Preparation of Profit and Loss Account

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. Similar to the Trading Account, the Profit and Loss Account is also a nominal account in which all the expenses or losses are debited and all the incomes or gains are credited. This account begins with a recording of the gross profit (or gross loss) depicted by the Trading Account. Preparation of Profit and Loss Account is discussed below

Preparation of Profit and Loss Account

Procedure to Prepare Profit and Loss Account

First of all, this account begins with transferring the gross profit or gross loss from the Trading Account. Gross profit is transferred to the credit side of the Profit and Loss Account. On the other hand, Gross Loss is transferred to the debit side of this account.

Secondly, all indirect expenses and losses are recorded on its debit side. After this, all the indirect incomes and gains are recorded on the credit side of the account.

Lastly, if the credit side exceeds the debit side then the balancing figure is shown as net profit and added to the capital account of the proprietor in the Balance Sheet. On the other hand, if the credit side falls short of the debit side then the balancing figure is regarded as net loss and deducted from the capital in the Balance Sheet.


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