Difference Between Trading and Profit & Loss Account

Differences between Trading and Profit & loss account

Difference Between Trading and Profit & Loss account, Trading, and Profit & Loss account are two different statements. A trading account is prepared to know the gross profit or loss of an entity for the particular accounting period. On the other hand, a Profit or Loss account is prepared to know the actual net profit or loss of an entity for the particular accounting period. To understand the difference between the Trading and Profit & Loss account, first, we have to understand the meaning of both terms.

Trading Account:-

The trading account is prepared to find out the gross profit of the business for the particular accounting period. It is calculated by comparing the net sale with the cost of goods sold(COGS). 

Gross Profit/Loss =  Net Sale – COGS 

Net Sale =  Total Sale (Cash sale + Credit Sale) – Sale Returned/Returned Inward

Cost of Goods Sold = Opening Stock + Net Purchase + Direct Expenses – Closing Stock.

  • Opening Stock = Stock we have in hand at the start of the accounting year.
  • Net Purchase =  Total Purchase (Cash Purchase + Credit Purchase ) – Purchase Returned/Returned Outward
  • Direct Expenses = All expenses which are directly related to purchasing of goods and converting them into saleable condition.
  • Closing Stock = Stock we have in hand at the end of the accounting year.

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Profit and loss account: –

Profit and loss account or Income statement is prepared to find out the Net Profit/loss of the business for the particular accounting period. It is calculated by comparing the Gross Profit/Loss with indirect income and expenses.

Net Profit/Loss =  Gross Profit/Loss + Indirect Income – Indirect Expenses

  • Indirect Income = Other incomes that are earned from other than the main operation of the business.
  • Indirect Expense = All business expenses other than direct expenses.

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Chart of Difference between the Trading and Profit & Loss account: –

Basis 

Trading Account

Profit and Loss Account

Meaning The trading account is prepared to find out the gross profit of the business for the particular accounting period Profit and loss account or Income statement is prepared to find out the Net Profit/loss of the business for the particular accounting period.
Timing  Trading Account is prepared before the P&L account Profit/Loss Account is prepared after the  Trading account
Purpose  To get to know the Gross profit or loss of the business. To get know Net profit or loss of the business
Stage It is the first stage of the final account. it is the second stage of the final account.
Dependency It is a first statement of the final accounts so it is not dependent on the Profit & loss account. It is dependent on the Trading account.
Accounts  In the trading account, the ledger accounts related to the Direct Expenses and Direct incomes are posted. In the Profit and Loss Account, the ledger accounts related to the Indirect Expenses and Indirect incomes are posted.
Transfer of  Balance  The balance (either Gross profit or  Gross Loss) of the Trading account will be transferred to the Profit and loss account. The balance (either Net profit or  Net Loss) of the Profit and loss account will be transferred to the Balance Sheet.
Treatment in the balance sheet  The trading account is not treated directly in the balance sheet. The Balance of the Trading account is transferred to the Profit and loss account only. then the combined effect of both accounts is posted in the balance sheet either by Net profit or by the net loss. The profit and loss account is treated directly in the balance sheet by adding or subtracting from the capital.

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Chart of Differences between Trading and Profit loss account 300x223 - Difference Between Trading and Profit & Loss Account

application pdf - Difference Between Trading and Profit & Loss Account
Chart of Difference between the Trading and Profit & Loss account

The conclusion of the Difference: –

Trading and Profit & Loss account are summaries of all business transactions done in the particular accounting period. These are prepared to know the actual financial performance of the business entity.

Is simple we can say that, these are the comparison statement of income and expenses of the business in a particular period.

Thanks for reading the topic.

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