Profit and Loss Account Proforma

Profit and Loss Account is prepared in order to discern whether the firm has made net profit or suffered net loss for a given accounting period. This account deals with indirect expenses such as administrative, selling and distribution expenses and the like. Profit and Loss Account starts where trading account ends; in other words it starts with gross profit on the credit side brought forward from the trading account . In case of gross loss brought forward from the trading account, profit and loss account begins with gross loss as the first item on the debit side.

All the indirect/running expenses, incurred on selling and distribution of the goods and the general administration of the business, are listed on the debit side while all the items of income and gain are listed on the credit side. When the credit side (revenue) exceeds the debit (expenses) side, the difference is net profit. But, if the debit side exceeds the credit side, the difference is net loss. Profit and loss account is net profit thus increases the capital; the net loss is deducted from the capital account(s) in the balance sheet and thus decreases the capital.

The following items are debited in the Profit and loss account:

• Administrative Expenses including Office Salaries, Office Rent, Office Lighiting, Printing, Direcor’s Fees, Telephone Rent, Postage, Insurance, etc.
• Sales and Distribution Expenses including Salesmens salary, Commission, Travelling expenses, Advertising, Packing expenses,  Royalty, etc.
• Financial Expenses including Interest on loan/Capital, Cash Discount Allowed, Bad Debts, Bank Charges, etc.
• Depreciation of Assets and various provisions.
• Other Expenses and Losses including Loss on Sales of Fixed Assets, Loss by Fire, by Theft, by Accident, etc.
• Taxes including Sales Taxes, Income Taxes etc.

The following items are credited in the Profit and Loss Account 

• Cash Discount Received
• Interest Received
• Rent Received
• Gain on Sale of Fixed Assets
• Apprentice Premium
• Dividend Received

Note: The household and personal expenses of the proprietor paid by the firm do not appear in the profit and loss account. Rather these are treated as personal drawings of the proprietor and are deducted from the capital in the balance sheet.

Proforma of Profit and Loss Account

Debit	Proforma of Profit and Loss account			Credit
Particulars		Rs	Particulars	Rs
Trading Account (for gross loss)			Trading Account (for Gross Profit)
Indirect/office running expeses			Income and Gain
Rent			Cash Discount Received
Lighting			Interest Received
Salaries			Rent Received
Insurance			Gain on Sale
Sundry/General Expenses			Bonus Received
Printing and Stationery			Income on Investment etc.
Repair			Capital Account
Advertaising			(Transfer of Net Loss)
Commission Paid
Cash Discount Allowed
Motor Expenses
Warehouse Rent/Insurance
Packing Expenses
Depreciation
Provision for Doubtful Debts
Interest on Loan
Loss on Sale etc,
Capital Account
(Transfer of Net Profit)
Total			Total

Note: 1. Either gross profit or gross loss as opening balance will be reflected.

         2. Similarly, the ending balance will also reflect either net profit or net loss.

Fixed asset retirement details

Asset retirement with a loss - Retirement occurs when a depreciable asset is taken out of service and no salvage value is received for the asset. In addition to removing the asset's cost and accumulated depreciation from the books, the asset's net book value, if it has any, is written off as a loss. Suppose the $90,000 truck reaches the end of its useful life with a net book value of $10,000, but the truck is in such poor condition that a salvage yard simply agrees to haul it away for free. The entry to record the truck's retirement debits accumulated depreciation-vehicles for $80,000, debits loss on retirement of vehicles for $10,000, and credits vehicles for $90,000. The loss is considered an expense and decreases net income.

Journal entry

	Debit	Credit
Accumulated Depreciation	80000
Loss on retirement of asset	10000
Asset account		90000

A gain never occurs when an asset is retired. If the entire cost of an asset has been depreciated before it is retired, however, there is no loss. For example, if the company using the truck had expected no salvage value and, therefore, had allocated $90,000 in depreciation expense to the truck before its retirement, the disposition would be recorded simply by debiting accumulated depreciation-vehicles for $90,000 and crediting vehicles for $90,000.

Journal entry

	Debit	Credit
Accumulated Depreciation	90000
Asset account		90000

Sale of depreciable assets. If an asset is sold for cash, the amount of cash received is compared to the asset's net book value to determine whether a gain or loss has occurred. Suppose the truck sells for $7,000 when its net book value is $10,000, resulting in a loss of $3,000. The sale is recorded by debiting accumulated depreciation-vehicles for $80,000, debiting cash for $7,000, debiting loss on sale of vehicles for $3,000, and crediting vehicles for $90,000.               

Journal entry

	Debit	Credit
Accumulated Depreciation	80000
Cash account	7000
Loss on sale of asset	3000
asset account		90000

       

If the truck sells for $15,000 when its net book value is $10,000, a gain of $5,000 occurs. The sale is recorded by debiting accumulated depreciation-vehicles for $80,000, debiting cash for $15,000, crediting vehicles for $90,000, and crediting gain on sale of vehicles for $5,000.

Journal entry

	Debit	Credit	Type of account	Rules
Accumulated Depreciation	80000		Nominal account	All expenses and losses
Cash account	15000		Real account	what comes in
Asset account		90000	Real account	what goes out
Gain or loss accoun		5000	nominal account	all incomes and gains

Purchase Order

Purchase order (PO) is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a purchase order to a supplier constitutes a legal offer to buy products or services. Acceptance of a purchase order by a seller usually forms a one-off contract between the buyer and seller, so no contract exists until the purchase order is accepted.

Debit memo

When a company fails to pay or short-pays an invoice, it is common practice to issue a debit memo for the balance and any late fees owed. In function debit memos are identical to invoices. 

Credit Memo

If the buyer returns the product, the seller usually issues a credit memo for the same or lower amount than the invoice, and then refunds the money to the buyer, or the buyer can apply that credit memo to another invoice.

