Note on Profit and Loss Account

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  • Things to remember

INTRODUCTION TO PROFIT AND LOSS ACCOUNT

Profit and loss account is the second step of final account. It is prepared after the preparation of trading account. It is prepared to know the net profit and net loss in the business during an accounting period. Profit and loss account is a nominal account. Thus, indirect expenses like office and administration, selling and distribution, financial expenses, repair and renewables etc. are recorded on the debit side of profit and loss account. All incomes of the business except sales and closing stock are recorded on the credit side of profit and loss account.

Objectives of Profit and Loss Account

The main objectives of profit and loss account are as follows:

  • To know the operating results i.e. the net profit or net loss for a certain period earned by a business.
  • To provide information about the various indirect expenses of a particular period.
  • To get information about the difference source of income except the sales.
  • To help to prepare the balance sheet.

Advantage of Profit and Loss Account

The advantages of profit and loss account are as follows:

  • It provides information about net profit or net loss.
  • It provides the information about indirect expenses.
  • It helps to determine the ratio between net profit to operating expenses.
  • It helps to determine the ratio between net profit to sales.
  • It helps to control the indirect expenses which helps to improve the future profitability.

Preparation of Profit and Loss account

The specimen of profit and loss account as given below:

Particulars

Dr. Amt

Particulars

Cr. Amt

To Gross loss b/d

XXX

By Gross profit b/d

XXX

A)Office and Administrative expenses:
To Salaries or salary and wages
To Rent,rateand tax
To Printing and stationary
To Telephone charges
To Postage and telegram
To Insurance
To Audit fee
To Legal charges
To Electricity charges (Office)
To Trade expenses
To Sundry or Miscellaneous expenses
To Entertainment expenses


XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX

A) Trading incomes:
By Discount received
By Apprenticeship premium
By Commission received
By Appreciation received
By Baddebitrecovered
By Sundry or Miscellaneous income


XXX
XXX
XXX
XXX
XXX
XXX

B)Maintenance Expenses
To Repair and renewable
To Depreciation on:
Office equipment
Office furniture
Office building


XXX

XXX
XXX
XXX

B)Non Tradingincome:
By Interest on investment
By Rent received
By Dividend received
By Share transfer fee received

XXX
XXX
XXX
XXX

C)Selling and Distribution expenses:
To salesman salary
To Godown and showroom rent
To Carriage or freight on sales
To Bad debt
To Establishment expenses
To Export duty
To Free sample, gift, charity, donation expenses
To Advertising expenses
To Salesman commission

XXX
XXX
XXX
XXX
XXX
XXX
XXX

XXX
XXX

C) Abnormal gain:
By Profit on sale of fixed assets
By Profit on sale of investment
By Profit on revaluation of fixed assets
By Net loss c/d

XXX
XXX
XXX
XXX

D)Expenses as written off:
To Preliminary expenses
To intangible fixed assets written off


XXX
XXX

E)Financial expenses
To Bank charge
To Interest on loan
To Discount on bills
To Discount allowed to customer


XXX
XXX
XXX
XXX

F)Abnormal losses:
To Loss on sale of machinery
To Loss on sale of investment
To Loss by fire/theft/accident (if not claimed by insurance company)
To net profit c/d


XXX
XXX
XXX

XXX

XXXX

XXXX

Items that appear in debit side of profit and loss account

  • Gross loss:This is the debit balance of trading account which is recorded in the debit side of profit and loss account.
  • Administrative expenses:These are expenses which are incurred for day-to-day running of office, administration and management. It includes office salaries or salary and wages, office rent and rates, office insurance, office lighting and heating, printing and stationary, Director’s fee, General or trade expenses and Legal charges, etc.
  • Selling and distribution expenses:They are incurred for promoting sales and distribution of sold goods. It includes packing charge, godwon’s rent, carriage outward or carriage inward, freight outward or freight inward, salesman's salary and commission, bad debt, showroom insurance, etc.
  • Maintenance expenses:They are incurred for maintaining the fixed assets of the administrative office in a good condition. They include repair and renewable, depreciation of assets and loss on revaluation of assets, etc.
  • Financial expenses:These include interest on loan, discount on bill, cash discount allowed, interest on capital, etc.
  • Abnormal losses:The losses which are loss on revaluation, capital losses, etc. are called abnormal loss. For example: loss on sale of fixed assets, loss on sale of machinery, etc.

Items that appear on the credit side of profit and loss account

  • Gross profit:It is the beginning item of profit and loss account. It is transferred from trading account.
  • Trading incomes:Trading incomes are the other incomes of financial nature other than income from the sale of goods. For example: discount or commission received.
  • Non- Trading incomes:The business may earn some amount of interest which will find a place in profit and loss account as non-trading income.
  • Abnormal gains:There may be capital gains arising during the course of the year. For example: profit arising out of the sale of fixed assets or profit on revaluation.
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Source: S3 amazonaws com

Closing Entries for Profit and Loss Account

At the end of the year, the expenses or income related with the profit and loss account should be closed down transferring into profit and loss account and the result net profit or net loss should be transferred to capital account. The entries which are made at the end of the year are known as closing entries related with profit and loss account.

Accounts to be closed:

  1. All indirect expenses and losses debited in profit and loss a/c
  2. All incomes and gains credited in profit and loss a/c
  3. Net Profit
  4. Net Loss

S.N.

Journal Entries

L.F.

Dr.Amt

Cr.Amt

1.

Profit and Loss a/c…………………….Dr
To Indirect expenses and losses a/c
(Being indirect expenses and losses closed transferring into profit and loss a/c)

XXX


XXX

2.

Income and gain a/c…………………Dr
To Profit and Loss a/c
(Being incomes and gains closed transferring into profit and loss account)

XXX


XXX

3.

Profit and Loss a/c…………………..Dr
To Capital a/c
(Being net profit transferred to capital a/c)

XXX


XXX

4.

Capital a/c……………………………..Dr
To Profit and Loss a/c
(Being net loss transferred to capital a/c)

XXX


XXX

Difference between Gross profit and Net profit

Bases

Gross profit

Net profit

Result

It is the trading result of the business.

It is the net result of the business.

Balance

It is the balancing figure of trading account.

It is the balance figure of profit and loss account.

Determination

It is determined by comparing sales and cost of goods sold.

It is determined by comparing gross profit and indirect expenses.

Transfer

Gross profit is transferred to profit and loss account.

Net profit is transferred tocapitalaccount.

Uses

It is used to evaluate the trading efficiency of the business.

It is used to evaluate operating efficiency of the business.



References:

Sharma, Narendra et.al., Principles of Accounting-XI, Bundipuran Prakashan, Kathmandu

Koirala, Yadav Raj et.al., Principles of Accounting-XI, Asmita Books Publication, Kathmandu

Shrestha, Dasharaha et.al., Accountancy-XI, M.K. Prakashan Kathmandu

  1. Profit and loss account is the second step of final account. 
  2. All indirect expenses and losses debited in profit and loss a/c.
  3. All incomes and gains credited in profit and loss a/c.
  4. Profit and loss account provides information about net profit or net loss.
.

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suman shai

interest on investment due in additional informationwhat we should do in invesment


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