Note on Profit and Loss Account

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Profit and Loss
Profit and Loss

Profit and loss account is prepared after the preparation of trading account.The main objective of preparing profit and loss account is to achieve the operating results of a company at the end of accounting period. Profit and loss account is a nominal account having debit side and credit side. All the indirect expenses are recorded in the debit side of the profit and loss account and all the incomes except sales and closing stocks are recorded in the credit side of the profit and loss account. In profit and loss account if debit side is excess the credit side , the difference is called net loss. If the credit side of profit and loss account is excess than the debit side ,the difference is called net profit. It is prepared in the form of ledger.

The following is the main definition of profit and loss account:

“Profit and loss account is a statement which summarizes all indirect revenue expenses in one side which are compared with gross profit/ revenue incomes in another side and net trading income of an accounting period is assessed.” – S. Mukherjee

Objectives of Profit and Loss Account

The profit and loss account is prepared for the determination of net profit or net loss for the specific period of time. The following are the main objectives of profit and loss account:

  1. To know the amount of net profit or net loss:
    Profit and loss account compares between indirect expenses and indirect incomes which helps to find out the amount of net profit and net loss made by the business the particular period of time. It enables the businessman to make a comparison of net profit or the net loss of the current year with the previous year.

  2. To provide information about office and administrative expenses:
    Office and administrative expenses like office salaries, printing and stationary expenses, legal expenses, telephone and electricity charges, office rent, audit fees, insurance premium etc. Percentage of such expenses on sales can be determined and compared with the previous year, which helps to control such expenses.

  3. To provide information about selling and distributing expenses:
    Selling and distributing expenses like warehouse expenses, carriage on sales, packing expenses, commission on sales, advertising, traveling expenses etc. Percentage of such expenses on sales can be determined and compared with the previous year, which helps to control such expenses.

  4. Expenses
    Expenses
    To provide information about other expenses and losses:
    Depreciation, repairs and maintenance, bad debts, provision for bad debts, loss on sale of fixed assets and loss of goods in transit are some of the examples of other expenses and losses. The information of such expenses is also provided by profit and loss account. These expenses can be compared with the expenses of the previous year and remedial action can be taken for minimizing such expenses and losses.

  5. To provide information about financial expenses:
    The financial expenses which includes interest on a loan, interest on bank overdraft, bank charges etc. Percentage of such expenses on net profit can be determined and compared with the previous year, which provides pertinent information for raising a loan.

  6. Incomes
    Incomes
    To provide information about incomes and profits:
    Different types of incomes and profits are earned by the business in the process of operation of the business. Rent received, interest received, the commission received, discount received, and profit on the sale of fixed assets and bad debts recovered are some of the examples of such incomes and profits. The information of such incomes and profits is provided by profit and loss account.

  7. To make comparison:
    Profit and loss account helps to evaluate the progress of the business by comparing the amount of sales and net profit of current year with those of previous years.

  8. To measure efficiency:
    Profit and loss account helps in measuring the operating efficiency of the business by comparing the amount of net profit with the amount of operating expenses.

Importance and Advantages of Profit and Loss Account

Profit and loss account is essential to determine the operating result of the business. It helps to examine the operating efficiency of the business. The importance and advantages of profit and loss account are as follows: -

  1. It gives the actual information about net profit or net loss of the business fro an accounting period.
  2. It account gives the actual information about indirect expenses.
  3. It serves to determine the ratio between net profit to sales.
  4. It helps in determining the ratio between net profit to operating expenses.
  5. It helps in controlling indirect expenses.
  6. It helps to prepare plans and policies by making a comparative study of net profit, indirect incomes, and indirect expenses.

Ruling or Specimen of Profit and Loss Account

Profit and loss account is prepared after preparation of trading account. The specimen of profit and loss account is as follows: -

Specimen of Profit and Loss Account
Specimen of Profit and Loss Account

  • Profit and loss account is the second step of final accounts. 
  • Profit and loss account is a financial statement, which helps to know the operating result of the business. It is prepared in the form of ledger.
  • The profit and loss account is prepared for the determination of net profit or net loss for the specific period of time. 
.

Very Short Questions

Profit and loss account is the second step of final accounts. It is prepared to ascertain the net profit or the net loss of the business during the accounting period. It is prepared after the preparation of trading account. It is prepared by transferring gross profit or gross loss from the trading account. Hence, profit and loss account is a financial statement, which helps to know the operating result of the business. It is prepared in the form of ledger.

According to S. Mukharjee,“Profit and loss account is a statement which summarizes all indirect revenue expenses in one side which is compared with gross profit/ revenue incomes in another side and net trading income of an accounting period is assessed.”

From the above definition, it is clear that profit and loss account is a financial statement, which helps to know the operating result of the business. It is prepared in the form of ledger.

Profit and loss account is essential to determine the operating result of the business. It helps to examine the operating efficiency of the business. The importance and advantages of profit and loss account are as follows: -

  1. It helps to determine the amount of net profit or net loss made by the business during the particular period of time.
  2. It helps to know the amount of office and administrative expenses, selling and distributing expenses, financial expenses and other expenses and losses.
  3. It helps to know the percentage of net profit on sales.
  4. It helps to determine the percentage of operating expenses on sales.
  5. It helps to determine the tax liability of the business.
  6. It helps to prepare plans and policies by making a comparative study of net profit, indirect incomes, and indirect expenses.

Solution:

Solution:

Profit and Loss Account of Nimit Traders

For the year ended 31st Chaitra

Dr.

Cr.

Particulars

Amt (Rs.)

Particulars

Amt (Rs.)

To gross loss b/d

To office rent

To office insurance

To legal charges

To salesman salary

To bank charges

To discount allowed

To telephone charges

To carriage on sales

To bad debts

52,500

12,250

7,500

7,750

3,500

900

1,200

2,000

2,500

800

By dividend received

By compensation received

By net loss c/d

2,500

5,000

83,400

90900

90900

0%
  • ______ is a financial statement, which helps to know the operating result of the business.

    Profit and loss account
    Trial balance
    Trading account
    Balance sheet
  • Profit and loss account is prepared after the preparation of ______.

    trading account
    ledger accounts
    trial balance
    balance sheet
  • "Profit and loss account is a statement which summarizes all indirect revenue expenses in one side which is compared with gross profit/ revenue incomes in another side and net trading income of an accounting period is assessed." Who said this?

    S.P. Arora


    J. R. Batliboi


    A. Ashley


    S. Mukharjee


  • Which one of them is not the objective of profit and loss account?

    To provide information about expenses and losses


    To provide information about other expenses and losses


    To provide information about office and administrative expenses


    To provide information about selling and distributing expenses


  • The expenses, which are incurred for fulfilling the financial need of the business, are known as ______.

    direct expenses


    outstanding expenses


    accrued expenses


    financial expenses


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