Difference between Trading and Profit and Loss Account

In this article, we have written the Difference between Trading and Profit and Loss Account.

A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period. Similar to the Trading Account, the Profit and Loss Account is also a nominal account in which all the expenses or losses are debited and all the incomes or gains are credited. This account begins with a recording of the gross profit (or gross loss) depicted by the Trading Account. 

The very first financial statement prepared by an enterprise is a Trading Account. It is an account that is prepared to ascertain the trading results of a firm in form of gross profit earned or gross loss incurred during an accounting period. It is a nominal account in which all expenses or losses are debited and all incomes or gains are credited. On the debit side of this account purchases, opening stock, and all the direct expenses are shown. While on the credit side Sales and closing stock is shown. An important point to be noted here is that Trading Account records only direct expenses. These are those expenses that are directly related to the manufacturing and production of goods and services. The excess of credit side over its debit side is regarded as Gross Profit.


The distinction between Trading and Profit and Loss Account


The given below are points of distinction between Trading and Profit and Loss Account.

Basis of
Difference
Trading AccountProfit and Loss Account
StageIt is the first financial statement prepared by an organization.It is the second financial statement prepared by an organization.
ExpensesIt records all direct expenses on its debit side.It records all indirect expenses on its debit side.
ResultIt reveals the gross profit or gross loss during the year.It reveals the net profit or net loss during the year
BeginsIt does not begin with the balance of any account.It always begins with the balance of a Trading Account.
TransferThe balance of this account is transferred to the Profit and Loss Account.The balance of this account is added or deducted from the capital of the proprietor in the Balance Sheet.

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