PROFIT & LOSS ACCOUNT (P&L) & BALANCE SHEET – QUICK REVISION NOTES
(Tailored for JKSSB Accounts Assistant (Finance) – Accountancy & Book‑Keeping)
1. WHAT ARE THEY?
| Statement | Primary Purpose | Time‑frame | Main Users |
|---|---|---|---|
| Profit & Loss Account (also called Income Statement) | Shows the financial performance – how much profit or loss was earned during a period. | For a specific accounting period (month, quarter, year). | Management, investors, tax authorities, creditors. |
| Balance Sheet | Shows the financial position – what the entity owns vs. what it owes at a point in time. | As on a specific date (usually the last day of the accounting period). | Same users + lenders, regulators, analysts. |
Key Point: P&L tells how the business performed; Balance Sheet tells where the business stands after that performance.
2. STRUCTURE & FORMAT
2.1 Profit & Loss Account (Vertical Format – most common in India)
Revenue / Sales
Less: Sales Returns, Discounts, Allowances
= Net Sales
Add: Other Income (interest, commission, etc.)
= Gross Revenue
Less: Cost of Goods Sold (COGS)
= Gross Profit
Less: Operating Expenses
– Selling & Distribution Expenses
– Administrative & General Expenses
– Depreciation & Amortization
= Operating Profit (EBIT)
Add: Non‑operating Income
Less: Non‑operating Expenses / Interest
= Profit Before Tax (PBT)
Less: Provision for Tax
= Net Profit After Tax (PAT)
Mnemonic to remember the order: “Sales Other Cost Operating Non‑operating Tax” → SOCONT (pronounced “so‑kont”).
2.2 Balance Sheet (Horizontal Format – Assets = Liabilities + Equity)
| Assets (Left‑hand side) | Liabilities & Equity (Right‑hand side) |
|---|---|
| Current Assets • Cash & Bank • Short‑term Investments • Trade Receivables (Debtors) • Inventory • Prepaid Expenses |
Current Liabilities • Trade Payables (Creditors) • Short‑term Borrowings • Outstanding Expenses • Statutory Dues (PF, ESI, TDS) |
| Non‑Current Assets (Fixed Assets) • Tangible: Land, Building, Plant & Machinery, Furniture • Intangible: Goodwill, Patents, Trademarks • Long‑term Investments • Deferred Tax Assets |
Non‑Current Liabilities • Long‑term Loans • Debentures • Long‑term Provisions |
| Other Assets (if any) • Miscellaneous Expenditure (to the extent not written off) |
Shareholders’ Funds (Equity) • Share Capital (Equity & Preference) • Reserves & Surplus (General Reserve, Profit & Loss A/c balance, Securities Premium) • Money Received Against Share Warrants |
Mnemonic for Assets order: “CASH‑IN‑VENT‑PREPAID” → Current Assets (Cash, Bank, Inventory, Debtors, Prepaid).
Mnemonic for Liabilities & Equity order: “PAY‑LOAN‑RES‑CAP” → Payables, Loans, Reserves, Capital.
3. RELATION BETWEEN P&L & BALANCE SHEET
| Concept | How it Links |
|---|---|
| Net Profit (PAT) | Added to Reserves & Surplus under Shareholders’ Funds (increases equity). |
| Depreciation | Appears as an expense in P&L (reduces profit) and as a deduction from Fixed Assets (reduces asset value). |
| Provision for Tax | Expense in P&L; creates a Current Liability (Tax Payable) until paid. |
| Dividends Paid | Not an expense; reduces Retained Earnings (part of Reserves & Surplus) and Cash/Bank (asset). |
| Outstanding Expenses | Appear as expenses in P&L (accrual basis) and as Current Liabilities. |
| Prepaid Expenses | Not an expense yet; shown as Current Asset; will be expensed in future periods. |
| Closing Stock | Valued at lower of cost or NRV; appears as Current Asset and is deducted from Cost of Goods Sold in P&L (Opening Stock + Purchases – Closing Stock). |
Golden Rule: Every transaction that affects profit or loss will, directly or indirectly, affect the equity side of the Balance Sheet (through retained earnings).
4. STEPS TO PREPARE THE STATEMENTS
4.1 From Trial Balance to Profit & Loss Account
- Separate debit and credit balances.
- Transfer all revenue accounts (Sales, Service Income, Other Income) to the credit side of P&L.
- Transfer all expense accounts (Purchases, Wages, Rent, Salaries, Depreciation, Interest, etc.) to the debit side of P&L.
- Adjust for:
- Opening & Closing Stock (to compute COGS).
- Prepaid / Outstanding expenses (adjust respective expense accounts).
- Depreciation on fixed assets (charge to P&L, reduce asset).
