What is Profit and Loss Account? | के हो नाफा नोक्सान खाता ?

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

1. Net profit and loss of the PL account should be charged on the capital side of the balance sheet.
2. Depreciation which is deducted from respective assets on balance sheet must be recorded on the debit side of PL account.
3. 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.
4. 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?