The Trading Profit and Loss Account
The trading profit and loss account is a statement showing in detail how the profit or loss of a period has been made.
The two parts of the statement may be examined in more detail
- The trading account – This shows the gross profit for the period. Gross profit is the difference between the value of sales and the purchase or production cost of the goods sold.
- The profit and loss account – This shows the net profit of the business. Net profit is the gross profit plus any other income from sources other than the sale of goods minus other expenses of the business which are not included in the cost of goods sold.
Relationship between the profit and loss account and the balance sheet
- The net profit is the profit for the period, and it is transferred to the balance sheet of the business as part of the proprietor’s capital.
- Drawings are appropriations of profit are not expenses.