What is Profit and loss account? Advantages of profit and loss account,difference Profit and loss appropriation account

What is Profit and loss account? Advantages of profit and loss account,difference Profit and loss appropriation account

Profit and loss account
Meaning of profit loss account
In the process of preparing final accounts, the second step is to prepare profit and loss account. Profit and loss account is prepared to ascertain the opening result of

a company during an accounting year. Opening result is reflected through net profit or net loss. A profit and loss account is a nominal account. Therefore, indirect expenses like office and administrative, selling and distribution and abnormal losses etc. are shown in debit side and all incomes of the business except sales and closing stock are recorded in credit side. If credit side is heavier than debit side the different is net profit and if the debit side is heavier than credit the difference is known are net loss. The amount of net profit is transferred to credit side of profit and loss appropriation account and net loss is transferred to the debit side of the same account.
Advantages of profit and loss account
The main advantage of preparing the profit and loss account is it shows net profit or net loss from business operations. The following are the main advantage of profit and loss account:
i.    It provides the information about net profit or net-loss made by the business during an accou ting year.
ii.    It provides information about indirect expenses.
iii.    It helps to determine the ratio between net profit and sales.
iv.    It also helps to determine the ratio between net profit and sales.
v.    It helps to control the indirect-expenses an improve the future profitability of the organization.
Items that appear in the debit side of profit and loss account
1.    Gross loss: this is the debit balance of trading account, which appears in the debit side of profit and loss account.
2.    Administrative expenses: these are the expenses, which ar incurred for day-ot-day running of official administration and management. These include the following expenses.
(i)    Office salaries or salary & wages (ii) office rent, rates (iii) office insurance (iv) office lighting and heating (v) printing and stationary (vi) postage, telegram and television charge (vii) legal charges (viii) audit fee (ix) director's fee (x) general or trade expenses.
3.    Maintenance expenses: these expenses are incurred for the maintenance of the fixed assets of administrative office. They include repair and renewable, depreciation of assets and loss on revolution of assets etc.
4.    Selling and distribution expenses: these expenses are incurred for promoting sales and distribution os sold goods. The examples of these expenses are: packing charge, godown charge, sales tax, export duty, commission paid to sales agent, travelling expenses, salesman salary and commission, salary to showroom, staff, advertising, distribution of free sample and gift, insurance, bad debt, etc.
5.    Financial expenses: these expenses are incurred for arranging rewuired fund for running the business. They include interest on loan, discount on bill, cash discount allowed, interest on capital etc.
6.    Miscellaneous expenses written off: these expenses are deferred revenue expenditures. In other words, they are incurred for a long period of time. Hence, they are written off at a certain rate each year. The part of such expenses written off is debited in the profit and loss account. Some of them are preliminary expenses, discount/ loss on issue of shares/ debentures, underwriting commission written off etc.
7.    Intangible assets written off: the assets which do not have their physical existence are called intangible assets. Such assets are also written off over a certain period of time. The patent, copyright, trademark written off etc.
8.    Abnormal losses: the losses, which are incurred due to the carelessness of the management like stock loss by fire and not recovered by insurance company, loss on sale of machinery etc.
Items that appear on the credit side of profit and loss account
1.    Gross profit: it is the beginning item of profit and loss account; it is transferred from trading account.
2.    Other incomes: during the course of the business, other than income from the sale of goods, the business may have some other incomes of financial nature e.g. discount or commission received. 3.    Non-trading incomes:  the business may have various transactions with the bank. At the end of the year, the business may earn some amount of interest, which wills dins a place in profit and loss account as no-trading income. The business may have some investment outside the business in the form of share or debenture. Any incomes received from these investment are also considered as non-trading incomes and are treated in the fro these investment are considered as non-trading incomes income and are trted in the same way.
4.    Abnormal gains: there may be capital gains arising during the course of the year. E.g. profit arising out of the sale of fixed assets.

Profit and loss appropriation account

Meaning of profit and loss appropriation account

Profit and loss appropriation account is prepared after the preparation of profit and loss account. It shows the appropriation of net profit for distribution of dividend, transfer to various reserves and issue of bonus share. However, there is no provision of the preparation of profit and loss appropriation account under Nepal company act, 2063.

A profit and loss appropriation account shows the distribution of net profit obtained from profit and loss account. In order to strengthen financial position, a company retains certain profit called retained earring after the apportionment.

These items like dividend to shareholder transfer to various reserves and issue of bonus shares are shown in debit side of profit and loss appropriation account. Adjustments of expenses for the previous year are also recorded in the debit side. In the credit side, last year's profit, current year's net profit from profit and loss account. Adjustments of expenses for the previous year are also recorded in the debit side. In the credit side, last year's profit, current year's net profit from profit and loss account and provision which is no longer rewired are recorded. If credit side is in excess than the debit side, the difference is transferred to liability side of balance sheet under the head reserve and reserve and surplus. If debit side is in excess than credit side, the difference is transferred to assets side of balance sheet under the head of miscellaneous expenditure.

 Importance of profit and loss appropriation account

The following are the importance of profit and loss appropriation account.
i.    It shows the amount of divisible profit.
ii.    It provides the information regarding reserve and fund.
iii.    It provides the information about the appropriation of dividend out of available profit.
iv.    It provides the information about adjustments relating to last year.