Profit and Loss account
Profit and Loss account: A profit and loss statement (P&L), also known as an income statement or a statement of operations, is a financial statement that summarises a company’s sales, costs, and profits/losses for a certain time period. The profit and loss statement demonstrates a company’s capacity to produce sales, control costs, and make money. It differs from the cash flow statement in that it is created using accounting concepts such as revenue recognition, matching, and accruals.
Profit & Loss Account |
Revenues |
| Expenses | |
| Profit/Loss |
The profit and loss account is the account used to determine a company’s yearly net profit or loss. A firm’s gross profit or loss is calculated using the trading account, and net profit is calculated using the profit and loss account by subtracting all indirect expenditures (business operational expenses) from the gross profit. As a consequence, the profit and loss account begins with the trading account’s outcome.
The trial balance contains all of the information needed to prepare the profit and loss statement. It only takes into account indirect expenditures and indirect income. This account begins with the outcome of a trading account (gross profit or gross loss). The credit side of the profit and loss account displays gross profit, while the debit side displays gross loss. This account’s debit side receives all indirect costs, while the credit side receives all indirect income. If the credit side’s total exceeds the debit side’s total, the outcome is “net profit,” but if the debit side’s total exceeds the credit side’s total, the result is “net loss.” The profit and loss account is used to assess the net profit or loss for a certain accounting period.
The Profit and Loss Statement’s Structure
The profit and loss statement of a corporation is shown over a period of time, usually a month, quarter, or fiscal year.
The following are the primary categories featured on the P&L:
- Earnings (or Sales)
- Cost of Goods Sold (Cost of Goods Sold) (or Cost of Sales)
- SG&A (Selling, General, and Administrative) Expenses
- Advertising and Marketing
- Technology
- Interest Charges
- Taxes
- Income (net)
Only current-year income and costs are debited or credited to the profit and loss account. The profit and loss account begins with gross profit on the credit side and moves to the debit side if there is a gross loss.
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 |
Expenses in the Profit and Loss Account in Order
The sequence in which the elements of costs are listed in the profit and loss statement is not set in stone. In general, the following is the order in which costs are shown:
Expenses for the office and administration:
These are expenditures associated with business administration, such as salary for the manager, accountant, and office clerks, office rent, office stationery, office energy charges, office telephone, and so on.
Expenses for selling and distribution:
These are costs associated with the selling of commodities, either directly or indirectly. These costs fluctuate with sales, increasing or decreasing as the number of items sold increases or decreases. Advertisements, transportation outward, salesmen’s wages and commissions, authorised discounts, travel costs, bad debts, packing expenses, warehouse rent, and so forth are examples.
Expenses for money and other things:
All additional expenditures, save those listed above, are included in this category.
The Profit and Loss Account has the following features:
- This account is created on the final day of the accounting year to establish the business’s net result.
- The final accounts are now in their second stage.
- This account only shows indirect costs and indirect income.
- It all begins with the trading account’s closing balance, which is either a gross profit or a gross loss.
All revenue items for the current year: Whether paid in cash or not, as well as all expenses: This account takes into consideration whether the payment was made in cash or not. It does not, however, contain any items from the previous or next years.