Difference Between a Trading Account and a Profit and Loss Account

Edited by Diffzy | Updated on: September 02, 2023

       

Difference Between a Trading Account and a Profit and Loss Account

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Introduction

People often think that only wealthy professionals and bureaucrats can gain phenomenal returns by trading their commodities and, in return, gathering a hefty amount of money. But it's not the case now; with the advent of change, commoner or retired people, young professionals, or even housemakers can avail themselves of the benefit of this system as it has been found that they are also showing a keen interest in the stock and commodity trading activities.

The very reason for this sudden involvement is due to the increased awareness among them over different sectors and the country's progress; with everything going digitalized, the chances of safekeeping and frauds have decreased, and the introduction of new systems like that of trading accounts and the profit and loss accounts have shown better results when it comes to raising profits.

Trading vs. Profit and Loss Account

A trading account can be best described as an account that can be used for buying and selling securities like mutual funds, commodities, insurances, and more, while on the other hand, a profit and loss account is the report of the expenses or revenues being carried out in a financial year.

Difference Between Trading Account and Profit and Loss Account in Tabular Form

Parameter for ComparisonTrading AccountProfit and Loss Account
DefinitionIt is the buying and selling of the stock which in turn incurs huge profits.It is the statement of the gains and losses that an establishment has experienced in a financial year.
Required MemberOne cannot function through this account without a stock broker.One does not need any registered member.
PurposeIt is purposefully made for the gross profit of a business.It is made for the net profit of an establishment.
TimingTrading accounts are prepared before the profit and loss accounts.But, the profit and loss accounts are made after the trading account.
BalanceBalancing is not required for the opening of the account.A proper is required of that of the trading accounts as well.
Holding of AccountsIt is mandatory to have additional accounts while trading.It is not mandatory to have different accounts.

Trading Account

As we have understood what a trading account is, let us understand the other areas of the account,

THE NEED

As we know, in India, investors cannot directly trade in stocks; they have to carry out the same through their registered members. Earlier, the brokers used to buy and sell shares physically, but through this emerging method, it can be done through their trading accounts with the help of their registered stock brokers.

Stock brokers are a mandate for this system as they are the members who are authorized to carry out the formalities within the account due to the correct knowledge and information about the market. The hype of the online methods has made the exchanges more chasing because the investors can purchase or sell from anywhere at any time.

How to Open a Trading Account?

Now, to open a trading account, one needs to have a Demat account, which will not particularly allow for trade, but it just acts as a watershed area by which trading can be possible. So, we can say that the Demat account will work as a part of a chain while using the trading account.

Let's understand it with an example – If A has placed an order for the purchase of shares, Firstly, the transaction is processed, and once it's done, it will be then credited to A's account(demat), and the proportionate amount of funds will be deducted from A's account. Lastly, when the sale order is passed, the preconditioned shares will be removed from the demat account, and the amount will be transferred back to A's account.

  1. Firstly, one should choose a registered broker; it's very important to have one cause without one broker, a person cannot carry out their work. Generally, people do not have a full knowledge of the markets and the stock exchanges, for which these members are compulsory for feasibility.
  2.  Secondly, one should choose a broker offering trading on both NSE and BSE
  3.  Thirdly, to check the features of a trading account, it's always suggested to every investor to look into the rules and the regulations of a trading account before investing to make a clear-cut decision over using the same.
  4.  Fourthly, if an investor is satisfied with the features, then the next step is to fill out the account opening and the KYC (Know Your Client) forms.
  5.  Fifthly, one has to upload all the documents which the system asks for general information.
  6.  Sixthly, completing the verification process, denotes that a person has passed all the steps and has entered and submitted all the documents correctly.
  7.  Lastly, the investor has to sign all the documents and then submit the application.

