- What is Profit & Loss A/C
- Objective of Profit & Loss A/c
- Components of Profit & Loss A/c
- Trading Account
- Profit and Loss A/c
What is Profit & Loss A/C
Profit and Loss Account is a type of financial statement which reflects the outcome of business activities during an accounting period (i.e. Profit or loss). Reported income and expenses are directly related to an organization’s are considered to measure the performance in terms of profit & loss.
Profit & loss a/c is popularly known as P&L A/c. It is also called as Profit and Loss Statement or income and expense statement. No matter whether how you call profit & loss statement, it reveals money spent or cost incurred in an organization’s effort to generate revenue, representing the cost of doing business.
Objective of Profit & Loss A/c
The very purpose of profit and loss account is to ascertain whether the business is making profit or loss for a given period. In other words, Profit & Loss Account reveals money spent or cost incurred in an organization’s effort to generate revenue, representing the cost of doing business.
Profit and Loss A/c Statement
The profit and loss (P&L) statement is an extremely crucial financial statement that gives a summary of the revenues, costs, and expenses incurred by a business during a specific period, usually a fiscal quarter or year.
This component considers all the indirect expenses and incomes including the gross profit/loss to arrive the net profit or loss.
| Debit side of Profit and Loss Account | |
| Items | Description |
| Cost of Sales | This term refers to the cost of goods sold. The goods could be manufactured and sold. |
| Other Expenses | All expenses which are not directly related to the main business activity will be reflected in the P & L component. The expenses covered here are mostly related to administrative, selling and distribution expenses. Examples are salary to office staff, salesmen commission, insurance, legal charges, audit fees, advertising, free samples, bad debts etc. It will also include items like loss on sale of fixed assets, interest & provisions and accrued expenses as well. |
| Abnormal losses | All abnormal losses are charged against Profit & Loss Account. It includes stock destroyed by fire, goods lost in transit etc. |
| Credit side of Profit and Loss Account | |
| Items | Description |
| Revenue Incomes | These incomes arise in the ordinary course of business, which includes commission received, discount received etc. |
| Other Income | The business will generate incomes other than from its main activity. These are purely incidental. It includes items like interest received, dividend received, etc,. |
Structure of Profit and Loss Statement
The structure of profit and loss statement is divide into 2 broad categories, one is the debit side and other is credit side as shown below:
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Profit & Loss Statement |
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Dr |
Cr |
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Particulars |
Amount |
Particulars |
Amount |
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Opening Stock |
|
--------------- |
Sales Accounts |
--------------- |
|
|
XXXX |
------ |
|
Sales |
------ |
|
|
XXXXXXXX |
----------- |
|
Closing Stock |
--------------- |
|
|
Purchase Accounts |
--------------- |
XXXXXX |
------ |
|
|
|
XXXXXXXXX |
------ |
|
XXXXXXXX |
------ |
|
|
Gross Profit c/o |
--------------- |
--------------- |
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||
|
|
6276700.05 |
Gross Profit b/f |
--------------- |
||
|
Indirect Expenses |
--------------- |
Indirect Incomes |
-------- |
||
|
XXXXXX |
------ |
|
|
------ |
|
|
XXXXXXXX |
------ |
|
------ |
|
|
|
Nett Profit |
--------------- |
|
|||
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Total |
|
--------------- |
Total |
|
--------------- |
The left side is called as “Dr” that represents all direct and indirect expenses and the right side is called as “Cr” side that shows direct and indirect incomes from business operations.
Components of Profit & Loss A/C
Profit & Loss Account consists of two broad components mentioned below
- Trading Account
- Profit and loss account statement.
Trading Account
Trading Account is an account which is prepared by a manufacturing/merchandising concern. The purpose of trading account or this financial statement is to find out the gross profit or gross loss which, is an important indicator of business efficiency. All the expenses and income which are direct in nature are considered.
The components which forms part of the trading account:
| Debit side of Trading Account | |
| Items | Description |
| Opening Stock | This includes the closing balance inventory carried forwarded from previous period. In the case of trading concern, the opening stock includes only finished goods. The amount of opening stock should be taken from Trial Balance. |
| Purchases | The amount of purchases made during the year. Purchases include cash as well as a credit purchase. The deductions can be made from purchases related to purchase return, goods withdrawn by the proprietor, goods distributed as free sample etc. |
| Direct Expenses | It means all those expenses which are incurred from the time of purchases to making the goods in a suitable condition. These expenses include freight inward, packaging cost, wages etc. |
| Gross Profit | If the credit side of trading A/c is greater than the debit side of trading A/c, gross profit will arise. |
| Credit side of Trading Account | |
| Items | Description |
| Sales Revenue | It denotes income earned from the main business activity or activities. The income is earned when goods or services are sold to customers. If there is any return, it should be deducted from the sales value. |
| Closing Stock | This includes all the value of inventory held on the date of closure of books of accounts.In case of trading business, there will be closing stocks of finished goods only. According to conservatism convention, stock is valued at cost or net realizable value whichever is lower. |
| Gross Loss | If the debit side of trading A/c is greater than the credit side of trading A/c, gross loss will appear. |
Example of Profit and Loss Statement
Below is the example of a profit and loss statement of Max Electronics for the current financial year 2020-21.
If you look at the above example of profit and loss statement, the total of direct income is reduced by direct expenses to arrive the gross profit. The gross profit is then added with indirect incomes and reduced by indirect expenses to arrive net profit.
How to prepare Profit and Loss Statement
Traditionally, to prepare profit and loss statement, set of other statements are prepared that help you gather the data to prepare this statement. Below are the steps to prepare profit and loss statement
- Prepare ledger accounts: From the journal book, you need prepare an account statement for each ledger to determine the closing balance.
- Create trial balance: Trial balance is a summary of all the ledger accounts. It lists all ledger accounts with closing balance posted from individual ledger accounts statement
- Preparing trading and profit & loss statement : Here, all the ledger accounts having a nature of the purchase, sales, direct expense and income, indirect expenses and income are posted to profit and loss statement in the structure that we discussed above.
Profit and loss statement being a crucial financial statement and most sought-after statement for decision making, the requirement to view the reports is more frequent than the traditional need of viewing it yearly or half-yearly. As a result, most businesses have automated the process of preparing the profit and loss statement using business management software.
Using TallyPrime, the powerful business management, you can generate all the financial reports automatically with a click of button. Its powerful analytical tolls help you get more insights to run your business better.
Comparative Profit and Loss statement in TallyPrime
Vertical Profit and Loss A/c in TallyPrime
