Accounting: Profit and Loss Format | Meaning | Types | Examples

Written by Sravan

Updated on:

Whether you run your own Sole proprietor business or You might have a Partnership business with partners, then, how would you assess whether your Business has scored Profit or debacle of Loss?

To assess whether Profit is earned or Loss is incurred, you should first understand a statement i.e. the “Profit and Loss account” or “Statement of Profit and Loss”.

Let’s get started..!!

1. Profit and Loss Account Meaning

A Profit and Loss account is a Statement that summarizes the Revenues, Costs, and Expenses incurred for a particular accounting period.

It records all Incomes and Expenses of the business. It is prepared based on accounting principles of Revenue recognition, Accruals, Matching, etc.

Every business enterprise whether it is a Sole proprietor or a Partnership Firm or a Company, needs to maintain a Profit and Loss account. The main reason to prepare it is to find the correct results for the business.

The Profit and Loss account will be prepared to assess whether the business has earned a Profit or occurred a Loss over a period of time. It is usually from 01st April to 31st March of every year.

A profit & Loss Account is also known as an “Income Statement” or “Statement of Profit & Loss”

2. Why the Profit and Loss account will be prepared?

There are 2 reasons to prepare a Profit and Loss account –
1. To ascertain Profit or Loss made by the business enterprise
2. For Statutory compliance ( For compliance with the Companies Act, Partnership Act, or any other governing law)

3. Profit and Loss Account Format for Sole Proprietor & Partnership Firms

For Sole proprietors & Partnership firms, there is no specific format for the preparation of the Profit and Loss account. But usually, the Profit and Loss account will be prepared in a “T” Shape. i.e. in Horizontal Format.

Horizontal format (“T” Shape)
Before preparing the Profit and Loss account for your Sole proprietor business or for your Partnership firm, a “Trading account” will be prepared.

The Trading account records all the Expenses directly related to Manufacturing / Trading concerns for the purpose of ascertaining Gross Profit or Gross Loss for a particular period.

The “T” shaped Profit and Loss account has 2 sides.
1. Debit
2. Credit

The horizontal format of the Trading, Profit, and Loss account will be as follows for Sole proprietors & Partnership firms.

In the books of
M/s……………..
Trading, Profit and Loss account for the period ending 31st Mar,xxxx

Dr Cr

ParticularsDebit (Rs.)ParticularsCredit (Rs.)
To Opening stockxxxBy Sales
Less: Returns
xxx
To Purchases
Less: Returns
xxxBy Closing stockxxx
To Direct expensesBy Gross Loss c/d
(Balance figure)
xxx
– Inward freightxxx
– Factory rentxxx
– Wages et.,xxx
To Gross Profit (Balance figure) c/d
xxxxxx
To Gross Loss (Balance figure) b/dxxxBy Gross Profit (Balance figure) b/dxxx
To Administrative expensesBy Other incomes
– Salariesxxx – Discount receivedxxx
– Office rentxxx – Commission receivedxxx
– Power and FuelxxxBy Non- Trading Incomes 
– Insurancexxx – Bank interestxxx
– Audit feesxxx – Rental incomesxxx
– Legal feesxxx – Dividend incomexxx
– Repairs & MaintenancexxxBy Abnormal gains
To Selling & Distribution expensesxxx – Profit on sale of Machineryxxx
To Interest & Finance charges – Profit on sale of Investmentxxx
– Interest on LoanxxxBy Net Loss (Transferred to Capital Accounts)xxx
– Bank chargesxxx
Abnormal Losses
– Loss on sale of Machineryxxx
– Loss by firexxx
To Depreciation on
– Plant & Machineryxxx
– Buildings etc.,xxx
To Net Profit (Balance figure) [Transferred to Capital Accounts]xxx
xxxxxx

4. Profit and Loss Account Format for Companies

In the case of Companies, the Statement of Profit and Loss account is to be prepared as per Schedule III of the Companies Act,2013.
Following is the Format of the Statement of Profit and Loss account as per Schedule III.

