What is Trading And Profit And Loss Account - Definition -T& P&L Example Format - Formulas

What is Trading Account

The Trading Account is the part of Cost of Goods Sold Statement i.e., it is related to finished goods or completed goods which have been manufactured in a industry. It is prepared to calculate Gross Profit or Gross Loss for the accounting period. It is a type of Ledger where Direct Revenues such as Sales on Credit Side and Direct Expenses such as Purchases on Debit Side are recorded. It is not prepared for Services Companies as it is related to goods or products.

If the Credit Side is greater than Debit side, then there is Gross Profit but if the Debit Side exceeds the Credit Side, then there is Gross Loss.

In the calculation of Gross Profit, the Closing Stock or Ending Inventory is valued at the cost which includes those goods unsold at the end of the accounting period and it must be offset with the revenue of the period according to Matching Principle Gaap as the all the cost incurred in earning revenues must be match with the revenues of the accounting period. To understand this concept, let’s us take an example. For Company ABC Co., If 1000 units are purchases at the cost of Rs. 100 Per Unit, then only 950 units sold out for Rs. 120 Per Unit, then 50 units remain unsold is called stock that must be match with the revenue as shown below:

Sales (950 X 120) = Rs. 114000

Purchases (1000 X 100) = Rs. 100000

Cost of Units remain unsold / Closing Stock = 50 X 100 = Rs. 5000

Below is the Trading Account For ABC Co. for the accounting period of July, 2018.

                                                                    ABC Co.

                                                        Trading Account Format

                                                   For the Accounting Period, July, 2018

                               Rs.                                                                                       Rs.

Cost of Sales        95000                                     Sales                                   114000

Gross Profit           24000                                     Closing Stock                        5000

                            ________                                                                            ________

Totals                    119000                                   Totals                                    119000

                            ________                                                                            ________

                            ________                                                                            ________

Here Cost of Sales can be calculated as shown below:

                                  Rs.

Opening Stock           -

Net Purchases        100000

Closing Stock           (5000)

                             ________

Cost of Sales           95000

                             ________

                             ________

 

Formula:

Gross Profit = Net Sales - Cost of Sales = 114000 - 95000 = Rs. 24000

What is Profit And Loss Account (P&L)

A Profit And Loss Account (also called Income Statement in American Accounting System) is prepared to calculate Net Profit or Net Loss or Financial Performance of the business for the accounting period. Gross Profit or Gross Loss find out under Trading Account (Explained Above) is transferred to this Account. It includes all Indirect Revenues / Incomes and Indirect Expenses for the period.

                                                                     ABC Co.

                                                         Profit And Loss Account

                                                         For The Month July, 2018

                                    Rs.                                                                                 Rs.

Rent Expenses           3000                                     Gross Profit                     24000

Travelling Expenses   1500                                    Investment Received        10000

Utility Expenses          2000                                      Bad Debts Recovered      100

Salaries Expenses       500

Bad Debts                    300

Advertising Exp.           500

Depreciation Exp.        1000

Net Profit                     25300

                                 ________                                                                      _________

Totals                          34100                                         Totals                           34100

                                 ________                                                                      _________

                                 ________                                                                      _________

Here Net Profit = Gross Profit + All Revenues - All Expenses

So, it is all about Trading Account and Profit And Loss Account With Example Format.