Profit and Loss Account

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.

Explanation

The purpose of preparing the profit and loss account is to ascertain the net income (performance result) of the enterprise for the year/period, which is the most significant information to be reported for decision making. Net income or net profit is calculated by charging all operating expenses and by considering other incomes earned in the form of commission, interest, rent, discount, fees, etc.

In fact, profit and loss account is prepared by following the ‘accrual system of accounting’. where gross profit and other operating incomes are credited and all operating expenses are debited. The resultant effect is either net profit or net loss. If the total amount of gross profit and other operating incomes are more than the operating expenses, the difference is treated as net income or net profit. Alternatively, if the total amount of gross profit and other operating incomes is less than the operating expenses, then the difference is treated as net loss.

The following items usually appear on the debit and credit side of a Profit and Loss Account.

On the debit side:

  1. Gross Loss (Transferred from Trading Account)
  2. All Indirect Expenses

On the credit side:

  1. Gross Profit (Transferred from Trading Account)
  2. 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

Profit and Loss Account Format

If it is prepared in the form of a statement, it appears as shown below:

Income Statement to Ascertain Net Profit and Net Loss

Income-Statement-to-ascertain-net-Profit-and-net-loss

Note:

  1. In the case of a partnership, net profit or net loss should be transferred to partners’ capital accounts in accordance with the agreed profit sharing ratio.
  2. While preparing income statement, it is a customary practice to prepare one single statement combining trading A/c and profit A/c items, including respective stages to ascertain gross profit/gross loss and net profit/net loss.

How the related items travel to P&L Account?

While preparing P&L 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:

closing entries for profit and loss account

2. For the items of credit side:

Profit and Loss Account items of credit side

3. For Net Profit:

Closing Entry for Net Profit transferred to Capital Account

4. For Net Loss:

closing entries for net loss transferred to capital account

Note: In the case of a partnership enterprise, the net profit or net loss is shared according to the partner’s profit-sharing ratio. Therefore, that amount of profit or loss of a partner will be transferred to his/her capital account.

Example

From the Following trial balance of John & Co. prepare the Trading and Profit and Loss Account for the year ended 31st December 2019.

P&L Account Examples
The closing stock was valued at $32,000.

Solution

P&L Account Solution

Example 2

From the following ledger balances extracted from the books of Mr. Bharath, prepare P&L account as on March 31, 2019.

PandL-account-example

Solution

In the Books of Mr. Bharath

Profit and Loss Account
For the year ended on March 31, 2019

Barath-statement-of-PL-Account

In the Books of Mr. Bharath

Statement of P&L Account
For the year ended on March 31, 2019

Statement-of-PLA

18 thoughts on “Profit and Loss Account”

    • Additional information always goes in two table either trading or p/l account and in balance sheet.
      so, its according to items list. Hope you get it

      Reply

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