All incomes and gains (other than sales) such as rent received, interest received, commission received, discount received, etc, are shown on the credit side of the Profit and Loss Account. The difference between the two sides of the Profit and Loss Account represents either Net Profit or Net Loss. In case the total of the credit side is higher than the total of the debit side, the difference is called Net Profit.

Thus, Net Profit is the excess of gross profit and incidental incomes over the expenses and losses relating to the normal activities of the business. If, however, the expenses and losses are more than. the gross profit and incidental incomes, the difference is called Net Loss. In other words, if the total of the debit side is more than the total of the credit side, the result is Net Loss.

The Net Profit or Net Loss belongs to the proprietor and therefore it is transferred to his Capital Account. Thus the Profit and Loss Account is closed. Let us now see how the Profit and Loss Account is prepared.