Profit and Loss Account Concept

Profit and Loss Account Concept

Profit and loss account shows the net loss or profit from the business. Profit and loss concept is quite different from the gross profit. Profit & loss account shows the overall profit from the business, where Gross profit is a direct profit from trading activities.

Profit & Loss Account Formula

Profit and loss formula can be express in two ways

Profit or Loss = Sales- all Expenses

Profit or Loss = Gross profit – Operating Expenses

Profit & Loss Calculation Methods

Profit and loss account is calculated by deducting all expenses of business i.e. direct & indirect Expenses. The profit & loss can be calculated in statement form or in the form of T account.

1.    Profit & Loss Statement Form

Sales                                                          100,000

Less: Cost of Sales                                       (80,000)                                                    Gross profit                                                   20,000

Less: Selling & Financial Expenses                  (10,000)

Net Profit                                                      10,000

2.    Profit & Loss T Account

Profit & loss account is divided into two section first is to calculate gross Profit & second is to calculated net profit. Income is recorded on credit side, where expenses are recorded on debit side. It is to be noted that Gross Profit is transferred to Profit & loss account for calculation of net profit. Gross profit & net profit are both balancing figures.

                                         

                                             Gross Profit Account

	Dr		Cr
Cost of sales	80,000	Sales	100,000
Gross Profit (Balancing)	20,000
	100,000		100,000

                                                   

                                              Net Profit & Loss account

Selling & Financial Expenses	10,000	Gross Profit	20,000
Net Profit (Balancing)	10,000
	20,000		20,000