Loss and Profit Account is prepared so as to discern whether the firm has made net profit or suffered net loss for a specified accounting period. Such account deals along with indirect expenses as administrative, distribution and selling expenses and the similar to. Although profit and loss Account starts where trading account ends; conversely, it starts along with gross profit on the credit side brought forward from the trading account. In condition of gross loss brought forward from the trading account, loss and profit account begins along with gross loss as the first item upon the debit side.
All the running or indirect expenses, incurred on selling and distribution of the goods and the common administration of the business, such are listed on the debit side whereas all the items of income and gain are listed on the credit side. While the credit side as revenue exceeds the debit as expenses side, the dissimilarity is net profit. However, if the debit side exceeds the credit side, the diversity is net loss. Profit and loss account is balanced through transferring net profit to the capital accounts into the balance sheet and net profit thus raises the capital; the net loss is deducted from the capital accounts into the balance sheet and thus reduces the capital.