Trading account

This account is prepared to know the trading results of the business. i.e. how much gross profit the business has earned from buying and selling during a particular period. The difference between the sales and cost of goods sold is gross profit.

Profit and loss account

This account is prepared to calculate the net profit or net loss of the business. There are certain items of incomes and expenses of the business which must be taken into consideration for calculating net profit of the business.

Balance sheet

A balance sheet is a statement prepared with a view to measure the financial position of a business on a certain fixed date. The financial position of the concern is indicated by its assets on a given date and its liabilities on that date. A Balance sheet is also described as a statement showing the sources and application of capital. It is a statement and not an account.

The liabilities are shown on the left hand side. The assets appear on the right hand side. On the liabilities side, capital and other liabilities to third parties are shown. Since business is different from the businessman, capital is the amount payable to the businessman by the business. So, capital is shown on the liabilities side. On the asset side, cash and anything which is convertible into cash are shown as assets. The totals of the liabilities side and asset side must agree.


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