Both Trading and Profit & Loss accounts play a prime role in assessing the performance and profitability of a company. The main difference between these two is the time period when they are used and the results they show. Which means, understanding the difference between these two accounts is the key to making successful investments.
Read this blog to understand the difference between a Trading account and Profit & Loss accounts and how they impact decision-making, along with practical examples.
What is a Trading Account?
A trading account is a part of financial statements which calculates gross profit or gross loss and cost of goods sold, from buying and selling of goods, to the direct cost involved during the process. The key components are opening stock, purchases, direct expenses, sales and closing stocks.
Trading account is also involved in trading stock, which records trading activities such as buying and selling of stocks, ETFs, etc., through an online broking platform.Â
How does it work in trading?
The bank account is used to transfer money to the trading account. Next, the trading account places trade orders, and finally, the security that is bought is delivered to the demat account, where the security is reflected in electronic format.
What is a Profit & Loss Account?
Profit and Loss account, or the Income Statement, is a report that summarises revenue, expenses, and income of a business, either monthly, quarterly, or annually. It presents the profit or loss of the business in a specific time period.
Its key pieces are gross profit or loss, other income, and indirect expenses.
It provides insight to the investors regarding profitability, operational efficiency, earnings per share, and other key metrics.
Comparison Table: Trading Account vs P&L Account
This table lays out the key differences between a Trading account and a Profit & Loss account:
| Key Differences | Trading Account | Profit & Loss Account |
| Objective | Its main objective is to calculate gross results from trading activities | It calculates net profit or loss, considering all incomes and expenses |
| Phase | Preparation of financial statements begins with Trading accounts | Then comes Profit & Loss accounts, after getting gross results |
| Main Theme | It has a focus on direct costs and activities of buying and selling transactions | It covers all indirect expenses and income |
| What’s Inside? | On the debit side it includes opening stock and direct expenses. And on the credit it includes sales or revenue and closing stock. | The debit side of the Profit & Loss account includes gross loss (if any) and indirect expenses. The credit side include gross profit and other incomes |
| Result | Gross profit or loss | Net profit or loss |
| Insight | Efficiency and profitability from trading activities | Overall financial performance and profitability |
When Each is Prepared (Timing in Final Accounts)
While preparing a financial statement, the first step is calculating the gross profit and which helps in calculating the net profit after making necessary deductions and adjustments.
- Trading Account: The first step is to prepare the Trading account to calculate gross results, considering the opening stock, new purchases, direct costs, sales and closing stocks.
- Profit & Loss Account: Next comes the Profit and Loss account. It uses the gross profit or gross loss from the trading account, deducts indirect expenses such as interest, taxes, and depreciation or amortisation, and adds other incomes such as interest from bonds or commission. This process calculates the net profit or may be a net loss.
Flow of Balances: From Trading → P&L → Balance Sheet
The flow of balances from trading activities to the Profit & Loss account and finally to the Balance Sheet reflects how short-term buying and selling by an investor or a company affects its long-term financial position.
- Trading Account (Gross Results): It tracks the buying and selling activities of a company or investor and only focuses on the direct costs involved in the process of trading activities. The formula below will provide a clearer view,
Gross Profit/Loss = (Opening Value + Purchases + Direct Expenses) – (Sales + Closing stock)
- Profit & Loss Account (Net Results): Then, in the P&L account, other incomes such as interest received or commission are added to the gross profit or loss, and indirect expenses are deducted.
Net Profit/Loss = Gross Profit + Other Income – Indirect Expenses
- Balance Sheet: It reflects the overall financial position of a business at a specific point of time. The net profit earned or net loss incurred is added or deducted from the owner’s equity or capital, respectively. For a company’s balance sheet, net profit adds up to its retained earnings, while net loss reduces it.
