Profit and loss account – Definition
The account that shows annual net profit or net loss of a business is called Profit and Loss Account. It is prepared to determine the net profit or net loss of a trader. P&L account is a component of final accounts.
The following items usually appear on the debit and credit side of a Profit and Loss Account.
On the debit side:
- Gross Loss (Transferred from Trading Account)
- All Indirect Expenses
On the credit side:
- Gross Profit (Transferred from Trading Account)
- All Indirect Revenues
Net Profit or Net Loss
Net Profit or Net Loss is the difference between the total revenue of a certain period and the total expenses of the same period. Net profit is made when the total revenues exceed the total expenses. If the total of revenues is less than the total expenses, the net loss is incurred. The balance of Profit and Loss Account which represents either net profit or net loss is transferred to the capital account.
Format/Specimen of Profit and Loss Account
How the related items travel to P&L Account?
While preparing Profit and Loss Account, an important point must be kept in mind that closing entries are made at the end of each accounting period to transfer the indirect expense and indirect revenues accounts to P&L Account. These closing entries are made in General Journal (Journal Proper). After making closing entries, the balances of these accounts disappear from the ledger, since they are closed and transferred to P&L Account.
Closing Entries to transfer Different Items in Profit and Loss Account
1. For the items of debit side:
2. For the items of credit side:
3. For Net Profit:
4. For Net Loss:
From the Following trial balance of John & Co. prepare the Trading and Profit and Loss Account for the year ended 31st December 2019.
The closing stock was valued at $32,000.