PART II – STATEMENT OF PROFIT AND LOSS

Name of the Company…………………….
Profit and loss statement for the year ended 31st March, XXXX
(Figures in Rupees)

ParticularsNote No.Figures as at the end of the previous reportingperiodFigures as at the end of the previous reporting period
I.Revenue from operationsxxxxxx
II.Other incomexxxxxx
III.Total Revenue (I + II)xxxxxx
IV.Expenses:
> Cost of materials consumedxxxxxx
> Purchases of Stock-in-Tradexxxxxx
> Changes in inventories of finished goods work-in-progress and Stockin-Tradexxxxxx
> Employee benefits expense xxxxxx
> Finance costsxxxxxx
> Depreciation and amortization expensexxxxxx
> Other expensesxxxxxx
Total Expensesxxxxxx
VProfit before exceptional and extraordinary items and tax (III-IV)xxxxxx
VI.Exceptional itemsxxxxxx
VII.Profit before extraordinary items and tax (V – VI)xxxxxx
VIII.Extraordinary itemsxxxxxx
IX.Profit before tax (VII- VIII)xxxxxx
X.Tax expense:
(1) Current tax
(2) Deferred tax

xxx
xxx

xxx
xxx
XI.Profit (Loss) for the period from continuing operations (VII-VIII)xxxxxx
XII.Profit/(loss) from discontinuing operationsxxxxxx
XIII.Tax expense of discontinuing operationsxxxxxx
XIV.Profit/(loss) from Discontinuing operations (after tax) (XII-XIII)xxxxxx
XV.Profit (Loss) for the period (XI + XIV)xxxxxx
XVI.Earnings per equity share:(
1) Basic
(2) Diluted

xxx
xxx

xxx
xxx

5. Types of Profit and Loss (P&L) Statements

A Profit and Loss account can be prepared in 2 methods

  1. Cash basis
  2. Accrual basis

Method 1 – Cash Basis

Under the Cash basis, the Revenues and Expenses will be recognized, when the actual receipts or payments are made.

Method 2 – Accrual Basis

The accrual basis of accounting is one of the methods of recording accounting transactions in the books of accounts.
Under an Accrual basis, Revenue will be recognized when the revenue is earned (Not when received) and Expenses will be recognized as and when accrued (Not at the time of payment)

6. Profit and Loss Account Example

For Sole proprietor & Partnership firms
Illustration 1:
M/s Harsha Enterprises provides the below Revenues & Expenses details for the year ended 31st March, 2022

Salaries Rs.4,65,000, Discount allowed Rs.4,500, Discount received Rs.6,000, Bank Interest Rs.9,500, Loss by theft Rs.19,000, Depreciation on Plant Rs.23,000, Gross Profit Rs.3,28,500, Power and fuel charges Rs.45,000, Printing & Stationery Rs.2,525, Interest on Loan Rs.85,000, Consultancy charges Rs.35,000, Audit fees Rs.50,000, Legal fees Rs.25,000, Postage charges Rs.1,500, Telephone charges Rs.6,500

Required:
Prepare the Profit and Loss account of M/s Harsha Enterprises for the year ended 31st March 2022.

Solution:

In the books of
M/s Harsha Enterprises
Trading, Profit, and Loss account for the period ending 31st Mar, 2022
Dr Cr

ParticularsDebit(Rs.)ParticularsCredit(Rs.)
To Salaries1,65,000By Gross Profit5,28,500
To Power and fuel charges 45,000By Bank Interest 9,500
To Interest on Loan 85,000By Discount received 6,000
To Consultancy charges 35,000
To Printing & Stationery 2,525
To Audit fees 50,000
To Legal fees 25,000
To Depreciation on Plant 23,000
To Discount allowed 4,500
To Loss by theft 19,000
To Postage charges 1,500
To Telephone charges
6,500
To Net Profit81,975
5,44,0005,44,000

I hope you understood the “Profit and Loss Account” concept.

Please Comment “GOOD” if you like the article and it encourages us. Also, share this article with your Finance related Friends & Family…Thanks for reading..!!!

 ———————————————————End——————————————————————

Disclaimer: The materials provided herein are solely for information purpose. No attorney-client relationship is created when you access or use the site or the materials. The information presented on this site does not constitute legal or professional advice and should not be relied upon for such purposes or used as a substitute for legal advice from an attorney licensed in your state.

Also, every effort has been made to avoid errors or omissions in this material. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. In no event the author or the website shall be liable for any direct, indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information.

Author is a Qualified CMA with rich industry experience for more than 6 years. He is an All India Ranker (AIR-101) in CMA and also a Semi-Qualified Chartered Accountant having a quite good experience in teaching the subjects of Accounting and Costing to the commerce aspirants.

Leave a Comment