Profit & Loss Account – Introduction
The Profit & Loss (P&L) Account shows the profitability of a business over an accounting period.
Why is it important?
- Determines Net Profit (or Net Loss) after all expenses.
- Helps stakeholders assess performance.
- Basis for tax calculations and dividend decisions.
When is it prepared?
- After the Trading Account (which gives Gross Profit).
- At the end of the financial year, before the Balance Sheet.
Structure
| Side | Items |
|---|---|
| Debit | Direct Expenses, Indirect Expenses, Gross Profit (if loss) |
| Credit | Gross Profit (if profit), Other Incomes, Net Profit (transferred to Balance Sheet) |
Key Terms
- Direct Expenses: Costs directly tied to production (e.g., wages, raw material costs).
- Indirect Expenses: Overheads (e.g., rent, utilities, admin salaries).
- Gross Profit: Profit from Trading Account.
- Net Profit: Final profit after all expenses.
Example (Indian Context)
ABC Traders – FY 2024‑25
| Item | Amount (₹) |
|---|---|
| Gross Profit (from Trading Account) | 1,95,000 |
| Direct Expenses (Carriage Outwards) | 30,000 |
| Indirect Expenses (Rent, Salaries) | 80,000 |
| Net Profit = Gross Profit – (Direct + Indirect) | 85,000 |
Steps to Prepare
- Bring Gross Profit from Trading Account to the Credit side.
- List all Direct Expenses on the Debit side.
- List all Indirect Expenses on the Debit side.
- Calculate Net Profit and show it on the Credit side (or Debit side if loss).
Common Mistakes
- Forgetting to bring Gross Profit forward.
- Misclassifying Direct vs Indirect expenses.
- Not transferring Net Profit to the Balance Sheet.
Quiz
Test Your Knowledge
Question 1 of 3
1. Net Profit is calculated as:
💡 Final Wisdom: "Profit & Loss Account tells you if the business as a whole made money after covering all costs. It’s the ultimate performance report."