Profit and Loss Account Financial Management and Cost

Profit and Loss Account Financial Management and Cost Accounting (DBM-422) A K JHA

Profit and Loss Account It is an account prepared to ascertain the net profit or net loss made by a concern during an accounting period. � Profit and Loss Account is prepared to estimate the net profit or net loss of the business for a given accounting period. � It is prepared after preparing the trading Account.

�The Profit and Loss Account starts with the credit from the Trading Account in respect of gross profit or debit if there is gross loss. �Then all indirect expenses and losses are debited to the Profit and Loss Account. �It means that all those expenses or incomes which have not been debited or credited to the Trading Account are debited or credited in the Profit and Loss Account. �Indirect expenses include all administrative, selling and distribution expenses like salaries, rent and taxes, postage, and stationery, insurance, depreciation, interest paid, office lighting, advertising, packing, carriage outwards, etc. �Losses include items like loss by fire, loss by theft, etc.

�If there is any income and gain beside the gross profit, it will also be transferred to the credit of the Profit and Loss Account. �If the total of the credit side exceeds the total of the debit side, the difference represent the net profit. �In adverse situation, represent the net loss. the difference will �This net profit or net loss is transferred to the capital account of the proprietor. �The net profit increases the capital or nt loss reduces the capital.

Format of Profit and Loss Account Dr. Cr. Particulars Amount( Rs. ) Particulars To Gross loss transferred from Trading a/c By Gross Profit transferred from Trading a/c To management expenses: By interest received salaries By discount received rent, rates and taxes By commission received stationery and printing charges By Income form investments Telephone expenses By apprenticeship premium legal charges and law costs By rent entertainment expenses By miscellaneous income Insurance premium By net loss transferred to capital account general expenses Audit fees Amount(Rs. )

Format of Profit and Loss Account contd. . Particulars To selling expenses : Advertising salesmen salaries Selling commission Brokerage travelling expenses Free samples Bad debts To Distribution expenses warehouse rent carriage outward warehouse insurance Packing expenses Delivery van expenses Amount (Rs. ) Particulars Amount(R s. )

Format of Profit and Loss Account Particulars To Depreciation : Maintenance expenses Depreciation of assets To Finance expenses: Discount on bills Discount allowed Interest on capital Interest on loans Loss by fire To net profit transferred to capital account Amount( Rs. ) Particulars Amount(R s. )

Advantages of Profit and Loss Account The net result –profit or loss , revealed by this account is an index by which progress can be measured. 2. Various expenses can be effectively controlled by comparing various expenses, year by year. 3. Profitability is the basis and helps in planning of action. 1.

Difference between Trading and Profit and Loss Account Trading Account Profit and Loss Account 1. The first section of revenue 1. The second section of account is trading account. revenue account is known as 2. It is prepared to know only the profit and loss account. the result of trading. 2. It is prepared to know the 3. It deals with purchasing and ultimate result of the manufacturing costs of goods. business. 4. Balance of this account is 3. It deals with administration, transferred to profit and loss selling, distribution expenses account. etc. 4. Balance of this account is transferred to capital account.