The following are some steps that are followed to prepare the Statement of Profit or Loss.
Steps to prepare Statement of Profit or Loss
Step 1: First of all, opening capital is ascertained by preparing an Opening Statement of Affairs. In this statement, all the opening balances of various assets and liabilities are shown.
Step 2: Next, closing capital is ascertained by preparing a Closing Statement of Affairs. In this statement, we record all the closing balances of various assets and liabilities only after making necessary adjustments such as depreciation, outstanding expenses, accrued incomes, prepaid expenses, incomes received in advance, etc.
Step 3: After this, closing capital (as computed in Step 2) is shown in the Statement of Profit or Loss.
Step 4: Then, we calculate the Adjusted Closing Capital by adding drawings and subtracting additional capital.
Step 5: Lastly, from the Adjusted Closing Capital (as computed in Step 4), we deduct the Opening Capital (as computed in Step 1).
Step 6: If the Adjusted Closing Capital exceeds the Opening Capital, then the balancing figure is regarded as profit, else, it is regarded as a loss.
Any interest paid on capital is considered as an expense and is shown in the Profit and Loss Account. Treatment of interest on capital in the final accounts is as follows.
Treatment of interest on drawings in the final accounts is as follows. Firstly, interest in drawings is shown on the credit side of the Profit and Loss Account.
Operating Profit can be defined as the profit earned by carrying the normal business activities. It is computed by subtracting the operating expenses from the gross profit.
The balance sheet is the last financial statement that is prepared by any organization. This statement helps to ascertain the true financial position of an enterprise at the end of an accounting period
A profit and Loss Account is the second financial statement prepared by an organization. This account is prepared to ascertain the net results of a firm in form of net profit earned or net loss incurred during an accounting period.
In order to incorporate adjustments in the financial statements, we pass the required Journal entries, which are termed as adjusting entries.