- Provision for doubtful debts, tax, etc.
- Calculate Gross Profit = Net Sales – COGS.
- Derive Operating Profit, PBT, and finally PAT.
4.2 From Trial Balance to Balance Sheet
- List all Asset accounts (debit balances) on the left side.
- List all Liability & Equity accounts (credit balances) on the right side.
- Make adjustments (same as step 4 above) before posting:
- Adjust Fixed Assets for depreciation.
- Adjust Inventory for closing stock.
- Adjust Prepaid/Outstanding items.
- Adjust Provisions.
- Add Net Profit (PAT) to Reserves & Surplus (under Equity).
- Verify that Total Assets = Total Liabilities + Equity.
Quick Checklist (Mnemonic): “A‑L‑E‑P‑R‑O”
- Adjustments (depreciation, stock, prepaid/outstanding)
- Liabilities (current & non‑current)
- Equity (share capital + reserves)
- Profit (PAT added to reserves)
- Re‑check (assets = liabilities + equity)
- Output (final statements)
5. COMMON ADJUSTMENTS & THEIR IMPACT
| Adjustment | Where it appears in P&L | Where it appears in Balance Sheet | Effect on Profit / Equity |
|---|---|---|---|
| Depreciation | Debit (expense) | Credit Fixed Assets (reduce) & Accumulated Depreciation (contra‑asset) | ↓ Profit, ↓ Equity (via retained earnings) |
| Closing Stock | Credit (deduct from COGS) | Debit Current Asset (Inventory) | ↑ Profit (if stock > opening) → ↑ Equity |
| Outstanding Expenses | Debit (expense) | Credit Current Liability | ↓ Profit, ↓ Equity (until paid) |
| Prepaid Expenses | Credit (reduce expense) | Debit Current Asset | ↑ Profit (expense deferred) → ↑ Equity (asset) |
| Provision for Doubtful Debts | Debit (expense) | Credit Provision (contra‑asset to Debtors) | ↓ Profit, ↓ Equity |
| Provision for Tax | Debit (expense) | Credit Current Liability (Tax Payable) | ↓ Profit, ↓ Equity |
| Interest Received | Credit (income) | Debit Bank/Cash (asset) | ↑ Profit, ↑ Equity |
| Dividend Paid | Not in P&L (appropriation) | Credit Bank/Cash (asset) & Debit Reserves & Surplus | ↓ Equity (no profit effect) |
| Loss on Sale of Asset | Debit (loss) | Credit Asset (remove book value) & Debit Bank/Cash (proceeds) | ↓ Profit, ↓ Equity |
6. KEY RATIOS DERIVED FROM THE STATEMENTS
| Ratio | Formula | What it Indicates | Typical Benchmark (Indicative) |
|---|---|---|---|
| Gross Profit Ratio | (Gross Profit / Net Sales) × 100 | Core profitability before operating costs | > 30 % (manufacturing) |
| Net Profit Ratio | (Net Profit / Net Sales) × 100 | Overall profitability after all expenses | > 10 % (good) |
| Operating Profit Ratio | (Operating Profit / Net Sales) × 100 | Efficiency of core operations | > 15 % |
| Return on Assets (ROA) | (Net Profit / Average Total Assets) × 100 | How well assets generate profit | > 5 % |
| Return on Equity (ROE) | (Net Profit / Average Shareholders’ Equity) × 100 | Return to owners | > 12 % |
| Current Ratio | Current Assets / Current Liabilities | Short‑term liquidity | 1.5 – 2.0 |
| Quick Ratio | (Current Assets – Inventory) / Current Liabilities | Immediate liquidity (excluding stock) | ≥ 1.0 |
| Debt‑Equity Ratio | Total Debt / Shareholders’ Equity | Financial leverage | < 2.0 (varies by industry) |
| Inventory Turnover | Cost of Goods Sold / Average Inventory | How fast stock moves | Higher = better (industry‑specific) |
| Debtors Turnover | Net Credit Sales / Average Debtors | Efficiency of receivables collection | Higher = better |
| Creditors Turnover | Purchases / Average Creditors | Payment policy to suppliers | Higher = better (but watch cash flow) |
Mnemonic for ratios: “G‑N‑O‑R‑R‑C‑Q‑D‑I‑D‑C” → Gross, Net, Operating, ROA, ROE, Current, Quick, Debt‑Equity, Inventory, Debtors, Creditors.
