Friday, January 27, 2012

Preparing Profit and Loss Account From Trial Balance

Preparation of Profit and Loss Account

An Explanation for Technical Personnel

Profit and loss account or income statement is prepared from the trial balance.
To keep things as simple as possible initially a very simple version of profit and loss account is shown and the more complex issues and more elegant formatting of the report are not covered in this article.
We start with the following trial balance
Trial Balance of Narayana Rao & Co, on 31.12.2007
Account
Debit
Rs.
Credit
Rs.
Purchases
100,000
 
Wages
6,000
 
Rent
2,400
 
Travelling expenses
4,800
 
Interest
1,200
 
Returns inward
4,000
 
Bank
10,000
 
Cash
34,000
 
Machinery
14,000
 
Furniture
1,000
 
Loan
 
45,800
Miscellaneous expenses
200
 
 
 
 
Returns outward
 
3,000
Salaries
12,000
 
Insurance
800
 
Discount
900
 
Sales
 
99,900
 
 
 
Sundry creditors
 
50,000
Capital
 
110,000
Drawings
15,000
 
Advertisements
2,400
 
Buildings
10,000
 
Sundry debtors
80,000
 
Stock (1-1-2007)
10,000
 
 
308,700
308,700

Profit and Loss Account
Dr.
Cr.
Particulars
Rs.
particulars
Rs.
To Purchases
100,000
By Sales
99,900
Stock (1-1-2007)
10,000
Returns outward
3,000
Wages
6,000
Stock (31-12-2007)
50,000
Rent
2,400
Travelling expenses
4,800
Interest
1,200
Returns inward
4,000
Salaries
12,000
Insurance
800
Discount
900
Miscellaneous expenses
200
Advertisements
2,400
Net Profit
8,200
152,900
152,900

Procedure of Preparing Profit and Loss Account From Trial Balance
From trial balance all  amounts nominal accounts (accounts related to revenues and expenses) are shown in the debit and credit sides of the profit and loss account. This account is similar to the other accounts in the ledger. All credit amounts in the trial balance are shown in the credit side of the P&L account and all debit amounts are shown on the debit side. When totals of these two sides are compared, if credit side is more than the debit side, the firm has made a profit. In the example the credit side is more than the debit side by Rs. 8,200. This amount is shown at the end in the debit side as net profit. Then similar to the ledger accounts, the total of both sides are shown at the both sides in the same line at the same level.
If you notice an additional entry which was not there in the trial balance was included in the credit side of  P&L account. This item is stock on 31-12-2007. The closing stocks in the store, shop floor and finished goods store are ascertained and are valued by accountants. This figure is to be included in the profit and loss account to determine the profit made in a period.
After the profit and loss account is prepared, balance sheet of the firm, that shows its assets and liabilities as on the day can be prepared. All real accounts with debit balances are assets. All personal accounts with credit balances are liabilities. All personal accounts with debits balances are assets. All customers' account balances are summed up and the total amount is shown as sundry debtors in the balance sheet. All suppliers' account balances are summed and the total amount is shown as sundry creditors in the balance sheet.
Liabilities
Rs.
Assets
Rs.
Sundry creditors
50,000
Buildings
10,000
Loan
45,800
Machinery
14,000
Capital
110,000
Furniture
1,000
Net Profit
8,200
Sundry debtors
80,000
                           Balance Sheet as on 31.12.2007
Drawings
15,000
Stock (31-12-2007)
50,000
Bank
10,000
Cash
34,000
214,000
214,000

As mentioned at the beginning many complex adjustments that are done to prepare profit and loss account and balance sheet as well as certain formatting conventions are ignored to provide a simple treatment in this article. The objective of the article is to show the basic logic of determining profit and then preparing a balance sheet.

More articles and examples on preparing P&L Accounts (Web pages)
Profit and Loss Account - Some More Articles and Examples

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1 comment:

  1. The profit and loss account usually has two columns, one for the current accounting period and one for the prior accounting period. To assess how a business is performing, and whether the figures in the profit and loss account appear reasonable, a detailed comparison is performed on a line by line basis. Accountants will raise questions about the accounts and attempt to identify errors in the accounts from such a comparison.

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