Preparation of Trading and Profit and Loss account (a/c)

The "Trading and Profit & Loss a/c" is a ledger account. Like all ledger accounts, the postings in this ledger account also flow from the journal. "No Journal No Ledger".

• Transactions making up the Trading and Profit & Loss a/c

The transactions relating to the journal entries that would go into the "Trading and Profit & Loss a/c" are not ones that are take place in the ordinary course of business. These are transactions that are specifically meant to create this "Trading and Profit & Loss a/c". Consider the above formula for ascertaining the profit or loss,
Profit = Sum of balances in Nominal accounts with a Credit Balance
− Sum of balances in Nominal accounts with a Debit Balance .

» For Ascertaining the sum of balances in Nominal Accounts with a Debit Balance

This is done by transferring the balances in the nominal accounts with a debit balance, to an account by name "Trading and Profit & Loss a/c".

Transferring a debit balance from one account to a second results in the second account being debited and the first account being credited.

Therefore the Journal Entry would be

Journal in the books of M/s __ for the period from ____ to _____
Date	V/R No.	Particulars		L/F	Debit Amount (in Rs)	Credit Amount (in Rs)
March 31st	–	Trading and Profit & Loss a/c       To Nominal a/c [with a debit balance]	Dr	– –	xxxx	xxxx
		[For the debit balances in the nominal accounts transferred to the "Trading and Profit & Loss a/c" for the purpose of ascertaining the profits on the last day of the accounting period ]

» For Ascertaining the sum of balances in Nominal Accounts with a Credit Balance

This is done by transferring the balances in the nominal accounts with a credit balance to an account by name "Trading and Profit & Loss a/c".

Transferring a credit balance from one account to a second results in the second account being credited and the first account being debited.

Therefore the Journal Entry would be

Journal in the books of M/s __ for the period from ____ to _____
Date	V/R No.	Particulars		L/F	Debit Amount (in Rs)	Credit Amount (in Rs)
March 31st	–	Nominal a/c [with a credit balance]       To Trading and Profit & Loss a/c	Dr	– –	xxxx	xxxx
		[For the credit balances in the nominal accounts transferred on the last day of the accounting period to the "Trading and Profit & Loss a/c" for the purpose of ascertaining the profits.]

• Trading and Profit and Loss Account (a/c)

Thus the "Trading and Profit & Loss a/c" would appear as follows

Dr

Trading and Profit & Loss a/c

Cr

Date	Particulars	J/F	Amount (in Rs)	Date	Particulars	J/F	Amount (in Rs)
31/03/06 31/03/06 31/03/06 31/03/06 31/03/06	To Nominal a/c 1 [Dr] To Nominal a/c 2 [Dr] To Nominal a/c 3 [Dr] ... ...	– – – – –	xxx xxx xxx xx xxx	31/03/06 31/03/06 31/03/06 31/03/06 31/03/06	By Nominal a/c 1 [Cr] By Nominal a/c 2 [Cr] ... ...	–	xxx xxx xxx xxx xxx
	sub-total		3,24,000		sub-total		5,80,000
31/03/06	To Bal (Profit)	–	2,56,000
	Total		5,80,000		Total		5,80,000

Thus the "Trading and Profit & Loss a/c", is nothing but a consolidated account formed by transferring the balances in the nominal accounts.