Who Uses These and Why (Stakeholder Relevance)
The table below tells who uses a Trading account and why:
| Stakeholders | Relevance |
| Trader or Investor | The main user, who buys and sells securities through it. It’s their access to markets and tools to manage risks and monitor their portfolio in real-time. |
| Brokers | The trading platform, that executes the trades, and earns from brokerage fees. Basically, they’re the middle-men between traders and the market. |
| Stock exchanges | These execute the actual trades placed through these accounts. Without the exchange, no orders would go live. |
| Regulators (SEBI) | SEBI keeps a watch to ensure transparency and prevent speculation and manipulation. |
The following table tells who uses a Profit & Loss account and why:
| Stakeholders | Relevance |
| Investor or the Company | For them it is a financial report card that shows how much they actually earned or lost over a period. |
| Investors or Shareholders | Helps to understand how stable and profitable a company or a stock is before putting money in. |
| Creditors | Used to check whether a company or business can repay loans. A consistent profit record builds trust. |
| Management or Analysts | They break down the numbers to find what’s working and what’s not, while spotting trends, costs, or revenue gaps. |
| Tax Authorities | To calculate taxable income and verify compliance. It’s part of every legit financial report. |
Practical Example with Figures & Visuals
Let’s understand the flow of balances from Trading to Profit & Loss account to Balance sheet with an example.
This is a financial statement of BK Financial Advisors Pvt. Ltd., who engages in financial consultancy as well as invests in stocks.
Trading Account
For the month ended 30 September 2025
| Particulars | Debit Amount (₹) | Particulars | Credit Amount (₹) |
| To Opening portfolio valueReliance Industries Ltd.- ₹6,03,000HDFC Bank Ltd.- ₹3,17,000 | 9,20,000 | By Sales (Reliance Industries Ltd.) | 5,00,000 |
| To Purchases(Infosys Ltd.) | 4,10,000 | By Closing Portfolio valueReliance Industries Ltd.- ₹1,03,000HDFC Bank Ltd.- ₹3,17,000Infosys Ltd. – ₹4,10,000 | 8,30,000 |
| To Brokerage and Transaction Costs | 15,000 | By Gross Profit (balancing figure) | 15,000 |
| Total | 13,45,000 | Total | 13,45,000 |
Profit & Loss Account
For the month ended 30 September 2025
| Particulars | Debit Amount (₹) | Particulars | Credit Amount (₹) |
| To Gross Profit | 15,000 | By Dividend received (HDFC Bank Ltd.) | 8,000 |
| To Salaries and wages | 75,000 | ||
| By Net Loss (balancing figure) | 82,000 | ||
| Total | 90,000 | Total | 90,000 |
Balance Sheet
As at 30 September 2025
| Liabilities | Amount (₹) | Assets | Amount (₹) |
| Owner’s Capital | 9,21,000 | Investments:Reliance Industries Ltd.- ₹1,03,000HDFC Bank Ltd.- ₹3,17,000Infosys Ltd. – ₹4,10,000 | 8,30,000 |
| Net loss | (82,000) | Cash at bank | 1,73,000 |
| Total | 10,03,000 | Total | 10,03,000 |
This example represents the role and flow of the balancing figures from each account and how each element is significant in ascertaining the financial performance.
Conclusion
Both Trading and Profit & Loss accounts play an important role in ascertaining financial performance. The Trading account reflects the gross results by considering trading activities and direct expenses, while the Profit & Loss account calculates net results after including other incomes and indirect expenses.
Understanding their flow helps investors and businesses to assess profitability, efficiency, and financial position more effectively.
FAQs
The Trading account calculates gross profit or loss from trading activities and direct costs, while the Profit & Loss account shows net profit or loss after including indirect incomes and expenses.
The Trading account shows gross profit or loss, and the Profit & Loss account shows net profit or loss.
Closing stock appears on the credit side of the Trading account and under current assets in the Balance Sheet. There is no treatment for closing stock in the Profit & Loss account.
They are prepared separately to show two stages of performance in different time periods. The Trading account reflects trading results and direct costs, while the Profit & Loss account shows overall profit after all expenses.
A debit balance in the Trading account indicates gross loss, which means direct costs are higher than trading income.
Gross profit is carried to the credit side of the Profit & Loss account as the opening balance. While gross loss is carried to the debit side.
The net profit or loss from the Profit & Loss account goes to the equity section of the Balance Sheet, which is adjusted to the retained earnings or capital.
