A Trading Account is prepared to arrive at the gross profit earned by the organisa-tion over a specified period. This helps the organisation to arrive at the cost of its core activity and calculate the direct profit from its operations.
Profit and Loss Account
The Profit and Loss Account gives the net profit earned by the company after con-sidering expenses incurred over a period. This helps the company monitor and control the costs incurred and improve its efficiency. In other words, the Profit and Loss statement shows the performance of the company in terms of profits or losses over a specified period. A key element of the Profit and loss account, and one that distinguishes it from a balance sheet, is that the amounts shown on the statement represent transactions over a period of time, while the items repre-sented on the balance sheet show information as on a specific date. All revenue and expense accounts are closed once the Profit and Loss Account is prepared. The will not hove an opening balance in the next accounting cycle.
A Balance Sheet is a statement that summarises the assets and liabilities of a business. The excess of assets over liabilities is the net worth of a business.
The balance sheet provides information that helps in assessing a company’s:
- Long-term financial strength
- Efficient day-to-day working capital management
- Asset portfolio
- Sustainable long-term performance
The balances of all the real, personal and nominal (capital in nature) accounts are transferred from trial balance to balance sheet and grouped under the major heads transferred from the Profit and Loss account.