Profit & Loss Account & Statement

Tally Solutions |Updated on: March 27, 2023

• What is Profit & Loss statement
• Objective of Profit & Loss A/c
• Components of Profit & Loss A/c
• Trading Account
• Profit and Loss A/c

What is Profit & Loss statement (P&L statement)

Profit and Loss Account is a type of financial statement which reflects the outcome of business activities during an accounting period (i.e. Profit or loss). Reported income and expenses are directly related to an organization’s are considered to measure the performance in terms of profit & loss.

Profit & loss a/c is popularly known as P&L A/c.  It is also called as Profit and Loss Statement or income and expense statement. No matter whether how you call profit & loss statement, it reveals money spent or cost incurred in an organization’s effort to generate revenue, representing the cost of doing business.

Objective of Profit & Loss A/c

The very purpose of profit and loss account is to ascertain whether the business is making profit or loss for a given period. In other words, Profit & Loss Account reveals money spent or cost incurred in an organization’s effort to generate revenue, representing the cost of doing business.

Profit and Loss A/c Statement

The profit and loss (P&L) statement is an extremely crucial financial statement that gives a summary of the revenues, costs, and expenses incurred by a business during a specific period, usually a fiscal quarter or year.

This component considers all the indirect expenses and incomes including the gross profit/loss to arrive the net profit or loss.

Structure of Profit and Loss Statement

The structure of profit and loss statement is divide into 2 broad categories, one is the debit side and other is credit side as shown below:

The left side is called as “Dr” that represents all direct and indirect expenses and the right side is called as “Cr” side that shows direct and indirect incomes from business operations.

Components of Profit & Loss A/C

Profit & Loss Account consists of two broad components mentioned below

• Trading Account
• Profit and loss account statement.

Trading Account

Trading Account is an account which is prepared by a manufacturing/merchandising concern. The purpose of trading account or this financial statement is to find out the gross profit or gross loss which, is an important indicator of business efficiency. All the expenses and income which are direct in nature are considered.

The components which forms part of the trading account:

Impact of Accounting Principles on the P&L Statement

The following is the impact of accounting principles on P&L statements: 

• Revenue recognition principle – Revenue is usually identified before cash is received 
• Matching principle – Expenditures are compared to revenues during the period those revenues are earned

Example of Profit and Loss Statement

Below is the example of a profit and loss statement of Max Electronics for the current financial year 2020-21.

If you look at the above example of profit and loss statement, the total of direct income is reduced by direct expenses to arrive the gross profit. The gross profit is then added with indirect incomes and reduced by indirect expenses to arrive net profit.

How to prepare Profit and Loss Statement

Traditionally, to prepare profit and loss statement, set of other statements are prepared that help you gather the data to prepare this statement.  Below are the steps to prepare profit and loss statement

• Prepare ledger accounts: From the journal book, you need prepare an account statement for each ledger to determine the closing balance.
• Create trial balance: Trial balance is a summary of all the ledger accounts. It lists all ledger accounts with closing balance posted from individual ledger accounts statement
• Preparing trading and profit & loss statement : Here, all the ledger accounts having a nature of the purchase, sales, direct expense and income, indirect expenses and income are posted to profit and loss statement in the structure that we discussed above.

Profit and loss statement being a crucial financial statement and most sought-after statement for decision making, the requirement to view the reports is more frequent than the traditional need of viewing it yearly or half-yearly. As a result, most businesses have automated the process of preparing the profit and loss statement using an accounting software.

Using TallyPrime, the powerful business management, you can generate all the financial reports automatically with a click of button. Its powerful analytical tolls help you get more insights to run your business better.

Comparative Profit and Loss statement in TallyPrime

Vertical Profit and Loss A/c in TallyPrime

FAQ: 

What is in a P&L statement?

Profit and Loss Account is a type of financial statement which reflects the outcome of business activities during an accounting period.

Is P&L same as income statement?

Yes, P&L statement is also known as income statement.

How is P&L calculated?

To calculate the profit percentage use the following formula: Profit % = Profit/Cost Price × 100. To calculate the loss percentage use the following formula Loss % = Loss/Cost Price × 100.

Watch Video on How to View and Analyse Profit and Loss Account in TallyPrime