Saturday, October 11, 2014

Profit and Loss Account

After calculating the gross profit or gross loss the next step is to prepare the profit and loss account. To earn net profit a trader has to incur many expenses apart from those spent for purchases and manufacturing of goods. If such expenses are less than gross profit, the result will be net profit. When total of all these expenses are more than gross profit the result will be net loss.

The aim of profit and loss account is to ascertain the net profit earned or net loss suffered during a particular period.

The Format of Profit and Loss Account is shown below

Items appearing in the debit side

Those expenses which are chargeable to the normal activities of the business are recorded in the debit side of profit and loss account.
They are termed as Indirect expenses.

  • Office and Administrative Expenses: Expenses incurred for the functioning of an office are office and administrative expenses – office salaries, office rent, office lighting, printing and stationery, postages, telephone charges etc.
  • Repairs and Maintenance Expenses: These expenses relates to the maintenance of assets - repairs and renewals, depreciation etc.
  • Financial Expenses: Expenses incurred on borrowings –Interest paid on loan
  • Selling and Distribution Expenses: All expenses relating to sales and distribution of goods - advertising, travelling expenses, salesmen salary, commission paid to salesmen, discount allowed, repacking charges etc.

Items appearing in the credit side

Besides the gross profit, other gains and incomes of the business are shown on the credit side. The following are some of the incomes and gains.

  • Interest received on investment
  • Interest received on fixed deposits.
  • Discount earned.
  • Commission earned.
  • Rent Received


Let us now prepare Trading and Profit Loss Account for the year ending 31st March 2002
from the books of Mr. Sree Ram

Balancing of Income statement

The difference between the two sides of profit and loss account indicates either net profit or net loss. If the total on the credit side is more the difference is called net profit. On the other hand if the total of debit side is more the difference represents net loss. The net profit or net loss is transferred to capital account.

Closing Entries

Profit and loss account should be closed by transferring the net profit or net loss to capital account.

If net profit
Profit and Loss A/c.............DrXXX
To Capital A/c (Net profit transferred to capital A/c)XXX
If net loss
Capital A/c....................Dr.XXX
To Profit and loss A/c (Net loss transferred to Capital A/c)XXX


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