Financial Statements:
Financial statements are the collection of reports that summarise an organisation’s business accounts,
stating its financial performance, financial position, and cash flows at the end of an accounting year (in
case of profit and loss account) and at a particular point in time (in case of the balance sheet). It includes:
a) Trading a/c
b) Profit and Loss a/c
c) Balance Sheet
Objectives of Preparing Financial Statements:
The main objectives of preparing financial statements are:
To present a true and fair picture of the financial position of the business
To present a true and fair picture of the financial performance of the business
To provide detailed information on how the business allocates and uses its resources
help decision makers and managers make informed decisions about the business
Trading Account:
A trading account is a financial statement that outlines the buying and selling activities of a business. It
records the direct expenses, direct revenues, and the gross profit or loss generated from the sale of goods
or services.
Profit and Loss Account:
Profit and loss account shows the net profit and net loss of the business for the accounting period. This
account is prepared in order to determine the net profit or net loss that occurs during an accounting period
for a business concern.
Profit and loss account gets initiated by entering the gross loss on the debit side or gross profit on the
credit side. This value is obtained from the balance which is carried down from the Trading account.
A business will incur many other expenses in addition to the direct expenses. These expenses are
deducted from the profit or are added to gross loss and the resulting value thus obtained will be net profit
or net loss.
Objectives of profit and loss account:
[Link] Know the Trading Result:
Profit and loss account provides trading results by ascertaining net profit or net loss of the business.
2. To Check Profitability:
Profit and loss account helps to check profitability of the company for the particular period.
3. To Know the Expenses
Profit and loss account helps to know selling and distribution expenses and office and
administrative expenses for the particular period.
4. To Compare the Results
Profit and loss account helps to compare current year's result (net profit or loss) with the result of
previous year.
5. To Control Expenses
Profit and loss account helps to control unnecessary indirect expenses which lead to higher
profitability.
6. To Determine Tax Amount
As we know that profit and loss account calculates net profit of the business that helps to
determine company's tax liability for the period.
Trading and Profit and Loss Account Format
Trading and Profit and Loss Account format is represented separately as follows:
Format of Trading Account
Format of Profit and Loss Account
Difference between Trading and Profit and Loss Account
The following points of difference exist between the Trading and Profit and Loss Account
Parameters Trading Account Profit and Loss Account
Meaning Trading account used to find the gross profit/loss Profit and loss account or Income statement is
of the business for an accounting period used to find the net profit/loss of the business
for an accounting period
Timing Trading Account is prepared first and then profit Profit/Loss Account is prepared after the
and loss account is prepared. trading account is prepared.
Purpose For knowing the gross profit or gross loss of a For knowing the net profit or net loss of a
business business
Stage It is the first stage in the creation of the final it is the second stage in the creation of the
account. final account.
Dependency It is not dependent on trial balance It is dependent on trading account
Transfer The balance in the form of Gross loss or Gross The balance in the form of Net loss or Net
of Balance Profit of the trading account will be transferred to Profit of the profit and loss account will be
the Profit and Loss Account transferred to the Balance Sheet