Profit and loss account is the second step in final accounts as it is prepared after trading account is closed. It is prepared to ascertain the amount of net profit or net loss as a result of business operation during a certain accounting period. It is maintained taking into account all the revenue loss, revenue gain and other operating expenses thus showing the net result room operation during certain period of time. All the expenses which are incurred to generate revenue are shown in debit side of profit and loss account whether these expenses are paid in cash or not and all revenue incomes whether received or to be Importance and advantage or profit and loss account
The advances of profit and loss account are as follows:
received are shown in the credit side of profit and loss account. Matching principle of accounting required that all expenses whether paid or not must be matched with the revenue earned in a certain accounting period. Thus profit and loss account collection all expenses, losses incomes and gain of an accounting period in order to calculate net profit or net loss.
The advances of profit and loss account are as follows:
• It is shows the operating results of company in terms of net profit and net loss.
• It facilitates to compares the profit of a current year with theat of last year and thus helps to knows whether the company is running effectively or not not.
• It helps in controlling indirect expenses and in improving profitability.
• It provides relevant information for determining bonus for worker. Commission to manager and tax payable to the government.
Preparation of profit and loss account
A profit and loss accounts is prepared at the end of an accounting period with a view to determining the net profit or loss. It is opened with the figures of gross profit or gross loss taken out from the trading account. Thus gross profit is brought down to the credit side and gross loss to the debit side of profit and loss account. And then all the revenue or losses which are not shown in trading account are shown on debit side and other indirect incomes or gains are shown on the credit side of profit and loss account. If credit side exceeds the debit side. Then it result in net profit and if the debit side exceeds credit side, then it results in net loss.
Closing entries (profit and loss a/c)
All the indirect expenses and income other than sales are transferred to profit and loss account each year. The following entries are made to transfer and close such entries (account).
Accrued income (income earned but not received)
Accrued income is also knows as outstanding income. It represents income due but the amount has not been received yet. It is the income of the same accounting years. It should, therefore given effect in the final accounts of business organization. They entry for adjustment is as follows:
Advance income
Advance income is also knows as unearned income. It is income received in advance in advance. In other words, amount received in advance before delivering the services are knows s advance income. Advance income don't form part of current rear's income, therefore, it should be deducted from the concerned income to find out the true net income of the business organization. The entry for adjustment for advance income.
Depreciation
Depreciation is the automatic and gradual decline in the value of fixed assets. It represents expenses or loss for the business organization and must take into account in final account of a business organization. The entry for adjustment is given below:
Loss of goods by some reasons and insurance claim
Sometimes goods can be lost due to fire, theft or earthquake etc. normally, goods are insurance by the company to protect from such losses. However, the insurance company may accept such claim for losses partially, or fully, even some time, the insurance company many not accepts the claim of the company at all.
Fictitious and intangible assets written off
All losses and expenses Incurred during the formation of a company are called fictitious assets. Fictitious expenses are expected to provide benefit for long period. These assets have to be written off (amortized) within the period prescribed by law. Discount on issue of shares/debentures. Preliminary expenses, underwriting commission are some of the examples of fictitious assets. Similarly, assets having no physical existence are called intangible assets. Goodwill, copyright, paten are some of the examples of intangible assets. These assets also collapse after their useful life. Intangible assets, therefore, must be written off over their usable life.
• It is shows the operating results of company in terms of net profit and net loss.
• It facilitates to compares the profit of a current year with theat of last year and thus helps to knows whether the company is running effectively or not not.
• It helps in controlling indirect expenses and in improving profitability.
• It provides relevant information for determining bonus for worker. Commission to manager and tax payable to the government.
Preparation of profit and loss account
A profit and loss accounts is prepared at the end of an accounting period with a view to determining the net profit or loss. It is opened with the figures of gross profit or gross loss taken out from the trading account. Thus gross profit is brought down to the credit side and gross loss to the debit side of profit and loss account. And then all the revenue or losses which are not shown in trading account are shown on debit side and other indirect incomes or gains are shown on the credit side of profit and loss account. If credit side exceeds the debit side. Then it result in net profit and if the debit side exceeds credit side, then it results in net loss.
Closing entries (profit and loss a/c)
All the indirect expenses and income other than sales are transferred to profit and loss account each year. The following entries are made to transfer and close such entries (account).
Accrued income (income earned but not received)
Accrued income is also knows as outstanding income. It represents income due but the amount has not been received yet. It is the income of the same accounting years. It should, therefore given effect in the final accounts of business organization. They entry for adjustment is as follows:
Advance income
Advance income is also knows as unearned income. It is income received in advance in advance. In other words, amount received in advance before delivering the services are knows s advance income. Advance income don't form part of current rear's income, therefore, it should be deducted from the concerned income to find out the true net income of the business organization. The entry for adjustment for advance income.
Depreciation
Depreciation is the automatic and gradual decline in the value of fixed assets. It represents expenses or loss for the business organization and must take into account in final account of a business organization. The entry for adjustment is given below:
Loss of goods by some reasons and insurance claim
Sometimes goods can be lost due to fire, theft or earthquake etc. normally, goods are insurance by the company to protect from such losses. However, the insurance company may accept such claim for losses partially, or fully, even some time, the insurance company many not accepts the claim of the company at all.
Fictitious and intangible assets written off
All losses and expenses Incurred during the formation of a company are called fictitious assets. Fictitious expenses are expected to provide benefit for long period. These assets have to be written off (amortized) within the period prescribed by law. Discount on issue of shares/debentures. Preliminary expenses, underwriting commission are some of the examples of fictitious assets. Similarly, assets having no physical existence are called intangible assets. Goodwill, copyright, paten are some of the examples of intangible assets. These assets also collapse after their useful life. Intangible assets, therefore, must be written off over their usable life.
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