What Is P & L Account – Meaning & Format

The performance result of any organisation is portrayed to the stakeholders and the public at large through the financial statements, namely balance sheet, profit and loss account, and cash flow statement. The profit and loss account is the most crucial statement as it displays the net income or loss of the entity that is helpful for all the stakeholders and management for decision making and future planning. Let us dive deep into the concepts of What is P & L account – Meaning & Format.

Definition And Meaning

A P & L account or profit and loss account is a crucial financial document. It provides insight into several details of the entity, including efficiency of the management, underperforming and performing sectors, operations, and profitability status of the organisation. It provides financial information to the investors, creditors, readers, and other stakeholders about the organisation’s financial performance.

P & L account is also known as income statement, statement of earnings, revenue statement, income statement, and operations statement. The P & L account is used by the accountants, business owners, and investors for analysing the financial shortcomings of an organisation and planning to find the solutions for the same.

Components Of A P & L Account

A P & L account is normally prepared for an annual, quarterly or monthly period. It provides the organisation’s performance for that period and the profitability status of the entity for that period.

The components of the P & l Account include the following:

1. Indirect Revenue

All the indirect income or revenue earned by the entity in the course of running the business’s core activity are placed on the credit side of the P & L Account. It includes all those incomes that are earned during the period that is not directly earned from the core business activity. Examples of such income include interest income, commission, discount, subsidy, and many more.

2. Indirect Expenses

All the indirect expenses incurred to run the business but are not directly related to the core activity of the concern are called indirect expenses. These expenses are incurred for such activities that are ancillary to the prime functioning of the business and for running the business efficiently. Examples of indirect expenses include administrative salary, rent, taxes, printing and stationery, telephone expenses, and many more.

3. Gross Profit Or Loss

Gross profit or loss is the amount transferred from the trading or manufacturing account. It implies the profit or loss earned or incurred due to the business’s core activity.

4. Net Profit Or Loss

The difference between the revenue earned by the organisation and the expenses incurred is stated as net profit or loss. The entity is in profit status when the revenue is more than the expenses. And if the expenses incurred are more than the income earned, then it is a net loss.

The resulting figure is transferred to the capital account of the proprietor or the partners in the profit-sharing ratio or is added to the company’s reserves.

Format Of P & L Account

The P & L Account is prepared in the account format or the statement format. Both of these formats are prepared below:

1. Account Format

XYZ Company
Profit & Loss Account
For the year ended 31st March 2021
Particulars	Amount (Rs.)	Particulars	Amount ( Rs.)
To Gross Loss Transferred from Trading and Manufacturing Account	XXXX	By Gross Profit Transferred from Trading and Manufacturing Account	XXXX
To Salaries	XXXX	By Discount	XXXX
To Legal Charges	XXXX	By Rent	XXXX
To Insurance	XXXX	By Commission	XXXX
To Electricity Expenses	XXXX	By Interest	XXXX
To Printing & Stationary	XXXX	By Dividend	XXXX
To Telephone Charges	XXXX	By Bad Debts Recovered	XXXX
To Postage & Telegram	XXXX	By Provision for Doubtful Debts	XXXX
To Rent Rates & Taxes	XXXX	By Royalty	XXXX
To Advertisement	XXXX	By Sundry Income	XXXX
To Freight Outwards	XXXX
To Carriage Outwards	XXXX
To Commission	XXXX
To Discount	XXXX
To Bad Debts	XXXX
To Depreciation	XXXX
To Interest	XXXX
To Bank Charges	XXXX
To Audit Fees	XXXX
To Repairs & Maintenance	XXXX
To Any Losses	XXXX
To Sundry Expenses	XXXX
To Net Profit Transferred	XXXX	To Net Loss Transferred	XXXX

2. Statement Format

XYZ Company
Profit & Loss Account
For the year ended 31st March 2021
Particulars	Amount (Rs.)	Amount (Rs.)
Gross Profit		XXXX
Add: Other Operating Income such as rent, discount, commission, fees		XXXX
Less: Management Expenses	XXXX
Less: Selling and Distribution Expenses	XXXX
Less: Financial Expenses	XXXX
Less: Depreciation and Maintenance Expenses	XXXX
Less: Other Unusual Expenses	XXXX	XXXX
Net Profit or Loss Transferred		XXXX

Final Words

The net profit or loss in a partnership firm is transferred to the partners’ capital account, while in proprietorship, it is transferred to the proprietors capital account. In the Company the profit is transferred to Reserves and surplus and carried forward to next year. The line items of the P & L account may differ as per the business and the entity.

Frequently Asked Questions

1. Why is P & L account prepared?

The profit and loss account is prepared to identify the net profit or loss of the business and determine the performance status of the entity. It is typically prepared for an annual, quarterly, or monthly period to provide insight into the business operations and future planning.

      2. Is the Profit and loss account a real account?

No, P & L Account is a Nominal account as it contains all the indirect expenses and indirect income of the business entity. The line items of the Profit and loss account contain all the cash and non-cash items of expenses and revenue.

      3. What is the purpose of the P & L account?

A profit and loss account is a very crucial financial document for any business entity. The major aim of preparing this account are:

• Assistance in decision making
• Tracking the profitability status of the entity
• Compliance with various laws.