Profit Antiond Los Present

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The Profit and Loss Account

By team 6


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PROFIT & LOSS ACCOUNT

A financial statement that summarizes the revenues, costs and

expenses incurred during a specific period of time - usually a fiscal

quarter or year. These records provide information that shows the

ability of a company to generate profit by increasing revenue

and reducing costs. The P&L statement is also known as a "statement

of profit and loss", an "income statement" or an "income and expense

statement". A profit and loss account shows 2 parts i.e. Trading

account which shows the result of buying and selling of goods.

After calculating the gross profit or gross loss the next step is to

prepare the profit and loss account. To earn net profit a company must

increase sales or reduce expenses.


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Profit and Loss account

Measuring profit

Income

Expenses

Net Profit

Drawings or

dividends

Retained

profitIncrease in assets

The profit and loss statement showsthe trading performance of the

business and the distribution of

profit.


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Or measuring loss

Turnover

Costs

Net Loss

Drawings or

dividends

Retained

lossDecrease in assets


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NEEDFORPROFIT AND LOSS ACCOUNT

The purpose of the profit and loss account is to:

Show whether a business has made a PROFIT orLOSS over a financial

year.

A profit and loss account starts with the TRADING ACCOUNT and then

takes into account all the other expenses associated with the business.

Trading account

The trading account shows the income from sales and the direct costs of

making those sales. It includes the balance of stocks at the start and

end of the year.


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FORMATOFTRADING ACCOUNT

PARTICULARS AMT

TOOPENINGSTOCK XXX

TOPURCHASES

LESS:REURNSOUTWARDS

xxx

TOWAGES XXXTOFREIGHT XXX

TO CARRIAGE XXX

INWARDS

TO CLEARING CHARGES XXX

TOPACKAGING CHARGES XXX

TODOCK CHARGES XXX

TOPOWERFACTORY XXX

TOOCTORIDUTY XXX

TOMOTIVEPOWER, COAL ,GAS,OIL

FUEL, HEATING, LIGHTINGETC

TO FACTORYEXPENSES

TO FACTORYRENT ANDINSURANCE

TOGROSSPROFITTRANSFERRED

TOP& L ACCOUNT XXX

PARTICULARSAMT

BYSALES XXX

LESS:SALESRETURN

BY CLOSINGSTOCK XXX

BYGROSS LOSSTRANSFERRED

TOP

& L ACCOUNT


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PREPARETRADING ACCOUNTFORTHEYEARENDING 31ST MARCH 2011 WITH

THEFOLLOWINGINFORMATION

PARTICULARSOPENINGSTOCK

SALES

SALESRETURN

CARRAGEINWARD

PURCHASERETURN

WAGES

PURCHASES

CLOSINGSTOCK

FREIGHT

FUEL AND HEAT

IMPORTDUTYONPURCHASE

AMT1,70,000

3,50,000

20,000

20,000

10,000

50,000

1,10,000

1,60,000

10,000

10,000

5,000


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TRADING ACCOUNT FOR THE YEAR ENDIND 31ST MARCH 2011

PARTICULARS

AMT

To opening stock

1,70,000

To purchase 1,10,000

less :returns (10,000 )1,00,000

To wages

50,000

To carriage inward

20,000

To freight

10,000

To fuel and heat

10,000

To import duty on purchase

5,000

To gross profit c/d

1,25,000

(transferred to p & l account)

PARTICULARS AMT

By sales 3,50,000

Less:returns ( 20,000 )

3,30,000

By closing stock

1,60,000

4,90,000


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Format of Profit & Loss AccountParticulars Amt. Rs. Particulars Amt. Rs.

To gross loss b/d (transferredfrom trading a/c )

Office and Administration

Expenses

To Office Salaries

To Salaries and WagesTo Rent, Rate and & Taxes

To Lighting and Heater

To postage & Telegram

To Printing & Stationery

To Telephone ChargesTo Legal charges

To Office Exp.

