The main difference between the Trading Account and the Profit and Loss Account is that the Trading Account is the account that shows the result of trading activities such as buying and selling, while the Profit and Loss Account is the account that means the actual profits and losses of the business during the accounting period.

Trade account vs. profit and loss account

The trading account is a type of account that is being prepared to know the result of trading activities and to know the gross profit or loss of the business, while the profit and loss account is a type of account that is being created to find out the net profit or loss of the business during the particular accounting period. The trade account is the first level of the final accounting, while the profit and loss account is the second level of the final accounting.

The trading account is preparing to discover the gross profit or failure of the accounting period, while the profit and loss account is preparing to find the net profit or loss of the accounting period. In the case of the trade account, the balance is transferred through a profit and loss account, while in the case of the profit and loss account, the balance is transferred through the capital account. Business accounts are used for direct income and direct expenses, while profit and loss accounts are used for labor and non-labor benefits and costs.

In the operating account to obtain the gross profit or loss, one has to deduct the cost of goods sold from the net sale, while in the profit and loss account to obtain the net profit or loss, one has to deduct the indirect gross expense. profit and loss and indirect income. The trading account is not considered directly on the balance sheet, while the profit and loss accounts are considered directly on the balance sheet.

Comparative chart

What is a business account?

The trading account is a type of statement that is organized to observe the consequences of trading activities and to obtain the gross profit or loss of the business. The business account indicates the assumption of business activities, such as the purchase of goods and the sale of products. The trading account is being generated to find out the gross profit or loss for the accounting period. In the case of the trade account, the balance is transferred through the profit and loss account. Business accounts are used for direct income and direct expenses.

In the trading account, if someone has to realize the gross profit or loss, they have to subtract the price of the items sold from the net sale. The trading account is not considered directly in the balance sheet, firstly, the balance of the trading account is moved to the profit and loss account, after the result of the association of both reports, the statements are included in the balance sheet , either by net profit or net loss. Making the mistake on a trading account will affect the profit and loss account, the trading account is the first level of final accounting.

The trading account is not dependent on any account. The action must be regulated during the creation of a trading account. All direct expenses and direct income are recorded in this account. Although the trading account is the first account or the final account, it does not depend on the experimental balance. Activities, even on a business account, typically create daily transactions.

What is the profit and loss account?

The profit and loss account is a type of account that is organized to look at the net profit or loss of the business during the particular accounting period. The profit and loss account indicates the actual profit of the industry and the substantial loss of the company during the entire accounting year. The profit and loss account is being generated to know the net profit or loss for the accounting period. In the case of the profit and loss account, the balance moves through the capital account.

Profit and loss accounts are used for labor and non-labor earnings and costs while they are in the profit and loss account. Profit and loss accounts are considered directly on the balance sheet by adding or subtracting from capital. If someone has to get the net profit or loss, then you have to deduct the indirect expense from the gross profit and loss and then add the indirect income. The profit and loss account depends on the trading account.

Making mistakes in the profit and loss account will not affect the trading account. The profit and loss account is the second level of final accounting. The trade account balance requires an organization of the profit and loss account. There is no inventory regulation that requires organizing the profit and loss account. All indirect expenses and indirect income are included in the profit and loss account. The profit and loss account is generated after the trading account.

Key differences

1. The purpose of the operating account is to obtain gross profit and loss, while the use of the profit and loss account is to obtain net profit and loss.
2. In the commercial account, the balance is transferred to the profit and loss account, on the other hand, in the profit and loss account the balance is moved to the capital account.
3. The trading account is not directly addressed on the balance sheet; Rather, the profit and loss account is dealt with directly on the balance sheet.
4. The trading account is the first level of the final accounting, on the other hand, the profit and loss statement is the second level of the final accounting.
5. The trading account is organized before the profit and loss account, while the profit and loss account is organized after the trading account.
6. Any error in the trading account, effect on the profit and loss account; on the other hand, any error in the profit and loss account does not affect the trading account.

Final Thought

The main purpose of the trade account and the profit and loss account is to individually classify the gross profit or loss and the net profit or loss of the business. The trading account is used to determine gross profit; however, the profit and loss account is used to determine the net profit of the company.