Profit and Loss Account: Meaning, Format & Examples

Today we are covering the Technical topic of the Profit and Loss account. So please read it very consciously and in this article, you will learn the meaning of the Profit and Loss Account, Feature, Needs, Format, and understand it in much better ways with examples.

What is Profit and Loss Account?

The profit and loss account shows all indirect expenses incurred and indirect revenue earned during the particular period. The period may be for a month, a quarter, or a year. It is prepared to find out the Net Profit/loss of the business for the particular accounting period. It is calculated by adding indirect income/revenue into the Gross Profit/Loss and deducting indirect expenses from the total of both above.

Net Profit/Loss =  Gross Profit/Loss + Indirect Income – Indirect Expenses

• Indirect Income = Other incomes which are earned from Business other than the main operation of the business. These types of incomes earned from the other services of the business i.e. comission received, Rent received from let out building.
• Indirect Expense = All business expenses other than direct expenses.

The feature of P&L Account: –

1. Profit and Loss a/c show the net result(net profit or loss) of the business for the particular accounting period.
2. It is the second statement of the final account.
3. Start with the balance of trading account means gross profit or gross loss which is transferred to this account. Gross profit shows on the credit side and Gross loss shows on the debit side of this account.
4. Only Indirect Expenses posted on the Debit side and Indirect revenue are posted on the credit side.
5. Excess of credit side over the Debit side represents the Net Profit of the year and Excess of Debit side over Credit side represents the Net loss for the year.

The Need for P&L Account: –

1. Net Profit/ Loss:- 

We need the Profit and Loss account to ascertain the Net profit for the year.

2. Calculation of Net Profit Ratio: –

The P&L account helps us to calculate the NP ratio by providing us with Net Profit/Loss.  (NP Ratio =  Net Profit / Net sale)

3. The trend of Indirect Expense and Indirect Incomes:- 

It helps in determining the trend of indirect expenses and indirect income. With the help of tread, top management takes the future decision for making targets and policies.

4. Controlling the Indirect Expenses:-

in this account, all indirect expenses related to the business enterprise shall be incorporated. It has been seen that in many business enterprises, indirect expenses cover more than 75% of the total expenses, So proper watch on these expenses is most for effective control of expenses.

5. Comparison:-

Through a comparison of the profit and Loss a/c of two different years, we will get the actual trend of our indirect expenses.

6. The basis of the Balance sheet: –

This account is the basis of the balance sheet. The result of the profit and loss account was transferred to the Balance sheet. So, in the absence of a Profit and Loss account, we cannot prepare a balance sheet.

Preparation of P&L Account:- 

For preparing a Profit and Loss Account, we have to close the ledger of indirect expenses or indirect income. For this we have to post the following closing journal entries in the Journal Proper: –

Closing Journal Entries: –

1. For closing all the Debit accounts of Indirect Expenses related to the P&L account: –

P&L A/c                          Dr.

To Accounts in Group head – Office and Administrative Expenses.

To Accounts in Group head – Selling and Distribution Expenses

To Accounts in Group head – Financial Expenses.

To Accounts in Group head – Maintenance Expenses.

To Accounts in Group head – Abnormal Losses

(Being all indirect expenses transferred to P&L Account)

2. For closing all the Credit accounts related to the P&L account: –

The accounts in Group head – Other Income               Dr.

The accounts in Group head – Non-trading Income     Dr.

The accounts in Group head – Abnormal Gains

To P&L Account

(Being indirect Income transferred to P&L Account)

3. For the transfer of Net profit/loss to Capital or P&L Appropriation Account: –

(i) In the case of Net Profit

P&L A/c            Dr.

To Capital Account

(Being Net profit transferred to Capital account )

OR

P&L A/c                 Dr.

To P&L Appropriation Account

(Being Net profit transferred to profit/loss appropriation account )

(i) In the case of Gross loss

Capital Account     Dr.