To Audit Fees

To Establishment Exp

To Trade Exp

To Insurance premium

By Gross profit (transferredFrom Trading a/c )

By Rent (Cr.)

By Rent from tenant

By Interest (Cr.)

By Int. on InvestmentBy Int. on Drawing

By Int. on Bank deposits

By Discount (Cr.) or discount

received or discount on

purchases

By commission (Cr.) or

commission received

By dividend on shares

By apprentice premium

By provision for discuont on Cr.

By bad debts recover


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To administrative exp.

To directors fees

To management exp.

To stable exp.

To office or shop rent

To subscription

SELLING AND

DISTRIBUTION EXP. :

To carriage outwards or

carriage on SalesTo Advertisement

To Commission (Dr.)

To Bed Debts

To Export duty

To packing chargesTo delivery van exp.

To new provision for bad and

doubtful debts

To selling agents commission

To distribution exp.

To travelling exp.

By rebates (Cr.)

By income from other source

By other incomes

By net loss (if any ) transferres

to capital a/c


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To Selling Agents Salary &

remuneration

To Warehouse Exp.

To Brokerage

To free SamplesTo Entertainment exp.

FINANCIAL EXPENSES

To interest on loan

To discount (Dr.) discount allowed

To initial On capital

To bank charges

To discount on B/R discounted

MISCELLANEOUS EXPENSES

To depreciation

To repairs of assets

To conveyance exp.

To donation in charity

To loss on sale of assets

To loss by theft and fire

To trading exp.

To license fees

To N/P (transferred to capital a/c)


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ITEMSOF ADJUSTMENTS

1. CLOSINGSTOCK

2. OUTSTANDINGEXPENSES

3. PREPAIDEXPENSES

4. ACCRUEDINCOME

5. UNEARNEDINCOME

6. DEPRECIATION

7. INTERESTON CAPITAL8. INTERESTON LOAN

9. INTERESTONDRAWING

10. BADDEBTS

11. PROVISIONFOR BADDEBTS

12. PROVISIONFORDISCOUNTONDEBTORS

13. RESERVESFORDISCOUNTON CREDITORS

14. ACCIDENTAL LOSSES

15. COMMISSIONPAYABLEONPROFIT

16. GOODSSENTON APPROVAL BASIS

17. GOODSINTRANSIT

18. DRAWINGSOFGOODS BYTHE PROPRITOR


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NEED FOR ADJUSTMENTS

The profit or loss for an accounting year is not based on the

revenues realized in cash and the expenses paid in cash

during that year because there may be some receipts of

incomes and payments of expenses during the currentyear which may partially relate to the previous year or to

the next year. Also, there may be some incomes and

expenses relating to the current year that are still to be

brought into books of account. So, unless such items duly

adjusted, the final accounts will not reflect the true and fairview of the state of affairs of the business.


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Adjustments entry

Outstanding expenses: expenses which have incurredduring the

yearbut payments in respects of which has not yet been made,

are called outstanding expenses.

Salaries outstanding

Entry:

Salaries a/c dr xxxto salaries outstanding a/c xxx

Prepaid expenses: the benefit of the amount already spent will

be available in the next accounting yearalso. Such a part of the

concern expenses is calledprepaid expenses.

Example :prepaid insurance

entry:

Insurance prepaid a/c dr xxx

to insurance premium a/c xxx


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Adjustments entry

Accured oroutstanding income :just as some of the expenses incurreddring

the yearmay not be settled in cash at the end of the year, similarly some

incomes may have been earned but not yet received.

