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Chapter 1

The Profit and Loss Account OR The Income Statement


Meaning and Definition of Profit & Loss Account:The profit and loss account is an account which shows the net profit or net loss (i.e.,
the ultimate or final profit or loss) of a business for a particular trading period or financial
year which is of 12 months or 1 year.
The net profit or net loss is the profit earned or loss suffered after charging all
business expenses. It provides the information if the business is earned profit or suffered
loss during the trading period or financial year.
Balance Sheet provides information about the assets and liabilities of a company as
of a particular date for example, 31/03/2014.
The Profit and Loss Account is the summary of all transactions, which the
company has entered into on revenue account during the accounting year.

The accounting year is termed as Fiscal Year i.e., involving financial matters which is
related to government revenue and taxes
In India normal accounting year starts from 01/04/2014 o 31/03/2015.
But it can be January to December or any other 12 months period which company
decides.
For tax purposes, however, income data is required for year ending 31/03/2015.
In the US, the Profit and Loss Account is called the Income Statement.

Expenditure incurred in obtaining inputs to be used for sale, is a revenue expenditure.


Capital expenditure is laid out for investment or purchases not intended to be sold at a profit
in the normal course of business.
Revenue:Companies consider revenue as earned when, the services has been provided or the
goods are delivered.
Companies earn revenue by selling its products or services, leasing or renting equipment
or property, receiving interest.
Expenses:"The Matching Principle requires that expenses be recorded in the same period in
which the revenue they helped produce are recorded".
When expenses directly related to producing goods and services are deducted from
net sales, we determine Gross Profit.
Additionally company incurs operating expenses like advertising; salaries; rent;
research and development; office supplies and any other administrative expenses.
Earnings:On deducting these from gross profit we get 'Operating Income'.
Also termed EBIT (Earnings before Interest and Tax).
Sometimes a variant of this is used to express earnings called EBITDA (Earnings
before Interest, Tax, Depreciation and Amortization)
EBIT less costs relating to debt financing and tax.

Expense provides us with 'net earnings'.


Often referred to a 'bottom line' (as it is the last line on the income statement).
While Sales appear on the first line on the income statement and are called 'top line'.
Often expressed as Earnings Per Share (EPS) money the shareholders would receive
for each share of the company, if the company distributed all its earnings to them.
EPS is universally used measure to compare profitability of other competitors in the
Industry.
But funds are required to grow and to expand its business by reinvesting money in its
own business.
Part of net earnings not distributed as dividends are termed as 'Retained Earnings'.
Summary:"The profit and loss account of a company provides information about income and expenses
for a period, operating and net profit, how much of it is distributed to shareholders and lastly
how much retained for growth and reinvestment into the business of the company".

Note:- Im adding the format of Trading and Profit and Loss account
for people who are from non-commerce background. Please go
through them and practice the same as much as you can. As these
are important to solve problems or sums.
Meaning and Definition of Trading Account:The trading account is an account which shows merely the result of trading (i.e., buying and
selling of goods) called gross profit or gross loss.
In other words, it is the account which shows merely the result of buying and selling
of goods, i.e., gross profit or gross loss on trading, without taking into account the indirect
expenses and indirect incomes of the business.
In the words of J. R. Batliboi, The trading account shows the results of buying and
selling of goods. In preparing this account, the general establishment charges are ignored
and only the transactions in goods are included.
Format of Trading Account is as follows:-

Trading Account for the period ending


DD/MM/YYYY

Dr.
Particulars

Rs.

To Opening Stock
To Purchases
Less: Purchases Returns or
Returns Outwards
Expenses incurred in
acquiring and bringing

Rs.
xxx

xxx

xxx

xxx

Particulars
By Sales
Less: Sales
Returns or Returns
Inwards
By Closing Stock
By Profit and Loss
Account

Cr.
Rs
.
xx
x
xx
x

Rs.

xxx
xxx

(Gross loss
transferred to
Profit and Loss
Account)

the goods purchased to


the business premises:
Cartage
Carriage
Import Duty
Clearing Charges
Dock Dues
Excise Duty
Octroi
Expenses incurred in
making the goods ready
for sale:
Wages
Power
Other Manufacturing
Expenses
To Profit and Loss Account
(Gross Profit transferred to
Profit and Loss Account)

xxx

xxx
xxx
xxx
xxx
xxx
xxx
xxx

xxx
xxx
xxx

xxxx

xx
xx

xxxx

xxx
x

Meaning of Profit and Loss Account:The profit and loss account is an account which shows the net profit or net loss (i.e., the
ultimate or final profit or loss) of a business for a particular trading period.
The net profit or net loss is the profit earned or loss suffered after charging all
business expenses. It is the final profit or loss of a business.
Format of Profit And Loss Account is as follows:Note:- There are two formats of Profit and Loss Account preparation, which Ive
mentioned below:First format of P&L A/c

Profit and Loss Account for the period ending


DD/MM/YYYY
Particulars
Rs.
Particulars
By Trading
To Trading A/c
xxx
Account
(Gross profit
(Gross loss
transferred
transferred from
from trading
Trading Account)
account)
To Management,
By Indirect
Office or
Incomes:
Dr.

Cr.
Rs.
xxx

Administration
Expenses:
Salaries
Rent, rates and
taxes
Office lighting and
heating
Insurances
Printing and
Stationery
Postage and
telegrams

Rent received
xxx
xxx
xxx
xxx
xxx
xxx

General charges

xxx

Telephone charges
Audit fees
Legal Expenses
Bank charges
To Maintenance
Expenses:
Repairs
Depreciation
To Selling and
Distribution
Expenses:
Advertisements
Travelling expenses
Cartage, carriage or
freight outwards
Commission paid
Bad debts
To Financial
Expenses:
Cash discount
allowed
Interest on loan
taken
Interest on capital
To Miscellaneous
expenses:
To Capital Account
(Net profit
transferred to capital
account)

xxx
xxx
xxx
xxx

xxx
xxx

xxx
xxx
xxx
xxx
xxx

xxx
xxx
xxx
xxx
xxx

Commission
received
Discount
earned
Bad debt
recovered
Interest
received
Capital
Account
(Net loss
transferred to
capital
account)

xxx
xxx
xxx
xxx
xxx
xxx

Rs.

xxxx

Rs.

xxxx

Second format of P&L A/c:-

Profit and Loss Account for the period


ending DD/MM/YYYY
Particulars
Rs.
Particulars
By Trading
To Trading Account
xxx
Account
(Gross loss
(Gross profit
transferred from
transferred from
trading account)
trading account
To Salaries
xxx
By Rent received
To Rent, rates and
By Commission
xxx
taxes
received
To Office lighting and
By Discount
xxx
heating
earned
By Bad debts
To Insurance
xxx
recovered
To Printing and
By Interest on
xxx
stationery
drawings
To Postage and
By Capital
xxx
telegrams
Account
(Net loss
To general expenses
xxx
transferred to
To Telephone charges
xxx
capital account)
To Interest paid
xxx
To Discount allowed
xxx
To Bad debts
xxx
To Repairs
xxx
To Depreciation
xxx
To Commission paid
xxx
To Carriage outwards
xxx
To Travelling
xxx
expenses
To Capital Account
xxx
(Net profit transferred
to capital account)
Dr.

Rs.

xxxx

Rs.

Cr.
Rs.
xxx

xxx
xxx
xxx
xxx
xxx
xxx

xxxx

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