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Difference between Trading Account and Profit and Loss Account

The combined account of trading and profit and loss account has the trading account occupying the upper section, and the profit and loss account the lower section. All costs incurred in putting goods into a saleable condition are charged to the trading account. Those expenses not directly connected with the selling of goods are dealt with in the profit and loss account.

A trader, who is someone who buys and sells goods, is usually more concerned with how much profit is made in trading before the expenses are deducted. The profit that is calculated in the trading account is known as the gross profit. The gross profit is the excess of sales over the cost of goods sold in a given period. The gross profit is carried down to the profit and loss section of the combined account.

The net profit is then calculated in the profit and loss account. All other revenues not earned from sales such as discounts received, commissions earned, etc. are added to the gross profit. After the deduction of all the expenses in the profit and loss account, what is left of the gross profit and other revenues is the net profit.

All expenses directly related to putting goods into a saleable condition are charged to the trading account. They include carriage inwards on goods. Carriage inwards is treated as part of the cost of goods and is added to purchases in the trading account. Carriage outwards on the other hand is not an expense in the purchase of goods, and is always entered in the profit and loss account.

Other direct selling expenses include promoting the sale of goods or advertising or publicizing a product or idea. Wrapping materials and boxes bought for packing finished goods are charged to trading account while the wages of the shop assistants selling them are charged to the profit and loss account.

Last Updated (Sunday, 05 December 2010 15:34)