Trading Account vs P&L Account: Final Accounts Explained
Both are parts of the Income Statement but measure profitability at different levels. Knowing which items go where is essential for scoring full marks in the Accounts paper.
head-to-Head Comparison
| Basis | Trading Account | Profit and Loss Account |
|---|---|---|
| Purpose | Determines Gross Profit or Gross Loss from buying and selling activities | Determines Net Profit or Net Loss after all indirect expenses and incomes |
| Items Included | Opening Stock, Purchases, Direct Expenses, Sales, Closing Stock | Gross Profit/Loss, Indirect Expenses (office, selling, financial), Indirect Incomes |
| Examples of Expenses | Wages, Carriage Inwards, Freight, Custom Duty on imports, Factory expenses | Salaries, Rent, Advertising, Depreciation, Discount Allowed, Bad Debts |
| Output | Gross Profit (transferred to credit side of P&L Account) | Net Profit (transferred to Capital Account or Balance Sheet) |
| Position in Final Accounts | First section of the Trading & P&L Account | Second section of the Trading & P&L Account |
The 'Wages vs Salaries' Trap
Wages (paid to factory/production workers) are a direct expense — they go in the Trading Account. Salaries (paid to office staff) are an indirect expense — they go in the P&L Account. Students frequently mix these up in journal and final account questions.
Common Ground (Similarities)
- Both are Nominal Accounts closed at the end of every accounting period.
- Both are part of the same document — 'Trading and Profit & Loss Account' — prepared together.
- Both follow the accrual concept and matching principle.
Test Your Understanding
Q1: Which of the following appears in the Trading Account?
Depreciation
Carriage Inwards ✅
Salaries
Commission Paid
Explanation: Carriage Inwards (freight paid to bring goods purchased to the warehouse) is a direct expense and appears on the debit side of the Trading Account.
Q2: The balance of the Trading Account is transferred to:
Capital Account
Balance Sheet
Profit & Loss Account ✅
Suspense Account
Explanation: The Gross Profit (or Loss) from the Trading Account is transferred to the credit (or debit) side of the Profit & Loss Account to begin the calculation of Net Profit.