Difference Between Trading Account, Profit and Loss Account

A trading account, profit and loss account, and balance sheet are the three main financial statements used by businesses to measure their financial performance.

Here are the differences between the trading account and the profit and loss account:

Trading Account and its features:

A trading account is a financial statement showing the gross profit a company earns from trading activities such as buying and selling goods. It includes revenue from sales, cost of goods sold, and gross profit. The trading account's purpose is to calculate a business's gross profit or loss.

The following are the main features of a Trading Account:

✓It shows the outcome of transactions involving the purchase and selling of goods and services.

✓A trading account is created to reflect the profits from the sale and buy transactions individually.

✓ The profit/loss determined in this manner is known as gross profit or gross loss since many other company expenditures, including administration, selling and distribution, repair and maintenance charges, and so on, are not excluded.

✓ Only direct expenses incurred to bring the product/goods into the saleable condition are considered when calculating the gross profit or gross loss, such as freight, carriage inwards, insurance, fuel, power, royalties on production, consumption of materials & stores, and so on.

✓ Gross Profit = Net Sales - Cost of Goods Sold

✓ Net Sales = Total Sales - Sales Returns (Inward)

✓ Cost of Goods Sold = Opening Stock of Goods + Net Purchases - Closing Stock of Goods at the End + All Direct Expenses

✓ Net Purchases = Total Purchases - Purchases Returns (Outward).

✓ If the balance of the Trading Account's debit side exceeds its credit side, the resulting figure is Gross Loss.  As a result, Gross Loss = Cost of Goods Sold - Net Sales.

✓ Stock in hand on the last day of the accounting year should be adjusted to reflect purchases that have been made but the goods have not yet been received, sales that have been made but the goods have not yet been delivered, and possibly items that may be out of the building due to consignment, goods delivered on a sale or return basis, etc.

✓ The Trading Account's gross profit or loss is moved to the Profit and Loss Account.

Profit and Loss Account and its features:

A profit and loss account, also known as an income statement, shows a company’s net profit or loss over a specific period. It includes revenue from all sources, such as sales and other income, and deducts expenses such as the cost of goods sold, salaries, rent, and taxes. The purpose of the profit and loss account is to show the overall profitability of a business.

The following are the main features of the profit and loss account:

✓ A business's net profit or loss for a certain accounting period is calculated using the profit and loss account.

✓ Rather than only accounting for profit or loss from trade activities (i.e., the sale and purchase of goods), it displays the outcomes of all company processes carried out during a specific period.

✓ The gross profit or gross loss transferred from the trading account serves as the basis for this account's building.

✓ Gross profit is transferred to the credit side of the Profit & Loss Account, while gross loss is transferred to the debit side. Following that, all costs and losses that have not already been charged to the Trading Account are debited here.

✓ Similarly, other income and profits other than sales revenue are recorded in the Profit and Loss Account, such as interest gained or commission paid, etc.

✓ The gap between revenue and costs results in a net profit or loss. This net profit/loss is subsequently moved to the Capital Account of sole proprietors/partners or the Profit & Loss Appropriation Account of partnership businesses. Net profit grows capital, whereas net loss shrinks capital.

✓ Net Profit= Total Revenues - Total Expenses, and Net Loss = Total Expenses - Total Revenues

Comparison Table:

The following list outlines the differences between a trading account and a profit-and-loss account:

Conclusion: -

In summary, the main difference between a trading account and a profit and loss account is that the trading account shows the gross profit or loss from buying and selling goods, while the profit and loss account shows the net profit or loss from all sources of income and expenses. Both financial statements are essential for analyzing a company's financial performance.

For more info, Visit us at: https://academy.tax4wealth.com/