The trading and profit and loss account set out the trading activities of a trader. It shows the current assets, current liabilities, and capital of an organization. For instance, a trader has cash in a bank account and securities in other accounts (if so, it must be mentioned).
It includes long-term assets and liabilities unrelated to ordinary trading activities. Any extraordinary income or expenditure in the profit and loss account for the year is also shown in this account. When any action or inquiry by the relevant authority is made, it is crucial to ascertain the trading position.
Trading and Profit and Loss Account Format – An Overview
Trading means exchanging, buying, and selling goods, services, or securities from one person to another. In business activity, trading is simply buying one product to sell it at a profit. Trade is the most common financial transaction between any two parties. This is usually done utilizing buying and selling goods or services.
A profit and loss account is an accounting record showing a business's financial performance for a specified period. Different types of companies will use another classification system for the P&L account.
For instance, manufacturing firms will earmark their costs into production or selling costs. In addition, firms engaged in sales and purchases will include a cost center called inventory turnover/sales ratio, which measures how quickly they sell a particular item.
Difference between Trading Account and Profit and Loss Account
A trading account is an account where you record all your trades. You can also call it a trading journal or a trading log. A profit and loss account is an accounting term for the income statement in which all revenues and expenses are recorded.
A trading account is an account with a broker that allows investors to buy and sell securities on the stock exchange without having to open a Demat account. It is also called a margin account because it provides leverage to investors through margin money (borrowed funds).
A profit and loss account shows the total revenue earned during an accounting period and all expenses incurred. It indicates whether the company made a profit or loss during that period. The net result is known as profit before tax (PBT).
Types of Trading Account
To trade in the stock market, you need a trading account. Trading accounts are of different types, and several factors influence their kind.
- Equity trading account: This is the most common type of trading account where you can buy, sell, and trade stocks, derivatives, and commodities.
- Futures trading account: This type of trading account allows you to trade futures contracts on various commodities like crude oil, gold, etc.
- Currency futures trading: This type of trading account allows you to trade currency futures contracts in currencies like EUR/USD etc.
- Options trading: You do not need much money to start options trading because this investment is based on speculation rather than directly investing in stocks or commodities. You can use the option trading profit calculator to determine the values.
- Debt Instrument Trading Accounts: Debt instrument trading accounts are used to buy and sell bonds issued by companies or governments, such as government bonds (gilt). Debt instruments are also traded through derivatives such as futures contracts or options contracts (opt).
Types of Profit and Loss Account
A profit and loss account is a financial statement showing the income and expenses of a business or other organization for a period, usually one year. It is also known as a P&L statement, income statement, or statement of earnings.
- Personal account: This type of profit and loss account is maintained by individuals or sole proprietorships. It records all the transactions about an individual's assets and liabilities and his business assets and liabilities.
- Real account: The actual accounts are maintained by companies whose balances are not included in their balance sheet because they do not carry on any business activity.
- Nominal account: The nominal accounts are maintained by companies who carry on business activities but do not have any sales transactions during the accounting period.
Trading and Profit and Loss Account Example
A Trading and Profit and Loss Account is a statement showing a company's or individual's trading activity. The companies maintain this account to record their sales, purchases, and profits. Any business or organization needs to keep this account to be used for analysis purposes.
Illustration of an Example of a Trading Account
Trading accounts are also maintained by individuals who buy and sell goods or services. Traders who sell goods or services on credit hold a trading account in which they record the amount due from their customers and the amount payable to suppliers. The total balance in this account represents the net profit made or loss incurred during the period.
It should be noted that trading accounts do not show any distinction between capital and income. For example, if a trader purchases goods for INR 1 lakh and sells them for INR 1.5 lakh, he would show the INR 1 lakh paid for the purchase of goods as an expense and would show INR 1.5 lakh received from the sale of goods as income from business activities.
Thus, there is no distinction between capital expenditure and revenue expenditure when maintaining a trading account.
Illustration of an Example of a Profit and Loss Account
Profit and loss accounts can be set up in different formats depending on the type of business and the level of complexity involved.
For example, an accountant preparing a P&L for a small company might use a single-column format to keep things simple. A more complex business, however, might require more detailed analysis and multiple columns to track different revenue and expense categories.
In addition to showing the income earned from sales, the profit and loss account also shows how much money was spent on production costs such as raw materials, labor, and other expenses. The difference between these two figures is known as gross profit.
Gross Profit = Sales - Cost of Goods Sold (COGS)
The result of this calculation is called net profit/loss. The net profit/loss can also be calculated using the formula:
Net Profit/Loss = Sales Revenue – Expenses
Profit and Loss Account consists of two parts:
- Income Statement - Each income category's sales revenue, cost, and gross profit.
- Expenses Statement - It shows all costs incurred by the company during that period.
The net profit (or loss) will be calculated by subtracting total expenses from total revenue.
Wrapping Up
Learning trading and accounting is essential in specific industries, especially finance. It will give you enormous insight into your business and help you get through the tough times. Knowing about the trading and profit and loss account allows you to explore additional ways of making your money work for you.
Frequently Asked Questions (FAQs)
What is a trading account?
A retail investor or trader uses a trading account to execute orders through a broker. The broker then executes the order on behalf of the client for a commission fee.
The trading accounts can be either margin accounts or cash accounts. In a margin account, you have to provide collateral to your broker in case you go into losses. On the other hand, in cash accounts, you don't have to provide collateral at all, as these are risk-free.
What is a profit and loss account?
This is the most common type of profit and loss account used today, especially by small businesses. It includes all revenues and costs incurred during an accounting period. The P&L statement is one of the three financial statements that must be prepared for each business entity (the other two being the balance sheet and cash flow statement). It shows how much money was earned or lost during a specific period, usually one year or less.
The P&L statement is also known as an income statement or statement of earnings because it summarizes all revenues and expenses for the year and calculates net income (or net loss). The P&L consists of two parts: income statement and balance sheet.
What are the types of trading accounts?
There are two main types of trading accounts: cash and margin accounts. A cash account is where funds are deposited directly into it without leverage or borrowing from the broker. A margin account is an account that uses borrowed money from the broker to buy securities, and these securities must be paid for using interest payments sent back to the broker at periodic intervals until maturity.
What are the types of profit and loss accounts?
The profit and Loss account is an important financial statement that summarises all the revenues and expenses incurred by a business. It helps to determine whether the business is profitable or not.
A profit and loss account is also known as the P&L statement, income statement, trading statement, or statement of financial performance. A profit and loss account is a financial statement showing a business's income, expenses, and net profit for a certain period. It can also be referred to as an income statement or a statement of financial performance.
The profit and loss account shows the net result of all transactions during a given period. It helps you determine how well your business is doing financially. It shows how much money has been earned or lost and how much has been spent on operating expenses such as salaries and wages.