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Profit refers to the excess of total revenue over total expenses. According to the rule “Debit all expenses and losses, Credit all incomes and gains”, expenses are recorded on the debit side while revenues are recorded on the credit side.

There is profit when Total revenue > Total expenses, which means the balance of the credit side > the balance of the debit side. Since, in accounting Dr. side is always equal to the credit side, a balancing figure (representing profit or loss) is shown on the shorter side, to make both sides equal.

When Credit side > Debit side, Profit(balancing figure) is shown on the Dr. side so that both sides are equal. 

PROFIT

Profit refers to the excess of total revenue over the total expenses of the business for an accounting year. In simple words, it shows how much extra the firm earned after deducting all the expenses it incurred during the year.

Profit = Total Revenue – Total Expenses

Suppose, the firm earned a total revenue of $10,000 for the accounting year 2022-23. Also, it incurred total expenses of $6,000 during the year. So, Profit for the AY 2022-23 is $4,000.

ASCERTAINING PROFIT

To ascertain profit earned or loss incurred by the firm during an accounting year, it prepares two accounts.

• Trading A/c
• Profit and Loss A/c

Points to be noted:

• Both accounts are Nominal Account which follows the rule “Debit all expenses and losses, Credit all incomes and gains”
• The debit side records expenses while the Credit side records incomes.
• Both are balanced accounts, which means its Dr. side is always equal to its Cr. side.
• If they are not balanced, then a balancing figure is added to the shorter side which represents profit or the loss depending on which side is greater.
• If Dr. side > Cr. side, it means expenses are more than the incomes and thus, there is a loss.
• If Cr. side > Dr. side, it means there are more incomes than expenses and thus, there is Profit.

TRADING ACCOUNT

It is the first final account prepared for calculating gross profit or gross loss during the year because of the trading activities of the firm.

Trading activities are related to the buying and selling of goods. In between buying and selling a lot of activities are there like transportation, warehousing, loading, unloading, etc. All expenses that are directly related to buying and selling as well as manufacturing of goods are known as Direct expenses and are also recorded in the trading accounts.

Items included on the debit side:

• Opening stock
• Purchases
• Direct expenses like wages, import duty, royalty, manufacturing expenses, etc.
• Gross Profit

Items included on the credit side:

• Sales
• Closing stock
• Gross loss

Gross Profit is when Cr. side (incomes) > Dr. side (expenses). It is recorded on the debit side as a balancing figure.

PROFIT AND LOSS ACCOUNT

A businessman incurs a lot of expenses during the year which may be directly related or indirectly related to the business.

As the Trading account only considers direct expenses, the businessman prepares the P&L A/c which considers all the expenses incurred during a year to ascertain net profit or loss.

Items written on the Debit side

• Gross loss (transferred from the trading a/c)
• Office and administrative expenses (like employee’s salary, office rent, office lighting bills, legal charges, printing expenses, etc.)
• Selling and distribution expenses (like advertisement fees, commission, carriage outward, packaging charges, etc.
• Miscellaneous expenses (like interest on loan, interest on capital, repair, depreciation, etc.)
• Net Profit

Items written on the Credit side

• Gross Profit (transferred from trading a/c)
• Other incomes and gains (Like income from investments, interest received, rent received, etc.)
• Net loss

Net Profit is when the Cr. side (incomes)> Dr. side(expenses). It is recorded on the Debit side as a balancing figure.