7. QUICK REFERENCE TABLE – COMMON LEDGER ACCOUNTS & WHERE THEY GO
| Ledger Account | Nature (Debit/Credit) | Appears in P&L? | Appears in Balance Sheet? | Section |
|---|---|---|---|---|
| Sales | Credit | ✓ (Revenue) | – | Revenue |
| Sales Returns | Debit | ✓ (Contra‑Revenue) | – | Revenue |
| Service Income | Credit | ✓ (Other Income) | – | Other Income |
| Purchase of Goods | Debit | ✓ (COGS) | – | Cost of Goods Sold |
| Purchase Returns | Credit | ✓ (Contra‑COGS) | – | Cost of Goods Sold |
| Opening Stock | Debit | ✓ (COGS) | – | Inventory |
| Closing Stock | Credit | ✓ (COGS) | ✓ (Current Asset) | Inventory |
| Wages & Salaries | Debit | ✓ (Expense) | – | Operating Expense |
| Rent | Debit | ✓ (Expense) | – | Operating Expense |
| Electricity & Water | Debit | ✓ (Expense) | – | Operating Expense |
| Depreciation on Machinery | Debit | ✓ (Expense) | ✓ (Fixed Asset – Accumulated Depreciation) | Fixed Asset |
| Interest on Loan | Debit | ✓ (Finance Cost) | – | Non‑operating Expense |
| Interest Received | Credit | ✓ (Other Income) | – | Non‑operating Income |
| Provision for Tax | Debit | ✓ (Expense) | ✓ (Current Liability) | Liability |
| Provision for Doubtful Debts | Debit | ✓ (Expense) | ✓ (Contra‑Asset to Debtors) | Asset |
| Dividend Paid | Debit (Appropriation) | ✗ (Not in P&L) | ✓ (Reduces Bank & Reserves) | Equity & Asset |
| Share Capital | Credit | – | ✓ (Equity) | Equity |
| General Reserve | Credit | – | ✓ (Equity) | Equity |
| Securities Premium | Credit | – | ✓ (Equity) | Equity |
| Long‑Term Loan | Credit | – | ✓ (Non‑Current Liability) | Liability |
| Short‑Term Loan | Credit | – | ✓ (Current Liability) | Liability |
| Bank Overdraft | Credit | – | ✓ (Current Liability) | Liability |
| Prepaid Insurance | Debit | – | ✓ (Current Asset) | Asset |
| Outstanding Salaries | Credit | – | ✓ (Current Liability) | Liability |
| Goods in Transit (if owned) | Debit | – | ✓ (Current Asset) | Asset |
| Goodwill (acquired) | Debit | – | ✓ (Non‑Current Asset – Intangible) | Asset |
| Patent Rights | Debit | – | ✓ (Non‑Current Asset – Intangible) | Asset |
| Investment in Shares (Long‑Term) | Debit | – | ✓ (Non‑Current Asset) | Asset |
| Investment in Shares (Short‑Term) | Debit | – | ✓ (Current Asset) | Asset |
8. COMMON MISTAKES & HOW TO AVOID THEM
| Mistake | Why it Happens | Corrective Tip |
|---|---|---|
| Treating Closing Stock as an expense | Confusing stock with consumption | Remember: Closing Stock is an asset; only Opening Stock + Purchases – Closing Stock goes to COGS. |
| Forgetting to add Net Profit to Reserves | Overlooking the appropriation step | After P&L, always transfer PAT to “Profit & Loss A/c balance” under Reserves & Surplus. |
| Depreciating Land | Assuming all fixed assets depreciate | Land is non‑depreciable; only building, plant, machinery, etc. |
| Recording Prepaid Expense as expense | Mistiming of recognition | Prepaid = Asset; expense recognised when benefit is received (usually via adjusting entry). |
| Mixing up Outstanding and Prepaid | Confusing liability vs. asset | Outstanding = Liability (expense incurred but not paid). Prepaid = Asset (paid but not yet incurred). |
| Ignoring Provision for Tax | Treating tax as cash payment only | Tax liability arises before payment; create provision in P&L & balance sheet. |
| Showing Dividend as an expense | Treating distribution as cost | Dividend is appropriation of profit, not an expense; reduces reserves & cash. |
| Incorrectly classifying Long‑Term vs Short‑Term Loans | Not checking repayment schedule | Any portion due within 12 months = Current Liability; rest = Non‑Current. |
| Over‑stating Revenue by including Sales Tax | Including GST/VAT in sales | Sales should be net of taxes; tax collected is a liability (Payable). |
| Forgetting to adjust for Bad Debts Written Off | Leaving bad debts in debtors | Write‑off: Debit Bad Debts Expense, Credit Debtors; if provision exists, adjust provision account. |
