Trading and Profit and Loss Account

Explain the Trading and Profit or Loss Account

Final accounts represent both the financial position of a business and also shows the profitability of the concern. The final Account is used by both the external and internal parties for various purposes. The Trading Account, Profit and Loss Account, and Balance Sheet all together are known as the final accounts.


The trading account is the first part of this final account, and this is used to determine the gross profit which is earned by the business. The profit and loss account is the second part of the final account that is used to determine the net profit of the business concern.


Trading and Profit and Loss Account

A trading account can be called an investment account which contains securities and cash. Generally, a trading account refers to a trader’s main account. The investors tend to buy and sell the assets frequently, thus their accounts are subject to special regulation for this. The assets which are held in a trading account are separated from others which may be part of a long-term buy and hold strategy.


The profit and loss abbreviated as the P&L statement is a financial statement that summarizes the revenues, the costs, and the expenses that are being incurred during a specified period, usually in a fiscal year. The P&L statement aligns with the income statement, which records information about a company's ability or its inability to generate profit by increasing the sales revenue, by reducing costs, or both. The P&L statement is also referred to as a statement of profit and loss, income statement, statement of operations, etc.


Trading and Profit and Loss Account and Balance Sheet

A balance sheet is the last drawn financial statement which reports a company's assets, liabilities, and the shareholders' equity at a particular year in time, and provides a basis for computing the rates of return and evaluating the capital structure of the company. The financial statement provides a view of what a company owns and owes to its debtors, as well as the amount that is invested by the shareholders.


How to Calculate Gross Profit in Trading Account

In order to calculate the gross profit, it is necessary to know the cost of goods which are sold and its sales figures.


Gross Profit = Sales – COGS (Sales + Closing Stock) – (Stock in the beginning + Purchases + Direct Expenses)


Items that are included on the debit side and on the credit side give the resultant figure which is either gross profit or the gross loss.


Every business wants to know how much money they made and how much money they spent during a certain period, usually at the end of the year.


A Profit & Loss Statement/Account shows how much money a business made or lost over a month or a year.


Companies use the Profit & Loss Statement, while other people use the "T Account" for these reasons. There are two main reasons why a Profit & Loss Statement/Account is made.

  • To find out how much money  was invested or incurred by a business

  • To follow and maintain the Statutory requirements


Traditionally, determining profit/loss required two steps. It referred to the process of preparing:

  • Trading Account

  • Profit and Loss Account 


The trade account reflects the business's gross profit or loss. The Profit & Loss Account displays the company's net profit or loss.


Balance Sheet

A balance sheet is one of the financial statement reports that shows the financial situation of an entity on a specific date.


The balance sheet of an entity has a wealth of information that can be used to assess financial stability and performance.


It is a report sheet that requires total assets to match total liabilities + shareholder capital.


Hence, the Calculation would be :

Assets = Liability + Capital

Assets - An asset is a resource that an entity owns and uses to generate positive economic value.

Liabilities – This is a list of obligations owed to others by an entity.

The money contributed by the shareholders is referred to as capital or equity.


Format and Calculation

Trading and Profit and Loss Account

There is no prescribed structure for profit and loss accounts for sole traders and partnership enterprises. They can create the profit and loss account in any format. However, it should separately display gross and net profit.


Typically, these entities prefer a "T-shaped form" for compiling their profit and loss statements.


A T-shape profit and loss account has two sides - debit and credit. Usually, a trading account is created, followed by a profit and loss statement and it has two sides - Debit and Credit.


Hence, Calculation of Profit and Loss Account would be:

  • Add up all revenue earned over the accounting period.

  • Add up all expenditures made throughout the accounting period.

  • Subtract total expenses from total revenue to find the difference.

  • If the value is positive, it represents profit; if it is negative, it represents a loss.

Particulars

Amount

Particulars

Amount

To Opening Stock

xxx

By Sales

xxx

To Purchases

xxx

By Closing Stock

xxx

To Direct Expenses

xxx



To Gross Profit

xxx




xxx


xxx

To Operating Expenses

xxx

By Gross Profit

xxx

To Operating Profit

xxx




xxx


xxx

To Non-operating expenses

xxx

By Operating Profit

xxx

To Exceptional Items

xxx

By Other Income

xxx

To Finance Cost

xxx



To Depreciation

xxx



To Net Profit Before Tax

xxx




xxx


xxx


Format of P&L Account for Companies

Companies are required to submit profit and loss accounts under Schedule III of the Companies Act, 2013.


