A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period. When the total revenueRead more
A profit and loss account is a financial statement which shows the net profit or net loss of an enterprise for an accounting period. It reports all the indirect expenses and indirect income including gross profit or loss derived from trading accounts for an accounting period.
When the total revenue i.e. credit side of profit and loss a/c is more than the total of expenses i.e. the debit side of profit and loss a/c, it results in net profit whereas when the total revenue is less than the total of expenses, it results in a net loss.
The debit balance of the profit and loss account is the net loss incurred during the accounting period by an enterprise. It is transferred to a capital account thereby reducing the capital or can be shown as a debit balance on the asset side.
Accounting entry for loss transferred is as follows :
Capital A/c …Dr.
To Profit & Loss A/c
(being net loss transferred to capital account)
Example
A Business has a total income of $50,000 in an accounting year and has expenses amounting to $60,000 in that particular year. The profit and loss account will show a net loss of $10,000 ($60,000-50,000). Net loss will be transferred to capital A/c. Capital of the business will be reduced by $10,000. This loss can also be shown on the asset side of the balance sheet.
Extract of a Profit and loss a/c showing net loss is as under:
Profit and loss A/c for the year ended …..
| Particulars | Amount (Dr.) | Particulars | Amount (Cr.) |
| To gross loss b/d | xxx | By gross profit b/d | xxx |
| To salaries | xxx | By bank interest | xxx |
| To office rent | xxx | By commission received | xxx |
| To printing and stationery | xxx | By rent received | xxx |
| To insurance | xxx | By dividend | xxx |
| To audit fees | xxx | By profit on sale of asset | xxx |
| To electricity chares | xxx | By Net Loss | xxx |
| To depreciation | xxx | ||
| To bad debts | xxx | ||
| To bank charges | xxx | ||
| To miscellaneous expenditure | xxx | ||
| To interest on loans | xxx | ||
| Total | xxx |
The debit balance for a non-corporate entity is shown as a reduction from the capital account
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on…
| Liabilities | Amount |
| Equity and liabilities | |
| Capital
Less: Profit & Loss A/c |
While the Debit balance of profit and Loss A/c of a corporate entity is shown as a reduction in Reserves and surplus. If the business doesn’t have reserves then the debit balance is shown on the asset side.
Extract of the Balance sheet showing the debit balance of Profit & Loss A/c is as under :
Balance Sheet as on..
| Liabilities | Amount |
| Equity and liabilities | |
| Reserves And Surplus
Less: Profit & Loss A/c |
Conclusion: Debit balance of profit and loss a/c represents that expenses are more than the income of a business in an accounting period. Debit balance of profit and loss a/c indicates that company need to increase its income or cut down on unnecessary expenses.
The business needs to find out the reason of excessive expenses because accumulated losses are not good for the health of the company.
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Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them. For example, X Ltd took an insurance policy on 30th September 20XX. The premium is to be paid annually on 30th SeptemRead more
Accrued expenses are those expenses that have already been incurred but not paid. The business has already received the benefit of these goods or services but is yet to pay for them.
For example,
Why does the concept of accrued expenses arise in accounting?
The concept of accrued expenses arises in accounting because accounting records transactions on an accrual and not cash basis.
Accounting on an accrual basis implies recording transactions as and when they are incurred while recording transactions on a cash basis means recording them as and when cash is actually paid for receiving those services.
For example,
Treatment of Accrued Expenses
Accrued expenses are classified as current liabilities. That is because the business has a short-term obligation to pay these expenses. The other party has a legal right to receive the amount due. In other words, accrued expenses become payable in the near term.
As current liabilities, accrued expenses are carried in the balance sheet on the liabilities side. They are also recognized in the income statement as an expense as per the concept of accrual basis of accounting.
Conclusion
Accrued expenses are the expenses for which the business has already received the benefit of goods or services but which are payable in an accounting period other than the one in which such benefit is received.
As per the accrual basis of accounting, they are recognized in the year in which the expense is incurred. The expense is carried forward as a current liability until the period in which it is actually paid.
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