Note on Items Included in Profit and Loss Account

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Profit and Loss
Profit and Loss

Profit and loss is prepared in form ledger. So, it contains two sides i.e. debit and credit side. The items included in profit and loss account are as follows: -

Items relating to Debit Side

  • Office and administrative expenses
    All the office and administrative expenses like office salaries, printing and stationery expenses, legal expenses, telephone and electricity charges, office rent, audit fees, insurance premium etc. are debited in profit and loss account. These expenses incurred in managing the whole activites of the business.

  • Selling and distributing expenses
    All the selling and distributing expenses like warehouse expenses, carriage on sales, packing expenses, commission on sales, advertising, traveling expenses etc. are debited in profit and loss account. These expenses incurred in maintaining and promoting sales.

  • Financial expenses
    Bank Charges
    Bank Charges

    The financial expenses that include interest on the loan, loan, interest on bank overdraft, bank charges etc. are debited in profit and loss account.These expenses are incurred for the steady supply of financial necessary for the business.

  • Depreciation and repair & maintenance
    Depreciation is the loss for a business because it is the permanent decrease in the value of fixed assets due to their continuous use. The repair & maintenance expenses are incurred to maintain the working condition of the fixed assets.

  • Other expenses and losses:
    Other expenses and losses are included on the debit side of the profit and loss account. Bad debts, provision for bad debts, loss on sale of fixed assets, loss of goods in transit etc. are some of the other expenses.

Items relating to Credit Side

  • Indirect incomes:
    Profit and loss account contains all the indirect incomes in its credit side. Incomes from commission and discount are the examples of indirect incomes.

  • Profits
    Profits
    Other incomes and profits:
    Profit and loss account contains all other incomes like interest on investment, interest on deposit, dividend received, bad debts recovered etc. it also includes profit on sale of fixed assets, profit on sale of investment etc.

Procedures of Preparing Profit and Loss Account

The procedures of preparing the profit and loss account can be explained as follows: -

  1. Transferring gross profit or gross loss:
    The amount of gross profit is transferred from the trading account in the credit side of the profit and loss account with the words “By gross profit b/d”. If there is the gross loss in the trading account, it is transferred in its debit side with the words “To gross loss b/d” under particulars column.

  2. Placing expenses and losses in debit side:
    Items relating to office and administrative expenses, selling and distributing expenses, financial expenses, depreciation and repairs and maintenance expenses and other expenses and losses are debited in the profit and loss account.

  3. Placing incomes and profits in credit side:
    Items relating to indirect incomes and other incomes and profits are credited in the profit and loss account.

  4. Balancing and closing the profit and loss account:
    Profit and loss account is prepared to know the amount of net profit or net loss. It is determined by balancing the profit and loss account. The following procedures are followed for balancing and closing the profit and loss account: -
    • Find out the heavier side
    • Put the difference amount in lighter side to make total of both sides equal
    • Write the words “To net profit c/d” if credit total exceeds debit total or “By net loss c/d” if the debit total exceeds credit total against the difference amount under particulars column.
    • Draw double parallel lines after the total amount of both sides to close the accounts.

  • Profit and loss account is prepared in the form of ledger and hence it contains two sides: debit and credit. 
  • All the expenses, which are incurred in the process of operating the business, are known as office and administrative expenses.
  • Expenses, which are incurred in the process of selling and distributing the goods, are known as selling and distributing expenses. 
  • The expenses, which are incurred for fulfilling the financial need of the business, are known as financial expenses. 
  • Depreciation is the permanent decrease in the value of fixed assets due to their continuous use. 
  • While placing the items in the profit and loss account, expenses and losses are debited and incomes and profits are credited. 
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Very Short Questions

The following are the items relating to debit side of the profit and loss account:

  • Office and administrative expenses:
    All the expenses, which are incurred in the process of operating the business, are known as office and administrative expenses. These expenses are incurred in managing the whole activities of the business. It includes the expenses like office salaries, printing and stationary expenses, legal expenses, telephone and electricity charges, office rent, audit fees, insurance premium etc.

  • Selling and distributing expenses:
    Expenses, which are incurred in the process of selling and distributing the goods, are known as selling and distributing expenses. These expenses are incurred in maintaining and promoting sales. It includes the expenses like warehouse expenses, carriage on sales, packing expenses, commission on sales, advertising, travelling expenses etc.

  • Financial expenses:
    The expenses, which are incurred for fulfilling the financial need of the business, are known as financial expenses. These expenses are incurred for steady supply of financial necessary for the business. These expenses include interest on loan, interest on bank overdraft, bank charges etc.

  • Depreciation and repair & maintenance:
    Depreciation is the permanent decrease in the value of fixed assets due to their continuous use. It is a loss to the business. The repair & maintenance expenses are incurred to maintain the working condition of the fixed assets.

  • Other expenses and losses:
    Other expenses and losses like bad debts, provision for bad debts, loss on sale of fixed assets, loss of goods in transit etc. are included on debit side of the profit and loss account.

The following are the items relating to credit side of profit and loss account:

  • Indirect incomes:
    Profit and loss account contains all the indirect incomes in its credit side. Incomes from commission and discount are the examples of indirect incomes.

  • Other incomes and profits:
    Profit and loss account contains all other incomes like interest on investment, interest on deposit, dividend received, bad debts recovered etc. It also includes profit on sale of fixed assets, profit on sale of investment etc.

Profit and loss account is prepared by following certain procedures. It is prepared in the form of the ledger and hence it contains two sides: Debit and Credit. While placing the items in the profit and loss account, expenses and losses are debited and incomes and profits are credited. The procedures of preparing the profit and loss account can be explained as follows: -

  1. Transferring gross profit or gross loss:
    The amount of gross profit is transferred from trading account in credit side of the profit and loss account with the words “By gross profit b/d”. If there is gross loss in the trading account, it is transferred in its debit side with the words “To gross loss b/d” under particulars column.

  2. Placing expenses and losses in debit side:
    Items relating to office and administrative expenses, selling and distributing expenses, financial expenses, depreciation and repairs and maintenance expenses and other expenses and losses are debited in the profit and loss account.

  3. Placing incomes and profits in credit side:
    Items relating to indirect incomes and other incomes and profits are credited in the profit and loss account.

  4. Balancing and closing the profit and loss account:
    Profit and loss account is prepared to know the amount of net profit or net loss. It is determined by balancing the profit and loss account. The following procedures are followed for balancing and closing the profit and loss account: -
    • Find out the heavier side
    • Put the difference amount in lighter side to make total of both sides equal
    • Write the words “To Net profit c/d” if credit total exceeds debit total or “By Net loss c/d” if debit total exceeds credit total against the difference amount under particulars column.
    • Draw double parallel lines after the total amount of both sides to close the accounts.

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  • All the expenses, which are incurred in the process of operating the business, are known as ______.

    financial expenses
    preliminary expenses
    office and administrative expenses
    selling and distributing expenses
  • Expenses, which are incurred in the process of selling and distributing the goods, are known as ______.

    office and administrative expenses


    selling and distributing expenses


    financial expenses


    preliminary expenses


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

    financial expenses


    preliminary expenses


    selling and distributing expenses


    office and administrative expenses


  • ______ is the permanent decrease in the value of fixed assets due to their continuous use.

    Appreciation
    Patent
    Goodwill
    Depreciation
  • Items relating to ______ are debited in the profit and loss account.

    all the options are correct
    depreciation
    selling and distributing expenses
    repairs and maintenance expenses
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Interest on development bond is adjusted on which side


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