Statement Of Profit & Loss 

Name of the Company - 

Statement of Profit and Loss for the period ended -


Note No

Figures for the current reporting period

Figures for the previous reporting period

INCOME 




a) Revenue From operations




b) Other Income




Total Income




EXPENSES




a) Cost of materials consumed




b) Purchases of Stock-in-Trade




c)Changes in inventories of finished goods, Stock-in -Trade and work-in-progress




d) Employee benefits expense




e) Finance costs




f)    Depreciation and amortization expenses




g) Other expenses




Total Expenses




Profit/(loss) before exceptional items and tax




Exceptional Items




Profit/ (loss) before tax




Tax Expense:




Current tax




Deferred tax




Profit (Loss) for the period from continuing operations




Profit/(loss) from discontinued operations




Tax expenses of discontinued operations




Profit/(loss) from Discontinued operations (after tax)




Profit/(loss) for the period




Other Comprehensive Income




A. (i) Items that will not be reclassified to profit or loss




(ii) Income tax relating to items that will not be reclassified  to profit or loss




B. (i) Items that will be reclassified to profit or loss




(ii)  income tax relating to items that will be reclassified to profit or loss




Total Comprehensive Income for the period Comprising Profit (Loss) and   other comprehensive income for the period )




Earnings per equity share (for continuing operation):




(1) Basic




(2) Diluted




Earnings per equity share (for discontinued operation):




(1) Basic




(2) Diluted




Earnings per equity share (for discontinued & continuing operation)




(1) Basic




(2) Diluted





Balance Sheet

A balance sheet examination can reveal a wealth of information about a business's performance.


It is a critical instrument for investors, creditors, and other stakeholders as it helps in ascertaining an entity's financial health.


It enables stakeholders to comprehend the entity's business performance and liquidity status.


There are various different balance sheet styles to choose from, however the most common of them includes horizontal and vertical. 


Horizontal Format

Company Name

Balance Sheet

For the Period Ended...........

Liabilities

Amount

Amount

Assets

Amount

Amount

Capital And Reserves



Fixed Assets



Opening Capital Balance

XXXX


Land

XXXX


Reserves and Surplus

xxx


Less: Depreciation

(xx)

XXXX

Less: Drawings

(XXXX)






Capital Balance


XXXX

Building

XXXX





Less: Depreciation

(xx)

XXXX

Secured Loans






Long term debt


xxx

Investments



Other long term liabilities


xxx

Long term Investments


xxx

Unsecured Loans



Current Assets, Loans and Advances



Cash credit payable


xxx

Inventory


xxx




Cash and cash equivalents


xxx

Current Liabilities 



Other current assets


xxx

Trade Payables


xxx




Accrued Interest


xxx

Prepaid expenses


xx

Other Current Liabilities


xxx

Miscellaneous expenditure


xx

Total Liabilities


XXXX

Total Assets


XXXX


Vertical format 

Company Name

Balance Sheet as at.................

Particulars

Note No.

Figures (as per the end of the current reporting period)

Figures (as per the end of the previous reporting period)

I. EQUITY AND LIABILITIES




1) Shareholder’s Funds

(a) Share Capital

(b) Reserves and Surplus

(c) Money received against share warrants




(2) Share application money pending allotment




(3) Non-Current Liabilities

(a) Long-term borrowings

(b) Deferred tax liabilities (Net)

(c) Other Long term liabilities

(d) Long term provisions




(4) Current Liabilities

(a) Short-term borrowings

(b) Trade payables

(c) Other current liabilities

(d) Short-term provisions




Total




II.Assets




(1) Non-current assets

(a) Fixed assets

(i) Tangible assets

(ii) Intangible assets

(iii) Capital work-in-progress

(iv) Intangible assets under development

(b) Non-current investments

(c) Deferred tax assets (net)

(d) Long term loans and advances

(e) Other non-current assets




(2) Current assets

(a) Current investments

(b) Inventories

(c) Trade receivables

(d) Cash and cash equivalents

(e) Short-term loans and advances

(f) Other current assets




Total




FAQs (Frequently Asked Questions)

1. What is the Importance of a Trading and Profit and Loss Account?

A trading profit and loss account priorly serves these two purposes:

  • Computing the net income for the period.

  • Identify the major revenue and expense items that affect the net income.

An accountant is required to compute the net income by subtracting the expenses from the revenues.


The profit & loss account provides information about an enterprise's income and expenses, this results in the net profit or net loss, which helps a businessman to evaluate the performance of an enterprise and provides a basis for forecasting the future performance.


While a Trading account helps to know the gross profit or loss, this helps to know the amount of the purchases, expenses that relate to the purchases, and the manufacturing expenses which help to know the percentage of gross profit and sales.

2. What is a Capital Structure of a Company?

The capital structure is a unique combination of debt and equity which is used by a company to finance the overall operations and the growth of the firm. The Debt comes in the form of bond issues or loans, while the equity which may come in the form of common stock, preferred stock, or in the form of retained earnings.


In a capital structure, the equity is the company's common and the preferred stock plus its retained earnings. This combination is considered as the invested capital which appears in the shareholders' equity section of the balance sheet. The Invested capital plus the debt comprises the capital structure.

3. What is an Income Statement?

An income statement reports the business's revenues, expenses, and the overall profit or loss of the business that is for a specific period of time. This is one of the three major financial statements that are small businesses prepare to report the financial performance, along with the balance sheet and the cash flow statement.

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