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Profit & Loss Account – Detailed Preparation

We now take the Gross Profit from the Trading Account and allocate all expenses to arrive at Net Profit.

Scenario

XYZ Manufacturing Ltd. – FY 2024‑25 (continuation from Trading Account example)

ItemAmount (₹)
Gross Profit (from Trading Account)95,000
Direct Expenses (Carriage Outwards)30,000
Indirect Expenses:
‑ Rent40,000
‑ Administrative Salaries35,000
‑ Utilities10,000
Total Indirect Expenses85,000
Net Profit = Gross Profit – (Direct + Indirect)‑20,000 (Loss)

Steps

  1. Credit Side – Bring Gross Profit forward.
  2. Debit Side – List Direct Expenses first.
  3. List Indirect Expenses under a separate heading.
  4. Calculate Net Profit/Loss: 
    Net Profit/Loss = Gross Profit – (Direct + Indirect Expenses)
  5. Show Net Loss on the Debit side (since it’s a loss).

Final Layout

Debit₹Credit₹
Direct Expenses (Carriage Outwards)30,000Gross Profit95,000
Indirect Expenses – Rent40,000
Indirect Expenses – Salaries35,000
Indirect Expenses – Utilities10,000
Total Expenses115,000
Net Loss20,000
Total115,00095,000

Key Points

  • Direct vs Indirect: Direct are tied to production; Indirect are overheads.
  • Net Loss appears on the Debit side; Net Profit appears on the Credit side.
  • Always ensure Total Debit = Total Credit (add Net Profit/Loss to balance).

Common Mistakes

  • Forgetting to bring Gross Profit forward.
  • Misclassifying expenses (e.g., treating rent as direct).
  • Not balancing the account after adding Net Profit/Loss.

Quiz

Test Your Knowledge

Question 1 of 3

1. If Direct + Indirect expenses exceed Gross Profit, the result is:

Net Profit
Net Loss
Gross Profit
Break‑even

💡 Final Wisdom: "Profit & Loss Account is the story of every rupee earned and spent – get the classification right and the final profit figure will be crystal clear."

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