Trading, Profit and Loss Account: Meaning, Differences and Benefits

Published on January 12, 2026 | 5 min read

The trading account and profit and loss account are both crucial accounting tools to keep track of business activities. The trading account keeps the record of purchases and sales of goods, including all direct expenses, to determine the gross profit or gross loss. The profit and loss account, commonly known asthe P&L account, shows the net profit or loss by subtracting the expenses from revenue.

The trading, profit and loss account displays whether the business is profitable at a specific point in time or not. Also, it guides the management to track the specific areas of high revenue and expenses. In this article, we will discuss the meaning, differences and benefits of a trading account and a profit and loss account.

What is a Trading Account?

A trading account is a financial statement that records the revenue and expenses of a business. It calculates the gross profit and gross loss of a business, which results from trading activities.

A trading account considers only the direct expenses and direct revenues while calculating gross profit. This account is prepared to understand the profit earned by the business on the purchase of goods.

The items on the debit side include purchases, operating stock and direct expenses, while the credit side includes closing stock and sales.

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What is Gross Profit?

The gross profit is the profit a business makes after subtracting all the costs related to manufacturing and selling of product and services.

The formula for calculating gross profit is as follows:

Gross Profit = Net sales - cost of goods sold.

Where, Net Sales = Gross sales of the business - sales return - discounts and allowances.

In accounting terms, the following journal entries are passed:

In case of Gross Loss:

Profit and Loss A/c Dr. To Trading A/c

Here, the profit and loss account is debited because the business had suffered a loss, and the trading account is closed by transferring the gross loss to the P/L account.

In case of Gross Profit:

Trading A/c Dr. To Profit and Loss A/c

Here, the trading account is debited to close it, and the P/L account is credited because the business has earned a profit.

What is a Profit and Loss Account?

The profit and loss account shows the net profit and net loss of the business for the accounting period. The formation of this account begins with entering the gross loss on the debit side or gross profit on the credit side.

The value is obtained from the trading account, which is carried down to the profit and loss account.

The profit and loss account also considers the indirect expenses incurred in the business. These expenses are deducted from the gross profit to obtain the value of net profit or net loss.

Examples of a few indirect expenses included in the debit side of the profit and loss account.

Sales Tax
Maintenance expenses
Depericiation
Administrative expenses
Selling and distribution expenses
Provisions
Freight and carriage on sales
Wages and salaries

What is Net Profit?

Net profit is the amount of money a business earns after deducting all operating, interest and taxes over a given period of time. It is an important parameter that determines the financial health of your business. It shows whether the business can make more than what it spends.

To calculate net profit, subtract all indirect expenses from the gross profit and add any income received.

Net Profit = Gross profit - expenses + other income.

In accounting, the following journal entries are passed:

In case of Net Loss:

Capital A/c Dr. To Profit and Loss Account A/c

In case of Net Profit:

Profit and Loss account Dr. To Capital A/c

Difference Between Trading, Profit and Loss Account

Below are the differences discussed between Trading, Profit and Loss Account.

Basis	Trading Account	Profit and Loss Account
Meaning	A financial statement that records purchases and sales of goods, including all direct expenses.	A financial statement that records indirect expenses and incomes of the business.
Timing of formation	The trading account is prepared first, and then the profit and loss account is prepared.	It is prepared in the second place after the completion of the trading account.
Purpose	The main purpose is to determine gross profit or gross loss.	The main purpose is to determine the net profit or net loss.
Stage	It is the first stage in the creation of a final account.	It is the second stage in the creation of the final account.
Dependency	It does not depend on the trial balance or any other account.	It is dependent on the trading account balance of gross profit or gross loss.
Transfer to the balance sheet	The financial figure of gross profit or loss is transferred to the profit and loss account only.	The output figure of net profit and net loss is transferred to the balance sheet.

Benefits of Trading, Profit and Loss Account

The trading, profit and loss account is an important stage for the preparation of a final account. It helps management, investors and stakeholders to evaluate the financial performance of the business. Here are other benefits.

Performance Evaluation

It allows management and market participants to evaluate the business activities over a specified period of time.

Tax Filing

The trading, profit and loss account provides essential financial data in a structured way that helps in tax filing.

Improve Profitability

Trading, profit and loss account helps to improve the profitability of the business by knowing the expenses and revenue in detail.

Strategic Decisions

This account helps the business to make strategic decisions, like when to give a discount to boost sales.

The trading, profit and loss account plays an important role in assessing the financial performance of a business over a period of time. The trading account helps to determine gross profit or loss by subtracting the cost of goods sold from net sales.

While the profit and loss account shows the net profit or loss after deducting indirect expenses from gross profit. Understanding both accounts helps beyond the preparation of the balance sheet.

About Author

Subhasish Mandal

Sub-Editor

finance professional with strong expertise in stock market and personal finance writing, he excels at breaking down complex financial concepts into simple, actionable insights. Holding a Master’s degree in Commerce, he combines academic depth with practical knowledge of technical analysis and derivatives.