Short Notes — Ch 13 Profit & Loss Account
⚡ Ch 13 — Profit & Loss Account
PYQ: 3 questions — 2022·Q84, Q89, Q109. MCQ bank: 10 questions (Q150–159). Part of the Final Accounts block (Ch 12–14) = 6 marks in 2022.
1️⃣ The core
The Trading A/c gave you Gross Profit. The P&L Account then deducts all indirect expenses and adds all other incomes to give NET PROFIT.
Net Profit = Gross Profit + Other Incomes − Indirect Expenses
⭐ It starts with Gross Profit on the CREDIT side (gross loss on the debit side).
| DEBIT side | CREDIT side |
|---|---|
| To Gross Loss b/d | By Gross Profit b/d |
| To all indirect expenses | By other incomes (discount/commission received) |
| To abnormal losses | By non-trading income (bank interest, rent, dividend) |
| To Net Profit → Capital A/c | By abnormal gains (profit on sale of fixed asset) |
2️⃣ ⭐ The 5 groups of indirect expenses
| Group | Examples |
|---|---|
| Selling & Distribution | carriage outward, advertisement, godown rent, sales commission, after-sales service |
| Management / Office | office salaries, office rent, printing & stationery, telephone, audit fees, legal charges |
| Maintenance | repairs & renewals of office assets |
| Financial | interest on loan, discount on bills, bank charges |
| Abnormal losses | stock lost by fire (uninsured), loss on sale of fixed asset |
⭐ Only revenue expenses of the CURRENT year go here. Personal expenses of the proprietor never do — they are Drawings.
3️⃣ Quick Revision Table
| Point | Answer |
|---|---|
| P&L shows | Net Profit / Net Loss |
| It is an | Account, prepared for a period |
| Starts with | Gross Profit on the credit side |
| Expenses paid out of Gross Profit | ⭐ All of them — general, financial, selling |
| Repair of old office furniture | Revenue expense |
| Capital profit | profit on sale of a fixed asset |
| P&L is also called | Statement of Income / Operations / Earnings |
| Discount received | Indirect INCOME (credit side) |
| Discount allowed | Indirect expense (debit side) |
| Auditor's remuneration payable | Balance Sheet, under current liabilities |
| Net Profit is | ⭐ CREDITED to the Capital A/c |
| Debit balance of P&L means | ⭐ NET LOSS |
| Unfavourable (debit) P&L balance | subtracted from capital in the B/S |
4️⃣ 🎯 PYQs from this chapter
2022 · Q84 — Closing debtors ₹1,00,000; opening provision ₹1,000; provision to be maintained at 5% → additional provision charged to P&L?
a) ₹1,000 b) ₹5,000 c) ₹4,000 d) ₹6,000 → Ans: C Method: Required = 5% × 1,00,000 = ₹5,000. Less existing ₹1,000 → charge ₹4,000. (If the existing provision were larger than required, the excess would be credited to P&L instead.)
2022 · Q109 — A firm omitted the provision for bad & doubtful debts. Impact?
a) Net Profit would decrease b) Net Profit would increase c) Gross Profit overstated d) Gross Profit understated → Ans: B Omitting an expense overstates net profit. Gross profit is unaffected — the provision sits in the P&L, not the Trading A/c.
2022 · Q89 — The credit balance of a retained earnings statement represents
a) Undistributed Profit b) Undisclosed Profit c) Distributed Profit d) Unearned Profit → Ans: A Profit retained in the business, not yet paid out as dividend.
5️⃣ Provision for doubtful debts — the standard sum
Charge to P&L = (Required provision) − (Existing provision) + (Bad debts written off during the year)
| Situation | Treatment |
|---|---|
| Required > existing | debit the difference to P&L |
| Required < existing | credit the excess to P&L |
| In the Balance Sheet | deducted from Sundry Debtors |
6️⃣ High-frequency MCQ traps
| MCQ | Point |
|---|---|
| Q150 | All indirect expenses are paid out of gross profit |
| Q152 | Repairs = revenue expense |
| Q153 | Capital profit = profit on sale of a fixed asset |
| Q154 | P&L = Statement of Income |
| Q155 | Salaries, insurance, rent = all indirect |
| Q156 | ⭐ Discount received = indirect INCOME |
| Q159 | Auditor's remuneration payable → Balance Sheet |
| Q147 (Ch 12) | Carriage outward = indirect → P&L |
| Q386 | Net profit is credited to Capital |
| Q389 | Provision for doubtful debts → debited to P&L |
7️⃣ If you remember nothing else
Net Profit = Gross Profit + Other Income − Indirect Expenses · starts with GP on the CREDIT side · debit balance = NET LOSS · Net profit is CREDITED to Capital · discount received = income, discount allowed = expense · carriage OUTWARD & salaries → P&L · provision charge = required − existing · omitting an expense OVERSTATES profit (gross profit unaffected)
🔗 Related
- Full notes: L-13-PROFIT LOSS ACCOUNT · MCQs Q150–159 in MCQs
- Prev: SN-12-Trading-Account · Next: SN-14-Balance-Sheet
