Profit and loss account

The profit and loss account is

produced by a business to show:
 How much net profit has been made
 How much net loss has been made
 All the expenses for the year
 Formula:
Net profit or loss for the financial year is
calculated as follows:

Gross profit or loss– Expenses = Net profit or loss

The profit and loss account is presented in a

vertical format.
Expenses:
Expenses are the day-to-day running
costs that the business will have to
pay.
Expenses are also known as
revenue expenditure.
The revenue expenditure for the
year must be listed in the profit and
loss account.
Examples of expenses:
 Rent
 Wages and salaries
 Lighting
 Cleaning
 Insurance
 Repairs
 Telephone
 Discount allowed
 Depreciation on fixed assets
 Legal fees
Discount allowed:
 A business may allow a discount to a
debtor for early payment of the amount
owed by the debtor.
 A business may use discount allowed to
improve the cash flow position.
 Discount allowed will reduce the profit of
the business. It is an expense and must be
shown in the profit and loss account.
Discount received:
 A business may receive a discount from trade
suppliers for early payment of the account.
 Discount received will increase the net profit.
 Discount received is added to the gross profit
in the trading account and profit and loss
account.
Carriage inwards and outwards:

 Carriage inwards is added to purchases in the

trading account.
 Carriage outwards is shown as an expense in
the profit and loss account.
 A business may pay the cost of delivering to
customers. This is an expense of the business.
Drawings:
 Drawings are a reduction in capital and must be
shown in the balance sheet.
 Cash drawings will reduce the asset of cash and
not affect the profit.
 Stock drawings will reduce the purchases in the
trading account.
 The amount of drawings made by the owner is
not an expense of the business and must not be
shown in the profit and loss account.