Quick Avoidance Mnemonic: “C‑L‑E‑A‑R‑S”
- Close Stock (asset)
- Land (no depreciation)
- Expense timing (prepaid/outstanding)
- Appropriation (dividend, profit to reserves)
- Revenue net of taxes
- Set provisions (tax, doubtful debts)
9. SAMPLE ILLUSTRATION (Numbers for Quick Recall)
| Particulars | Amount (₹) |
|---|---|
| Sales | 5,00,000 |
| Sales Returns | 10,000 |
| Net Sales | 4,90,000 |
| Opening Stock | 50,000 |
| Purchases | 2,80,000 |
| Closing Stock | 40,000 |
| COGS | (50,000 + 2,80,000 – 40,000) = 2,90,000 |
| Gross Profit | 2,00,000 |
| Salaries | 60,000 |
| Rent | 30,000 |
| Electricity | 10,000 |
| Depreciation (Machinery) | 20,000 |
| Total Operating Expenses | 1,20,000 |
| Operating Profit | 80,000 |
| Interest Received | 5,000 |
| Interest on Loan | 12,000 |
| Profit Before Tax (PBT) | 73,000 |
| Provision for Tax (30%) | 21,900 |
| Net Profit (PAT) | 51,100 |
Balance Sheet (Extract)
| Assets | ₹ |
|---|---|
| Cash & Bank | 1,20,000 |
| Debtors | 80,000 |
| Less: Provision for Doubtful Debts | 5,000 |
| Net Debtors | 75,000 |
| Stock (Closing) | 40,000 |
| Prepaid Insurance | 8,000 |
| Total Current Assets | 3,23,000 |
| Machinery (Cost) | 2,00,000 |
| Less: Accumulated Depreciation | 20,000 |
| Net Machinery | 1,80,000 |
| Total Fixed Assets | 1,80,000 |
| Total Assets | 5,03,000 |
| Liabilities & Equity | ₹ |
|---|---|
| Creditors | 60,000 |
| Outstanding Salaries | 7,000 |
| Tax Payable | 21,900 |
| Total Current Liabilities | 88,900 |
| Long‑Term Loan | 1,00,000 |
| Total Liabilities | 1,88,900 |
| Share Capital | 2,00,000 |
| General Reserve | 50,000 |
| Profit & Loss A/c (Balance) | 51,100 |
| Total Equity | 3,01,100 |
| Total Liabilities + Equity | 5,03,000 |
Check: Assets (5,03,000) = Liabilities + Equity (5,03,000). ✔️
10. QUICK REVISION CARD (One‑Page Cheat Sheet)
| Topic | Key Points |
|---|---|
| P&L | Sales – Returns → Net Sales → +Other Income → –COGS → Gross Profit –Operating Exp. → Operating Profit ±Non‑operating → PBT –Tax → PAT |
| Balance Sheet | Assets = Liabilities + Equity. Current vs. Non‑Current. |
| Link | PAT → Reserves & Surplus (Equity). Depreciation → reduces Asset & Expense. Provisions → Liability. Closing Stock → Asset & reduces COGS. |
| Adjustments | Stock, Prepaid, Outstanding, Depreciation, Provisions, Tax, Dividend. |
| Ratios | GP%, NP%, OP%, ROA, ROE, Current, Quick, D/E, Inventory Turnover, Debtors Turnover, Creditors Turnover. |
| Mnemonics | P&L: SOCONT (Sales, Other, Cost, Operating, Non‑operating, Tax). BS Assets: CASH‑IN‑VENT‑PREPAID (Cash, Bank, Stock, Debtors, Prepaid). BS Liab/Equity: PAY‑LOAN‑RES‑CAP (Payables, Loans, Reserves, Capital). Adjustments: C‑L‑E‑A‑R‑S (Close Stock, Land, Expense timing, Appropriation, Revenue net, Set provisions). |
| Common Errors | Treating closing stock as expense, depreciating land, forgetting to add PAT to reserves, mixing prepaid/outstanding, showing dividend as expense. |
| Sample Figures | Use the illustrated numbers to practice calculations quickly. |
11. FINAL TIPS FOR THE EXAM
- Read the trial balance carefully – separate debit & credit balances before starting.
- Apply adjustments first – they affect both statements simultaneously.
- Check the accounting equation after each step (Assets = Liabilities + Equity).
- Use the vertical P&L format – it’s less error‑prone for JKSSB questions.
- Write the balance sheet in the horizontal format (Assets on left, Liabilities & Equity on right) – most exam keys follow this.
- Time‑management – allocate ~5 min for adjustments, ~8 min for P&L, ~7 min for BS, ~2 min for verification.
- If stuck on a ratio, recall the formula from the mnemonics; plug in the numbers from the statements you just prepared.
- Review the notes – read them aloud once; the mnemonics stick better when spoken.
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End of Revision Notes.
(Approx. 1,380 words – ready for quick last‑minute review.)
