Profit and Loss Account | Bank Exam Preparation

Profit and Loss Account

IIntroduction of Profit and Loss Account
Profit and loss account is that financial statement which is able to present income, gain, expenses and losses of the firm on given period of time. It is a ledger of nominal account. It is able to present net profit or loss of the firm so P/L account is called financial performance indicator of the firm. It is the presentation of revenue nature financial transaction. It is accounting output of the firm.

Method of Making Profit and Loss Account

• Before making P/L account we have to prepare trading account in order to find out Gross profit/Gross loss.
• If there is provision of regulator than it is mandatory to use format prescribed by such entity otherwise format of accounting standard is applicable to make P/L account.
• All expenses and losses are charged on debit side of P/L account but all income and gain should be recorded on credit side.
• Main objective of P/L account is to find out net profit or loss of the firm so it deduct interest as financing cost and tax expenses as government obligation while making P/L account.
• Organization can use traditional “T” format or modern vertical format to make P/L account.

Core element of balance sheet with example are presented below,
Profit and Loss Account of XYZ firm for the period of Shrawan 1 2074 to Ashadh 31, 2075

Method of Making Profit and Loss Account of Bank

Bank and financial institutions prepare P/L account from trial balance. They prefer format of regulator. In Nepal, Bank prepare Profit and loss account as per unified directives no 4 of central bank. Interest is treated as per cash basis accounting concept but remaining elements are treated under accrual basis accounting concept. Core elements of bank’s balance sheet are as follows.
 
Profit and Loss Account of XYZ bank from 2074 Shrawan to 2075 Ashad

Difference Between Gross Profit and Net Profit

Difference Between P/L a/c and BALANCE Sheet

 Similarities between Balance Sheet and P/L Account

• Both are the elements of financial statements
• Both are quantitative expression of historical data
• To provide information to the stakeholder it is necessary to prepare both accounting output
• Both are the indicator of transparency
• Both are prepare from trial balance
• To complete final account, preparation of both tools is essential
• For the calculation of ration both are required

Interrelationship between Balance Sheet and P/L Account

• After making profit and loss account, organization can prepare balance sheet,
• Depreciation which is deducted on assets should be recorded on debit side of balance sheet,
• Amount deducted on debit side of profit and loss account should be recoded on assets side,
• Deducted amount of income is the liability element of balance sheet,
• Provision for bad debt is reduced from debtors on assets side and should be charged on debit side of balance sheet.

So, all additional information of trail balance should be recorded at least twice on that process balance sheet and profit and loss account becomes interdependent each other.