Difference WikiAccounting

Difference Between Trading Account and Profit and Loss Account

Main Difference

The main difference between Trading Account and Profit and Loss Account is that Trading Account is such account that is showing the result of trading activities like buying and selling, whereas Profit and Loss Account is such account that is signifying the real profit and loss earning by the business during the accounting period.

Trading Account vs. Profit and Loss Account

The trading account is a type of account that is preparing to find out the result of the trading activities and to know the gross profit or loss of the business, whereas the profit and loss account is a type of account that is creating to find out the net profit or loss of the company during the particular accounting period. The trading account is the first level of the final accounting, whereas the profit and loss account is the second level of final accounting.

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The trading account is preparing to discover the gross gain or failure of the accounting period, whereas the profit and loss account is preparing to find the net profit or loss of the accounting period. In the case of the trading account, the balance is transferring through a profit and loss account, while in the case of the profit and loss account, the balance is transferring through the capital account. The trading accounts are using for direct incomes and direct expenditures, whereas the profit and loss accounts are using for working and non-working profits and costs.

In the trading account to get the gross gain or loss, one has to deduct the cost of sold goods from the net sale, while in the profit and loss account to get the net profit or loss one has to deduct the indirect expense from the gross profit and loss, and the indirect income. The trading account is not directly considering in the balance sheet, whereas the profit and loss accounts are directly considering in the balance sheet.

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Comparison Chart

Trading AccountProfit and Loss Account
It shows the result of trading activities, like purchasing and selling of goods.It shows the real profit and loss get from the business.
Organizing For
Getting gross profit or lossGetting net profit or loss
Balance Transfer By
Profit and loss accountCapital account
Accounts For
Direct revenues and direct expensesOperating and non-operating incomes and expenses
Considering in Balance Sheet
IndirectlyDirectly
Level of Final Accounting
FirstSecond

What is a Trading Account?

The trading account is a kind of statement that is organizing to observe the consequence of trading activities and to get the gross profit or loss of the business. The trading account is indicating the assumption of the trading activities, such as buying of goods and selling of products. The trading account is generating to find out the gross profit or loss of the accounting period. In the case of the trading account, the balance is transferring through the profit and loss account. The trading accounts are using for direct incomes and direct expenditures.

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In trading account if someone has to get the gross profit or loss, the one has to subtract the price of sold items from the net sale, The trading account is not directly considering in balance sheet, firstly the balance of the trading account is moving to the profit and loss account then after association result of both reports, then the statements are including in balance sheet either by net profit or by net loss. Making the error in a trading account will effect on the profit and loss account, the trading account is the first level of final accounting.

The trading account does not depend on any account. The stock ought to be regulated during the making of a trading account. All the direct expenses and the direct revenues are recording in this account. Though the trading account is the first account or the final account, so it does not depend on the experimental balance. The activities, including in a trading account, normally create day trading.

What is Profit and Loss Account?

The profit and loss account is a type of account that is organizing to observe the net profit or loss of the business during the particular accounting period. The profit and loss account is indicating the authentic getting the benefit from the industry and substantial distress loss from the company during the thorough out of the accounting year. The profit and loss account is generating to find out the net profit or loss of the accounting period. In the case of the profit and loss account, the balance is moving through the capital account.

The profit and loss accounts are using for working and non-working profits and costs while in the profit and loss account. The profit and loss accounts are directly considering in the balance sheet by adding or subtracting from the capital. If someone has to get the net profit or loss, then one has to deduct the indirect expense from the gross profit and loss, and then add the indirect income. The profit and loss account is depending on the trading account.

Making the errors in the profit and loss account will not affect the trading account. The profit and loss account is the second level of the final accounting. The balance of the trading account requires an organization of the profit and loss account. There is no stock regulation requiring to arrange the profit and loss account. All the indirect expenses and the indirect incomes are including in the profit and loss account. The profit and loss account is generating after the trading account.

Key Differences

  1. The purpose of the trading account is to get gross profit and loss, whereas the use of profit and loss account is to get net profit and loss.
  2. In trading account balance are transferring by profit and loss account, on the other hand, in profit and loss account balance is moving by capital account.
  3. The trading account is not treating directly in the balance sheet; conversely, profit, and loss account is treating directly in the balance sheet.
  4. The trading account is the first level of final accounting, on the flip side, profit and loss statement is the second level of final accounting.
  5. The trading account is arranging before the profit and loss account, whereas the profit and loss account is arranging after the trading account.
  6. Any mistake in the trading account, effect on profit and loss account; on the other hand, any error on profit and loss account does not affect the trading account.

Conclusion

The primary purpose of the trading account and the profit and loss account is to individually classify the gross profit or loss and net profit or loss from the business. The trading account is using to determine the gross profit; however, the profit and loss account is using to determine the net profit of the company.