Profit and Loss Account in financial statement
Trading Account considers all direct expenses and Profit or ‘Gross Loss’ of the business. However, many indirect expenses and incomes are also occurred in the general working of the business, which are essentially needed to be consider to know the correct net result of the business. Here, indirect incomes means the income earned by the business through its general working, other than sales, like interest, commission, discount, rent received, etc. Thus, to consider all other indirect incomes, expenses, profits and losses of a particular accounting year, to know the net result of the business, the “Profit and Loss A/c” is prepared.
or loss of business. Therefore to ascertain net profit or loss. in the chain of preparing final A/c’s after trading a/c, profit & loss a/c is prepared.
In the words of Carter, “Profit and loss account is an account in which all incomes and expenditure are collected to know the excess of income over expenses or vice versa.
Characteristics of Profit and Loss Account
1.Profit and loss account is prepared after preparing Trading account.
2.In this account, indirect expenses and incomes are recorded..
3.This account gives knowledge of real profit or loss to the trader.
Object or Utility or Importance of Profit and
Loss Account Following are the main utilities of “Profit and Loss /ac
1.It helps to know the net profit or net loss of the business by considering all other expenses, losses, incomes and profits of the business.
100.00 It gives a detail information of the indirect expenses of business and helps in controlling the unnecessary expenses.
2. It helps in planning the future strategies for the expansion and development of business by making a comparative study of pasty ears profit.
3.theIt is prepared after trading account.
It reveals the net profit or net loss of the year.
All indirect expenses and indirect incomes are re-
4.Profit and loss account helps in assessment of true income tax, payable to the government.
5.The result of profit and loss account helps in testing, the rate of return on capital is satisfactory or not.
6.Profit and loss account also enables in fixation of employees salary, allowances, bonus, etc. in employees welfare.
Procedure of Preparing Profit and Top
Profit and Loss A/c has two side, i.e., debit side and credit side. It starts with the heading :
‘Profit and Loss A/c for the year ended 20.
1. Items appearing on the debit side of P/L
(i) Gross loss In case when Trading Account
shows any gross loss” such losses are recorded at first in the debit side of P/L A/c.
(ii) Indirect expenses: Indirect expenses are those
expenses incurred in the general working of business other than the expenses made on purchasing and manufacturing
Definition of Profit and Loss Account
According to Carter; “Profit and Loss A/c is an ac-
count in which all indirect expenses and incomes are collected to know, the excess of income over expenditure or vice versa.
According to Batliboi,” “Profit and Loss Account’ is prepared to enable the trader to ascertain the net profit or net loss resulting from business transactions given period.”
By preparing trading A/c, Gross Profit or Gross loss of business can be ascertained but this is not the real profit of goods. Indirect expenses reduces the profit of the bus ness and are recorded in debit side of P/L A/c. Examples =
(a) Selling expenses: All expenses made on sa
of goods like packing, advertisement, brokerage, commisnsion, sates tax, carriage on sale, agents travelling expensenetc. are called as selling expense.
(b) Maintenance expenses: Various fixed asset
like buildings, furniture’s, machines, tools, etc. are used in the business. Constantly expenditures are incurred in main tenance of these assets, like repairing, oiling, greasing, servicing charges, etc. The expense of depreciation is also included in it.
(c) Financial expenses: Expenses incurred on fi-
nancial aspects of the business like interest on capital, interest on loan, discount allowed, etc. are called as financial expenses.
(d) Establishment expenses: Employees salary,
administration expense, office rent, postage, telephone, stationery, electricity, legal expense, etc. are included under establishment expenses.
2. Items appearing on the credit side of ‘P/L
(i) Gross profit: In case, when Trading Account
shows gross profit, such profit is recorded at first on the credit side of P/LA/c.
(ii). Indirect incomes: Incomes made by the other working of business, other than the sale of goods are called indirect incomes. For example; incomes earned through rent, commission, discount, interest, dividends, etc.
(iii) Balancing of profit and loss account: After
recording the above mentioned items in their respective sides, profit and loss account is balanced. The excess of credit side over the debit side represents the Net Profit of the business and is placed in the debit side as ‘To Net Profit transferred to Capital A/c’.
Similarly, the excess of debit side over the credit side is the Net Loss of the business and is placed on the credit side of P/L A/c as ‘By Net Loss’ transferred to capital account.Both, the net profit or net loss occurred in the business is transferred into capital account.