Profit and loss account is the second part of trading and profit and loss account. The profit and loss account is prepared with the help of the trial balance. The purpose of preparation of profit and loss account is to know the actual profit of the business firm during a particular period after taking into account all indirect expenses and indirect incomes which are not shown in trading account. Profit and loss account is like a statement and contains the following columns:-

  1. Expenditure
  2. Amount Dr.
  3. Income
  4. Amount Cr.

All the indirect expenditures relating to profit and loss account are shown in debit side of profit and loss account and all the indirect incomes relating to the profit and loss account are shown in the credit side of the profit and loss account. The following items are shown in the credit side of the profit and loss account:-

  1. Gross profit as per trading account
  2. Cash discount received
  3. Interest received from bank
  4. Interest received from other sources
  5. Profit on sale of fixed assets
  6. Commission received
  7. Rent received
  8. Miscellaneous Incomes
  9. Net loss transferred to capital account

Following items are shown in debit side of profit and loss account:-

  1. Gross loss as per trading account
  2. Salaries
  3. Advertisement and publicity expenses
  4. Bank charges
  5. Bank Interest or interest on bank loans
  6. Business promotion expenses
  7. Books and periodicals expenses
  8. Conveyance expenses
  9. Cash discount allowed
  10. Commission paid
  11. Depreciation
  12. Donations and charities
  13. Electricity and water expenses
  14. Interest paid on other loans
  15. Interest on Capital of Partners
  16. Miscellaneous expenses
  17. Insurance expenses
  18. Printing and stationery expenses
  19. Postage and courier expenses
  20. Rent paid
  21. Audit fees
  22. Legal and professional expenses
  23. Staff welfare expenses
  24. Telephone expenses
  25. Traveling expenses
  26. Vehicle maintenance expenses
  27. Loss on sale of fixed assets
  28. Net profit transferred to capital account

After putting all the items in respected places the total of both columns of profit and loss account is done. If the total of credit side is more than debit side then it will be net profit of the firm but if the total of debit side is more than credit side then it will be the net loss of the firm. The net profit or net loss is transferred to the capital account in case of proprietorship business or partnership firm. The net profit of a limited company is transferred in reserve and surplus account after making the provision for income tax and dividend etc.

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