What is Profit and Loss Account?
- Profit and loss account is a financial statement which presents the income, gain, losses, and expenses of the firm on a given period of time.
- It shows the financial performance of the firm because the PL account presents the net profit and net loss.
- It is the presentation of revenue nature transactions debit side holds the expenses and losses and credit side records income and gain.
- It is a ledger of nominal account.
- It discloses the profit and loss of the organization so it is also called financial performance indicator.
Methods of preparing PL account
- Before making the PL account, we have to prepare a trading account in order to find gross profit and loss.
- If there is a provision of a regulator then it is mandatory to use the format provided by NRB otherwise follow the accounting standard.
- All expenses and losses are charged on the debit side and income and gain should be on the credit side.
- The organization can use a traditional “T” format or modern vertical format.
- Revenue nature transactions are included.
- B&FIs follow the unified directive no. 4 by NRB by using vertical format.
- Interest income is recorded on a cash basis and other transactions are recorded in accrual basis. [There is no trading account in the bank]
Example of PL account
PL account normal format (Traditional T format)
Profit and loss account of ABC firm for the period of Shrawan 1, 2075 to Ashad 31, 2076
| Particulars | Amount | Particulars | Amount |
|---|---|---|---|
| To gross loss b/d | 0 | By gross profit | 10,00,000 |
| To office and administrative expenses | 7,00,000 | By revenue income | 12,00,000 |
| To selling and distribution expenses | 4,00,000 | By revenue gain | 1,00,000 |
| To interest expenses | 2,00,000 | By net loss c/d | 0 |
| To revenue losses | 1,00,000 | ||
| To tax expenses | 2,00,000 | ||
| To net profit c/d | 7,00,000 | ||
| Total | 23,00,000 | Total | 23,00,000 |
PL account banking format (Vertical format)
| Particulars | Note No | Amount in Crore |
|---|---|---|
| Interest income | 600 | |
| Interest expense | 250 | |
| Net interest income | 350 | |
| Fee & Commission income | 150 | |
| Fee & Commission expense | 70 | |
| Net fee & commission income | 80 | |
| Net interest, fee and commission income | 430 | |
| Net trading income | 50 | |
| Other operating income | 100 | |
| Total operating income | 580 | |
| Loan loss provision | 90 | |
| Net operating income | 490 | |
| Personnel expenses | 280 | |
| Other operating expense | 20 | |
| Depreciation & Amortization | 50 | |
| Operating profit | 140 | |
| Non-operating income | 60 | |
| Non-operating expense | 50 | |
| Profit before income tax | 150 | |
| Income tax expense | ||
| Current tax | 80 | |
| Deferred tax | 10 | |
| Profit of the year | 60 |
Importance of Balance Sheet, Profit & Loss Account and Cash Flow Statement
| Balance Sheet | Profit & Loss Account | Cash Flow Statement |
|---|---|---|
| To show financial position | To show financial performance | To show statement of change in financial position |
| To provide info about capital nature transaction | To provide info about revenue nature transaction | To present all activities systematically via operating, investing and financing activities - To provide capital and revenue nature cash related transation |
| To create transparency | To create transparency | To create transparency |
| To maintain financial discipline | To maintain financial discipline | To maintain financial discipline |
| To support for auditing | To support for auditing | To support for auditing |
| To create culture of accountability | To create culture of accountability | To create culture of accountability |
| To complete financial statement | To complete financial statement | To complete financial statement |
| To analyze strength and weakness of the firm | To analyze strength and weakness of the firm | To analyze strength and weakness of the firm |
| To support corporate good governance | To support corporate good governance | To support corporate good governance |
| It is statement only not ledger | It is ledger of nominal account | |
| It is prepared in point of time | It is prepared in period of time | |
| Elements- Capital, Assets, Liabilities | Elements - income, gain, losses, expenses |
Similarities Between Balance Sheet and PL Account
- Both are the quantitative expression of historical data
- Both are prepared by trial balance
- Both follow accounting cycle i.e input, process, and output
- Both support to show a financial statement
- Both support corporate governance
- Both show transparency
Interdependency between balance sheet and PL account
Balance sheet and PL account are supplementary to each other
- Net profit and loss of the PL account should be charged on the capital side of the balance sheet.
- Depreciation which is deducted from respective assets on balance sheet must be recorded on the debit side of PL account.
- Outstanding expenses which are added on the respective heading of expenses of PL account must be charged on the liability side of the balance sheet.
- Provision for bad debt which is deducted from the debtor on balance sheet must be recorded on the debit side of PL account.
By observing the above facts about the balance sheet and PL account, we can conclude that balance sheet and PL account are not only competitive but also supplementary to each other.
Q) What are balance sheet and PL account? How they are interdependent to each other?
