what is trading and profit and loss account?
Answers
Answer:
Trading and Profit and Loss Account. ... Trading account is the first part of this account and it is used to determine the gross profit that is earned by the business while the profit and loss account is the second part of the account which is used to determine the net profit of the business.
Answer:
what is trading and profit and loss account?
Explanation:
A business needs to prepare a trading and profit and loss account first before moving on to the balance sheet. Trading and profit and loss accounts are useful in identifying the gross profit and net profits that a business earns.
The motive of preparing a trading and profit and loss account is to determine the revenue earned or the losses incurred during the accounting period.
The trading and profit and loss account are two different accounts that are formed within the general ledger. The two parts of the account are:
1. Trading Account
2. Profit and Loss Account
Trading account is the first part of this account and it is used to determine the gross profit that is earned by the business while the profit and loss account is the second part of the account which is used to determine the net profit of the business.
Let us know more about these accounts in detail
1. Trading Account
Trading account is used to determine the gross profit or gross loss of a business which results from trading activities. Trading activities are mostly related to the buying and selling activities involved in a business. Trading account is useful for businesses that are dealing in trading business. This account helps them to easily determine the overall gross profit or gross loss of the business. The amount thus determined is an indicator of the efficiency of the business in buying and selling.
The formulae for calculating gross profit is as follows:
Gross profit = Net sales – Cost of goods sold
Where
Net sales = Gross sales of the business minus sales returns, discounts and allowances.
The trading account considers only the direct expenses and direct revenues while calculating gross profit. This account is mainly prepared to understand the profit earned by the business on purchase of goods.
Items that are seen in the debit side includes purchases, opening stock and direct expenses while credit side includes closing stock and sales.
Closing entries for Gross Loss or Gross Profit
The following entries are passed in case of Gross Loss
Profit and Loss A/c – Dr.
To Trading A/c
While in the case of Gross Profit
Trading A/c -Dr.
To Profit and Loss A/c
2. Profit and Loss Account
Profit and loss account show the net profit and net loss of the business for the accounting period. This account is prepared in order to determine the net profit or net loss that occurs during an accounting period for a business concern.
Profit and loss account get initiated by entering the gross loss on debit side or gross profit on the credit side. This value is obtained from the balance which is carried down from the Trading account.
A business will incur many other expenses in addition to the direct expenses. These expenses are deducted from the profit or are added to gross loss and the resulting value thus obtained will be net profit or net loss.
The examples of expenses that can be included in a Profit and Loss Account are:
1. Sales Tax
2. Maintenance
3. Depreciation
4. Administrative Expense
5. Selling and Distribution Expense
6. Provisions
7. Freight and carriage on sales
8. Wages and Salaries
These appear in the debit side of Profit and Loss Account while Commission received, Discount received, profit obtained on sale of assets appear on the credit side.
Net profit can be determined by deducting business expenses from the gross profit and adding other incomes obtained
Net profit = Gross profit – Expenses + Other income
Closing Entries for Net Loss or Net Profit:
i. In case of Net Loss
Capital A/c – Dr.
To Profit and Loss A/c
ii. In case of Net Profit
Profit and Loss A/c -Dr.
To Capital A/c
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