Profit and loss account

The points of distinction between Profit and Loss Accoont and Balance Sheet are:

(i) A profit and loss account shows the profit or loss made by the business during a particular period. While a balance sheet shows the financial position of the business
on a particular date.

(ii) A profit and loss account incorporates those items which are of a revenue nature while a balance sheet incorporates those items which are of a capital nature.

(iii) Of course, both profit and loss account and the balance sheet are prepared from the Trial Balance. However, the accounts transferred to the profit and loss account are finally closed while the accounts transferred to the balance sheet represent those accounts whose balances are to be carried forward to the next year.

MANUFACTURING ACCOUNT

In the preceding pages, we have explained the preparation of the Trading and Profit and Loss Account from the point of view of a trader, i.e., a person who purchases and sells goods. However, a person may manufacture goods by himself for selling them at a profit. In case of such a person, i.e., a manufacturer, it will be necessary to ascertain the cost of manufacturing the goods. In his case, therefore, the profit or loss made by him will be ascertained by preparing the following three accounts:

(i) Manufacturing account This account gives the cost of the goods manufactured by a manufacturer during a particular period.

(ii) Trading account This account gives information about the gross profit or loss made by a manufacturer in selling the manufactured goods. In case a manufacturer also functions as a trader, i.e., besides manufacturing and selling goods of his own, he also purchases arid sells goods of others, he will be a manufacturer-curn-tracler. In such a case, his Trading Account will disclose not only the profit made by him on selling his manufactured goods, but also the profit made by him in selling the goods purchased by him from others.

(iii) Profit and loss account This account gives the overall profit or loss made or suffered by the manufacturer of manufacturer—cum—trader during a particular period.

Distinction between Profit and Loss Account and Balance Sheet

Manufacturing Account