The trading, profit, and loss account are usually prepared periodically or at the end of a financial year which is usually one year by the owner of a business to ascertain the profits made or losses incurred from the trading activities of the organisation.
The profit and losses of the organisation can be categorised into two: These are:
- Gross profit or Gross Loss
- Net Profit or Net Loss
Trading Account:
The trading account is prepared to determine the business gross profit or gross loss. Gross profit is the excess of sales over the cost of goods sold within a given period (Sales > cost of goods sold). If the sales are less than the cost of goods sold, it is regarded as a gross loss.
In the trading account, operating expenses or overhead costs are not used.
Profit and Loss Account:
The profit and loss account is prepared to determine net profit or net loss made by the business within a given period of time. This account is prepared after preparing the trading account and the ascertainment of gross profit or loss.
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