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Profit and Loss Account – Meaning, Format and General Instructions

Last Updated : 01 Nov, 2023
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The accounting process ends with the preparation of the financial statement. The information about the financial position of any company is provided with the help of Financial Statements. The main objective of preparing the financial statement is to present a true and fair view of the financial performance and position. Accounting data is summarised in such a way that the profitability of the business is clearly visible. Financial Statements also serve as an information tool for all the parties concerned with the firm. To guarantee consistency in reporting, these statements; which include an income statement, balance sheet, and statement of cash flows, must be prepared in accordance with predetermined and established accounting principles and conventions. 

What is Profit and Loss Account?

It is a financial statement of an organization that helps in determining the loss incurred or profit earned by the business during the financial or accounting year. In simple terms, Profit and Loss Account is a summary of an organization’s expenses and revenues and ultimately calculates the net figure of the business in terms of profit or loss. If the revenues of an organization are more than its expenses, it is known as Net Profit. However, if the revenues of an organization are less than its expenses, it is known as Net Loss. The Profit and Loss Account collects information from Trial Balance and other given transactions.

Format of Profit and Loss Account:


General instructions for preparation of Profit and Loss Account:

1. Revenue from Operations:

The revenue earned from business operations comes under Revenue from Operations. For example, Net Sales, Sale of Scrap, Trading Commission Received, and Revenue from Services.

2. Other Income:

The revenue that is not earned from business operations comes under Other Income. It is classified under three categories; viz., Rent Received, Interest and Dividend Received, and Net Gain/Loss on the Sale of Investments.

3. Cost of Materials Consumed:

Cost of Materials Consumed = Opening Stock of Materials + Net Purchases – Closing Stock of Materials

4. Purchases of Stock-in-Trade:

The Purchases of Stock-in-Trade consist of Net Purchases. 

5. Changes in Inventories of Finished Goods, Work-in-Progress, and Stock-in-Trade:

Changes in Inventories of Finished Goods, Work-in-Progress, and Stock-in-Trade = Opening Stock – Closing Stock

6. Employee Benefit Expenses:

It consists of Wages, Salaries, Staff Welfare Expenses like Canteen Expenses, and Contributions of Provident Fund, and other staff welfare funds. 

7. Depreciation and Amortisation Expenses:

It consists of depreciation and amortisation expenses of the company.

8. Finance Costs:

Finance Cost is the amount of interest paid by the company on its borrowings.

9. Other Expenses:

Other expenses consist of expenses other than the ones that are mentioned above. For example, Telephone Expenses, Selling and Distribution Expenses, Rent and Taxes, Loss on Sale of Fixed Assets/Investments, Advertisement Expenses, Bad Debts, Provision for Bad and Doubtful Debts, and Cash Discount Allowed. 

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