give two difference between trading account and profit and loss account
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Explanation:
Definition of Trading Account
In the income statement, trading account represents the first part, which is prepared to know the gross result, i.e. profit (loss) for the period. The account shows the outcome of trading activities, i.e. the profit earned or loss suffered on purchase or sale of goods.
The account consists of two sides; debit side indicates direct expenses and credit side is for direct incomes. Direct expenses which are incurred by the organization, to bring goods into the condition, fit for sale. Such expenses include fuel, power, freight, insurance, carriage inward, consumption of stores, etc. On the other hand, direct incomes refers to income from the activities that are earned from the sale of goods.
Definition of Profit & Loss Account
Profit and loss account is a part of the financial statement, which takes into account operating and non-operating revenues and expenses incurred, during an accounting period. It ascertains, net profit earned or loss sustained by the business.
Profit & Loss account is prepared after the preparation of trading account, with the help of trial balance. The balance of trading account is transferred to this account, which acts as the initial point, after which all expenses and losses are debited, and all incomes and gains are credited to this account.
When the debit side of the account exceed the credit side, it is a net loss, and when the credit side is more than the debit one, the result is net profit. The balance (net profit or net loss) is transferred to the capital account, on the balance sheet.
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