Financial Statements

Trading and Profit and Loss Account

In order to arrive at the balance sheet of a business, one needs to prepare the trading account and profit and loss account first. This account is prepared to arrive at the figure of revenue earned or loss incurred during a period. Let us understand the trading account and profit and loss account in detail.

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What is a Trading Account?

A trading account helps in determining the gross profit or gross loss of a business concern, made strictly out of trading activities. Trading involves buying and selling activities. In the trading account, the cost of goods sold is subtracted from net sales for the period to calculate gross profit. Only direct revenue and direct expenses are considered in it. Trading account is prepared mainly to know the profitability of the goods bought by the businessman.

Learn about Balance Sheet and Opening Entry here in detail.

The difference between selling price and cost of goods sold is the earning for the businessman, which is also known as gross profit. Whereas, net profit means all revenues minus all expenses including the cost of goods sold, the selling, general and administrative expenses, and the non-operating expenses. Thus in order to calculate the gross earning, it is necessary to know the cost of goods sold and sales figures. Also,

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

Items included on the debit side are opening stock, purchases, and direct expenses and on the credit side are sales and closing stock. The resultant figure is either gross profit or gross loss.

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Closing entries for Gross Profit/Loss

In case of gross profit:

Trading A/c -Dr.

To Profit and Loss A/c

And, in case of gross loss:

Profit and Loss A/c -Dr.

To Trading A/c

Trading Account and Profit and Loss Account

What is the Profit and Loss Account?

The profit and loss account is opened by recording the gross profit on the credit side or gross loss on the debit side.

For earning the net profit, a businessman has to incur many more expenses in addition to the direct expenses. Those expenses are deducted from profit or added to a gross loss and thus, the resultant figure will be net profit or a net loss.

Expenses included in the profit and loss account are Selling and distribution expenses, Freight & carriage on sales, Sales tax, Administrative Expenses, Financial Expenses, Maintenance, depreciation and Provisions and more. On the credit side, Discount received, Commission received, Profit on sale of assets and more appear.

What is the difference between Capital Revenue and Capital Expenditure?

Closing entries for Net Profit/Loss

In case of a net profit:

Profit and Loss A/c -Dr.

To Capital A/c

And, in the case of net loss:

Capital A/c -Dr.

To Profit and Loss A/c

Solved Question for You

Question: The following trial balance has been taken out from the books of XYZ as on 31st December 2009.

 Particulars Dr. Cr.
Plant and Machinery 100,000
Opening stock 60,000
Purchases 160,000
Building 170,000
Carriage inward 3,400
Carriage outward 5,000
Wages 32,000
Sundry debtors 100,000
Salaries 24,000
Furniture 36,000
Trade expense 12,000
Discount on sales 1,900
Advertisement 5,000
Bad debts 1,800
Drawings 10,000
Bills receivable 50,000
Insurance 4,400
Bank balances 20,000
Sales 480,000
Interest received 2,000
Sundry creditors 40,000
Bank loan 100,000
Discount on purchases 2,000
Capital 171,500
795,500 795,500

Closing stock is valued at INR 90,000. Prepare the trading and profit and loss account of the business for the year ended 31.12.2009 and a balance sheet as at that date.


Trading and Profit and Loss Account
For the year ended 31st, December 2009

 Particulars  Amt Amt Particulars Amt Amt
Opening stock 60,000 Sales 480,000
Purchases 160,000 Less discount 1,900 478,100
Less discount 2,000 158,000
Closing stock 90,000
Carriage inward 3,400
Wages 32,000
Gross profit (transferred to P&L) 314,700
568,100 568,000
Carriage outward 5,000 Gross profit (transferred to P&L) 314,700
Salaries 24,000 Interest received 2,000
Trade expenses 12,000
Advertisement 5,000
Bad debts 1,800
Insurance 4,400
Net profit (transferred to capital) 264,500
316,700 316,700


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