7/4/2019 Difference Between Trading Account and Profit & Loss Account (with Comparison Chart) - Key Differences

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Di erence Between Trading Account and Pro t &

Loss Account
Last updated on April 5, 2017 by Surbhi S

Trading Account is an account that is prepared by the entities to know the profit
earned or loss suffered from trading activities. On the other hand, Profit & Loss
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7/4/2019 Difference Between Trading Account and Profit & Loss Account (with Comparison Chart) - Key Differences

account is an account created to ascertain the net profit or loss for the period.
This article excerpt deals with the difference between trading and profit & loss
account.

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There are two types of entities, i.e. manufacturing entities and non-
manufacturing entities. Non-manufacturing entities are the entities engaged in
trading of goods, without converting their form, meaning that they sell the
products in their original form. At the end of the accounting period, it is
important to identify the profit earned or loss suffered by the firm. For this
purpose, the financial statement is prepared.

Financial Statement is the final product of the accounting process that involves
the preparation of the summary of accounts, which are presented in a way that
they depict the financial position and performance of the undertaking clearly.

Financial Statement is divided into two parts, income statement and position
statement, wherein the former is further sub-classified into a trading account,
and profit & loss account and the latter includes Balance Sheet.

Content: Trading Account Vs Pro t & Loss Account

1. Comparison Chart
2. Definition
3. Key Differences
4. Specimen
5. Conclusion

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7/4/2019 Difference Between Trading Account and Profit & Loss Account (with Comparison Chart) - Key Differences

Comparison Chart

BASIS FOR PROFIT & LOSS

TRADING ACCOUNT
COMPARISON ACCOUNT

Meaning Trading account is an Profit & loss account is an

account which indicates account, representing the
the result of trading actual profit earned or loss
activities, such as sustained by the business
purchase and sale of during the accounting period.
products.

Preparation It is prepared to ascertain It is prepared to ascertain net

gross profit for the profit for the period.
period.

Transfer of Balance of trading Balance of profit & loss

balance account is transferred to account is transferred to
Profit & Loss Account. Capital Account.

Accounts for Direct revenue and direct Operating and non-operating

expenses incomes and expenses.

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De nition of Trading Account

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7/4/2019 Difference Between Trading Account and Profit & Loss Account (with Comparison Chart) - Key Differences

In the income statement, trading account represents the first part, which is
prepared to know the gross result, i.e. profit (loss) for the period. The account
shows the outcome of trading activities, i.e. the profit earned or loss suffered on
purchase or sale of goods.

The account consists of two sides; debit side indicates direct expenses and credit
side is for direct incomes. Direct expenses which are incurred by the
organization, to bring goods into the condition, fit for sale. Such expenses
include fuel, power, freight, insurance, carriage inward, consumption of stores,
etc. On the other hand, direct incomes refers to income from the activities that
are earned from the sale of goods.

De nition of Pro t & Loss Account

Profit and loss account is a part of the financial statement, which takes into
account operating and non-operating revenues and expenses incurred, during
an accounting period. It ascertains, net profit earned or loss sustained by the
business.

Profit & Loss account is prepared after the preparation of trading account, with
the help of trial balance. The balance of trading account is transferred to this
account, which acts as the initial point, after which all expenses and losses are
debited, and all incomes and gains are credited to this account.

When the debit side of the account exceed the credit side, it is a net loss, and
when the credit side is more than the debit one, the result is net profit. The
balance (net profit or net loss) is transferred to the capital account, on the
balance sheet.

Key Di erences Between Trading and Pro t & Loss

Account
The points presented below explain the difference between trading and
profit & loss account in detail:

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7/4/2019 Difference Between Trading Account and Profit & Loss Account (with Comparison Chart) - Key Differences

1. Trading account is a part of the financial statement, prepared by the

entities to show the result of trading activities, i.e. purchase and sale
of goods. On the other hand, profit & loss account is an account
indicating the actual profit earned or loss sustained by the business
during the accounting period.

2. Trading account determines the gross profit or loss for the

accounting period. As against, profit & loss account ascertains the
net profit or loss for the given period.

3. The balance of the trading account is transferred to the trading

account, whereas the balance of profit & loss account is taken to
capital account, in the Balance Sheet.

4. Trading account is a summary of all direct revenue and direct

expenses. Conversely, Profit & Loss account takes into account all
operating and non-operating incomes and expenses.

Specimen
Trading Account

Specimen of Trading Account

Profit & Loss Account

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7/4/2019 Difference Between Trading Account and Profit & Loss Account (with Comparison Chart) - Key Differences

Specimen of Profit & Loss Account

Conclusion
The main purpose of preparing financial statement is to identify the profit
earned or loss sustained by the entity, during a particular accounting period.
These two are nominal account and reflect the performance of the entity.

These two accounts are nothing but a summary of incomes and expenses of the
business, which reckons the net amount, i.e. the profit and loss from the
business. If revenue exceeds expenses, then it is a profit, whereas if expenses are
greater than revenue, then it is a loss.

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7/4/2019 Difference Between Trading Account and Profit & Loss Account (with Comparison Chart) - Key Differences

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