Profit & loss account is a nominal account which shows the financial performance of an entity.

Steps to be followed while preparing Profit and Loss Account

A. Debit side

(i) In case there is a Gross Loss, it is transferred from Trading A/c is written as the first item.

(ii) then all items of revenue expenses and losses are written. These items may be stationery expenses , salaries, interest on loan, etc.

B. Credit side

1. In case there is a Gross Profit, it is transferred from Trading A/c is written as the first item.

2. Next all items of revenue incomes and gains are recorded. These may be interest on investments, discount received, commission received, etc.

C. Ascertaining Net Profit/Net Loss

The next step is to get the balancing figure as debit and credit will not match generally. If credit side is more than the debit side the difference in amount is written as Net Profit. If debit side exceeds the credit side, the difference is Net Loss. This amount is transferred to Capital Account.

 Total of Debit side < Total of credit side ⇒ Net loss

 Total of credit side > Total of debit side ⇒ Net profit

Net Profit = Gross Profit + Other Incomes – Indirect Expenses

Relevant items in Profit & Loss account

Salaries :

These include salaries paid to the administration, godown and warehouse staff for the services rendered by them for running the business. If salaries are paid in kind by providing certain facilities (called perks) to the employees such as rent free accommodation, meals, uniform, medical facilities should also be regarded as salaries and debited to the profit and loss account.

Rent paid :

These include office and godown rent, municipal rates and taxes, factory rent, rates and taxes. The amount of rent paid is shown on the debit side of the profit and loss account.

 Interest paid :

Interest paid on loans, bank overdraft, renewal of bills of exchange, etc. is an expense and is debited to profit and loss account.

 Commission paid:

Commission paid or payable on business transactions undertaken through the agents is an item of expense and is debited to profit and loss account.

 Repairs :

 Repairs and small renewals/ replacements relating to plant and machinery, furniture, fixtures, fittings, etc. for keeping them in working condition are included under this head. Such expenditure is debited to profit and loss account.

Selling & distribution expenses:

These expenses are done in order to sell the goods in the market and to boost the sales as well as providing it to maximum sellers to cover a greater area. It is an indirect expense that is recorded in the debit side of profit & loss account.

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

Depreciation expenses:

The expenses which occur due to reduction in the value of asset because of wear and tear of assets, technological obsolescence , usage of assets etc. It is a non cash expense.

Miscellaneous expenses :

Though expenses are classified and booked under different heads, but certain expenses being of small amount clubbed together and are called miscellaneous expenses. In normal usage these expenses are called Sundry expenses or Trade expenses.

Credit side items

Other incomes :

 Besides salaries and other gains and incomes are also recorded in the profit and loss account. Examples of such incomes are rent received, dividend received, interest received, discount received, commission received, etc.

                         PROFIT & LOSS ACCOUNT  OF ……. FOR THE YEAR ENDED 31^ST MARCH 20XX

Operating Profit

Operating profit is the excess of operating revenue over operating expenses. While calculating operating profit, the incomes and expenses of a purely financial nature are not taken into account. Thus, operating profit is profit before interest and tax (EBIT). Similarly, abnormal items such as loss by fire, etc. are also not taken into account. It is calculated as follows:

Operating profit = Net Profit +Non Operating Expenses – Non Operating Incomes

Non operating expenses includes expenses that are incurred for other than the core business of the entity. e.g. interest on loan

 Non operating income includes income that is earned from other than the core business of the entity. e.g. dividend income, profits or incomes earned from outside the business

Balance sheet

The balance sheet is a statement prepared for showing the financial position of the business summarising its assets and liabilities at a given date. The assets reflect debit balances and liabilities (including capital) reflect credit balances. It is prepared at the end of the accounting period after the trading and profit and loss account have been prepared. It is called balance sheet because it is a statement of balances of ledger accounts that have not been transferred to trading and profit and loss account and are to be carried forward to the next year with the help of an opening entry made in the journal at the beginning of the next year.

Preparing Balance sheet

All the account of assets, liabilities and capital are shown in the balance sheet. Accounts of capital and liabilities are shown on the left hand side, known as Liabilities. Assets and other debit balances are shown on the right hand side, known as Assets. There is no prescribed form of Balance sheet, for a proprietary and partnership firms.

                                    BALANCE SHEET OF …… AS AT 31^ST MARCH, 20XX

Relevant Items in the Balance Sheet Items which are generally included in a balance sheet are explained below :

1.Current Assets:

Current assets are those which are either in the form of cash or a can be converted into cash within a year. The examples of such assets are cash in hand/bank, bills receivable, stock of raw materials, semi-finished goods and finished goods, sundry debtors, short term investments, prepaid expenses, etc.

2.Current Liabilities:

Current liabilities are those liabilities which are expected to be paid within a year and which are usually to be paid out of current assets. The examples of such liabilities are bank overdraft, bills payable, sundry creditors, short-term loans, outstanding expenses, etc.

3.Fixed Assets:

Fixed assets are those assets, which are held on a long-term basis in the business. Such assets are not acquired for the purpose of resale, e.g. land, building, plant and machinery, furniture and fixtures, etc. Sometimes the term ‘Fixed Block’ or ‘Block Capital’ is also used for them.

4.Intangible Assets :

These are such assets which cannot be seen or touched. Goodwill, Patents, Trademarks are some of the examples of intangible assets.

5.Investments:

Investments represent the funds invested in government securities, shares of a company, etc. They are shown at cost price. If, on the date of preparation the balance sheet, the market price of investments is lower than the cost price, a footnote to that effect may be appended to the balance sheet.

6.Long-term Liabilities :

All liabilities other than the current liabilities are known as long-term liabilities. Such liabilities are usually payable after one year of the date of the balance sheet. The important items of long term liabilities are long-term loans from bank and other financial institutions.

7.Capital:

It is the excess of assets over liabilities due to outsiders. It represents the amount originally contributed by the proprietor/ partners as increased by profits and interest on capital and decreased by losses drawings and interest on drawings.

8.Drawings :

Amount withdrawn by the proprietor is termed as drawings and has the effect of reducing the balance on his capital account. Therefore, the drawings account is closed by transferring its balance to his capital account. However it is shown by way of deduction from capital in the balance sheet.

Marshalling of Assets and Liabilities

In a balance sheet, the assets and liabilities are arranged either in the order of liquidity or permanence. Arrangement of assets and liabilities in a particular order is known as Marshalling.

In case of permanence, the most permanent asset or liability is put on the top in the balance sheet and thereafter the assets are arranged in their reducing level of permanence.