Chapter 2

FINAL ACCOUNTS OF SOLE TRADER

FAROOK INSTITUTE OF MANAGEMENT STUDIES

Profit and Loss Account

 After preparing Trading Account and ascertaining Gross profit, the next step is the
preparation of Profit and Loss account.
 Profit and Loss Account is an account prepared to find out the net profit earned or net loss
incurred by a business during an accounting period.
 It is a Nominal Account.

Preparation

 Profit and loss account begin with the gross profit or gross Loss brought down from Trading
Account.
 All the indirect expenses are shown on the debit side and all the indirect incomes are shown
on credit side of Profit and Loss Account.
 If the total of the credit side of the profit and loss account is more than the total of the debit
side, the difference is net profit.
 If the total of the debit side exceeds the total of the credit side, the difference is net loss.
 The amount of net profit or net loss is transferred to capital account.

Need / objectives

The purposes and importance of preparing Profit and loss Accounts are:
1. To ascertain the net profit or loss of the business.
2. To compare with the previous year’s Profit
3. To compare the actual performance of the business with the desired one.
4. To determine the future line of action.
5. To calculate different ratios such as net profit ratio which is the ratio of net profit to sales,
ratio of operating expenses to sales etc.
6. Helps in the preparation of Balance sheet.

Closing Entries:

1. For transferring the item of expenses and losses the entry is

Profit and Loss Account (Dr.)
Each item of expenses or loss.
2. For transferring the items of incomes and gains the entry is
Each item of income and gain (Dr.)
Profit and Loss A/c
3. For transferring the net profit to capital, the entry is
Profit and Loss Account (Dr.)
Capital Account
4. For transferring any net loss to capital, the entry is
Each item of income and gain (Dr.)
Profit and Loss A/c

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Format of Profit & Loss Account

Dr. Profit and Loss Account for the year ended ............. Cr.
Particulars Amount Particulars Amount
To Gross Loss b/d XXX By Gross Profit b/d XXX
Management expenses
To Salaries (Administrative) XXX Other Income
To Salaries & wages XXX By Discount Received XXX
To Office rent, rates and taxes XXX By Commission Received XXX
XXX
To Printing and stationery XXX
To Telephone charges XXX Non-trading Income
To Postage and telegrams By Bank Interest XXX
XXX
To Insurance premium By Rent of property let-out XXX
XXX
To Audit Fees By Dividend from shares XXX
XXX
To Legal Charges XXX
To Electricity Charges XXX Abnormal Gains
To travelling Expenses XXX By Profit on sale of machinery XXX
To General expenses XXX By Profit on sale of investment XXX

Maintenance expenses
To Repairs & renewals XXX
To Depreciation on:
Office Equipment XXX
Office Furniture XXX
Office Buildings XXX

Selling and Distribution expenses

To Salaries (selling staff) XXX
To Advertisement XXX
To Godown rent XXX
To Carriage Outward XXX
To Bad Debts XXX
XXX
To Provision for bad debts XXX
To Selling commission XXX
To Brokerage XXX
To Export duty XXX
Financial expenses
To Bank charges XXX
To Interest on loans XXX
To Discount on bills XXX
To Discount allowed to customers XXX

Abnormal Losses
To Loss on sale of machinery XXX
To Loss on sale of investment XXX
To loss by fire XXX
To Net Profit (transferred to Capital A/c) XXX By Net Loss (transferred to capital A/c)
XXX
XXX XXX

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 FAROOK INSTITUTE OF MANAGEMENT STUDIES

ILLUSTRATION 3
From the following information, prepare Profit and Loss Account for the year ending 31st
December, 2002.

Gross Profit Rs. 82000 Interest received Rs. 500

Salaries Rs.8,000 Discount received Rs.400
Rent Rs.4000 Postage and telegrams Rs. 600
Insurance Rs.800 Repairs Rs.300
Interest on loan Rs.1000 Depreciation Rs.600
Advertising Rs.300 Printing and stationery Rs.400
Commission received Rs.2000 Law charges Rs.300
Solution:

Exercise 2
From the following figures, prepare a profit and loss account of M/s. Krishna Raj and Bros.
for the year ended 31st.Dec. 1993.
Printing and stationery Rs.750 Bad debts Rs.500
Salaries Rs.5000 Insurance charges Rs.400
Carriage outwards Rs.500 Discount allowed Rs.650
Commission paid Rs.1000 Discount received Rs.750
Interest received Rs.2000 Advertisement charges Rs.440
Sales amounted to Rs. 75,000 and gross profit was 20% of sales. (Net Profit = 8510)
Exercise 3
From the following balances, taken from the Trial Balance of Shri Suresh, prepare Trading
and Profit and Loss Account for the year ending 31st Dec., 2006:
Stock on 1.1.2006 Rs. 2000 Rent Rs.1000
Purchases Rs.20000 Interest Received Rs.2000
Sales Rs. 30000 Salaries Rs.2000
Returns inwards Rs.2000 General Expenses Rs.1000
Returns outwards Rs.1000 Discount received Rs.500
Carriage Rs.1000 Insurance Rs.500
Cartage Rs.1000
The Closing Stock on 31st December, 2006 is Rs. 5,000. (Net Profit = Rs.8,000)

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