities is the fair value at which the value of shares was recorded at the end of the year.

According to that, united co. Had gained $(125,000 – $100,000) = $25,000 as unrealized gain. Since the money is not received, we will record the following journal entry in the books of united co. –

The next year, united co. Was able to sell the shares and gained $120,000 from the sale. Meaning the actual profit was $(120,000 – 100,000) = $20,000.

But in the previous year’s balance sheet, united co. Had shown $25,000 as the unrealized gain. So, here’s the final entry we need to pass for making things right –

By doing this, united co. Has made things right. The real gain was $20,000, and by passing the last entry, the investment in trading securities got closed, and united co. Had got a profit of $20,000.

Conclusion

From the above discussion, it’s clear that how a company can use a certain amount of money for short-term investments and can gain a lump sum amount at the end of the period.

Two things are most important here –

First, at the end of the year, the balance sheet should reflect the fair value of the stocks or the bonds in which the amount is being invested.

Second, the reverse entry to effect the unrealized gain or loss.

Trading securities in balance sheet video

Trading profit and loss account template

Download trading profit and loss account sample format below

What is trading profit and loss account?

The trading profit and loss account also known as income statement is used to access your business performance and financial performance.

In other words, the profit and loss statement reports a company’s revenues, expenses, and most of the gains and losses which occurred during the period of time specified in its heading.

Key terms

The trading profit and loss is divided into to categories:

The trading account

The profit and loss account

Trading accoun t is prepared to show the gross profit or gross loss for the period. It is prepared to conform to the rules of double entry.

Here: gross profit = sales revenue – cost of goods sold

Trading account looks at the difference between the sales and the cost of goods sold.

Profit and loss account shows the net profit or net loss of a business. This account follows the trading account using value of the gross profit to ascertain the net profit or net loss for a period.

The profit and loss features all expenses incurred during the given period (sales and marketing expenses, administrative expenses etc.).

Here: net profit = gross profit – total expenses

Net loss occurs when value of total expenses incurred is greater than the gross profit. Download trading profit and loss account template here (excel)

A simple example of a trading profit & loss statement:

Sample company, inc.
Sample trading profit & loss statement for the month/year ended
january 1-31, 2017

What is a trading account?

As you probably know, demat account is essential for holding your securities in today’s digital age. But note the careful use of words! A demat account, while it may allow you to hold your securities, will not allow you to ‘transact’ - that is, buy or sell securities. For that, you’re going to have to open a trading account.

A trading account is mainly known to facilitate multiple objectives that are essential for all types of trading - right from helping you manage expenses to keeping a careful control of your choice of transactions.

A trading account is typically used by traders to speculate about the movements of the assets, with an expectation of a decent profit.

There are two types of trading accounts: a securities/standard trading account and a commodities trading account.

Objectives of a trading account

A trading account is mainly known to facilitate multiple objectives that are essential for all types of trading - right from helping you manage expenses to keeping a careful control of your choice of transactions. As the name suggests, a trading account helps customers trade in securities.

A trading account helps the broker or the investment dealer to keep track of progress by comparing the present figures with those of the previous trading year.

The gross profit percentage on net sales (gross profit sales) can be easily determined by the trader. The trader or the broker can keep a track of the gross profit and determine the profit percentage that you’ve gained on transactions. The gross profit should be adequate enough for indirect expenses.

You can conduct proper planning and research to improve the results of your investments made through the trading account, thanks to the vast array of data available to you.

Your broker can keep a track of the stocks at the open and end of a particular trading day.

The stock turnover ratio can be determined from your trading account. This rate can be used to measure the failure or success of the business.

Basics of trading accounts

A trading account is essentially used to facilitate transactions such as stock trading, mutual fund investments (or redemptions), etfs and more. Additionally, it can also keep a track of cash, securities, foreign currency and other transactions.

Investors use a trading account for transactions involving stocks, commodities and other securities. A trading account is typically used by traders to speculate about the movements of the assets, with an expectation of a decent profit.

An investor can also open multiple trading accounts with different brokers for several purposes. Here are some of the most popular reasons why traders tend to use their trading accounts:

Day-trading activities

Long term investment

Retirement savings

Education and health insurance planning

In a trading account, only direct expenses and revenue are considered. Direct expenses are considered on its debit side, while direct revenue is considered on its credit end. No item related to the past year is considered. If the credit side has a bigger total than the debit side, it indicates a profit, and vice-versa.

How to open a trading account

For investing in securities, you necessarily need a demat account and a trading account. In fact, if you’re trading futures & options, you could possibly go without needing a demat account, but not without a trading account.
Here are the steps for opening a trading account online:

First, you need to select a broker. The broker must respond to your demands in a timely order. Time is money--especially when dealing with the stock market. A smooth and intuitive user interface is key to saving time.. Ensuring that you choose a good broker from the beginning of your trading life is a very important decision. Speaking of which, have you checked out upstox pro?

Next, you should compare the brokerage rates. Each and every broker or firm charges a processing fee. And then there are some of the good ones that don’t.

Get in touch with the brokerage firm and read whatever you find about their account opening procedure.

The firm would either send a representative to your house or office with the demat account opening form and know your client (KYC) form or allow you to open the trading account online. You have to fill up or submit those forms and give them the required documents [proof of identity, proof of address, proof of bank account (cancelled cheque or bank statement)] to carry on the process.

Your forms will be verified on the phone or through an in-person check and you will have to disclose your personal details.

Once all the procedures are completed you will be provided with the details of your trading account.

Now, you should be all set to conduct trades in the stock market.

Types of trading accounts

A standard trading account covers all the basics. It allows you to trade equity intraday and delivery, futures & options, mutual funds, exchange-traded funds (etfs) and currency futures. This is ideal for short-term traders leveraging their funds at a high frequency.

A commodity trading account is one you’ll need to open if you’re planning to trade in commodities such as gold, silver, crude oil, and copper. A commodities broker is who you need for this process. A commodities broker is an individual broker or a firm that is a trading member of a recognized commodity exchange like the MCX. With a commodity trading account, you can trade commodity futures, and therefore would not need this to be linked to your demat account.

You can open only one trading account with one broker. That just means that you can’t have multiple trading accounts with just one broker. However, you can hold multiple trading accounts provided your brokers are different.

Clearly, a trading account is a necessity for an investor, on par with a demat account. The online trading account opening process has gotten far simpler than before, making it even more lucrative to jump in and become a part of india’s success story as its markets scale new heights.

So, let's see, what we have: the trading profit and loss account is used by a merchandiser to show both gross and net profit. It is a combination of two ledger accounts. At trading account example