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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