PROFIT AND LOSS ACCOUNT
16.6 JOURNAL ENTRIES FOR THE PREPARATION OF P&L A/C ARE GIVEN BELOW
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16.5 PRINCIPLES OF PREPARING PROFIT OF LOSS ACCOUNT
In this section, we attempt to make a brief survey about the principles to be followed while preparing profit and loss account.
1. Only revenue receipts should be entered
2. Only revenue expenses together with losses should be taken into account.
3. Expenses and incomes relating only to the period for which the accounts are being prepared should be considered.
4. All expenses and income relating to the period concerned should be considered even if the expense has not yet been paid in cash or the income has not yet been received in cash.
5. All personal expenses of the proprietor and pertners must be debited to the capital or drawings accounts and must not be debited to the profit and loss account. Similarly any income has been earned from the private assets of the proprietor which is received by firm, it must be credited to the capital or drawings account.
16.6 JOURNAL ENTRIES FOR THE PREPARATION OF P&L A/C ARE GIVEN BELOW
In this section, we listed out some journal entries to be passed to prepare profit and loss account.
. For transferring the items of expenses and losses the entry is:
Profit & Loss Account Dr
To Each item of expenses or Loss a/c
2. For transferring the items of income and gains the entry is Each item of income & gain account Dr To profit and loss account
3. For transferring the net profit to capital the entry is:
Profit & Loss Account Dr To capital Account
4. For transferring the net loss to capital account the entry is:
Capital Account Dr To profit and loss Account Check your Progress 3
List out three difference between trading account and profit and loss account Note: a) Write your answer in the space given below.
b) Check your answer with the ones given at end of this lesson (pp. 144 ) ………..
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16.7 ILLUSTRATION
In this section, we worked out some modal problems for you, to learn how to prepare profit and loss account
Illustration-1
From the following Trial balance of Kanmani prepare profit and loss account for the year ended 31-3-2007.
Debit Credit
Rs. Rs.
Gross Profit 9,50,000
Commission received 5,000
Interest received 4,000
Sundry income 7,000
Depreciation 10,000
Salaries 15,000
Discount (Dr) 8,000
Discount (Cr) 12,000
Bank charges 4,000
Audit fees 2,000
Stationery 400
Solution
Profit and Loss Account of Kanmani for the year ended 31-3-2007 Dr Cr
Particulars Rs. Particulars Rs.
To Depreciation 10,000 By Gross profit b/d 9,50,000
To Salaries 15,000 By Commission received 5,000
To Discount 8,000 By Interest received 4,000
To Bank charges 4,000 By Sundry income 7,000
To Audit fees 2,000 By Discount 12,000
To Stationery 400
To Net profit c/d 9,38,600 9,78,000 Illustration-2
From the following balance given below, prepare Profit and loss A/c of Lingam Ltd. for the year ending 31.12.2006.
Rs. Rs.
Salary & wages 8,000 Discount allowed 7,000
Interest paid 5,000 Interest received 4,000
Commission received 11,000 Traveling 5,000
Commission paid 6,000 Bad debts 1,500
Advertisement 5,000 Depreciation 10,000
Printing & Stationery 11,500 Other office expenses 1,200 Postage & telegram 7,500 Sundry income 15,000 Rent & rates 1,500 Provision for doubtful debts 2,000 Medical fees 3,000 Gross Profit for the year 1,25,000 Solution
Profit & Loss of LingamLtd. for the year ending 31.12.2006
Dr Cr
Rs. Rs.
To Salary & wages 8,000 By Gross profit b/d 1,25,000
To Interest paid 5,000 By Commission 11,000
To Commission 6,000 By Interest 4,000
To Advertisement 5,000 By Sundry income 15,000
To Discount 7,000 By Provision for doubtful debts
2,000 To Traveling expenses 5,000
To Bad debts 1,500
To Depreciation 10,000
To Printing & Stationery 11,500 To Postage & rates 7,500 To Rent & rates 1,500
To Medical fees 3,000
To Other office expenses 1,200
To Net profit 84,800
1,57,000 1,57,000
Illustration- 3
From the following balance extracted at the close of the year ended 31st Dec. 2005.
Prepare Profit and Loss account of Mr.Veerappan as at that date:
Rs. Rs.
Gross profit 55,000 Repairs 500
Carriage on sales 500 Telephone expenses 520
Office Rent 500 Interest (Dr.) 480
General expenses 900 Fire insurance premium 900
Discount to customers 360 Bad debts 2,100
Interest from Bank 200 Apprentice Premium (Cr.) 1,500
Traveling expenses 700 Printing & Stationary 2,500
Salaries 900 Trade expenses 300
Commission 300
Solution
Profit & Loss Account Mr. Veerappan for the year ending 31-12-2005 Dr Cr
Rs. Rs.
To Carriage on Sales 500 By Gross profit b/d 55,000
To Office Rent 500 By Bank Interest 200
To General 900 By Apprentice Premium 1,500
To Discount to customers 360 To Traveling expenses 700
To Salaries 900
To Commission 300
To Repairs 500
To Telephone expenses 520
To Interest paid 480
To Fire Insurance Premium 900
To Bad debts 2,100
To Printing & Stationery 2,500
To Trade expenses 300
To Net Profit transferred to Capital A/c
45,240
56,700 56,700
16.8 LET US SUM UP
In this lesson, we have briefly touched upon the following points
1. The resulting balance of profit and loss account is either Net profit or Net loss for the given period.
2. Personal expenses of proprietor should not be debited to the profit and loss account Examples: Life insurance premium, Medical expenses of the owner, income tax
3. If any expenses are paid after deduction of income tax should be added back to the net expenses in order to arrive at the gross expenses.
4.The amount charged from a person to whom training is given by the business is an income and shown on the credit side of the profit and loss account
5. The incomes earned from usual business carried on by the concern is known as operating incomes. If the incomes are not related to the business carried on by the firm is known as non- operating incomes.
6. The main purpose of preparing profit and loss account is to know the net profit or loss of