Explanation of certain elements of the profit and loss account
1. Salaries
Salaries are paid for the services of the employees and are charged to the profit and loss account as an indirect expense. If any salary has been paid to the owner or partners, it must be shown separately because it requires special treatment at the time of income tax determination.
2. Wages and salaries
When the salary account is included with salaries, it is treated as an indirect expense and is taken into the profit and loss account.
3. Rent
Renting the office shop showroom or going down is an indirect expense and is therefore charged to the profit and loss account. However, the factory rent is charged to the business account. When a part of the building has been sublet, the rent received must be shown on the credit side of the profit and loss account as a separate item.
4. Fees and taxes
These are collected by local authorities to cover public spending. Being an indirect expense, it is shown on the debit side of the profit and loss account.
5. Interest
The business pays interest on loans, overdrafts or past due debts. It is an indirect expense; so it is charged to the profit and loss account. The interests of the loans advanced by the company on the investments of the depositors are income of the company and, therefore, are credited to the profit and loss account.
If the company has paid any interest on the capital to its owner or partners, it must also be debited to the profit and loss account, but separately because this item needs special treatment at the time of the income tax assessment.
6. Commission
In business, agents are sometimes appointed to make sales, who are paid a commission as compensation. Therefore, these selling expenses are shown on the debit side of the profit and loss account. Sometimes the commission is also paid for purchases of goods, for example, expenses must be debited from the business account. Sometimes the company can also act as an agent for the other business houses and, in such cases, receives a commission from them. The commission thus received is shown on the credit side of the profit and loss account.
7. Business expenses
They are also called “miscellaneous expenses.” Business expenses represent expenses of such a nature that it is not worth opening separate accounts. Business expenses are not posted to the business account.
8. Repairs
Repairs to the plant, machinery, and buildings are indirect expenses, they are treated as expenses and charged to the profit and loss account.
9. Travel expenses
Unless otherwise stated, travel expenses are treated as indirect expenses and are charged to the profit and loss account.
10. Horse and stable expenses
Horse feed expenses and salaries paid for the care of the stable are treated as indirect expenses and are charged to the profit and loss account.
11. Premium Apprentice
This is the amount charged to the people to whom the company provides training. It is income and is credited to the profit and loss account. In case the apprentice premium is collected in advance for two or three years, then the amount is spread over several years and the profit and loss account for each year is credited with your share of the income.
12. Bad debts
It is the amount that the merchant was unable to recover due to credit sales. It is a business loss, so it is charged to the profit and loss account.
13. Life insurance premium
If the premium is paid on the business owner’s life policy; It is treated as your drawings and displayed by capital account deduction. It should not be taken to the profit and loss account.
14. Premium insurance
If the insurance premium account appears on the trial balance, it means company insurance. This is carried into the profit and loss account. The insurance premium on purchased goods, factory construction, and factory machines are treated as direct expenses and posted to the trade account.
15. Income tax
In the case of merchants, the income tax paid is treated as a personal expense and shown as a deduction from the capital account. Income tax in the case of companies is treated differently.
16. Discount allowed and received
The discount is a reward for punctual payment. It is believed to show the received discount and the allowed discount separately on the credit and debit side of the profit and loss account, respectively, instead of showing the net balance of this account.
17. Depreciation
Depreciation is a loss incurred from the use of fixed assets in the business. Generally, it is debited from the profit and loss account at a fixed percentage. Students must be very careful regarding the depreciation rate. If the rate does not have the words “per year”, then the rate will be taken regardless of the period of the accounts. This is very important when the accounting period is less than one year. On the other hand, if the depreciation rate is ‘annual’, the depreciation should be calculated on the assets with due regard to the period for which the asset has been used in business during the year. In case of additions to assets during the year, it is advisable to ignore the depreciation of the additions if the date of the additions is not given. The same rule will apply to the sale of assets during the year.
18. Stock at the end of the trial balance.
It is important to emphasize the rule that the balance that appears in the trial balance is carried to one place. It can be a trading account or a profit and loss account or a balance sheet. Since stocks are ultimately an asset, they will be added to the balance sheet. On the other hand, as long as there are stocks in the trade, the account should be kept open and therefore should be carried to the asset side of the balance sheet.
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