What is Profit & Loss Account? Profit & Loss Account is part of final accounts, prepared by a business firm to know the net profit of the business activities during a particular period.

Profit and Loss Account is different from Trading Account because Trading account shows only the gross profit while profit and loss account shows net earnings of the business firm. In profit and loss account all indirect expenses and indirect incomes are shown. After preparing trading account the decision is taken regarding the costing of products but after preparing profit and loss account decision is taken in respect to control the expenditures to maximize the profitability of the firm. In short, both statements are very important for a business firm.

Who prepares Profit and Loss Account? Profit and Loss Account is prepared by all business and professional firms.

What are the benefits of preparation of Profit and Loss Account?

  1. It is very necessary to prepare Profit and Loss Account to pay exact income tax to the income tax authorities.
  2. Without profit and loss account, income of partners also can not be ascertained.
  3. To know the actual profit of a firm, it is compulsory to prepare profit and loss account.
  4. Unless profit and loss account is prepared, balance sheet can not be prepared.
  5. Profit and loss account is mandatory for all the companies which are listed in stock exchange.
  6. In Limited Companies, dividend is declared as per the availability of profit with company.
  7. Without preparation of profit and loss account, the accounts are incomplete. It is the part of accounting system.
  8. At last, I do not know why the profit and loss account should not be prepared?

When a Profit and Loss Account is Prepared? It can be prepared by a business firm on any particular date. It can be prepared on monthly basis or quarterly basis or half yearly basis or yearly basis according to its requirement. For example all the companies registered with stock exchanges furnish monthly details relating to sale, and profits. Therefore these companies have to prepare the Trading account as well as Profit and Loss Account on monthly basis. But if we talk in general then it is prepared at the end of the financial year.

Contents of Profit and Loss Account:- A Profit and Loss Account shows the following details:-

  • Gross profit or gross loss brought forward from the Trading  account.
  • All indirect incomes
  • All indirect expenditures
  • Net profit.

How a Profit and Loss Account is prepared? Profit and Loss Account is prepared with the help of Trial Balance. Profit and Loss Account is just like Trading Account which is divided in two parts i.e. Income part and Expenditure Part.

In income part, we show the following accounts:-

  • Gross Profit brought forward.
  • Indirect Income i.e. interest received, commission received, rent received etc. In other words indirect income means which is not directly related to purchase or sales.

In Expenditure part, we show the following details:-

  • Gross Loss brought forward
  •  All indirect Expenses i.e. any expenses which arr not related to purchase and sales.

 Example of Profit and Loss Account

From the following trial balance we have to prepare Profit and Loss Account:-

Note:- Though, I have already shown the Trading Account in my other term “How to Prepare Trading Account” but for clarification of profit and loss account, I am again making the Trading Account. The same can be helpful for the learners to understand it in a better way through same example.

TRIAL BALANCE OF M/S ABC ENTERPRISES AS ON 31.03.12

 TRIAL BALANCE OF M/S ABC ENTERPRISES AS ON 31.03.2012

PARTICULARS AMOUNT AMOUNT
DR. CR.
OPENING STOCK OF GOODS

250000

PURCHASES

500000

SALES

900000

FUEL EXPENSES FOR MACHINERY

50000

ELECTRICITY EXPENSES – FACTORY

60000

ELECTRICITY EXPENSES – OFFICE

10000

WAGES TO WORKERS

100000

SALARIES

30000

PACKING CHARGES

5000

TELEPHONE EXPENSES

3000

PRINTING & STATIONERY EXPENSES

2000

BANK OF INDIA

15000

CASH IN HAND

12000

SUNDRY DEBTORS

40000

SUNDRY CREDITORS

77000

MACHINERY A/C

30000

CRATAGE & FREIGHT EXP.

6000

BANK CHARGES

500

BANK INTEREST

12500

ADVERTISEMENT EXP.

10000

SALES PROMOTION EXP.

15000

CONVEYANCE EXP.

12000

VEHICLE MAINTENANCE EXP.

30000

CAPITAL A/C

216000

1193000

1193000

CLOSING STOCK AS ON 31.03.12 WAS RS. 224000/=

M/S ABC ENTERPRISES

TRADING A/C AS ON 31.03.2012

INCOME AMOUNT CR.
SALES

900000

CLOSING STOCK

224000

TOTAL

1124000

OPENING STOCK

250000

PURCHASES

500000

FUEL EXPENSES FOR MACHINERY

50000

ELECTRICITY EXP. – FACTORY

60000

WAGES TO WORKER

100000

PACKING CHARGES

5000

CARTAGE & FREIGHT EXP.

6000

GROSS PROFIT

153000

TOTAL

1124000

 

 

M/S ABC ENTERPRISES

   

PROFIT AND LOSS ACCOUNT AS ON 31.03.12

INCOME

AMOUNT CR.

GROSS PROFIT

153000

TOTAL

153000

EXPENDITURE

AMOUNT DR.

ELECTRICITY EXPENSES – OFFICE

10000

SALARIES

30000

TELEPHONE EXPENSES

3000

PRINTING & STATIONERY EXPENSES

2000

BANK CHARGES

500

BANK INTEREST

12500

ADVERTISEMENT EXPENSES

10000

SALES PROMOTION EXPENSES

15000

CONVEYANCE EXPENSES

12000

VEHICLE MAINTENANCE EXPENSES

30000

NET PROFIT

28000

TOTAL

153000

 

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