Accounting basics · final accounts

Profit & Loss Account: format & example.

The statement that turns Gross Profit into the number every owner actually cares about. What a Profit and Loss Account is, which expenses and incomes belong in it, and a fully worked example from Gross Profit down to Net Profit.

Reviewed July 2026
7 min read
CA Anil Agarwal & the TatvaBooks team

What is a Profit and Loss Account?

A Profit and Loss (P&L) Account is a financial statement prepared at the end of an accounting period (usually a financial year) to find out whether a business made a Net Profit or suffered a Net Loss. It picks up the Gross Profit worked out in the Trading Account and adjusts it for every other income and expense the business had during the year — salaries, rent, advertisement, interest, discount received and so on.

In short: the Trading Account tells you if you sold goods for more than they cost you (Gross Profit). The Profit and Loss Account tells you if the whole business — after paying staff, rent, interest and every other running cost — actually made money (Net Profit). Together, the two are often prepared as a single statement called the Trading and Profit & Loss Account.

The rules: what goes in, and on which side

The Profit and Loss Account is a nominal account, so it follows the golden rule "debit all expenses and losses, credit all incomes and gains" — but only the indirect ones. Direct costs of buying or producing goods stay in the Trading Account.

Rule	Why it matters
It starts where the Trading Account ends	The Trading Account gives Gross Profit (or Gross Loss). That figure is brought down (b/d) as the first income line of the Profit & Loss Account — the two statements are really one continuous working, often prepared together as the 'Trading and P&L Account'.
Only indirect expenses are debited	Direct costs of buying/making goods (purchases, carriage inward, wages, factory power) already sat in the Trading Account. The P&L Account carries only indirect / operating expenses — office, selling, distribution and financial expenses such as salaries, rent, advertisement and interest.
Only indirect incomes are credited	Income that isn't from the core sale of goods — discount received, commission earned, interest on investments, rent received from a sub-let portion — is credited here, in addition to Gross Profit b/d.
The balancing figure is Net Profit or Net Loss	If total income (credit side) exceeds total indirect expenses (debit side), the difference is Net Profit. If expenses exceed income, it's a Net Loss. Either way, this figure transfers to the Capital Account (sole proprietorship/partnership) or Retained Earnings (company).
Non-cash and provision items still get expensed	Depreciation, provision for doubtful debts and provision for discount on debtors reduce profit even though no cash leaves that day — the Matching Concept requires the expense be recognised in the period the related asset/benefit was used.

Typical indirect expenses (debit side): office salaries, rent & rates, printing & stationery, telephone, depreciation, interest paid, bad debts, advertisement, carriage on sales, audit fees, insurance. Typical indirect incomes (credit side): Gross Profit b/d, discount received, commission received, interest received, rent received.

Worked example: Profit & Loss Account of Sharma Traders

Continuing the books of Sharma Traders for the year ended 31 March: the Trading Account has already produced a Gross Profit of ₹4,50,000. That figure is brought down (b/d) as the first credit entry below, alongside a handful of other indirect incomes and expenses for the year.

Dr. — Expenses / Losses		Cr. — Incomes / Gains
Salaries	90,000	Gross Profit b/d	4,50,000
Rent, rates & taxes	36,000	Discount received	12,000
Printing & stationery	8,000	Commission received	10,000
Telephone & internet	6,000	Interest on investments	5,000
Depreciation on furniture	12,000
Interest on loan	9,000
Bad debts	7,000
Advertisement	15,000
Carriage on sales	22,000
Audit fees	20,000
Net Profit transferred to Capital A/c	2,52,000
Total	₹4,77,000	Total	₹4,77,000

Total indirect income is ₹4,77,000 (Gross Profit ₹4,50,000 + discount received ₹12,000 + commission received ₹10,000 + interest on investments ₹5,000). Total indirect expenses before Net Profit are ₹2,25,000. The difference — ₹2,52,000 — is the Net Profit, entered as a balancing debit entry ("Net Profit transferred to Capital A/c") so both sides total ₹4,77,000 exactly. This ₹2,52,000 now moves to the credit side of Sharma Traders' Capital Account.

Common mistakes & student tips

Debiting a direct expense (like wages on production, or carriage inward) to the P&L Account instead of the Trading Account — this overstates Gross Profit and understates Net Profit, even though the final Net Profit figure stays right only if it isn't debited twice.
Forgetting to bring down Gross Profit as the opening credit entry — the P&L Account cannot be prepared in isolation from the Trading Account.
Crediting incomes on a receipts basis instead of an accrual basis — commission earned but not yet received is still income for the year, under the Accrual Concept.
Missing non-cash charges: students often skip depreciation or provision for doubtful debts because 'no cash was paid' — but these are still expenses of the period.
Confusing Net Profit's place in the accounts: it is transferred to the Capital Account (adding to owner's equity), not shown as a liability or asset on the Balance Sheet.

Exam tip: when you're handed a trial balance and asked to prepare final accounts, sort every expense into "direct" (Trading Account) or "indirect" (P&L Account) before you start writing — wages, carriage inward, factory rent and royalty on production are the direct ones examiners love to plant as traps in the expense list.

In TatvaBooks, this happens automatically

In real bookkeeping, nobody manually sorts a trial balance into direct and indirect heads every month-end. In TatvaBooks, every expense voucher is tagged to the right ledger group when it's entered, so the Trading and Profit & Loss Account generates live — Gross Profit rolls straight into Net Profit, correctly split, the moment you post a transaction. No spreadsheet, no re-classifying at year-end.

See how TatvaBooks builds your P&L Account automatically, or start free on the Solo plan.

Frequently asked questions

What is a Profit and Loss Account?

A Profit and Loss (P&L) Account is a financial statement that shows whether a business earned a net profit or suffered a net loss over an accounting period. It starts with Gross Profit brought down from the Trading Account, adds other (indirect) incomes, deducts all indirect / operating expenses, and the balancing figure is the Net Profit or Net Loss for the year — which is then transferred to the Capital Account.

What is the difference between the Trading Account and the Profit and Loss Account?

The Trading Account calculates Gross Profit — sales minus the direct cost of goods sold (opening stock + purchases + direct expenses − closing stock − sales returns). The Profit and Loss Account picks up that Gross Profit and adjusts it for indirect expenses (salaries, rent, depreciation, interest) and indirect incomes (discount received, commission earned) to arrive at Net Profit. Together they're often called the 'Trading and Profit & Loss Account'.

Is depreciation shown in the Trading Account or the Profit and Loss Account?

Depreciation on office, selling and administrative assets (like office furniture or a delivery vehicle) is debited to the Profit and Loss Account as an indirect expense. Depreciation on a purely production/factory asset can appear in the Trading Account instead, since it's a direct cost of making the goods. Most B.Com and CA-Foundation problems treat depreciation as a P&L item unless stated otherwise.

What happens to the Net Profit shown in the Profit and Loss Account?

Net Profit is transferred to the credit side of the Capital Account (for a sole proprietorship or partnership) or to Retained Earnings / Reserves & Surplus (for a company), increasing owner's equity. A Net Loss is transferred to the debit side instead, reducing capital. It never appears as a separate line item on the Balance Sheet — it flows into capital first.

How is the Profit and Loss Account different from GST returns?

The Profit and Loss Account is an accounting statement measuring business profitability for a period, prepared under accrual accounting. GST returns (GSTR-1, GSTR-3B) are tax filings reporting outward and inward supplies for input tax credit and tax payment — a different purpose, timeline and set of rules. A sale appears in both, but the P&L Account also includes non-GST items like salaries, depreciation and interest.

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