To P&L A/c

(Being Net loss transferred to Capital account )

The format of Profit and Loss Account:-

Note: –
if the total of Credit side excess over Debit side = Net Profit
if the total of Debit side excess over Credit side = Net  Loss

Items on the debit side of P&L A/c: –

1. Gross Loss: – Gross Loss transferred from the trading account. this is the first transaction in the P&L account.
2. Indirect Expenses:-  Indirect Expenses are those expenses which are not directly related to the purchase or creation of goods. These expenses are related to office and administrative and selling and distribution of goods. these are classified into the following group head: –
   1. Office and Administrative Expenses: –Expenses incurred on the carrying out the routine work of the enterprise fall under this group head. Some example is shown below:-
      1. Salary of Office employees
      2. Office Electricity Expenses
      3. Office Rent(if any)
      4. Legal Charges
      5. Postage and telegram
      6. Printing and Stationery
      7. Insurance
      8. Taxes
      9. Interest on late payment
      10. Audit fee and Etc.
   2. Selling and Distribution Expenses: –Expenses incurred for promoting sales and distribution of goods fall under this group head. Some example is shown below:-
      1. Provide Free delivery to Customer- Freight outward, Carriage outward
      2. Godown rent
      3. After-sale services
      4. Advertisement and Publicity
      5. Commission to the employee to promote sales
      6. Salary of the Marketing team
      7. Travelling Expenses of the Marketing Team
      8. Brokerage to an agent to promote sales
      9. Sales Promotional Expenses
   3. Financial Expenses: – Expenses incurred for arranging finance for business activities fall under this group head. Some example is shown below:-
      1. Interest on Loan
      2. Bank charges against loan accounts
      3. Legal charges for arranging the loan
      4. Brokerage paid for arranging the loan
      5. Discounts and Rebate on bills
   4. Maintenance Expenses.:- Expenses incurred on maintenance of business assets fall under this group head. Some example is shown below:-
      1. Repair and Maintenance of Fixed assets
      2. Renewals
      3. Depreciation on Fixed Assets
   5. Abnormal Losses: – Losses which are out of business course fall under this group head. Some example is shown below:-
      1. Loss on sale of Fixed assets
      2. The loss by theft/Fire/Flood
      3. Accident loss in transit
3. Net Profit: – To ascertain the Net Profit or loss for the particular period we have to prepare the profit and loss account of a business. The balance of the credit side shown on the debit side of the Profit and loss account is the Net profit for the business for the particular accounting period for which the final accounts are prepared.

Items on the Credit side of Profit and Loss Account: –

1. Gross Profit: – Gross Profit transferred from the trading account. This is the first transaction in the P&L account.
2. Indirect Incomes:-  Indirect Incomes are those Incomes which are not directly related to the sale of goods. These are classified into the following group head: –
   1. Non-Trading Incomes: – Incomes earned other than the income from the sale of goods or services is known as other incomes. Some example is shown below:-
      1. Discount Received
      2. Rent received from the building
      3. Commission received
      4. Interest received on bank balance
      5. Dividend received on share or debenture
   2. Abnormal Gains: – Gain on the sale of fixed assets is known as abnormal gains.
3. Net Loss: – To ascertain the Net Profit or loss for the particular period we have to prepare the profit and loss account of a business. The balance of the debit side shown on the credit side of the Profit and loss account is the Net loss for the business for the particular accounting period for which the final accounts are prepared.

1. Illustration of Profit and Loss Account: –

Prepare Profit and Loss account for the year ending March 31, 2018, in the books of Tutorstips Ltd. from the following balances as of March 31, 2018.

Also, show the closing entries.

Solution: –

TutorsTips Ltd.

Journal book 

TutorsTips Ltd.

Profit and Loss Account for the year ended March 31 2018 

Or 

If you want to download the above illustration please download the following image: 

2. Illustration of Profit and Loss Account: –

Prepare Profit and Loss account for the year ending March 31, 2018, in the books of Aman Enterprise Ltd. from the following balances for the year ended March 31 2018.

Also, show the closing entries.

Firstly solve it by yourself then saw the solution. 

Solution: –

Aman Enterprise Ltd.

Journal book 

 Aman Enterprise Ltd.

Profit and Loss Account for the year ended March 31 2018 

Or 

If you want to download the above illustration please download the following image: 

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