Final Accounts for Sole Proprietors - Non-manufacturing

Profit And Loss Account

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

Particulars Amount Particulars Amount
To Gross loss b/d To Gross profit b/d
Management expenses: Income:
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 Salaries
To Advertisement
To Godown
To Carriage outward
To Bad debts
To Provision for bad debts
To Selling commission
Financial expenses:
Bank charges
Interest on loan
Discount allowed
Abnormal losses:
To Loss on sale of machinery
To Loss on sale of investments
To Loss by fire
To Net Profit
 (transferred to capital a/c)
                                    TOTAL                                       TOTAL

Profit And Loss Account

Items not shown in Profit and Loss Account Format

  1. 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.
  2. 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.
  3. 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.
  4. 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.

Closing entries

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)
Opening stock 32000
Purchases 230000
Sales 370000
Return inwards 25000
Return outward 18000
Carriage inwards 8000
Carriage outwards 5000
Rent 36000
Discount allowed 4000
Salaries 48000
Plant and machinery 180000
Furniture 30000
Drawings 9000
Sundry debtors 120000
Sundry creditors 175000
Capital 164000
Cash at bank 25500
                                    TOTAL 727000 727000

Additional information:

Value of the Closing stock is Rs. 63000.

Bad debts of Rs. 5000

Rent received Rs. 6000

Depreciation on:

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

Trading account

For the year ended 31st March 2018

Particulars Amount Particulars Amount
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
408000 408000

Profit and loss account

For the year ended 31st March 2018

Particulars Amount Particulars Amount
To Carriage outward 5000 By Gross profit 156000
To Rent 36000 By Rent received 6000
To Discount allowed 4000
To Salaries 48000
To Depreciation: 19500
Plant and machinery       18000
Furniture                             1500
To Bad debts 5000
To Net profit- transferred to capital a/c 44500
162000   162000



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