How to Prepare a Trading Account for Self-Help Groups and NGOs

Many Self-Help Groups (SHGs) and NGOs are not just savings-and-credit bodies – they actively buy and sell goods as part of income-generating activities. A group that makes and sells candles, handicrafts, or packaged food needs to know whether those activities are actually profitable. That is exactly what a Trading Account tells you. It is the first statement in the final accounts preparation process, and it gives a clear, single-figure answer: how much gross profit (or gross loss) did the group earn from its core buying and selling activities during the year? Understanding how to prepare one is a foundational financial skill for any SHG treasurer or NGO accountant.

Why trading accounts matter for SHGs and NGOs 🔗

Most people associate financial statements with large corporations, but SHGs across India – the vast majority of which are women-led community groups – run real trading operations. They purchase raw materials or finished goods, process or repackage them, and sell them to generate income for members. Without a structured account to capture all of this, it is impossible to tell whether the activity is creating value or quietly draining resources.

Proper accounting for NGOs and SHGs is not just about regulatory compliance – it builds donor trust, attracts funding, and enables better financial planning. The Trading Account sits at the centre of this. It answers the most immediate financial question before any overhead or administrative costs are even considered: is the buying-and-selling activity itself profitable?

This matters for several reasons. Funding agencies and banks that lend to SHGs under programmes like NABARD’s SHG-Bank Linkage Programme expect groups to demonstrate transparent and well-maintained books of accounts. A Trading Account that shows a healthy gross profit signals that the group’s livelihood activity is viable, which directly supports loan eligibility. For NGOs that run commercial wings or product-based programmes, the same logic applies: a Trading Account is the evidence base for whether a programme model is financially sustainable.

The link between Trading Account and overall profitability 🔗

A Trading Account determines gross profit or gross loss at the stage of final accounts preparation. It is the first statement prepared, and its closing balance – the gross profit figure – is then carried forward to the Profit and Loss Account, which captures indirect expenses like rent, salaries, and administrative costs. The net profit is only known after that second stage. Skipping the Trading Account means there is no structured way to distinguish between losses caused by poor trading (buying too high, selling too low) and losses caused by high overheads. That distinction is essential for making the right management decision.

Key components of a trading account 🔗

A Trading Account follows the standard T-format used in double-entry bookkeeping, with a Debit (Dr.) side on the left and a Credit (Cr.) side on the right. Both sides must balance out, reflecting an accurate gross profit or loss figure. Here is what goes on each side.

Debit side – costs and expenses 🔗

The debit side records everything the SHG or NGO spent directly in order to acquire or produce the goods it sold. These are called direct expenses.

Opening stock is the value of unsold goods carried forward from the previous accounting period. If a group had ₹5,000 worth of handmade soaps left over from last year, that figure opens the current year’s Trading Account on the debit side. It represents goods already paid for that still need to be sold.

Purchases refers to all goods bought during the year for the purpose of resale, recorded at cost. If the group buys raw materials for candle-making or purchases finished goods for resale, those totals are debited here. Any goods returned to the supplier (purchase returns) are deducted from this figure – so the entry reads “Purchases less Returns.”

Direct expenses are all costs directly tied to bringing goods to a saleable condition or to the point of sale. Common examples include carriage inward (freight paid to bring goods in), wages paid to workers involved in production, packing materials, and octroi or local levies. Indirect expenses like rent or office costs do not appear here – they belong in the Profit and Loss Account.

If the credit side total exceeds the debit side total, the difference is written on the debit side as Gross Profit to balance the account, and this figure is then transferred to the credit side of the Profit and Loss Account.

Credit side – income and closing stock 🔗

The credit side records what the group earned from selling goods and the value of goods still on hand.

Sales represents the total revenue from selling goods during the year – both cash and credit sales combined. Goods returned by customers (sales returns) are deducted, so the entry reads “Sales less Returns.” This is the group’s primary income from trading.

Closing stock is the value of goods that remain unsold at the end of the accounting period. It is valued at cost price or market price, whichever is lower – a standard accounting principle of conservatism. Closing stock appears on the credit side of the Trading Account and also as a current asset in the Balance Sheet. It is not usually part of the trial balance and is entered only at the time of preparing final accounts.

If the debit side total exceeds the credit side total, the difference is a Gross Loss, written on the credit side to balance the account.

The gross profit formula 🔗

The relationship between all these items can be expressed as a single formula:

Gross Profit = (Net Sales + Closing Stock) − (Opening Stock + Net Purchases + Direct Expenses)

This is also commonly written as:

Gross Profit = Net Sales − Cost of Goods Sold
where Cost of Goods Sold (COGS) = Opening Stock + Net Purchases + Direct Expenses − Closing Stock

Both expressions give the same result. The formula shows that gross profit improves when the group sells more, keeps purchase costs low, controls direct expenses, or reduces wastage that inflates closing stock.

