by Statement of Profit and Loss for a proprietary concern provides a summary of the financial performance over a specific period, showing the revenue earned and expenses incurred, ultimately resulting in net profit or loss.
When preparing a profit and loss account, special adjustments such as depreciation are common. Depreciation reflects the reduction in value of fixed assets over time due to wear and tear or obsolescence. It is an expense that reduces profit but does not involve any cash outflow.
Statement of Profit and Loss For the Year Ended December 31, 2024
| Particulars | Amount ($) |
| Revenue | |
| Sales Revenue | 500,000 |
| Other Income (Interest, Discounts) | 10,000 |
|
Total Revenue (A) |
510,000 |
| Expenses | |
| Purchases | 220,000 |
| Less: Closing Stock | (30,000) |
| Cost of Goods Sold | 190,000 |
| Salaries and Wages | 60,000 |
| Rent and Utilities | 30,000 |
| Depreciation on Machinery | 10,000 |
| Office Supplies | 5,000 |
| Advertising Expense | 7,000 |
| Insurance Expense | 3,000 |
| Interest on Loan | 8,000 |
| Miscellaneous Expenses | 4,000 |
| Total Expenses (B) | 317,000 |
| Net Profit Before Tax (A-B) | 193,000 |
| Less: Income Tax (Proprietor’s tax) | (38,600) |
| Net Profit After Tax | 154,400 |
Explanation of Special Adjustments (Depreciation):
Depreciation on Machinery: Depreciation is applied as a non-cash expense to account for the wear and tear of fixed assets like machinery. In this case, $10,000 depreciation is deducted from the profit to reflect the gradual reduction in the asset’s value.
Depreciation is recorded as an operating expense and reduces the net profit, although it does not involve an immediate outflow of cash. Straight-Line Method or Diminishing Balance Method may be used for depreciation, based on the accounting policy of the proprietary concern.
Steps for Preparation:
- Revenue Section: Start with all revenues, including sales and any other income like interest, discounts, or investment income.
- Cost of Goods Sold (COGS): Calculate the cost of goods sold by subtracting closing stock from purchases. COGS represents the direct costs associated with the sale of goods.
- Operating Expenses: List all operating expenses incurred during the period. This includes salaries, rent, utilities, office supplies, advertising, insurance, and other costs required for the business’s operation.
- Depreciation: Include depreciation on fixed assets (machinery, equipment, or buildings) as an expense. This is a non-cash charge that reduces the value of assets over time.
- Net Profit Before Tax: Subtract total expenses (including depreciation) from total revenue to arrive at the net profit before tax.
- Income Tax: Deduct any income tax applicable to the proprietor (if applicable, depending on the taxation structure of the concern).
- Net Profit After Tax: This is the final profit figure for the proprietary concern after accounting for all expenses and taxes.
Importance of Depreciation Adjustment:
Depreciation is critical because it matches the cost of an asset with the revenue it generates over its useful life. It also ensures that the business reports realistic profits by accounting for the wear and tear of long-term assets. Not adjusting for depreciation would overstate profits and understate asset consumption.
