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 under 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 actual performance of the organization.
The accounting of expenditure 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.
In terms of the balance sheet, two prominent elements help the finance team to work on the profit-loss statements. One is the trading account and the other is the manufacturing account.
Trading Account vs Manufacturing Account
The main difference between Trading Account and Manufacturing Account is, the trading account gives the Gross profit made by the company whereas the Manufacturing account is the cost of the product manufactured by the company. a Manufacturing account’s status affects the trading account‘s results, whether it is a profit or a loss.
Comparison Table Between Trading Account and Manufacturing Account (in Tabular Form)
| Parameter of Comparison | Trading Account | Manufacturing Account |
|---|---|---|
| Meaning/Definition | Trading Account is the final financial statement created considering all the elements of cost, expenditure, and income. | Manufacturing Account is the account of expenses incurred in manufacturing the product. |
| Result | Trading Account gives the verdict 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’s information to conclude. | 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 the one that determines the profitability of a company. The trading account is the collection of all expenditures, known and unknown costs with the income which helps the finance team of the company to 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?
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.
It can be the employees’ salary, industrial equipment rent, building lease cost, raw material expense, its transportation expenses all come under one roof called 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 to see where the maximum expenditure is made and make alternate arrangements if any.
The cost of the product is not including the advertisement or marketing expenses. The manufacturing account holds good for the raw cost incurred while manufacturing the product.
This along with certain other features decide 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.
References
- https://pubs.aeaweb.org/doi/pdf/10.1257/aer.97.2.351
- https://pdfs.semanticscholar.org/e6c8/4f3fcc3cc25f169e0f7bb1e75c9019d433d5.pdf