Introduction to the Trading and Profit and Loss Account

• The profit/loss of a business is calculated by preparing a trading and profit and loss account
• It is sometimes called only the profit and loss account in error
• It is also more accurately known as the: Statement of Comprehensive Income
• It is also known as: The Income Statement
• It matches revenue and expenditure incurred in generating that revenue for any given period
• If the revenue generated in a given period exceeds the expenditure the result is known as a profit
• If expenditure exceeds revenue then the result is known as a loss
• The Trading and Profit and Loss Account is prepared by profit making businesses
• It is prepared at the end of each trading period
• The concerned business’s management decides on how long a trading period is, when it starts and when it ends
• A trading period can be a day, week, month, quarter (three months), half year or full year
• Because it is a costly and lengthy process most business have a trading period that is a year long
• It may start on 1 January and end on 31 December or 1 May to 31 April the next year
• In short a trading period is however long the management wants it to be
• However there are laws that limit the business’s discretion in setting this period which means most businesses prepare at least one Trading and Profit and Loss Account each year
• The Trading and Profit and Loss account can be divided into two broad accounts
• The Trading Account and
• The Profit and Loss Account
• The Trading and Profit and Loss account is a financial statement
• This means it is different in some ways from “normal” accounts such as say the Purchases Account
• Unlike the Balance Sheet/Statement of Financial Position however it is part of the double entry system of the business
• Expenses such as rent payable appear as expenses in the profit and loss account
• This is the same as debiting the profit and loss account
• Revenues such as rent receivable appear as income which is the same as crediting the profit and loss account
• The Trading and Profit and Loss Account should always be prepared in columnar form
• The horizontal method of preparing the Trading and Profit and Loss Account is not acceptable as it is contradiction of the International Accounting Standards

To access more topics go to the Principles of Accounts Notes.