A company’s profit and loss depend on a lot of factors. Many internal aspects as much as external aspects too.
Accounting the same to arrive at an unbiased result shall give proper information to the management about the situation of the company for that financial year. It is all on the numbers that the finance team arrive at with the organisation’s actual performance.
The accounting of expenditures and calculating the net sales all come under one roof called the balance sheet. The balance sheet has many elements, and it finally gives the result, whether it is a gross profit or a gross loss.
Regarding the balance sheet, two prominent elements help the finance team work on the profit-loss statements. One is the trading account, and the other is the manufacturing account.
Key Takeaways
- A trading account is an account used to record the buying and selling of securities, such as stocks, bonds, and other financial instruments. In contrast, a manufacturing account calculates the cost of goods a manufacturing business produces.
- The trading account determines the gross profit or loss from trading activities, while the manufacturing account focuses on the cost of goods produced, including raw materials, labor, and overhead expenses.
- Both accounts serve different purposes within a business’s financial accounting system, with the trading account primarily used by trading and investment companies and the manufacturing account used by manufacturing businesses.
Trading Account vs Manufacturing Account
The final financial statement produced after taking into account all cost, spending, and income components is the trading account. It deals with finished goods only. While the account for costs spent during product manufacture is known as the manufacturing account. It deals with the raw material.
Comparison Table
| Parameter of Comparison | Trading Account | Manufacturing Account |
|---|---|---|
| Meaning/Definition | Trading Account is the final financial statement created considering all cost, expenditure, and income elements. | Manufacturing Account is the account of expenses incurred in manufacturing the product. |
| Result | Trading Account gives the verdict of whether it is a profit or a loss for the company in a financial year. | Manufacturing Account gives the cost of the product manufactured. |
| Features | Trading Account features Manufacturing account information to conclude. | The manufacturing account features every expenditure caused while the product is manufactured. |
| Hierarchy of Statements | Trading Account helps create the final balance sheet of the company. | Manufacturing Account details are required to create a trading account. |
| Accounts for | Trading Account displays direct revenue and direct expenses. | Manufacturing Account displays operating expenditure in manufacturing the product. |
What is Trading Account?
A Trading account is one that determines the profitability of a company. The trading account collects all expenditures and known and unknown costs with the income, which helps the company’s finance team decide the profit or loss for that financial year.
The trading account is the blueprint of expenses in various departments and entities as well. This will majorly help the management take decisions about increased profits.
The trading account takes all expenses into account, which also includes the manufacturing account’s information. The cost of the goods manufactured and sales numbers predominantly determine the profit-loss statement for the company.
The trading account gives the gross profit for a company. It is different from the net profit made by the company.
Net profit is always less than the gross profit. Still, the trading account matters the most as it gives solutions to many highly spent areas to cut down costs at an early stage.
The trading account will help make informed decisions to improve certain aspects to increase profit. Trading account help trigger the sales team of the organization as well.
The precise version of the trading account marks the development of the company at any stage of the financial year.
The trading account is the last step towards making the balance sheet for any company.
What is Manufacturing Account?
The manufacturing account is the cost of manufacturing a product for the company. It includes a lot of factors that influence the price of manufacturing the product.
The employees’ salary, industrial equipment rent, building lease cost, raw material expense, and transportation expenses all come under one roof called the Manufacturing account. Indeed, the data from the manufacturing account impacts the trading account a lot.
The manufacturing account’s data will sure shot tell if the company is making a profit or a loss for that financial year. This also ensures seeing where the maximum expenditure is made and making alternate arrangements, if any.
The cost of the product does not include advertisement or marketing expenses. The manufacturing account holds good for the raw cost incurred while manufacturing the product.
This, along with certain other features, decides the price of the product too. The sales number with that price and the cost of the goods will feature in the trading account to get the gross profit or loss.
The manufacturing account is the last but one step for preparing the balance sheet for the company. It is the last step before sketching the trading figures.
Main Differences Between Trading Account and Manufacturing Account
- The main difference between a trading account and a manufacturing account is that the trading account gives the company profitability. In contrast, the manufacturing account gives the cost of the product manufactured by the company.
- The trading account is the verdict; it gives the company’s gross profit or gross loss with all the elements of cost, expenses, and income in place. The manufacturing account gives the cost of the goods manufactured by taking all the expenses made while preparing the product.
- Trading Account features the manufacturing account’s information, while the Manufacturing account has data on expenses incurred while manufacturing the product like the wages, cost of raw materials, rent, etc.
- The trading account is the last step of preparing the balance sheet of the company while the Manufacturing account data is required to prepare the trading account statement.
- The trading account gives direct revenue and expenses while manufacturing accounts give the product’s operational expenses.
- https://pubs.aeaweb.org/doi/pdf/10.1257/aer.97.2.351
- https://pdfs.semanticscholar.org/e6c8/4f3fcc3cc25f169e0f7bb1e75c9019d433d5.pdf
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