Format of Profit And Loss Account

Profit and loss Account-

Profit and loss Account is an account, which is prepared to calculate the net profit or net loss of the business  for the accounting period.

profit and loss account is one of the financial statements of a company and shows the company’s revenues and expenses during a particular period.

According to Prof. Carter, “A Profit & Loss Account is an account into which all gains and losses are collected, in order to ascertain the excess gains over the losses or vice-versa”.

Format of Profit And Loss Account

Preparation of Profit and Loss Account-

A Profit and Loss Account is started with the amount of gross profit or gross loss brought down from the Trading Account. As such, all those expenses and losses which have not been debited to the Trading Account are now debited to Profit & Loss Account and all indirect income credited to Profit and Loss Account.

Profit and Loss Account is a Nominal Account and as such, all the indirect expenses and losses are shown on its debit side and all the incomes and gains are shown on its credit side.

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Items written on the Dr. side of Profit & Loss Account-

1.Gross Loss: If trading account discloses Gross Loss, it is shown on the debit side first of all.

2. Office and Administrative Expenses: Such as salary of office employees, office rent, lighting, postage, printing, legal charges, audit fee etc.
3. Selling and Distribution Expenses: Such as advertisement charges, commission, carriage outwards, bad-debts, packing charges etc.
4. Miscellaneous Expenses: Such as interest on loan, interest on capital, repair charges, depreciation, charity etc.

Items written on the Cr. side of Profit & Loss Account-

1. Gross Profit: the starting point of the Cr. side of Profit and Loss Account is the gross profit brought down from the Trading Account.
2. Other Incomes and Gains: All items of incomes and gains are shown on the credit side of the Profit & Loss Account, such as income from investments, rent received, discount received, commission earned, interest received, dividend received etc.

            If the credit side of the profit and loss account exceeds that of debit side, the difference is termed as net profit. On the other hand, the excess of the debit side over the credit side is termed as net loss. Net profit is added to the capital whereas net loss is deducted from the capital.

Closing Entries relating to Profit and Loss Account-

The preparation of profit and loss account requires that the balances of (Indirect Expenses and Indirect Income, Gain and Loss) all concerned items are transferred to profit and loss account it, by passing the following closing entries:

Balance of all Indirect income and indirect expenses transferred transfer to profit and loss account.

Balance of all indirect income transfer to credit side of profit and loss account.

Balance of all indirect expenses transfer to debit side of profit and loss account.

Balance of losses transfer to debit side of profit and loss account.

Balance of gains transfer to credit side of profit and loss account.

1. Accounts of various items of expenses (Indirect expenses) and losses are transferred to the debit side of Profit and Loss Account by means of the following entry:

Profit and Loss A/c                                                                 Dr.

To Salaries A/c

To Rent, Rates and Taxes A/c

To Printing and Stationery A/c

To Postage and Telegrams A/c

To General Expenses A/c

To Advertisement Expenses A/c

To Administration Expenses A/c

To Office Expenses A/c

To Bad Debts A/c

To Depreciation A/c

To Bank Charges A/c

To Carriage on sales A/c

To Export Duty A/c

To Commission on Sales A/c

To Discount Allowed A/c

To Salaries and wages A/c

To Carriage Outward A/c

To Legal Expenses A/c

To Financial Expenses A/c

To Sundry Expenses A/c

To Interest on Bank Overdraft A/c

To Other indirect expenses A/c

(Transfer of nominal accounts showing Dr. balances(Indirect expenses and Losses) to the Debit of P & L A/c)

2. Balances of all the accounts of Indirect incomes and gains will be transferred to the credit side of Profit and Loss Account by means of the following entry:

Interest Received A/c                                                             Dr.

Commission Received A/c                                                    Dr.

Rent Received A/c                                                                  Dr.

Dividend Received A/c                                                          Dr.

Discount Received A/c                                                           Dr.

To Profit and Loss A/c

(Transfer of nominal accounts showing Cr. balances to the Credit of P & L A/c)

3. Balances of gains will be transferred to the credit side of Profit and Loss Account by means of the following entry:

Profit on sale of Assets A/c                                                             Dr.

Bad debts Recovered A/c                                                          Dr.

To Profit and Loss A/c

(Transfer of gains accounts showing Cr. balances to the Credit of P & L A/c)

4. For the transfer of credit balance of Profit & Loss A/c, known as net profit to capital Account:

Profit and Loss A/c                                                                 Dr.

To Capital A/c

(Transfer of net profit to Capital A/c)

5. For the transfer of debit balance of Profit & Loss A/c, known as net loss to capital Account:

Capital A/c                                                                              Dr.

To Profit and Loss A/c

(Transfer of net loss to Capital A/c)

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Format of Profit And Loss Account-