Profit and Loss Account

Financial Management and Cost Accounting

(DBM-422)

A K JHA
 Profit and Loss Account

It is an account prepared to ascertain the net

profit or net loss made by a concern during an
accounting period.
Profit and Loss Account is prepared to
estimate the net profit or net loss of the
business for a given accounting period.
It is prepared after preparing the trading
Account.
 The Profit and Loss Account starts with the credit from
the Trading Account in respect of gross profit or debit if
there is gross loss.
 Then all indirect expenses and losses are debited to the
Profit and Loss Account.
 Itmeans that all those expenses or incomes which have
not been debited or credited to the Trading Account are
debited or credited in the Profit and Loss Account.
 Indirect expenses include all administrative, selling and
distribution expenses like salaries, rent and taxes,
postage, and stationery, insurance, depreciation, interest
paid, office lighting, advertising, packing, carriage
outwards, etc.
 Losses include items like loss by fire, loss by theft, etc.
Ifthere is any income and gain beside the gross
profit, it will also be transferred to the credit of the
Profit and Loss Account.
Ifthe total of the credit side exceeds the total of the
debit side, the difference represent the net profit.
In adverse situation, the difference will represent
the net loss.
This net profit or net loss is transferred to the
capital account of the proprietor.
The net profit increases the capital or nt loss
reduces the capital.
 Format of Profit and Loss Account
Dr. Cr.
Amount(
Particulars Particulars Amount(Rs.)
Rs.)

To Gross loss transferred from By Gross Profit transferred from

Trading a/c Trading a/c
To management expenses: By interest received
salaries By discount received
rent, rates and taxes By commission received
stationery and printing charges By Income form investments
Telephone expenses By apprenticeship premium
legal charges and law costs By rent
entertainment expenses By miscellaneous income
By net loss transferred to capital
Insurance premium account
general expenses
Audit fees
 Format of Profit and Loss Account contd..
Amount Amount(R
Particulars Particulars
(Rs.) s.)
To selling expenses :
Advertising
salesmen salaries
Selling commission
Brokerage
travelling expenses
Free samples
Bad debts
To Distribution expenses
warehouse rent
carriage outward
warehouse insurance
Packing expenses
Delivery van expenses
 Format of Profit and Loss Account

Amount( Amount(R
Particulars Particulars
Rs.) s.)

To Depreciation :
Maintenance expenses
Depreciation of assets
To Finance expenses:
Discount on bills
Discount allowed
Interest on capital
Interest on loans
Loss by fire

To net profit transferred to capital

account
 Advantages of Profit and Loss Account

1. The net result –profit or loss , revealed by

this account is an index by which progress
can be measured.
2. Various expenses can be effectively
controlled by comparing various expenses,
year by year.
3. Profitability is the basis and helps in
planning of action.
 Difference between Trading and Profit
and Loss Account
Trading Account Profit and Loss Account

1. The first section of revenue 1. The second section of

account is trading account.
2. It is prepared to know only
the result of trading.
3. It deals with purchasing and
manufacturing costs of
goods.
4. Balance of this account is
transferred to profit and loss
account.
revenue account is known as
the profit and loss account.
2. It is prepared to know the
ultimate result of the
business.
3. It deals with administration,
selling, distribution expenses
etc.
4. Balance of this account is
transferred to capital
account.