Step-by-step example: preparing a trading account for an SHG 🔗

Consider Saheli SHG, a group of women in rural Maharashtra that produces and sells handmade organic soaps. The following figures are available for the financial year ending 31 March 2025:

• Opening Stock: ₹8,000
• Purchases: ₹42,000
• Purchase Returns: ₹2,000
• Carriage Inward (freight): ₹1,500
• Wages (production): ₹6,000
• Sales: ₹75,000
• Sales Returns: ₹3,000
• Closing Stock (31 March 2025): ₹10,000

Here is how Saheli SHG’s Trading Account looks for the year ending 31 March 2025:

Let’s verify using the gross profit formula:

Net Sales = ₹75,000 − ₹3,000 = ₹72,000
Net Purchases = ₹42,000 − ₹2,000 = ₹40,000
COGS = ₹8,000 + ₹40,000 + ₹1,500 + ₹6,000 − ₹10,000 = ₹45,500
Gross Profit = ₹72,000 − ₹45,500 = ₹26,500

Wait – let us reconcile with the T-account. Adding both sides: Debit total without gross profit = ₹8,000 + ₹40,000 + ₹1,500 + ₹6,000 = ₹55,500. Credit total = ₹72,000 + ₹10,000 = ₹82,000. Gross Profit = ₹82,000 − ₹55,500 = ₹26,500. This ₹26,500 is written on the debit side as “Gross Profit c/d” to balance both sides at ₹82,000, and the same amount is carried forward to the credit side of the Profit and Loss Account.

This means that from Saheli SHG’s soap-selling activities alone, the group earned a gross profit of ₹26,500 before any indirect costs like group meetings, stationery, or bank charges are deducted. That is the story the Trading Account tells in a single, clean figure.

Common items to watch in SHG and NGO trading accounts 🔗

Preparing the account accurately requires attention to a few practical points that often trip up first-time preparers.

Correct stock valuation 🔗

Closing stock is valued at cost price or market price, whichever is lower. Overstating closing stock inflates gross profit artificially, which can mislead funding agencies or members about how well the trading activity is performing. For SHGs dealing in perishables or seasonal goods, market value can drop quickly, so physical stock-taking at year end is essential.

Direct versus indirect expenses 🔗

Only expenses directly connected to the production or acquisition of goods belong in the Trading Account. Wages paid to workers who make the product go here; salaries of the group secretary or treasurer do not – those are indirect expenses for the Profit and Loss Account. Misclassifying expenses distorts the gross profit figure and makes it harder to analyse the business efficiently.

Purchase and sales returns 🔗

Returns must always be deducted from their respective figures rather than shown as separate line items on the opposite side. Purchase returns are deducted from purchases on the debit side, and sales returns are deducted from sales on the credit side. This keeps the account clean and the figures meaningful.

Goods withdrawn for personal use or donated 🔗

If any group member takes goods for personal use, or if the SHG donates product samples, those quantities must be deducted from purchases before entering the figure in the Trading Account. Including them inflates the cost side and understates gross profit.

Why the Trading Account is just the beginning 🔗

The gross profit figure from the Trading Account does not mean the group made that much money overall. It only measures the efficiency of core buying and selling. NGOs and SHGs must prepare periodic financial statements including the Profit and Loss Account and Balance Sheet to get the full financial picture. The Profit and Loss Account takes the gross profit and deducts all indirect expenses – administrative costs, depreciation, bank charges – to arrive at net profit or net surplus. The Balance Sheet then shows the group’s overall financial position at a point in time.

For groups that submit accounts to NABARD, banks, or government bodies as part of credit linkage or grant applications, having a properly prepared Trading Account is not optional. It is part of the evidence that the group is financially literate and operationally sound. Financial transparency builds trust among stakeholders – whether those stakeholders are donors, bank officers, or the group’s own members.

For SHGs that are just beginning to maintain formal accounts, a well-prepared Trading Account is also a confidence-building tool. It shows members in clear numbers whether the work they are putting in is generating real returns – and where they need to adjust prices, cut costs, or improve sales volumes to do better next cycle.

What do you think? If an SHG’s Trading Account shows a gross profit but the group still seems to have no money left over at year end, what does that tell you about where to look next in the financial statements? And if two SHGs sell the same product at the same price but one reports a much higher gross profit – what factors in the Trading Account format would explain that difference?

References

1. https://www.nabard.org
2. https://filingscorner.com/blogs/accounting-bookkeeping-for-ngo-organizations
3. https://www.nabard.org/content.aspx?id=624
4. https://www.financestrategists.com/accounting/final-accounts/trading-account/
5. https://plutuseducation.com/blog/trading-account-format/
6. https://www.vedantu.com/commerce/trading-and-profit-and-loss-account
7. https://upstox.com/learning-center/trading-account/trading-account-format/article-450/
8. https://www.religareonline.com/knowledge-centre/share-trading/trading-account-format/
9. https://ngoresources.com/ngo-accounting/
10. https://ngo.management/management-functions/journals-ledgers-trial-balances-ngo-accounting/