The main objective of every business is to earn profit by selling goods and services because business is started only to earn profit, for this it is very important for the business to know whether the business is earning profit or loss. Without knowing the profit and loss, proper decisions (related) cannot be taken in business because unless it is known what is the status and performance of the business.
To know the profit and loss in any business, Profit and Loss Account is prepared, for which all the economic transactions of the business are systematically recorded and managed. Profit and Loss Account cannot be prepared whenever one wants because to prepare it all the related accounts have to be closed so that their amounts can be recorded in it, that is why Profit and Loss Account is prepared at the end of the financial year. It has become very easy to create using technologies.
Table of Contents
What is a Profit and Loss Account?
Meaning of Profit and Loss Account
Profit and loss account is a summary of income and expenses and is the financial statement of the business. Profit and Loss Account is also known as Income Statement. In this, the rule of nominal account is applied due to which all the expenses are recorded on the debit side and all the income is recorded on the credit side. In the profit and loss account, only indirect income and expenses are recorded along with the gross profit and loss. When all the related transactions are recorded in it, it is known whether the business has made profit or loss.
Rules applicable in P&L A/C
Debit all expenses and losses.
Credit all income and gains.
To prepare Profit and Loss Account, first of all, all transactions are identified, then measured, then recorded, then classified, then Manufacturing Account* is prepared, then Trading Account is prepared, and finally profit and loss account is prepared.
Definition of Profit and Loss Account
According to Prof. Carter – “A Profit & Loss Account is an account into which all gains and losses are collected, in order to ascertain the excess gains over the losses or vice-versa.”
According to own word – “Profit and loss account is a summary of income and expenses which is used to determine the profit or loss in a business in a particular period.”
Features of Profit and Loss Account
Following are the features of profit and loss account:
1. Financial Statement:
Profit and Loss Account is a financial statement as it shows the summary of indirect income and expenses and is a part of the financial statements which include Balance Sheet, Profit and Loss Account, Trading Account, Manufacturing Account*, Cash Flow Statement, etc. By using these anyone can learn more about business.
2. Profit and Loss:
The main objective of preparing profit and loss account is to find out the profit or loss in a business during a particular period. If the income is more than the expenses then it means that there is profit in the business, similarly if the expenses is more than the income then it means that there is loss in the business. It can also be understood in another way like if the credit side is more than the debit side then it means that there is a profit in the business, similarly, if the debit side is more than the credit side then it means that there is a loss in the business. .
3. Nominal Account:
Profit and Loss Account is a nominal account due to which all the expenses are recorded on the debit side and all the income is recorded on the credit side. If there is gross loss then it will be recorded on the debit side and if there is gross profit then it will be recorded on the credit side. In expenses, only indirect expenses like salaries, stationery, selling expenses, office expenses, etc. are recorded, and in income, only indirect income like discounts received, interest received, commission received, etc. are recorded.
4. Certain Period:
Profit and Loss Account cannot be prepared whenever one wants as it is a time-consuming process and before it is prepared all the related accounts have to be closed so that they can be recorded in it. It is generally prepared at the end of the financial year, like if the financial year starts from April then it will be prepared taking data till 31st March.
5. Gross Profit and Loss:
Profit and Loss Account starts with gross profit or loss like if there is gross loss in the business then it starts with gross loss and if there is gross profit in the business then it starts with gross profit. Gross loss and profit are calculated with the help of trading account. Gross loss is recorded on the debit side and gross profit is recorded on the credit side.
6. Help in Planning:
Profit and Loss Account helps in planning as it provides data of profit and loss of the business. It is prepared with the help of indirect income-expenses and gross profit-loss of the business, which makes it easy to find out why profit-loss is occurring and then decisions can be taken accordingly. Future decisions can also be taken with the help of profit and loss account.
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QNA/FAQ
Q1. What is a Profit and Loss Account?
Ans: Profit and loss account is a summary of income and expenses and is the financial statement of the business.
Q2. By what name is profit and loss account also known?
Ans: Profit and loss account is also known as Income Statement.
Q3. Are only indirect income and expenses recorded in profit and loss account?
Ans: Yes, only indirect income and expenses (including gross profit or loss) are recorded in the profit and loss account.
Q4. Which account is profit and loss account?
Ans: Profit and loss account is a nominal account.
Q5. Which rule applies in profit and loss account?
Ans: Nominal account rule applies in profit and loss account.
* Debit all expenses and losses.
* Credit all income and gains.
Q6. Write the features of profit and loss account.
Ans: Following are the features of profit and loss account:
1. Profit and loss account is a financial statement.
2. Profit and loss account shows profit or loss.
3. Profit and loss account is a nominal account.
4. Profit and loss account is prepared for a fixed period of time.
5. Profit and loss account starts with gross profit or loss.
6. Profit and loss account helps in planning.
