Accounting for a trading business

Key facts

• A trader buys and sells goods without changing them. Profit comes from the margin, so accurate stock and purchase cost matter more than anything else.
• The Trading Account shows gross profit: Sales − (Opening stock + Purchases + Direct expenses − Closing stock).
• Value closing stock at cost or net realisable value, whichever is lower.

Ledgers you need

GST for traders

• Registration is compulsory above ₹40 lakh turnover (₹20 lakh in special category states) for goods, or for any inter-state sale.
• Composition (1% for traders, turnover up to ₹1.5 crore) suits shops selling mostly to consumers. You cannot collect GST or claim ITC, and you cannot make inter-state sales.
• Keep stock-wise HSN codes; GSTR-1 needs an HSN summary.

Income tax for traders

• Presumptive scheme (section 58, old 44AD): turnover up to ₹2 crore, or ₹3 crore if cash receipts are within 5%. Declare at least 8% of turnover as profit (6% for digital receipts).
• Above those limits, keep full books; a tax audit applies above ₹1 crore turnover (₹10 crore if cash is within 5%).
• TDS on purchase of goods applies if your turnover exceeded ₹10 crore last year: 0.1% on purchases above ₹50 lakh from one seller.

Key numbers to watch every month

• Gross profit % by product or brand.
• Stock turnover (cost of goods sold ÷ average stock) and slow-moving items.
• Debtor days and creditor days.

Common questions

Should freight inward be added to stock cost?

Yes. Freight inward, loading and other costs of bringing goods to your godown are part of purchase cost and closing stock value. Freight outward is a selling expense.

How do I handle trade discounts and cash discounts?

Trade discounts shown on the invoice are simply deducted from the sale or purchase value. Cash discounts for early payment are recorded as discount allowed or received.

In Hisab Central

Use stock items with HSN and GST rate set once, and the Stock Summary and Gross Profit reports to track margin.

Sources

• Central Goods and Services Tax Act, 2017 (as amended)
• Income-tax Act, 2025
• Accounting Standards (AS 2 Inventories, AS 7 Construction Contracts, AS 11 Foreign Exchange) and Ind AS 21 / 115