Preparation of Profit and Loss Account

Explanation of Certain items of Profit and Loss Account

1. Salaries

Salaries are paid for the services of employees and are debited to profit and loss ac- count being indirect expense. If any salary has been paid to proprietor or partners, it should be shown separately because it requires special treatment at the time of income tax assessment.

2. Salaries and Wages

When wages account is included with salaries it treated is as indirect expense and is taken into profit and loss account.

3. Rent

Rent of the office shop showroom or godown is an indirect expense and so is debited to profit & loss account. However, rent of factory is debited to trading account. When a part of the building has been sublet the rent received should be shown on the credit side of profit and loss account as a separate item.

4. Rates and Taxes

These are levied by the local authorities to meet public expenditure. It being an indirect expenditure is shown on the debit side of profit and loss account.

5. Interest

Interest on loan, overdraft or overdue debts is payable by the firm. It is an indirect expense; so debited to profit and loss account. Interest on loan advanced by the firm on depositor investments is an income of the firm and so is credited to the profit and loss account.

If business has paid any interest on capital to its proprietor or partners it should also be debited in the profit and loss account but separately because this item needs special treatment at the time of income-tax assessment.

6. Commission

In business sometimes agents are appointed to effect sales, who are paid commission as their remuneration. So this being a selling expenses is shown on the debit side of profit and loss account. Sometimes commission is also paid on purchases of goods, such 'as expense should be debited in the trading account. Sometimes the firm can also act as an agent to the other business houses and in such cases it receives commission from them. Commission so received is shown on the credit side of profit and loss account.

7. Trade Expenses

They are also termed as 'sundry expenses'. Trade expenses represent expenses of such a nature for which it is not worthwhile to open separate accounts. Trade expenses are not taken to trading account.

8. Repairs

Repairs to the plant, machinery, building are indirect expenses are treated expense and are debited to profit and loss account..

9. Traveling Expenses

Unless mentioned otherwise, traveling expenses are treated as indirect expenses and are debited to profit and loss account.

10. Horse & stable Expentses

Expenses incurred for the fodder of horses and wages paid for looking after stable are treated as indirect expenses and debited to profit and loss account.

11. Apprentice Premium

This is the amount charged from persons to whom training is imparted by the business. It is an income and is credited to profit and loss account. In case apprentice premium is charged in advance for two or three years, then the amount is distributed over number of years and each year's profit and loss account is credited with its share of income.

12. Bad debts

It is the amount which could not be recovered by the trader on account of credit sales. It is a business loss, so is debited in the profit and loss account.

13. Life Insurance Premium

If the premium is paid on the life policy of the proprietor of the business; it is treated as his drawings and is shown by way of deduction from the capital account. It should not be taken to profit and loss account.

14. Insurance Premium

If insurance premium account appears in the trial balance, it stands for the insurance of the business. This is taken to profit and loss account. Insurance premium on goods purchased, factory building, factory machines are treated as direct expense and are taken to trading account.

15. Income Tax

In the case of merchant income-tax paid is treated as a personal expense and is shown by way of deduction from capital account. Income-tax in case of companies is treated differently.

16. Discount allowed and Received

Discount is a reward for prompt payment. It is belief to show discount received and discount allowed separately on the credit and debit side of profit and loss account respectively instead of showing the net balance of this account.

17. Depreciation

Depreciation is a loss incurred on account of use of fixed assets in the business. Generally, it is charged from profit and loss account at a fixed percentage. The students should exercise great care as regards the rate of depreciation. If rate is without words 'per annum', then the rate will be taken irrespective of the period of accounts. This is very important when the period of accounts is less than one year. On the other hand, if the rate of depreciation is 'per annum' the depreciation should be calculated on the assets with due consideration to the period for which the asset has been used in business during the year. In case of additions to assets during the year, it is advisable to ignore depreciation on additions if the date of additions is not given. Same rule shall hold good for the sale of assets during the year.

18. Stock at the end appearing in the trial balance.

It is important to emphasize the rule that balance appearing in the trial balance is taken to one and only one place. It may either be trading account or profit and loss account or balance sheet. Since stock at the end is an asset, it will betaken to balance sheet. On the other hand, so long as there is stock in trade, account for that must be kept open and thus be taken to the assets side of balance sheet.


Proprietor of HiTech Computer Services, Anil Kumar Gupta, Bachelor of Engineering (Hons.) in Electrical and Electronics Engineering from Birla Institute of Technology and Science, Pilani, India, Year of passing : May, 1985, is born on January 7, 1964 , Age : 40+, and is Indian national. Services Offered by HiTech Computer Services : Standard software for various business segments, Customized Software Development, Websites and web based ASP applications development, Financial Accounting and...

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Have a question for Anil?

29th May 2014 5:17am
My Querry Is That How Much Of House Rent We can Take In Capital Account & How Much Get Deduction For Individual?
Eg:I Paid Rs.216000/-Rent As Yly
So How Much Get Deduction In Income Tax How Much Amount We Can Take In Capital Account.As Per I.T Rules

12th January 2015 6:25am
Proprietor renumeration comes which side in final account ?

5th March 2015 1:14am
will "advance paid" come under p&l appropiration ? & Regarding its Treatment

16th March 2015 7:33am
Dear Sir, Kindly clarify the difference between debited in and debited to

Fred Aletor
15th April 2015 10:51am
How is sundry income recognized in the profit & Loss Account. Is it to be added to Gross profit or deducted from it?

30th April 2015 12:51pm
My wife has a share trading business, where in I handle all the accounts and transactions for her. Can the salary paid by her to me be claimed as an expense. I have done my MCOM.

17th June 2015 5:15pm
how do we treat salary paid to a partner but not entered in the partnership account?

6th July 2015 3:14am
Sir, if we recd the loan from the bank, is it shown in p & l as an other income or how it treats. is there any effect in p & l

10th August 2015 10:06am
how to adjust overdrawn travelling expenses in P&L a/c.

7th September 2015 7:26am
Dear sir is annual fire insurance premium for renewal of policy is allowed to be debited in profit and loss account or not

Damilola Olarewaju
7th September 2015 11:16am
How do treat loan payable in the balance sheet

14th October 2015 1:29am
Respected Sir,
Kindly suggest me, in which side the Life Insurance Premium will appear in Balance Sheet?

10th February 2016 4:47am
what kind of expenses can be claimed even if bills are not present?

17th July 2016 2:57am
Where do we post interest on overdraft due amount

9th March 2017 4:47am
IS staff loan part of profit and loss accounts?

31st March 2017 3:07am
If nothing is given regarding income tax whether it is paid by the company or merchant,how should we treat it in profit and loss account?

17th April 2017 8:53am
Is premises at cost posted to the balance sheet or profit and loss account and which side is it posted?

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