The Trading Account simply tells about the gross profit or loss made by a businessman on purchasing and selling of goods. Jt does not take into account the other operating expenses incurred by him during the course of running the business. For example, he has to maintain an office for getting orders and executing them, taking policy decision and implementing them. All such expenses are charged to the Profit and Loss Account. Besides this, a businessman may have other sources of income. For example, he may receive rent from some of his business properties. He may have invested surplus funds of the business in some securities. He might be getting interest or dividends from such investments. In order to ascertain the true profit or loss which the business has made during a particular period, it is necessary that all such expenses and incomes should be considered.
Important points regarding Profit and Loss Account
Gross Profit or Gross Loss. The figure of gross profit or gross loss is brought down from the Tading Account. Of course, there will be only one figure, i.e., either of gross profit or gross loss.
Salaries. Salaries payable to the employees for the services rendered by them in running the business being of indirect nature are charged to the Profit and Loss Account. In case of a partnership firm, salaries may be allowed to the partners. Such salaries will also be charged to the Profit and Loss Account.
Interest: Interest on loans whether short-term or long-term is an expense of an indirect nature and, therefore, is charged to the Profit and Loss Account. However, interest on loans advanced by a firm to third-parties is an item of income and, therefore, will be credited to the Profit and Loss Account.
Commission: Commission may be both an item of income as well as an item of expense. Commission on business hroughtby agents is an item of expense while commission earned by the business for giving business to others is an item of income, Commission to agents is, therefore, debited to the Profit and Loss Account while commission received is credited to the Profit and Loss Account
Bad debts: Bad Debts denotes, the amount lost from debtors to whom the goods were sold on credit. It is a loss and therefore, should be debited to the Profit and Loss Account