Financial Management & Cost Accounting

Module 3. Trial balance, bank reconciliation, depreciation and final accounts

Lesson 16
INTRODUCTION AND PREPARATION OF PROFIT AND LOSS ACCOUNT

16.1 Profit and Loss Account

To ascertain net profit earned or loss suffered during a given period of time, Profit and Loss account need to be prepared. This Profit and Loss account is prepared after ascertaining the gross profit (or gross loss) from the Trading account. The preparation of the profit and loss account starts by writing the gross profit on the credit side ; or if there is gross loss it is written on the debit side.

After that all those expenses (and losses) which have not been entered in the Trading Account are written on the debit side and all the Income & gains (other than sales income) are written on the credit side. Finally the balancing figure of this account gives the net profit or net loss for the given period. The net profit or net loss is transferred to the capital account.

While preparing the Profit and loss account care should be taken to include related expenses under one group; and the groups should be based on various functions such as Marketing, administration, selling, financing etc so as to give the reader a correct idea of the profit earned or loss suffered by the firm during the given period.

Format of Profit and loss account
Particulars	Amount(Rs.)	Particulars	Amount(Rs.)
To Gross loss transferred from Trading a/c		By Gross Profit transferred from Trading a/c
To management expenses:		By interest received
salaries		By discount received
rent, rates and taxes		By commission received
stationery and printing charges		By Income form investments
Telephone expenses		By apprenticeship premium
legal charges and law costs		By rent
entertainment expenses		By miscellaneous income
Insurance premium		By net loss transferred to capital account
general expenses
Audit fees
To selling expenses :
Advertising
salesmen salaries
Selling commission
Brokerage
travelling expenses
Free samples
Bad debts
To Distribution expenses
warehouse rent
carriage outward
warehouse insurance
Packing expenses
Delivery van expenses
To Depreciation :
Maintenance expenses
Depreciation of assets
To Finance expenses:
Discount on bills
Discount allowed
Interest on capital
Interest on loans
Loss by fire
To net profit transferred to capital account

16.2 Advantages of Profit and Loss Account

1. The net result –profit or loss , revealed by this account is an index by which progress can be measured.

2. Various expenses can be effectively controlled by comparing various expenses, year by tear.

3. Profitability is the basis and helps in planning of action.

Table 16.1. Difference between Trading and Profit and Loss Account

Trading Account	Profit and Loss Account
1. The first section of revenue account is trading account. It is prepared to know only the result of trading. It deals with purchasing and manufacturing costs of goods. Balance of this account is transferred to profit and loss account.	1. The second section of revenue account is known as the profit and loss account. It is prepared to know the ultimate result of the business. It deals with administration, selling, distribution expenses etc. Balance of this account is transferred to capital account.

Illustration

Consider the following data of M/S Natubhai and sons' books of accounts, Its Trial balance as on 31st march 2008 is as follows. Prepare the Final Accounts

Trial Balance

Debit balance	Amount(Rs.)	Credit Balance	Amount(Rs.)
Stock on 1.04 .2007	5000	Capital	100000
Purchases	37500	Bills payable	12500
Wages	2500	Sundry Creditors	12500
Fuel and Power	1500	Sales	52750
Furniture	12500	Bank overdraft	15000
Machinery	65000		0
Cash in hand	7500		0
Bank balance	30000		0
Salary	7500		0
Royalty	1250		0
Factory Rent	1250		0
Advertisement	1500		0
Office expenses	750		0
Commission	1250		0
Bills Receivable	7500		0
Discount	250		0
Sundry Debtors	10000		0
	192750		192750
Note:-
Stock on 31st March 2008 is Rs. 12500

ANSWER

Trading Account

Particulars	Amount(Rs.)	Particulars	Amount(Rs.)
To Opening Stock	5000	By sales a/c	52750
To Purchases a/c	37500	By closing a/c	12500
To wages a/c	2500
To fuel and power a/c	1500
To royalty a/c	1250
To factory rent a/c	1250
To Gross profit transferred to P& L account	16250
	65250		65250

P and L account for year ended on 31^st March 2008

Particulars	Amount(Rs.)	Particulars	Amount(Rs.)
To salary a/c	7500	By Gross profit transferred to Pand L account	16250
To advertising a/c	1500
To office expenses a/c	750
To Commission	1250
To discount	250
To Net profit Transferred to the capital account in the balance sheet	5000
	16250		16250

Balance sheet as on 31st March 2008

Liabilities	Amount(Rs)	Assets	Amount(Rs)
Capital	100000	Machinery	65000
Add Net Profit	5000	Furniture	12500
Bank overdraft	15000	Bills receivable	7500
Bills Payable	12500	Sundry Debtors	10000
Sundry Creditors	12500	Stock in trade	12500
		cash in hand	7500
		cash in bank	30000
	145000		145000