Final accounts – an understanding – Key statements

In the last upload to the Learning & Development group, I had shared a sample of a vertical format of a Profit & Loss Account.

In India, we normally use the “T” form. See the image below.

fao pnl t form  

Now, in our working quite often, we would have seen that the profit & loss account or the income & expenditure statement is not the only statement prepared for ascertaining the status of the current period operations.

Those of you, who are or have been accounting students, will surely know of Trading Account and a Manufacturing Account.

Trading account is prepared for entities whose business is to buy products and then sell them, making a margin of profit on the difference between the purchase and sale price.

A manufacturing account on the other hand is prepared for entities which purchase raw materials, process them in a manner to create a new product and then sell them.

So, what is the difference between these accounts and the profit & loss account?

The key element, and a crucial one is whether the nature of transaction is direct or indirect…

I will leave you today with this thought. Do a Google search and try to explore what direct / indirect means, and upload your comments on this post.

I will simplify this next week.

Mohit Gupta