Difference Between Trading Account and Profit and Loss Account

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 24, 2023

A summary of the differences between a trading account and a profit and loss account is given below.

Trading Account

Profit and Loss Account

Preparing a trading account is the first stage of final accounts—prepared before the profit and loss account The second stage of final accounts—prepared after the trading account
Shows the gross profit or loss of the business Shows the net profit or loss of the business
If any mistake is committed to this account, the profit and loss account will be wrong If any mistake is made, the trading account will not be affected
Direct expenses such as expenses connected with purchases, production of goods, and expenses incurred to bring goods to a salable condition are included Indirect expenses such as expenses relating to sales and administration of business are charged to this account
The true results of the business cannot be ascertained using this account—it discloses only partial results of the business It discloses the true and complete result of the business
It does not start with the balance of any account It starts with the balance of the trading account
The balance of this account is transferred to the profit and loss account The balance of this account is transferred to the Capital Account in the case of a sole proprietorship firm and to the Profit & Loss Appropriation Account in the cases of a partnership firm or joint-stock company



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About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.