In accounting, a trading business is one that primarily earns revenue by buying and selling goods in their original form. This means they don't alter the product in any way, they just resell it. Examples of trading businesses include:

  • Retail stores (clothing, electronics, groceries)
  • Wholesalers
  • Distributors

Here are some key accounting aspects specific to trading businesses:

  • Inventory:  A crucial element for trading businesses. Inventory represents the good  available for sale at any given time.  Accounting for inventory involves tracking its purchase cost,  recording sales, and valuing the remaining stock.
  • Cost of Goods Sold (COGS): This is the biggest expense for most trading businesses. It represents the direct cost of the goods sold during a period.
  • Trading Account: A specific account used to determine the gross profit or loss from trading activities. It considers opening inventory, purchases, COGS and closing inventory.

Understanding these aspects is essential for accurate financial reporting and performance analysis in a trading business.