What is Profit and Loss Account?
Profit and Loss Account is a statement which shows the difference between the net worth of a business at the beginning and at the end of the accounting year. This statement shows the amount of net profit and net loss for a particular fiscal year. However the statement completely ignores the sources and amounts of the income and expenses which resulted in net profit or net loss.
Purpose of Profit and Loss Account
The statement of profit and loss account is prepared at the end of each year. It provides the summary of all the income and expenses that have risen during an accounting period. The most important thing to note is that, it includes the incomes and expenses incurred during a year. On the other hand Balance Sheet tells about the financial position of the company on a particular date.
The motive of all the business is to earn profit. This statement shows whether the final objective has been realized or not. It is not only the owner who is interested in the profit and loss account. There are others also who have an interest in this statement such as directors, executives, shareholders, employees, creditors, prospective buyers of business, etc.
Profit and Loss Account Format
|To opening stock||By Sales|
|To Purchases||By Closing stock|
|To Carriage Inward|
|To gross profit c/d (profit)||By gross loss c/d (loss)|
|To Gross Profit b/d (loss)||By gross profit b/d (profit)|
|To salaries||By interest earned|
|To carriage outward||By dividend earned|
|To rates and taxes||By rent earned|
|To insurance||By discount received|
|To depreciation||By profit on sale of fixed assets|
|To bad debts||By profit on sale of investments|
|To interest paid|
|To travelling expenses|
|To discount allowed|
|To loss on sale of fixed assets|
|To loss on sale of investments|
|To loss by fire|
|To net profit transferred to B/S||By net loss transferred to B/S|