Types of Trading Accounts

  1. EQUITY TRADING ACCOUNT – This type of account can be used not only for securities but also for option trading; though they are not versatile with the Initial public offerings, in this type, there is no need for additional demat accounts.
  2.  COMMODITY TRADING ACCOUNTS - One can understand that this type of account enables one to sell and buy different commodities like tea, sugar, and more.
  3.  ONLINE AND OFFLINE TRADING ACCOUNTS - This type allows one to hold their accounts in both ways; like in the offline system, one needs to visit the broker and then place orders, but in the online system, it can be done directly through the trading apps.
  4.  TWO-IN-ONE AND THREE-IN-ONE TRADING ACCOUNTS – Generally, for the functioning of a trading account, one needs to have a bank account, a trading account, and demat accounts where shared are held but at times, some brokerage offers a two-in-one system where both the demat and the trading accounts are held together, and on the other hand some offer a three in one where all the three accounts are combined for that more feasibility and easy transfers.
  5.  DISCOUNT AND FULL-SERVICE TRADING ACCOUNTS – Now, the accounts can be differentiated in the way of services as well; in discount service, the investors are only offered the trading, and with no value additions, but in the full service, the investors have the right to view the reports, the market areas, to have suggestions for a better investment.
  6.  ALL IN ONE ACCOUNT – This type is the newest, wherein one is allowed to trade everything under one head, like stocks, commodities, investment plans, SIPs, IPOs, and more.

Profit and Loss Account

Think of a situation wherein you are establishing a business with huge turnovers. What will be your financial strategies to look over the gains and losses of your company?

Surely, there will be different areas to be looked upon, but one of the main work would be to look over the activities carried out by your establishment in a year, which can be done through the Profit and loss account regulation or financial reports.

A profit or loss account, or it can be called a profit or loss statement, is the report of the activities, expenses, or revenues incurred in a year. The overall earnings and the expenditures reflected in the P&L account help to indicate the business performance of a company in a year and also help the members find a positive approach against the negative reflections.

THE NEED

As we know, in the existing world, each and every company's head has only one motive of making their business flourish, and the very reason why this system has been introduced is to keep them updated with their accounts. The P&L account, in a way, helps an establishment to know about their generating profits and losses.

  1. It acts as a watchdog of every company's actions and then gives the results, which are a reflection of their work.
  2.  It helps to provide a more efficient way of analyzing the situations in a company through which an entity can stay balanced.
  3.  It helps to fulfill the auditing and the returning requirements for tallying their gains and losses.
  4.  The account or report helps summarize the business costs, expenditures, levied taxes, borrowings, and more in a single platform.

How Is a P&L Account Prepared?

The account is prepared through three easy steps,

Step – 1 – Create ledger accounts

Firstly, it is important to have ledger accounts. Ledger accounts are nothing but a sum of all the details of the transactions entered by an entity over a year. It carries all the account openings, the debits, and the credits for which there are separate ledger accounts.

Step – 2 – Trial balance

Now, the trial balance sheets are the documents that incorporate all the ledger accounts, and accordingly, a report is prepared based on them, known as the trial balance sheets.

Step – 3 – Curating The profit and loss statement

Lastly, based on the trial balance sheets, the balanced figures are drafted into a profit and loss report, which also includes the debts of the company.

Types of Profit and Loss Statement

There are two types of profit and loss statements-

  1. Single-step P&L account – This is the most used type of account as all the expenses and revenues are listed in one place, after which the net profit or loss is calculated. It is just a straight type that doesn't carry any kind of deep detailing.
  2.  Multi-step P&L account – This type is, however, a little more exhaustive than the first type as this requires a lot of detailing; under this, all the expenses and revenues are bifurcated into different categories like the areas of expenses, the operating expenses, or the past revenues. After which, the gross profit is first determined, followed by the net profit.

Main Difference Between Trading and P&L Account in Points

After taking a look at both accounts separately, the main distinction that arises is that-

  1. The purpose of both accounts is that the former is concerned with the gross determination while the latter is concerned with the net profit determination.
  2.  The trading account is mainly concerned with buying and selling shares, while the profit and loss account is concerned with determining the net profit of a year; it could even include the above action as a point to calculate the net.
  3.  The profit and loss account does not have a feature of multiple links, which is important in trading accounts.

Conclusion

Although there are a lot of different systems that have since past years gained a lot of momentum and will do more in the coming years, it's all about the development as a challenge through which every country grows even financially, like in the case of China as financial market persistently develops, the market risk of commercial banks trading account and its risk management have become a heated topic for the financial institutions. What we have discussed are among them, but it depends upon each and every individual as to how they engage themselves for the benefit as both have their own features, so it depends upon different minds as to how they pursue it.


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"Difference Between a Trading Account and a Profit and Loss Account." Diffzy.com, 2023. Tue. 03 Oct. 2023. <https://www.diffzy.com/article/difference-between-a-trading-account-and-a-profit-and-loss-account>.



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