Introduction

A business must prepare a trading, profit and loss account before preparing the balance sheet. The accounts are two separate accounts prepared within the general ledger to calculate the gross and net gains or losses a business generates.

You must maintain your company’s trading account and profit and loss account to understand its financial health and performance. There is a common trading, profit and loss account format that you can benefit from while preparing the final accounts.

There are also different types of trading and profit and loss accounts. But before acquiring knowledge about anything else, you must understand the trading and profit and loss account meaning.

What is a trading and profit and loss account?

A trading account is the first part of a business account. It comprises records of a business’s buying and selling transactions during a financial year. Trading businesses must prepare the account with entries for cost of goods sold, sales revenue, and the period’s gross profit or loss. A trading account indicates a business’ efficiency in buying and selling.

A profit and loss (P&L) account is the second part of the account. It is also referred to as the income statement. It records a company’s revenue and expenses during a specified period to calculate the net profit or loss. The P and L account format starts with the gross profit on the credit side or the gross loss on the debit side.

Types of trading accounts

You must have a trading account for executing stock market trades. The different types of trading accounts are:

1. Equity trading

This type of account is used for buying, selling, and trading stocks, commodities, and derivatives.

1. Futures trading

The futures trading account lets you trade futures contracts on different commodities like gold, crude oil, etc.

1. Options trading

Options trading doesn’t require much money. The investment depends on speculation instead of direct investment in commodities or stocks. The account lets you trade in options contracts.

1. Debt instrument trading

This account allows the buying and selling of government or company-issued bonds like GILT.

Types of profit and loss accounts

There are three primary types of profit and loss accounts:

1. Personal account

Individuals or sole proprietors prepare these accounts to record all the transactions related to a business’ activities or an individual’s assets and liabilities.

1. Real account

Companies that do not engage in active business activities maintain this account. Their balances are not a part of the balance sheet.

1. Nominal account

Companies with business activities but no sales transactions during the specified period maintain a nominal account. These accounts record different revenues, expenses, gains, and losses the business incurs.

Read More: What is a Demat Account?

Trading and profit and loss account format

The trading and profit and loss accounts are vital financial statements that help a company assess its revenue, expenses, and profitability for a particular accounting period. Its format comprises various key aspects like cost of goods, operating expenses, sales revenue, tax expenses, gross profit, net profit before tax, and net profit after tax. You must know the trading and P&L account format to evaluate a company’s financial position and invest wisely.

Here’s an example of the trading account and profit and loss account format for your reference.

The trading and profit and loss account above displays the company’s gross profit and net profit for the prescribed period.

Differences between a trading account and a profit and loss account

The most crucial difference between a trading account and a profit and loss account is that the former records transactions related to the buying and selling of goods and calculates the gross profit or loss. On the other hand, the latter reports all revenues and expenses of a business to determine the net profit or loss after deducting operating costs.​​​​​​​

Conclusion

You must learn what is P&L in trading to gain insights into your business’ performance and identify how you can grow it more efficiently. The accounts help you develop a more cost-effective strategy and minimise redundant losses.

Trending Blogs: NSE Holidays 2024 | BSE Holidays 2024 | Invest in Small Cap & Mid Cap Mutual Fund & Stocks | Companies affected by Rise in Crude Oil Price | Fall in IT Stocks | Launch of 4 New Indices | Revised Lot Size of Nifty Contracts | Impact of RBI Circular on Currency Trading | RBI’s New Lending Guidelines | Electric Air Taxis in India

Financial Calculators: SIP Calculator | SWP Calculator | Compound Interest Calculator | EMI Calculator | FD Calculator | Retirement Calculator | Option Value Calculator | Inflation Calculator | Lumpsum Calculator

Popular Stocks: ICICI Bank Share Price | HDFC Bank Share Price | CDSL Share Price | UPL Share Price | TCS Share Price | BHEL Share Price | Trident Share Price | IRFC Share Price | Adani Power Share Price