Trading and Profit & Loss Account

In a Trading Business,

Trading and Profit and Loss Account is prepared by extracting the related Ledger Accounts from Trial Balance.

Mainly Nominal Ledger Accounts (Incomes/gains and Expenses/Losses) from Trial Balance are taken into consideration for preparing the Trading and Profit & Loss Account.

Opening Stock and Closing Stock values are also taken into consideration for preparing Trading Account.

Trading Account and Profit & Loss Account are two separate Accounts. But due to the inter-relationship between both the two Accounts,it is represented and pronounced as one Account.

The inter-relationship between Trading Account and Profit & Loss Account is that,Gross Profit/Loss derived from Trading Account is transferred to Profit & Loss Account.

Profit & Loss Account is prepared by taking the Gross Profit/Loss amount derived from Trading Account.

What is Trading Account and how is it prepared ?

Trading Account is a Ledger Account prepared at the stage of Final Account,which shows the Gross Profit/Gross Loss of a Business.

Gross Profit/Gross Loss is the differential amount of Actual Sale Price and Cost of Goods Sold.

Let's take an example,Mr.Robert purchased goods for ₹9850/- and paid Carriage for ₹750/- towards the Purchase of Goods.

In the above transaction,Cost of Goods for Selling is ₹10600/-(Actual Cost of Goods ₹9850 + Carriage paid ₹750)

If Mr.Robert sold these Goods for ₹12190/-(or any amount more than the Cost of Goods for Selling),it shows Gross Profit.

Here,Gross Profit is ₹1590/-(₹12190 - ₹10600)

If Mr.Robert sold these Goods for ₹9500/-(or any amount less than the Cost of Goods for Selling),it shows Gross Loss.

Here,Gross Loss is ₹1100/-(₹10600 - ₹9500)

The above example is a simple calculation procedure to know the Gross Profit/Gross Loss.

But in practical,in an existing/running business,Purchase and Sale of Goods occur repeatedly and remains some pending stock at the end of an accounting period.

So,the following formula is used to know the Gross Profit/Gross Loss of a Business.

Commonly,two specific formats of Trading Account are used in Financial Accounting.

1. Horizontal Format

2. Vertical Format

Horizontal Format : This format of Trading Account is a 'T' shape format which consists of two side. Left hand side is the Debit side and right hand side is the Credit side. Both the sides have two primary column,Particulars Column and Amount Column.

Ledger Accounts to put into Debit side(Left side):

Opening Stock Value and

Balances of Direct Expenses from Trial Balance,such as Purchases,Carriage & Freight,Loading & Unloading Expenses etc. are taken in Debit side of Trading Account.

Ledger Accounts to put into Credit side(Right side):  

Closing Stock value and 

Balances of Direct Incomes from Trial Balance such as Sale of Goods,Sale of Services etc. are taken in Credit side of Trading Account.

Sample of Horizontal formats of Trading and P & L Account extracted from a Trial Balance of M/s.Surya Electronic Centre,Cuttack is given below.

To see Trial Balance of M/s.Surya Electronic Centre,Cuttack - click here

1) When Trading Account and Profit & Loss Account is shown in separate page or separately.

For the Trading Account shown above,Calculation of Gross Profit/Gross Loss is given below.

Sales = ₹77857.43

Cost of Sales/Cost of Goods Sold is ₹38472.86 (detail calculation is given below)

Calculation of Cost of Sales

Here,Sales value is greater than Cost of Goods Sold.

So,the result is Gross Profit.

Vertical Format : In vertical format of Trading Account there is no Debit and Credit side like Horizontal Format. This is a calculation sheet,sample format of which is shown below.

What is Profit & Loss Account and how is it prepared ?

Profit & Loss Account is a Ledger Account prepared at the stage of Final Account to know Net Profit/Net Loss by taking Gross Profit/Gross Loss figure from the Trading Account.

Basics of Profit & Loss Account : 

1) When Trading Account shows Gross Profit,and

if (Gross Profit + sum of Indirect Income) is greater than the sum of Indirect Expenses,differential amount will be Net Profit.

if (Gross Profit + sum of Indirect Income) is less than the sum of Indirect Expenses,differential amount will be Net Loss.

1) When Trading Account shows Gross Loss,and

if (Gross Loss + sum of Indirect Expenses) is greater than the sum of Indirect Incomes,differential amount will be Net Loss.

if (Gross Loss + sum of Indirect Expenses) is less than the sum of Indirect Incomes,differential amount will be Net Profit.

Like Trading Account,two common specific formats are used for reporting of Profit & Loss Account.

1. Horizontal Format

2. Vertical Format

Horizontal Format: Horizontal Format is like a 'T' shape Ledger Account,consists of two sides. Left hand side is Debit side and right hand side is Credit side. There are two columns in each side. The left column of each side is Particulars column and right column is Amount column.

Ledger Accounts to put into Debit side(Left side):

Gross Loss(when Trading Account shows Gross Loss) and

Balances of Indirect Expenses from Trial Balance,such as Office and Administrative Expenses,Selling and Distribution Expenses,Financial Expenses,Normal and Abnormal Losses etc. are taken in Debit side of Profit & Loss Account.

Ledger Accounts to put into Credit side(Right side):  

Gross Profit(when Trading Account shows Gross Profit) and 

Balances of Indirect Incomes from Trial Balance such as Bank Interest Received,Interest on Security Deposits,Commission Received,Discount Received and other Abnormal gains etc. are taken in Credit side of Profit & Loss Account.

For better understanding on Horizontal format of Profit and Loss Account,a sample of Horizontal format is given below,which is linked to the above mentioned Trading Account of M/s.Surya Electronic Centre,Cuttack. 

 

Vertical Format : In vertical format of Profit & Loss Account there is no Debit and Credit side like Horizontal Format. This is a calculation sheet used for reporting of Profit and Loss Statement,a sample format of M/s.Surya Electronic Center,Cuttack is given below.

2) When Trading Account and Profit & Loss Account is shown in a single page.

A sample of Horizontal format of Trading and Profit & Loss Account of M/s.Surya Electronic Center,Cuttack is given below.

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