Trading Section of Income Statement

Preparation Methods of Trading Section of Income Statement:

Trading section of income statement is usually prepared on a separate sheet (in a vertical layout) rather than drawn up in an account form. In vertical style this is not divided into debt and credit sides rather it looks like an arithmetical equation that is sales – cost of sales = gross profit.

However trading section of income statement when prepared in an account from (horizontal layout) then it has debit and credit sides in a similar fashion to other accounts, but some arrangement of balances take place to provide clearer information like cost of sales, i.e., the cost to the business of the goods, it has sold to its customers.

Remember that the same information is shown in both forms of account but is presented in a different way.

The gross profit figure in the trading section is the difference between the net value of sales (sales less returns) and the cost of making these goods sale able (cost of sale). It is obtained by balancing the trading section in the same way as ledger accounts are balanced. The gross profit (balance of trading section) is carried forward to its original credit side in the profit and loss section of the income statement.