⚡ Ch 13 — Profit & Loss Account

PYQ labels (updated 1 Sep 2026)

FAA 2022 = the real Finance Account Assistant paper, 6 Mar 2022 — FAA-2022-paper 2024 = the FAA paper of 28 Jan 2024 — 2024-paper PAA 2020·A = the Panchayat Accounts Assistant paper of 10 Nov 2020 — a different post, kept as practice. These were previously mislabelled "2022"; see Four-Paper-Comparison.

Exam weight

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 sideCREDIT side
To Gross Loss b/dBy Gross Profit b/d
To all indirect expensesBy other incomes (discount/commission received)
To abnormal lossesBy non-trading income (bank interest, rent, dividend)
To Net Profit → Capital A/cBy abnormal gains (profit on sale of fixed asset)

2️⃣ ⭐ The 5 groups of indirect expenses

GroupExamples
Selling & Distributioncarriage outward, advertisement, godown rent, sales commission, after-sales service
Management / Officeoffice salaries, office rent, printing & stationery, telephone, audit fees, legal charges
Maintenancerepairs & renewals of office assets
Financialinterest on loan, discount on bills, bank charges
Abnormal lossesstock 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

PointAnswer
P&L showsNet Profit / Net Loss
It is anAccount, prepared for a period
Starts withGross Profit on the credit side
Expenses paid out of Gross Profit⭐ All of them — general, financial, selling
Repair of old office furnitureRevenue expense
Capital profitprofit on sale of a fixed asset
P&L is also calledStatement of Income / Operations / Earnings
Discount receivedIndirect INCOME (credit side)
Discount allowedIndirect expense (debit side)
Auditor's remuneration payableBalance 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 balancesubtracted from capital in the B/S

4️⃣ 🎯 PYQs from this chapter

PAA 2020·A · 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.)

PAA 2020·A · 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.

PAA 2020·A · 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.

PAA 2020 · Q89 — What amount of additional provision for bad and Doubtful debts should be charged to current years P/L. Account if the closing balance of debtors is Rs 1,00,000, Opening balance of Provision is Rs 1,000 and the Provision is to maintained at 5% of debitor?

a) Rs. 1,000 · b) Rs. 5,000 · c) Rs. 4,000 · d) Rs. 6,000 → Ans: C Provision charge = required − existing.

PAA 2020 · Q96 — The credit balance of retained earning statement Represents

a) Undistributed Profit · b) Undisclosed Profit · c) Distributed Profit · d) Unearned Profit → Ans: A A credit balance on retained earnings = undistributed profit.

PAA 2020 · Q109 — A firm has omitted to record provision for bad and doubtful

a) Net Profit would decrese · b) Net profit would increase · c) Gross profit would be overstated · d) Gross Profit would be understated → Ans: B ⭐ Omitting an expense OVERSTATES net profit. Gross profit is unaffected.


⭐ From the REAL FAA 2022 paper (6 Mar 2022) — added 1 Sep 2026. See FAA-2022-paper.

FAA 2022 · Q32 — A positive balance on the debit side of the Profit & Loss account indicates

a) gross profit b) net profit c) gross loss d) net loss → Ans: B and D (double-keyed) ⚠️ Badly worded, so both were accepted. The rule to learn: a DEBIT balance in P&L = NET LOSS; a credit balance = net profit.

FAA 2022 · Q35 — Loss due to fire in a factory is recorded in the

a) balance sheet b) insurance account c) profit and loss statement d) factory account → Ans: C An abnormal loss — it is not a trading expense, so it goes to P&L, not the Trading A/c.

5️⃣ Provision for doubtful debts — the standard sum

Charge to P&L = (Required provision) − (Existing provision) + (Bad debts written off during the year)

SituationTreatment
Required > existingdebit the difference to P&L
Required < existingcredit the excess to P&L
In the Balance Sheetdeducted from Sundry Debtors

6️⃣ High-frequency MCQ traps

MCQPoint
Q150All indirect expenses are paid out of gross profit
Q152Repairs = revenue expense
Q153Capital profit = profit on sale of a fixed asset
Q154P&L = Statement of Income
Q155Salaries, insurance, rent = all indirect
Q156⭐ Discount received = indirect INCOME
Q159Auditor's remuneration payable → Balance Sheet
Q147 (Ch 12)Carriage outward = indirect → P&L
Q386Net profit is credited to Capital
Q389Provision 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)

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