A Trading, Profit and Loss Account is one of the final accounts of a business. It is prepared to find out whether a business has made a profit or incurred a loss during a particular period, usually one year.

It is divided into two main parts:

1. The Trading Account, which shows the gross profit or gross loss made from buying and selling of goods.


2. The Profit and Loss Account, which shows the net profit or net loss after considering all other expenses and incomes.

1. It helps you to find out the gross profit or gross loss made from trading activities.


2. It helps you to determine the net profit or net loss after deducting all expenses and adding all incomes.


3. It helps you to check how well the business is performing.


4. It provides information for decision-making by the business owner and management.


5. It forms part of the final accounts along with the Balance Sheet.


6. It helps you to prepare the financial statement of the business correctly.

Meaning of Trading Account

A Trading Account is the first part of the Trading, Profit and Loss Account. It is prepared to find out the gross profit or gross loss made from buying and selling of goods during a trading period.

When the Net Sales is greater than the Cost of Goods Sold, the business makes a Gross Profit.
When the Cost of Goods Sold is greater than the Net Sales, the business makes a Gross Loss.

Purpose of Trading Account

It helps you to measure how profitable the trading activities of a business are before considering indirect expenses.

Debit Side (Expenses and Costs):

1. Opening Stock (goods in hand at the beginning of the year)


2. Purchases (goods bought for resale)


3. Returns Outwards (goods returned to suppliers)


4. Carriage Inwards (transport cost of goods purchased)

Credit Side (Income):

1. Sales (cash and credit sales)


2. Returns Inwards (goods returned by customers)


3. Closing Stock (unsold goods at the end of the year)

Gross Profit = Net Sales – Cost of Goods Sold (COGS)
Gross Loss = Cost of Goods Sold – Net Sales

1. Start with Opening Stock.


2. Add Purchases and Carriage Inwards, then deduct Returns Outwards.


3. Deduct Closing Stock to obtain the Cost of Goods Sold.


4. On the other side, show Sales minus Returns Inwards to get Net Sales.


5. Compare both sides — the difference will be either Gross Profit or Gross Loss.

Meaning of Profit and Loss Account

A Profit and Loss Account is the second part of the final accounts. It is prepared to find out the net profit or net loss made after considering all indirect expenses and incomes of a business for a particular period.

It shows the overall performance of the business after all costs have been deducted.

1. It helps you to determine the final profit or loss made by a business.


2. It helps in evaluating how efficiently the business is run.


3. It serves as a guide for future planning and budgeting.


4. It provides a record of all indirect expenses and incomes.


5. It helps to update the owner’s capital through the net profit or net loss.

Debit Side (Indirect Expenses):

1. Salaries and Wages


2. Rent and Rates


3. Insurance


4. Advertising


5. Carriage Outwards


6. Office Expenses


7. Repairs and Maintenance


8. Depreciation


9. Discount Allowed

Credit Side (Indirect Incomes):

1. Gross Profit (from the Trading Account)


2. Commission Received


3. Interest Received


4. Rent Received


5. Discount Received


6. Any Other Income

Net Profit = Gross Profit + Other Incomes – All Expenses
Net Loss = All Expenses – (Gross Profit + Other Incomes)

1. Bring the Gross Profit from the Trading Account to the credit side of the Profit and Loss Account.


2. If there is a Gross Loss, bring it to the debit side.


3. Record all indirect expenses on the debit side.


4. Record all indirect incomes on the credit side.


5. Find the difference between both sides.


6. If the credit side is greater, it is Net Profit.


7. If the debit side is greater, it is Net Loss.


8. Transfer the Net Profit or Net Loss to the Capital Account in the Balance Sheet.


9. Always write the name of the business, the title of the account, and the date clearly at the top.

Example 1

Question:
The following balances were extracted from the books of Mariam Enterprises as at 31st December, 2024:

Items	₦
Opening Stock	10,000
Purchases	40,000
Sales	70,000
Returns Inwards	2,000
Returns Outwards	1,000
Carriage Inwards	2,000
Closing Stock	8,000
Rent	4,000
Salaries	6,000
Commission Received	1,000

Required:
Prepare the Trading Account and Profit and Loss Account.

Trading Account for the year ended 31st December, 2024

Particulars	₦	Particulars	₦
Opening Stock	10,000	Sales	70,000
Purchases	40,000	Less: Returns Inwards	(2,000)
Less: Returns Outwards	(1,000)	Net Sales	68,000
Carriage Inwards	2,000	Closing Stock	8,000
Cost of Goods Sold	51,000
Gross Profit c/d	25,000
Total	76,000	Total	76,000

Profit and Loss Account for the year ended 31st December, 2024

Particulars	₦	Particulars	₦
Rent	4,000	Gross Profit b/d	25,000
Salaries	6,000	Commission Received	1,000
Net Profit c/d	16,000
Total	26,000	Total	26,000

Therefore, Net Profit = ₦16,000

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Example 2

Question:
The following trial balances were extracted from the books of Bright Future Enterprises as at 31st December, 2025:

Items	₦
Opening Stock	15,000
Purchases	55,000
Sales	100,000
Returns Inwards	3,000
Returns Outwards	2,000
Carriage Inwards	4,000
Closing Stock	12,000
Rent	5,000
Salaries	10,000
Advertising	2,500
Insurance	1,500
Discount Received	1,000
Commission Received	2,500

Required:
Prepare the Trading Account and Profit and Loss Account for the year ended 31st December, 2025.

Trading Account for the year ended 31st December, 2025

Particulars	₦	Particulars	₦
Opening Stock	15,000	Sales	100,000
Purchases	55,000	Less: Returns Inwards	(3,000)
Less: Returns Outwards	(2,000)	Net Sales	97,000
Carriage Inwards	4,000	Closing Stock	12,000
Cost of Goods Sold	72,000
Gross Profit c/d	37,000
Total	109,000	Total	109,000

Profit and Loss Account for the year ended 31st December, 2025

Particulars	₦	Particulars	₦
Rent	5,000	Gross Profit b/d	37,000
Salaries	10,000	Commission Received	2,500
Advertising	2,500	Discount Received	1,000
Insurance	1,500
Net Profit c/d	21,500
Total	40,500	Total	40,500

Therefore, Net Profit = ₦21,500

Interpretation:
Bright Future Enterprises made a Net Profit of ₦21,500 during the year 2025, showing that the business managed its trading and operational activities efficiently.

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Summary

1. The Trading Account shows the gross profit or gross loss.


2. The Profit and Loss Account shows the net profit or net loss.


3. These two accounts help the business owner to know how well the business performed.


4. Direct costs appear in the Trading Account; indirect expenses and incomes appear in the Profit and Loss Account.


5. The Net Profit increases capital, while the Net Loss reduces capital.


6. Together, the Trading, Profit and Loss Account form part of the final accounts used to prepare the Balance Sheet.