Example :

rent receivable a/c dr xxx

to rent a/c xxx

Unearned income or income received in advance :

the amount received in respect of an income during the yearpertains

partically to the next year .

rent a/c dr xxx

to rent received in advance xxx

Depreciation : the value of fixed assets reduces year afteryearbecause of

usage andpassage of time . Decrease in value should be considered as an

expense orloss incurred in realizing revenue andlike otherexpenses should

be chargeable to profit orloss account


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Adjustment entry

Depreciation a/c dr xxx

to asset a/c xxx

BALANCE

DR P& L A/C CR DR SHEET CR

TODEPRECIATION ASSETON (-) DEPRECIATION

FURNITURE


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ADJUSTMENTS ENTRY

INTERESTON CAPITAL :

SUPPOSETHEINTERESTON CAPITAL IS 40,000 ANDTHERATEOF

IINTERESTIS5% . Then the interest will be 2000 . It will be treatedlike he

otherexpenses anddebited to profit andloss account ,, the amount will be

credited to capital account.

Entry

interest on capital a/c dr 2000to capital a/c 2000

P& L

DR ACCOUNT CR balance sheet

To interest 2000 liabilities assets

on

Capital capital 40000(+)int 2000

42000


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qBADDEBTS:

Baddebts referto the amount that the firm has not been able to realise from

its debtors. It is regarded as a loss and is termed as bad debt. The entry for

recording baddebt is:

Baddebts A/c Dr. xxxx

To Debtors A/c xxxx

Example: Ankits trial balance, that it contains baddebts amounting

to Rs. 4,500. Whereas, the sundry debtors of Ankit are reported as Rs. 15,500.

However, assuming one of his debtors who owed him Rs. 2,500 had becomeinsolvent, and nothing is receivable from him.

So the entry will be

Baddebts A/c Dr. 2,500

To Debtors A/c 2,500

treatment of baddebt in p& l a/c

Baddebts 4500

(+ )future bad 2500

debt

7000


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q

Provision forBad andDoubtfulDebts:

FOREXAMPLE: Mr.X feels debtors appear to be 13000

which is theirestimatedrealizable value during next year. It is quite possible

that the whole of this amount may not be realized in future. However, it is

notpossible to accurately know the amount of such baddebts.

The followingjournal entry is recorded in this context :

Profit and Loss A/c Dr. xxxx

To Provision fordoubtfuldebts A/c xxxx

Let us assume, X feels that 5% of his debtors on March 31, 2005 arelikely to default on theirpayments next year. This implies he expects bad

debts ofRs. 650 (Rs. 13,000 5%). Ankit needs to record the adjustment

entry as :

Profit andloss A/c Dr. 650

ToP

rovision fordoubtfuldebts A/c 650

treatment ofprovision fordoubtfuldebts in Profit & Loss A/C

Baddebts 4500

(+) furtherbad 2500

debts

(+) provision for

Discount on debts 650


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a

Provision forDiscount on Debtors:

A business enterprise allows discount to its debtors to encourage prompt

payments. Discount likely to be allowed to customers in an accounting yearcan be

estimated and

provided forby creating a provision fordiscount on debtors. The following journal

entry is recorded to create provision fordiscount on debtors:

Profit andloss A/c Dr. xxxx

To Provision fordiscount on debtors A/c xxxx

Given pdd to be 227

It will be calculated on the amount ofdebtors arrived at after

deducting the doubtfuldebts, i.e. Rs. 12,350 (Rs. 13,000 Rs. 650).

X needs to record the adjustment entry as :

Profit andloss A/c Dr. 227

ToP

rovision fordiscount on debtors A/c 227

treatment of provision fordiscount on debtors

Baddebts 4500

(+)furtherBD 2500

Provision fordoubtful 650

DebtsProvision fordiscount 227


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Illustration 1:-

Show how you will record the following items in the Profit and Loss Account and theBalance Sheet.

The Trial Balance showed the following balances as on December 31, 1987:

Particulars Amount in Rs.

