The Trading and Profit and Loss Account
One of the main aims of operating a business is to make profit. Profit is calculated in a Trading and Profit and Loss Account. This is divided in a Trading Account which calculates the Gross Profit for the period, and a Profit and Loss Account which calculates Net profit for the period.
The Trading Account ─ calculates the profit made strictly from trading activities. Trading involves buying and selling. In the trading account the cost of goods sold is subtracted from Net Sales for the period to calculate Gross Profit.
Cost of Goods Sold ─ the value of the goods sold at cost.
Net Sales ─ the actual sales made after all adjustments have been made for goods returned.
Gross Profit ─ this is the excess of Net Sales over Cost of Goods Sold.
Gross Loss ─ this is the excess of Cost of goods sold over Net Sales.
At the end of a financial period, all expense and revenue accounts are closed to a summarizing account usually called a Profit and Loss Account. This is the financial statement that summarizes revenues and expenses for a specific period of time, usually a month or a year.
The Profit and Loss Account reflects a Period of Time – Month, Quarter, Year. It shows financial the activity of a business during that period and indicates any profit or loss earned.
Revenue ─ is the value of goods and services which have been delivered to customers.
Expenses ─ costs incurred in earning these revenues.
Net Profit ─ is the excess of Revenue over Expenses, on the Profit and Loss Account.
Net Loss ─ is the excess of Expenses over Revenue, on the Income Statement.