Every company prepares a Profit and Loss Account/statement at the end of the year generally, to get the visibility of the income, earning, expenses and loss incurred in a specific range of period. It is important to prepare Profit and Loss statement because this information helps an organisation to take the right business decision like where should we do the cost-cutting, from where can a business generate more profit and in which part business is suffering the loss. In this article, we will see types of Profit and Loss account and Profit and Loss account format.
Profit and Loss Account/Statement
Types of Profit and Loss
- Gross profit/ Gross loss
- Net profit/ Net loss
We prepare Trading account to ascertain the Gross profit/ Gross loss. While we prepare Profit and loss account to ascertain the Net profit/ Net loss.
Profit and loss account is made to ascertain annual profit or loss of business. Only indirect expenses are shown in this account. All the items of revenue and expenses whether cash or non-cash are considered in this account.
Understand the concept of Trading Account here in detail.
Only the revenue or expenses related to the current year are debited or credited to profit and loss account. The profit and loss account starts with gross profit at the credit side and if there is a gross loss, it is shown on the debit side.
Profit and Loss Account Format
|To Gross loss b/d||To Gross profit b/d|
|To salaries||By Discount received|
|To office rent, rates, and taxes||By Commission received|
|To printing and stationery||Non-trading income:|
|To Telephone charges||By Bank interest|
|To Insurance||By Rent received|
|To Audit fees||By Dividend received|
|To Legal charges||By Bad debts recovered|
|To Electricity charges||Abnormal gains:|
|To Maintenance expenses||By Profit on sale of machinery|
|To Repairs and renewals||By Profit on sale of investments|
|To Depreciation||By Net Loss|
|(transferred to Capital A/c)|
|Selling distribution expenses:|
|To Carriage outward|
|To Bad debts|
|To Provision for bad debts|
|To Selling commission|
|Interest on loan|
|To Loss on sale of machinery|
|To Loss on sale of investments|
|To Loss by fire|
|To Net Profit|
|(transferred to capital a/c)|
Items not shown in Profit and Loss Account Format
- Drawings: Drawings are not the expenses of the firm. Hence, debit it to the Capital a/c and not to the Profit and loss a/c.
- Income tax: In the case of companies income tax is an expense but in the case of a sole proprietor, it is his personal expense. Therefore, debit it to Capital A/c.
- Discount: As we know the discount is of two types – a trade discount and cash discount. We deduct Trade discount from the invoice amount and hence do not show it in the books of accounts. On the other hand, we allow a cash discount when the customer pays the amount on a certain date. We show the cash discount in the books of accounts. Thus, we debit it to profit and loss account.
- Bad debts: It is the amount which is due from a customer and he does not pay it. We debit this amount to Profit and Loss A/c. In case if the provision is already made for bad bets than it is first written off from it. In case if bad debts are recovered, so it is again. Now it is not credited to the party’s account but should be credited to bad debts recovered account. And it will be shown on the credit side of profit and loss account.
To complete profit and loss account these entries are necessary:
|Date||Particular||Amount (Dr.)||Amount (Cr.)|
|1. For items of Expenses||Profit and loss account a/c||Dr.|
|To Expenses A/c (individually)|
|(Being the accounts of all the expenses closed)|
|2. For items of Incomes||Incomes A/c (individually)||Dr.|
|To Profit and loss account a/c|
|(Being the accounts of all the incomes closed|
|3. In case of profit:||Net profit a/c||Dr.|
|To Capital A/c|
|(Being net profit transferred)|
|4. In case of loss:||Capital A/c||Dr.|
|To Net Loss A/c|
|(Being net loss transferred)|
Solved Example For You
Following is the trial balance of PQR company on 31st March 2018:
|Particulars||Amount (Dr)||Amount (Cr)|
|Plant and machinery||180000|
|Cash at bank||25500|
Value of the Closing stock is Rs. 63000.
Bad debts of Rs. 5000
Rent received Rs. 6000
Plant and machinery @10% and furniture @5%
Prepare profit and loss account for the year ended 31st March 2018.
In the books of PQR company
For the year ended 31st March 2018
|To Opening stock||32000||By Sales 370000|
|To Purchase 230000||Less: return 25000||345000|
|Less: return 18000||212000||By Closing stock||63000|
|To carriage inwards||8000|
|To Gross profit||156000|
Profit and loss account
For the year ended 31st March 2018
|To Carriage outward||5000||By Gross profit||156000|
|To Rent||36000||By Rent received||6000|
|To Discount allowed||4000|
|Plant and machinery 18000|
|To Bad debts||5000|
|To Net profit- transferred to capital a/c||44500|