Dot Nepal presents useful notes for the 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
|To gross loss b/d||XXX||By gross profit b/d||XXX|
|To office and Administrative expenses||XXX||By revenue income received||XXX|
|To selling and distribution expenses||XXX||By revenue gain||XXX|
|To revenue losses||XXX||By net loss c/d||XXX|
|To interest expenses||XXX||Total||XXX|
|To tax expenses||XXX|
|To net profit c/d||XXX|
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
|3||Net interest income||XXX|
|4||Commission and discount income||XXX|
|5||Other operating income||XXX|
|7||Total operating income||XXX|
|9||Other operating expenses||XXX|
|11||Operating Profit before possible losses||XXX|
|12||Possible loan loss provision||XXX|
|14||Non operating income/expenses||XXX|
|16||Profit from regular activities||XXX|
|17||Income/expenses from extra ordinary transaction||XXX|
|18||Profit Before bonus and tax||XXX|
Difference Between Gross Profit and Net Profit
|Gross Profit||Net Profit|
|It is calculated from trading account||It is calculated from P/L account|
|It is difference between sales and cost of goods sold||It is excess amount of gross profit over its operating expenses|
|It is recorded on credit side of P/L a/c||It is accumulated on capital|
|It is not distributable profit||This profit is use to provide dividend|
|It is use for internal purpose||It is applicable for external user|
Difference Between P/L a/c and BALANCE Sheet
|s.n.||Base||P/L account||Balance sheet|
|1||Account||It is a ledger of nominal account||It is not a ledger but a statement only|
|2||Time||It is prepared on given period of time||It is prepared on any point of time|
|3||Indicator||It disclose net profit or loss of the firm so it is called financial performance of the organization||It shows financial health or status of the firm so it is called financial position indicator|
|4||Elements||Core elements of income statements are income, gain, expenses and losses.||Core elements are balance sheet are assets, capital and liabilities|
|5||Balance||It is not necessary for being equal amount on debit and credit side of P/L account because it is ledger||Due to the accounting equation both side of balance must be equal|
|6||Natur||It is combination of revenue nature transaction||It is the presentation of revenue nature transaction|
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.