Invoice

An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms. The buyer has a maximum amount of days to pay these goods and are sometimes offered a discount if paid before. From the point of view of a seller, an invoice is a sales invoice. From the point of view of a buyer, an invoice is a purchase invoice

An invoice is essentially a detailed bill left by vendors and outside suppliers for goods or services rendered to a company. A typical invoice might list the quantity of each item, prices, billable hours, service description and a contact address for payment. While some expenses may be paid out of a general fund or petty cash account an invoice is usually paid through an accounts payable department by the posted due date.

An invoice is a legal document which can be used as evidence of an incurred debt. The recipient of the goods or services can challenge the legitimacy of individual charges, but the invoice itself is considered a bona fide debt. Sometimes a vendor or serviceman cannot collect on a bill immediately, so their company will send an invoice at a later date for payment. The actual daily expense of a service may be so low that a company will simply wait for a larger invoice to cover all of the costs at once. Vending machine attendants and bottled water providers may only send one invoice a month instead of billing the company a few dollars a day for supplies.

Accounts Payable - Accounts Receivable

Accounts Payable :- An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.

Accounts Payable are often referred to as 'Payables'.

Another common usage of  AP refers to a business department or division that is responsible for making payments owned by the company to suppliers and other creditors.

Journal entries - Accounts Payable Process

When you purchase a good or service on account the journal entry is

Debit - The appropriate expense account for the amount
Credit - Accounts Payable for the amount

When  the account is paid the journal entry is

Debit - Accounts Payable for the amount
Credit - Cash for the amount.

Accounts Receivable - Accounts Receivable is a current asset that reports the amount that a companys customers owe the company for the goods or services provided on credit.

Journal entries - Accounts Receivables Process 

Journal entry when billing customers

Debit - Accounts Receivables
Credit - Revenue account

When account receivable is collected

Debit - Cash account
Credit - Accounts Receivables account

Classify the below accounts...

Classify the following accounts into (a) personal accounts, (b) real accounts, and (c)nominal accounts:

1. Furniture Account
2. Salaries Account
3. Outstanding Wages Account
4. National Trading Co. Ltd.'s Account
5. Stationery Account
6. Prepaid Insurance Account
7. Capital Account
8. Interest Account
9. Buildings Account
10. Purchases Account
11. Cash Account
12. Bank Account
13. Sales Account
14. Commission Received in Advance Account
15. Discount Account
16. Drawings Account
17. Loan Account
18. Mysore Store's Account
19. Repairs to Machinery Account
20. Stock Account
21. Investments Account
22. Loose Tools Account
23. Bangalore Sports Club's Account
24. Loss of Goods by Fire Account
25. Motor Vans Account
26. Rent Account
27. Carriage Account
28. Charity Account
29. Postage Account
30. Sales Returns Account
31. Purchases Returns Account
32. Goodwill Account
33. Depreciation Account
34. Bad Debts Account
35. National College's Account
36. Bangalore Corporation Account
37. Bad Debts Recovered Account
38. International Traders Account
39. Bank Overdraft Account

Examples of Nominal or Fictitious Accounts

Nominal accounts may be expenses and losses or incomes and gains. Therefore, the accounts of expenses and losses are debited, and the accounts of incomes and gains are credited.

The rule for debiting and crediting nominal accounts may be explained with the help of the following examples:

1.Paid rent Rs.100.

In this transaction, the nominal account involved is Rent Account. Rent paid is an expenses. So, Rent Account has to be debited.

2.Paid salary Rs. 500.

Here, the nominal account involved is Salary Account. Salary is an expense. Therefore, Salary Account has to be debited.

3.Received commission Rs.100.

In this transaction, the nominal account involved is Commission Account. Commission received is an income. So, commission Account has to be credited.

4.Received Interest on bank deposit Rs.100.

The nominal account involved in this transaction is Interest Account. Interest received is an income. So, Interest Account has to be credited

Classification of Accounts - Nominal or Fictitious Accounts

Nominal or Fictitious Accounts:

Nominal or fictitious accounts are accounts of the expenses and losses which a concern incurs, and incomes and gains which a concern earns in the course of its business. These accounts are called nominal accounts, as they exist only in name and cannot be seen or touched.

Nominal accounts may be:

a. Revenue accounts or incomes accounts, i.e., accounts of revenues, incomes, gain or profits, such as commission earned, interest received, discount received, etc.

b. Expense accounts, i.e., accounts of expenses or losses, such as salaries paid, rent paid, discount allowed, bad debts, etc.

Examples of Personal Account

Personal Accounts:

A person may either receive the benefit of a transaction or give the benefit of a transaction. Therefore, the account of the person who receives the benefit of the transaction is debited, and the account of the person who gives the benefit of the transaction is credited.

The rule for debiting and crediting personal accounts is explained with the help of the following examples:

1.Received from Ramesh Rs. 2000.

In this transaction, the personal account involved is Ramesh's Account. The personal account of Ramesh gives the benefit, i.el., cash. So, Ramesh's Personal Account has to be credited.

2. Paid Ganesh Rs. 1,000.

The personal account involved in this transaction is Ganesh's Account. The personal acccount of Ganesh receives the benefit, i.e., cash. So, Ganesh's Personal Account has to be debited.

3.Purchased goods from David on credit Rs. 500

Here, the personal account involved is David's Account. The personal account of David gives the benefit of the transaction, i.e,. goods. Therefore, David's Personal Account has to be credited.

4. Sold goods to Henry on credit Rs. 600.

In this transaction, the personal account involved is Henry's Account. The personal account of Henry receives the benefit of the transaction, i.e., goods. So, Henry's Personal Account has to be debited.