The Profit and Loss Account is a statement of income and expenditure for a given period, and the net amount of these two elements is known as the profit or loss for that company. It is prepared to assess whether the company has generated profit or loss through its activities.
Normally, Profit and Loss Statements are prepared at the end of each accounting year. The accounting year, as defined by our accounting standards, starts on the 1st of April each year and ends on the 31st of March of the next year.
Importance of Profit and Loss Account
- Profit & Loss statements must be prepared under the Companies Act rules and regulations.
- It is a part of the Balance Sheet.
- The financial health and achievements of your business are assessed with this statement. You will know whether your business is earning profit or incurring losses through this statement.
- It is the preliminary stage for preparing your Balance Sheet.
- One should first arrive at the Profit or Loss figure before preparing the Balance Sheet of any company, as that figure is to be shown in assets or liabilities as the case may be.
- The Profit and Loss Statement is to be submitted along with the Balance Sheet for filing your tax returns and for Income-Tax assessments.
- Banks require this statement along with the Balance Sheet while sanctioning loans to business.
How to Prepare Profit and Loss Account
It is very simple to prepare a profit and loss statement. It is a summarised statement of expenses and incomes to derive the net result.
- First of all, you need to balance each account in the Main Ledger or General Ledger of your business and copy them to the Trial Balance Sheet.
- Then tally your Trial Balance.
- On the basis of that trial balance, you can easily prepare a profit and loss statement. Enter all expenses in the expenditure column and all income in the income column. The net result will give you the profit and loss.
- There are two types of preparation. One is horizontal P&L a/c, and the other is vertical P&L a/c.
Horizontal Profit and Loss Account Sample
Income Expenditure
Sales 5,000,000
Goods purchased 37,50,000
Goods purchased 37,50,000
Freight/transportation 2,50,000
Labour charges 50,000
Godown rent 30,000
_______ _________
50,00,000 40,80,000
Gross/Trading Profit 9,20,000
Gross/Trading Profit 9,20,000
1) Staff salary 1,80,000
2) Electricity 50,000
3) Stationery 30,000
4) Package charges 30,000
5) Sales promotion 30,000
6) Other expenses 20,000
Total (1 to 6) 3,40,000
Profit before interest/depreciation 5,80,000
Interest on loans 100000
Depreciation of assets 180000
2,80,000
NET PROFIT 3,00,000
NET PROFIT 3,00,000
The above is a sample format of profit and loss account prepared in horizontal format.
In a vertical format, you will start with sales income, and below it, all the expenses are mentioned in the same manner as in the above format. The three elements of Gross profit, Profit before Depreciation and Net profit will be calculated in the same manner and in the same column under income.
All expenses directly related to the production of goods are taken for calculating the Trading profit of the company. Then salaries and administrative expenses and sales promotion are taken to arrive at the net profit before interest and depreciation. Then, you can separately calculate profit after depreciation and profit after interest, if you want them separate, to get separate statistics for each element of cost.
It is customary to provide the figures of the previous year also in the profit and loss statements, to enable comparison with previous achievements.
