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Tuesday, May 21, 2024

Difference Between Trading Account And Profit and Loss Account

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Trading Account in the bookkeeping system is different from a trading account in the stock market. 

  • In the accounting system followed by all companies, a trading account is maintained in the books of a company to determine the gross profit made or loss suffered during an accounting period through all its trading activities – purchase and sale of goods/products, including direct expenses and direct incomes. 
  • On the other hand, a trading account in the stock market is an online account to be opened with SEBI and exchange-registered stockbrokers to place trade orders on stock exchanges. 

Another account in the accounting system is a profit & loss account. This account is maintained in the books of a company to determine the net profit or not loss in a financial year, unlike a trading account that ascertains gross profit/loss for the period. 

For the stock market investors and traders, this post consists of the difference between a trading account and demat account. Before that, here is the difference between trading and P & L accounts in the accounting system. 

Trading Account vs. Profit & Loss Account in the Accounting System 

  • A trading account represents the gross profit/loss in an accounting period through the purchase and sale of products, whereas a profit & loss account calculates the actual profit or loss during the specified period after deducting every expense incurred in that period in order to sustain the business, thus providing the net profit.
  • The closing balance of the trading account of a company is the opening balance of its profit & loss account. On the other hand, the balance of the P&L account is carried forward to the Capital Account.
  • A trading account does not involve indirect revenue and indirect expenses, like a P & L account. 

Thus, these two accounts are the statement of profit and losses made by entrepreneurs in their business.

Demat account and Trading account 

An investor requires a demat account and a trading account to enter the stock market. Once you determine the type of investing or trading style you want to follow, you can connect with a stockbroker to open demat and trading account online. 

Difference between trading account and demat account 

  • The main objective of a demat account is to store all your financial securities in the stock market, whereas a trading account is required to place your trade orders in the stock market on stock exchanges and maintain a record of their flows. 
  • A trading account is required for intraday trading as well as long-term investing or positional investing. However, a long-term investor requires to place a delivery trade less frequently. On the other hand, a day trader can skip a demat account as they do not hold their securities even for a whole session. They buy and sell securities in a trading session hundreds of times. 
  • Day traders using a trading account can utilize the margin trading facility and buy more securities than they can afford at any point in time, which is not available for investors using a demat account.
  • An investor looks at demat account maintenance charges as the main expense. In contrast, a day trader using an advanced trading account requires looking at trading costs and brokerage fees.
  • As an investor, you should have a basic demat account as per the mandate of the SEBI, where you can hold securities worth Rupees Two Lakhs at any point in time. If your requirements are high, then you can upgrade your account with your stockbroker. 

On the other hand, a trading account is the primary account of day traders, and there are different trading accounts based on the type of security and brokerages. These are Discount Brokerage Trading Account, Full-service Trading Account, Equity and Derivatives Trading, Commodity Trading Account.
Thus, you can open demat and trading account as per your requirements in stock trading.

Also read:- Explaining The Reason Behind Market Fall and What Lies Ahead

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