Closing P&L accounts is a mandatory when creating annual financial reports. Profit and loss accounts can also be presented by means of T-accounts. The Generally Accepted Accounting Principles indicate the preferable structure and order of every P&L account. Since both the nature of the expense and the cost of sales methods achieve the same end result, it is up to you to decide which one to assess your account with.
The following example shows a P&L account for the purpose of completing an annual financial statement, which is used to close nominal accounts. The debit column includes balances of expense accounts for a given financial year, whereas the credit column lists the balances of income accounts.
Profit and loss account | Table 1a
Debit (Balances of expense accounts) | Credit (Balances of income accounts) |
Rental costs: £54,000 | Sales revenue: £1,900,000 |
Wages and salaries: £1,260,000 | Intrest earned: £55,000 |
Operating taxes: £60,000 | Sale of fixed assets: £30,000 |
Account balance: £611,000 | |
Total: £1,985,000 | Total: £1,985,000 |
In this example, the total value of the debit side amounts to £1,985,000. Since it is the highest of the two values, it is also considered the sum of the overall account. However, the calculation does not end here. Firstly, the difference between the two sides must be determined in the following manner:
£1,985,000 (total of the credit side)
- £1,374,000 (rental costs, wages and salaries, operating costs)
£611,000 (account balance, i.e. the difference)
The difference is therefore recorded under “account balance” on the debit side. This, on the other hand, signifies that the credit side is greater, which creates a credit balance. The annual net profit therefore amounts to £611,000.
Profit and loss account | Table 2a
Debit (Balances of expense accounts) | Credit (Balances of income accounts) |
Rental costs: £70,000 | Sales revenue: £1,623,000 |
Wages and salaries: £1,638,000 | Interest earned: £50,000 |
Operating taxes: £55,000 | Sale of fixed assets: £25,000 |
| |
| Account balance: £65,000 |
Total: £1,763,000 | Total: £1,763,000 |
£1,763,000
- £1,698,000
£65,000
In this example however, a total of £1,763,000 appears on the debit side, which exceeds the sum of £1,698,000 on the credit side. What results from this is a debit balance of £65,000. This is a so-called net loss.