Salaries

Wages

Rent Received

Commission Received

Interest onInvestments

10000=00

20000=00

6600=00

2000=00

6000=00

Additional Information:

1. Salaries amounting to Rs.2,000 are Outstanding.

2. Wages include Rs.1,500 paid in Advance.

3. Interest on Investment include Rs.1,200 for the months of January, February andMarch, 1988

4. Rent for the month of December amounting to Rs.600 is not yet received.

Gross Profit for the year is Rs.40,000 and other expenses amounted to Rs.10,000.


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Profit and Loss Account for the year ended December 31, 1987Dr. Cr.

Particulars Amount inRs.

Amount in Rs. Particulars Amount inRs.

Amount in Rs.

To Salaries

Add: Outstanding

To Wages

Less: Prepaid

To OtherExpenses

To Net Profit

(Transferred toCapital A/c)

10,000

2,000

-------------

20,000

1,500

-------------

12,000

18,500

10,000

13,500

___________54,000

___________

By Gross Profitb/d

By Rent Received

Add: Outstanding

By CommissionReceived

By Interest onInvestments

Less: Received inAdvance

6,600

600

------------

6,000

1,200

------------

40,000

7,200

2,000

4,800

___________54,000

___________


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Balance Sheet as on December 31, 1987

Liabilities Amount in Rs. Assets Amount in Rs.

Current Liabilities:

Salaries OutstandingInterest Received in

Advance

2,0001,200

Current Assets:

Wages PrepaidRent Outstanding

1,500600


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The following balances have been extracted from the trial balance of M/s Kolkata Ltd.

Youare required to prepare the trading and profit and loss account on dated March 31,

2006.Also prepare balance sheet on that date.

Debit balances Opening stock 6,000

Furniture 1,200

Drawings 2,800

Cash in hand

3,000

Purchases 24,000 Sales return

2,000

Establishment expenses4,400

Baddebts

1,000

Debtors

10,000

Carriage1,000

Bills receivable6,000

Bank deposits8,000

Wages 1,000

Trade expenses 500

Bank charges400

Credit balanceCapital 20,000

Sales 41,300

Purchases return 4,000

Bank overdraft 4,000

Baddebts provision 400

Creditors 5,000

Commission 100

Bills payable 5,000

Apprenticeshippremium 500


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ADJUSTMENTS

Adjustments

1. Outstanding salaries Rs. 100. Rent and taxes Rs. 200,Wages Rs.

100.

2. Unexpired insurance Rs. 500.

3. Commission is received in advances Rs. 50.

4. Interest Rs. 500 is to be received on bank deposits. 5. Interest on bank overdraft Rs. 750.

6. Depreciation on furniture @ 10%.

7. Closing stock Rs. 9,000.

8. Furtherbaddebts Rs. 200 New provision @ 5% on debtors.

9. Apprenticeshippremium received in advance Rs. 100. 10. Interest on drawings @ 6%.


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Books of Kolkata Ltd. Trading andProfit and Loss Account for the year ended as at March 31,

2006

Expenses /Losses

Opening stock

6,000

Purchases 24,000

Less purchases return (4,000)

20,000Wages 1,000

Add Outstanding wages 100

1,100

Coal,Gas,Water 2,000

Gross profit c/d

19,200

48300

Revenue/Gains

Sales 41300

Less sales return (2,000) 39,300

Closing stock 9,000

48300


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q

Establishment expenses

4,400

Carriage 1,000

Trade expenses

500Bank charges 400

General expenses 1,000

Salaries 2,000

(+)Outstanding salary (100 )

2,100

Interest on drawings 168Insurance 1,500

(-)Prepaid insurance (500) 1,000

Postage andTelegram 500

Rent,rates andTaxes 2,200

Interest on bank overdraft

750Baddebts 1,000

Add Further bad debts 200

Add Newprovision 490

1,690

Less Oldprovision (400)

1,290De reciation on furniture

Gross profit b/d

19,200

Commission 100

Less Advance commission (50)

50Accrued interest on

500

Deposits

Apprenticeshippremium 500

Less :Advance received 100

400

Documents

Profit Antiond Los Present