Profit & Loss Account why and How it is prepared and its format

Table of Contents

What is Profit and Loss Accounts ?

Profit and Loss Account is a type of financial statement which shows the result of business activities during an accounting period (i.e. Profit or loss).

It directly related and considers reported income and expenses to an organization measuring the performance in terms of profit & loss.

Trading Accounts only reveal the gross profit earned because of buying and selling of goods .

However, a business owner has to carried out number of expenses which are not taken trading account.Hence, organization is more interested in knowing the net profit earned or loss incurred during a year.

A profit-and-loss account is prepared, which comprises all the items of losses and gain relating to the accounting period .

Why to prepare Profit and Loss Accounts

It determines the Net Profit or Net Loss ;

A trading account only revealed the Gross Profit or Gross Loss because of trading activities, whereas the profit-and-loss accounts revealed the net profit or ne loss available to the proprietors and credited to his capital accounts. if profit or debited to his capital if loss .

It helps to analyze with the preceding year’s Profit.

We can compare the net profit of the present year with that of the previous year .It facilitates the organisation to know whether the business is being managed effectively

It facilitates to control of expenses :

Profit and loss accounts help to compare various expenses with the expenses to net profit .It calculates and compared with the similar ratio of the previous year .Such relation will be helpful in taking concrete steps for managing the unnecessary expense.

It helps in preparing balance sheet .

We can only prepare a balance sheet after ascertaining the Net Profit on preparing profit-and-loss account.

Format of a Profit and Loss Account

Profit and Loss Account for the year ending ……………..

Particular	Amount	Particular	Amount
To Gross Loss b/d (Transfer from Trading (account)	Xxxx	By Gross Profit b/d (Transfer from Trading (account)	Xxx
Office expense		By Rent from Tenant	Xxxx
To salary	xxx	BY rent (Cr.)	Xxx
To salary and Wages	Xxx	By discount received	Xxx
To rent rates and taxes	Xxx	By discount (Cr.)	Xxx
To printing and stationary	Xxx	By commission received	Xxx
To postage and telegram	Xxx	By interest on Investment	Xxx
To lighting	Xxx	BY Dividend on shares	Xxx
To insurance premium	Xxx	By bad debts recovered	xxx
To telephone charges	Xxx	By apprentice premium	Xxx
To legal Charges	Xxx	By profit on sale of assets	Xxx
To lighting	Xxx	By dividend on shares	Xxx
To insurance premium	Xxx	By bad debts recovered	Xxx
To Audit fees	Xxx	BY apprentice premium	xxx
To travelling expenses	Xxx	By profit and sale of assets	Xxx
To establishment Expense	Xxx	By income and other source	Xxx
To trade expense	Xxx	By miscellaneous receipts	Xxx
To general expense	Xxx	By loss (if any) Transfer to capital a/c	xxx
Selling and distribution Expense	Xxx
To carriage outward	Xxx
To carriage sale	Xx
To advertisement	Xxx
To commission	Xxx
To brokerage	Xx
To bad debts	Xxx
To export duty	Xxx
To Packing charges	Xx
To delivery charges	Xx
To stable expense	Xxx
Miscellaneous expense
To discount	Xxx
To repairs	Xxx
To depreciation	Xxx
To interest (Dr.)	Xxx
To bank charges	Xxx
To entertainment expenses	Xxx
To conveyance expense	Xxx
To donation and charity	Xxx
To loss on sale of Assets	Xxx
To net profit (transfer to capital a/c)
	xxxx		xxxxx

How to prepare Profit and loss accounts

A profit-and-loss account opened with the amount of gross profit or loss carried down from the trading account.

After ,preparation of trading account, all expenses and losses which are not debited in trading account are now written in Profit and loss accounts .These expenses include administrative expense, selling expense and distribution expense.

Similiary All income not credited in trading account are now credited to profit-and-loss accounts.

We call these indirect expenses.

Expenses or Loss which are written on Debit side of Profit and Loss accounts.

Gross Loss: If trading accounts reveal Gross Loss.The Gross Loss is recorded on Debit side of Profit and loss accounts.
Office and administrative expense : Such as salary of office employees office rent ,lighting ,postage ,printing ,legal charges audit fee etc.
Miscellaneous expense : These expense includes such as interest on loan ,,interest on capital, repair charges ,depreciation etc.
Selling and distribution expense : Such as advertising charges , commission ,carriage on sales or carriage outward, etc.

Income or gain written on credit side of Profit and Loss Accounts.

Gross Profit : If trading accounts reveal Gross profit, it is to be transferred to Credit side of Profit and loss accounts.
Other incomes and Gains : All items of incomes and gain are shown on the credit side of profit and loss accounts such as income from shares or investment , Bad debts recover, rent , divident received ,commission received , discount allowed, etc.

Difference between Profit and Loss account and Balance sheet

Profit and Loss Accounts	Balance Sheet
The Profit and Loss Account is a depiction of the entity’s revenue and expenses.	A Balance Sheet gives an overview of the assets, equity, and liabilities of the company,
The Profit and Loss account discloses the entity’s financial performance.	The Balance Sheet reveals the entity’s financial position
The Profit and Loss account is prepared for a particular period.	The Balance Sheet is prepared at a particular date, usually the end of the financial year
The Profit and Loss account balance transfer to Balance sheet	The Balance sheet is prepared on the basis of the balances transferred from the Profit and Loss account.