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CSEET · Fundamentals of Accounting · Preparation of Final Accounts for Sole Proprietorship

Which statement correctly identifies the purpose of the Trading Account in the final accounts of a sole proprietor?

The Trading Account is prepared to find the gross profit or gross loss by comparing sales with the cost of goods sold and direct expenses. Net profit is determined later in the Profit and Loss Account, and financial position is shown in the Balance Sheet.

  1. AIt shows the gross profit or gross loss from buying and selling goodsCorrect
  2. BIt shows the net profit after all indirect expenses
  3. CIt lists assets and liabilities on the closing date
  4. DIt checks that total debits equal total credits

Explanation

The Trading Account matches sales with the cost of goods sold, including direct expenses, to give gross profit or loss. Net profit is found in the Profit and Loss Account after indirect expenses and incomes. Assets and liabilities appear in the Balance Sheet, and the equality of debits and credits is tested by the trial balance.

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