Trading and Profit and Loss Account

Bookmark added to your notes.
View Notes
×

Explain the Trading and Profit or Loss Account

Final accounts represent both the financial position of a business 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.


Format of Trading, Profit and Loss Account


Trading Account Format

Particulars

Amount

Particulars

Amount

To Opening Stock

xx

By Sales

xx

To Purchases

xx

Less: Returns

xx

Less: Returns

xx

By Closing Stock

xx

To Direct Expenses:




Freight and Carriage

xx



Customs and Insurance

xx



Wages

xx



Gas, Water & Fuel 

xx



Factory Expenses

xx



Royalty on Production

xx



To Gross Profit c/d





Profit and Loss Account Format

Particulars

Amount

Particulars

Amount

To Gross Loss b/d


To Gross Profit b/d


Management Expenses:


Income:


To Salaries

XX

By Discount Received

XX

To Office Rent, Rates and Taxes

XX

By Commission Received

XX

To Printing and Stationery

XX

Non- Trading Income:


To Telephone Charges

XX

By Bank Interest

XX

To Insurance

XX

By Rent Received

XX

To Audit Fees

XX

By Dividend Received

XX

To Legal charges

XX

By bad debts recovered 

XX

To Electricity Charges 

XX

Abnormal Gains

XX

To Maintenance Expenses

XX

By Profit on sale of Machinery

XX

To Repairs and Renewals

XX

By profit on sales of investments

XX

To Depreciation

XX

By Net Loss

(transferred to Capital A/C)

XX

Selling and Distribution Expenses:

XX



To Salaries

XX



To Advertisements

XX



To Go-down Expenses

XX



To Carriage Outward

XX



To Bad Debts

XX



To Provision for Bad Debts

XX



To selling Commission

XX



Financial Expenses:




Bank Charges

XX



Interest on Loan

XX



Discount Allowed

XX



Abnormal Losses:




To Loss on sale of machinery

XX



To loss on the sale of investments

XX



To loss by fire

XX



To Net Profit

XX




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 good which is 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.

FAQ (Frequently Asked Questions)

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

Ans. 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?

Ans. 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?

Ans. 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.