• Trading and Profit and Loss account is prepared to

determine the profit earned or loss sustained by the

business enterprise during the accounting period.
• Trading a/c is prepared to ascertain whether the selling
of goods and/or rendering of services to customers have
proved profitable for the business or not.
• It summarizes the performance for an accounting period.
• It is achieved by transferring the balances of revenues
and expenses to the trading and profit and loss account
from the trial balance.
• Trading and Profit and Loss account is also an
account with Debit and Credit sides.
• The debit balances and losses are transferred
to the debit side of the Trading and a Profit
and Loss account and credit balance are
transferred to its credit side.
 Items in trading account
Debit side Credit side
• Opening stock • Sales less returns
• Purchases less returns
• Wages
• Carraige inwards/Freight
inwards
• Fuel/water/power/gas
 Items in profit and loss account
Debit side Credit side
• Packing material /packing • Other incomes like;
charges . rent received,
• Salaries dividend received,
• Rent paid interest received,etc.
• Interest paid
• Commission paid
• Repairs
• Miscellaneous expenses
 Gross profit
• The trading account or the first part ascertains the gross profit
and profit and loss account or the second part ascertains net
profit.
• The excess of sales over purchases and direct expenses is called
gross profit.
Gross Profit = Sales – (Purchases + Direct Expenses)
• Direct expenses means all expenses directly connected with the
manufacture, purchase of goods and bringing them to the point
of sale.
• If the total of the credit side of the profit and loss account is more
than the total of the debit side, the difference is the net profit
 Net profit
• If the total of the credit side of the profit and
loss account is more than the total of the
debit side, the difference is the net profit.
• If the total of the debit side is more than the
total of the credit side, the difference is the
net loss .
• Net Profit = Gross Profit + Other Incomes –
Indirect Expenses
Closing stock & cost of goods sold
• The business will have an unsold stock of
goods called closing stock.
• Cost of Goods Sold = Opening Stock +
Purchases Direct Expenses–Closing Stock
 Operating profit (EBIT)
• It is the profit earned through the normal
operations and activities of the business.
• Operating profit is the excess of operating
revenue over operating expenses.
• operating profit is profit before interest and
tax (EBIT).
• Operating profit = Net Profit+ Non Operating
Expenses – Non Operating Incomes
Example