Profit and loss account

Profit and Loss account is part of final accounts, prepared by business firm to know the net
profit of the business activities during a particular period. The P&L account show your total
income and expenses, and also show whether your business has earned more income than it has
spent on its running costs. If that is case, then your business has made profit.
The P&L is calculated as follows: total sales minus the cost of those sales (also known as direct
or variable costs) will give you the gross profit. Subtract from that the fixed costs (for example
insurance, marketing, administration costs etc) to find the net profit. Tax payments and
shareholder dividends must then be subtracted and an allowance can made for retained profit to
reinvest in the business. This will give you a picture of performance over a particular period in
time, either historical or forecast for the future. The profit and loss account represents the
profitability of a business. It cannot, for example, show you if you are running out of cash as you
build stock. For this sort of insight, you’ll need a balance sheet.

The purpose of the profit and loss account is to:

 Show whether a business has made a PROFIT or LOSS over a financial year.
 Describe how the profit or loss arose – e.g. categorising costs between "cost of sales" and
operating costs.

A profit and loss account starts with the TRADING ACCOUNT and then takes into account all
the other expenses associated with the business.
Profit and Loss Account is different from Trading Account because Trading Account show only
the gross profit while profit and loss account show net earnings of the business firm.

Profit and loss account terms explained

What is net income? This is your income minus the cost of goods sold, expenses and taxes.
What is gross profit? This is your total revenue / sales, minus the cost of those goods sold.
What is operating profit? This is the profit you have after operating expenses (like rent) are
deducted from gross profit. It doesn’t include interest or tax deductions.
What is net profit? This is your actual profit. It’s the amount you’re left with after remaining
working expenses are deducted from gross profit.

Contents of P&L :
 Gross profit or gross loss brought forward from the Trading account.
 All indirect incomes.
 All indirect expenditures.
 Net profit.
Who prepares Profit and Loss Account? Profit and Loss Account is prepared by all business
and professional firms.

When a profit and loss account is prepared ? It can be pepared by a business firm on any
particular date. It can be prepared on monthly bais or quarterly basis or yearly basis according to
its requirement.For example all the companies registered with stock exchanges furnish monthly
details relating to sale, and profits. Therefore these companies have to prepare the Trading
account as well as Profit was and Loss Account on monthly basis. But if we talk in general then
it is prepared at the end of the financial year.
How a profit and loss account is prepared ? Profit and los account is prepared with the help of
Trial Balance. Profit and Loss account is just like Trading Account which id divided in two parts
i.e Income part and Expenditure Part.

Balancing the Capital Account

The Capital Account is the account that is the last to be balanced. It is balanced only after the net
profit or net loss for the accounting period has been determined. The capital balance at the end of
the accounting period becomes the capital balances at the beginning of the next period.
The Capital Account is concerned with payments of debts and claims, regardless of the time
period. The balance of the capital account also includes all items reflecting changes in stocks.

Closing Nominal Accounts affecting Net Profit

All the relevant expenses account are closed by crediting the account and their balances
transferred to the debit side of the Profit and Loss Account. The expenses account referred to are
those of rent expenses, rates, carriage, outward, salaries, interest expenses, advertising and other
operating expenses.
When the credit entries in the Profit and Loss Account exceed expenses, a net profit is earned.
Conversely, if the debit side of the Profit and Loss Account exceed the credit side. Then a net
loss is incurred.