What is a Profit and Loss Account?
A profit and loss account (P&L account) determines the company’s net profit or loss for the accounting period. It is one of the accounts required to prepare a balance sheet. It is created after determining the gross loss or profit from the trading account as it carries down the gross loss or profit from the trading account.
A P&L account records all expenses and profits incurred or earned by a business. These can be direct or indirect expenses. After deducting or adding the expenses from the profit or to a gross loss, the value obtained will be net profit or a company’s net loss for the current accounting period.
What is a Trading Account?
A trading account can be defined in two contexts – first for businesses and second in the stock market.
A Trading Account in the Context of Business
A trading account in a company is used to calculate the gross profit earned by the business. The calculated figure for Net loss or Net Profit is carried forward to the company’s Balance Sheet. These accounts are used to prepare a balance sheet of the company.
- Trading Account Definition in the Stock Market
A trading account is one of the mandatory accounts in the online trading system. A trading account facilitates convenient, and secure online stock trading.
- The account allows you to make a buy or sell trade in the stock market.
- You need to open a trading account with a stock broker to access a trading platform. This trading platform is linked to multiple stock exchanges to process trade orders.
- Trades placed using a trading account are processed on online stock exchanges. You cannot approach a stock exchange directly. Only SEBI registered stockbrokers can connect you with stock exchanges.
Therefore, it is the primary requirement with a demat account to make an online trade in the stock market.
Thus, trading and profit and loss accounts altogether are prepared by a business to determine the profit earned or losses incurred. The calculated figure is used while preparing the balance sheet of the company.
How A Trading Account Works in the Stock Market:
A trading account links your online demat account and bank account to smooth the trading process.
- When you place a trade order using the broker’s trading platform through your trading account, the broker forwards it to the stock exchange. The exchange processes the order after finding a trade order with the same securities in the same number.
- The clearing house of the exchange verifies and clears the transaction. The proportionate transaction value for the securities will be deducted/added from/to your linked bank account.
- After the order clears, the securities get debited or credited from/to your demat account with the number of securities you sold/purchased.
You need to log in to your trading account on a web-based or mobile app-based trading platform, select the securities you want to trade, and place the trade order. The trade will be processed in the relevant stock exchange.
Types of Online Trading Accounts in the Stock Market:
- Equity and Derivatives Trading Account: It is a regular trading account that allows intraday trading plus delivery and to trade stocks, mutual funds, futures, and options. This is the account for short-term investors or traders who invest frequently.
- Commodity Trading Account: To trade commodities, like crude oil, copper, silver, gold, etc., you need to open a commodity trading account. It allows you to trade commodity futures. You are not bound to link it with your Demat account.
Thus, if you are interested in the stock market, open a demat account online with a trading account with a reputed discount stockbroker and trade prudently to make significant returns.