Final accounts are prepared at the end of an accounting period to determine profit and to show financial position. Trading Account shows gross profit, Profit & Loss Account shows net profit, and Balance Sheet shows assets and liabilities.
Trading account is prepared to calculate gross profit.
[ ext{Gross Profit} = ext{Net Sales} - ext{Cost of Goods Sold}]
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Final accounts are prepared at the end of an accounting period to determine profit and to show financial position. Trading Account shows gross profit, Profit & Loss Account shows net profit, and Balance Sheet shows assets and liabilities.
Trading account is prepared to calculate gross profit.
[ ext{Gross Profit} = ext{Net Sales} - ext{Cost of Goods Sold}]
Profit & Loss Account is prepared to calculate net profit.
Balance sheet shows assets and liabilities on a date.
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Final accounts are prepared to summarise the results and financial position of a business at the end of an accounting period. Their purpose is: (i) to ascertain the profit or loss for the period (gross profit through Trading Account and net profit through Profit & Loss Account); (ii) to show the financial position on the closing date through the Balance Sheet by listing assets, liabilities and capital; (iii) to provide reliable information to owners, creditors, banks and other users for decision-making; and (iv) to incorporate necessary year-end adjustments so that profit and position are shown correctly.
Trading account is prepared to ascertain gross profit or gross loss from core trading activities. It considers direct items like opening stock, purchases (net), direct expenses (wages, carriage inward) and sales/closing stock. Profit & Loss account is prepared to ascertain net profit or net loss after considering indirect expenses (rent, salaries, depreciation, selling and office expenses) and other incomes (commission received, discount received). Thus, trading account shows trading performance; P&L account shows overall profitability.
Trading Account is prepared first to ascertain gross profit/gross loss. Debit side includes opening stock, purchases (net of returns) and direct expenses; credit side includes sales (net of returns) and closing stock. The difference is gross profit (transferred to P&L).
Profit & Loss Account starts with gross profit on credit side and records indirect incomes (commission, discount received). Indirect expenses (salaries, rent, depreciation, selling and office expenses) are debited. The difference is net profit/net loss, which is transferred to capital account.
Balance Sheet is prepared to show financial position by listing liabilities (capital, loans, creditors, outstanding expenses) and assets (fixed assets after depreciation, stock, debtors, cash/bank, prepaid expenses). All year-end adjustments are incorporated so that assets and liabilities reflect true amounts.