Purpose Of Providing Trade Accounts And Profit Loss Accounts
1. Trading account and Profit Loss Account is a finishing account because both accounts are provided at the end of an accounting period based on information in the estimated balance.
2. The Trading Account is provided to determine the gross profit or loss of the business at the end of the accounting year.
(a) Gross profit (or loss) is earned before consideration of expenses and business operating results.
(b) Gross profit is recovered if net sales exceed sales costs while gross loss is recovered if the cost of sales exceeds net sales.
Gross profit = net sales – sales costs
Gross loss = cost of sales – net sales
3. Profit Loss Accounts are made for profit or loss at the end of the accounting period.
(a) Net gains (or losses) are arrived at after the gross profit (or loss) plus revenue and deduction of operating expenses for an accounting period. (b) Net profit is obtained if the gross profit plus the amount of revenue exceeds the operating expenses.
Net profit = gross profit + revenue – expenses
(c) Net loss is recovered if operating expenses exceed the gross profit plus yield.
Net loss = expenses – (gross profit + revenue)
(d) Net loss is also recovered if a gross loss plus operating expenses exceeds operating profit.
Net loss = loss + expenses – revenue