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Profit and Loss Statement (P&L) Definition - Format, Entries, Debit & Credit Side

Profit and Loss Statement (P&L) Definition

By creating a trading account, one gets to know the gross profit or gross loss as a result of the purchase and sale of goods. But the businessman has to make many expenses which are not written in the trading account, so every businessman is more interested in finding the net profit or net loss in the year. To find out, a profit and loss account is created in which all the expenses and income of the year are written off. If you are a student of a Commerece subject. So it is very important to understand accounting terminology as well as it is also important to know What Is Depreciation.

Profit and Loss Statement (P&L) Definition - Format, Entries, Debit & Credit Side
Profit and Loss Statement (P&L) Definition


Need and Importance of Profit & Loss Account

1. Knowledge of net profit or net loss - From the trading account only the knowledge of gross profit or gross loss as a result of business actions. Whereas the profit-loss account gives the knowledge of the net profit or net loss which is available to the business owner and which is credited to his capital account.

2. Comparison of profit of previous years - Profit and loss account is created every year. Therefore, by comparing the profit and loss account of the current year with the profit and loss account of the previous year, the real situation of the business can be studied. And based on the conclusions obtained, a future policy can be made.

3. Control of expenses - The expenditure shown in the Profit and Loss Account is compared to the expenditure of previous years. And the percentage of each expenditure by net profit is also determined and they are compared with these percentages of the previous year. Such a comparison helps in taking effective steps to control unnecessary expenses.

4. Help in creating the balance sheet - Only after knowing the net profit from the profit and loss account, the balance sheet can be made.

Did you want to know - What is Provisions & Reserve - Difference Between Provisions and Reserves

Profit & Loss Account Preparation

The profit and loss (P&L) statement is started by writing down the amount of gross profit or gross loss brought from the trading account. All the expenses which are not written to the trading account are written on the debit side of the profit and loss account. Administration expenses, sales expenses and distribution related expenses are mainly in these cases. These expenses are called indirect expenses. A profit-loss account is a nominal account, so all expenses are written on the debit side of this account (Debit all expenses and losses). Credit all incomes and gains are written in the credit side of the profit and loss account.

Profit & Loss Statement - Debit Side

Items to be written on the debit side of the profit and loss account

(1) Gross Loss - If the gross loss is known from the trading account, it is written first on the debit side of the profit and loss account.

(2) Office and Administration Expenses - such as the salary of office workers, office rent, lighting, post-telegraph expenditure, printing, civil expenditure, auditor's fees, etc.

(3) Selling and Distribution Expenses - such as advertisements, commissions, carriage on sale, bad debts, packing expenses etc.

(4) Miscellaneous Expenses - These expenses include interest on loans, interest repair expenses on capital, losses, donations etc.

Profit & Loss Statement - Credit Side

Items written in the credit side of the profit and loss account

(1) Gross Profit - First write the amount of gross profit made from the trading account in the credit.

(2) Other benefits: All income is written on the credit side such as income from appropriations, rent received, exemption received, commission received, interest received etc.

If the credit side of the profit-loss account is more than the debit side, there is a net profit which is added to the capital on the liability side of the balance sheet and if the debit side of the profit-loss account is more than the credit side. So there is a net loss which is subtracted from the capital on the liability side of the balance sheet.

Profit & Loss Statement - Journal Entries

Closing Entries Related to Profit and Loss A/c

Did you want to know how to create Journal Entries. What Is Debit & Credit Rules

1. The balances in the accounts of all expenses and losses are transferred to the debit side of profit and loss account by the following entry:

Profit & Loss A/c (DR)

        To Salaries A/c 

        To Rent, Rates & Taxes A/c 

        To Printing & Stationery A/c 

        To Postage & Telegrams A/c 

        To General Expenses Etc. A/c 

(Transfer of nominal accounts showing DR. Balances to the Debit Of P & L A/c)

2. All the profit and income accounts balances are transferred to the credit side of the profit and loss account by the following entry:

Interest Received A/c (Debit)

Commission Received A/c (Debit)

Rent Received A/c (Debit)

        To Profit and Loss 

(Transfer of nominal accounts showing Cr. balances to the Credit of P & L A/c)

3. To transfer the credit balance of the profit-loss account, ie the net profit.

Profit & Loss A/c (DR)

        To Capital A/c

(Transfer of net profit to capital A/C)

4. To transfer the debit balance of the profit-loss account, ie the loss due

Capital A/c (DR)

        To Profit & Loss A/c

(Transfer of net Loss to capital A/C)


Profit & Loss Statement - Format

Profit and Loss A/c
For the year ending...........

Dr (Debit Side)

To Gross Loss B/d
(Transferred From Trading A/c)

Office Expenses

To Salaries
To Salearies & Wages
To Rent, Rates &Taxes
To Printing & Stationery
To Postage & Telegram
To Insurance Premium
To Telephone Charge
To Legal Charge
To Audit Fees
To Travelling Expenses
To Establishment Expenses
To Trade Expenses
To General Expenses

Selling & Distribution Expenses

To Carriage Outwards, Carriage On Sales
To Advertisement
To Commission
To Brokerage
To Bad-Debts
To Export Duty
To Packing Charges
To Delivery Van
To Stable Expenses

Miscellaneous Expenses

To Discount
To Repair
To Depreciation
To Interest (DR)
To Bank Charges
To Entertainment Expenses
To Conveyance Expenses
To Donation and Charity
To Loss on Sale Of Assets
To Net Profit
(Transferred To Capital A/c)

Cr (Credit Side)

By Gross Profit B/d
(Transferred From Trading A/c)
By Rent From Tenant
By Rent (CR)
By Discount Received OR Discount (CR)
By Commission Received
By Interest On Investments
By Dividend On Shares
By Bad-Debts Recovered
By Apprentice Premium
By Profit On Sale Of Assets
By Income From Other Sources
By Miscellaneous Receipts
By Net Loss
(If Any Transferred To Capital A/c)
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