Statement of Profit And Loss

The two statements of affairs one at the beginning of the accounting period (known as opening) and the other at the end of the accounting period (known as closing) would simply provide information in respect of capital in the beginning and capital at the end respectively. Now are to find out the profit or loss. An increase in the capital at the end over the capital in the beginning would apparently mean profit and decrease a loss. But it should be appreciated that such increase or decrease in the capital at the end may not necessarily be on account of profit or loss as the case may be.

Pro-Forma Statement Of Profit and Loss (With Adjustments in Capital)
    For The Year Ending On…..
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                                    ________________________________________Rs.
Capital at the end
Add: Drawings during the year (i)
Less: Additional capital introduced or invested during the year (ii)
Actual Capital that ought to be at the end
Less: Capital in the beginning
Profit or loss subject to adjustments (iii)
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(i)    In the absence of drawings, the capital at the end would have been more; hence drawings are added back to the capital at the end.

(ii)    In case additional capital was not introduced during the year, capital at the end would be less. Thus additional capital is deducted from the capital at the end.

(iii)    If the adjusted closing capital is more than the capital in the beginning, there is a profit and if it is less than opening capital, there is a loss.

The Profit of loss, thus arrived at, is subject to following adjustments:

(i)    Interest on capital and drawings;

(ii)    Salary to a partner;

(iii)    Depreciation;

(iv)    Provision for doubtful debts;

(v)    Outstanding income and expenses;

(vi)    Prepaid expenses and income etc.

These adjustments are made to profit or loss arrived at by comparing two capitals. Unadjusted figure is like gross profit or loss.

Alternatively,

the above stated adjustments may be made in the capital in beginning as well:
_______________________________________________________________________
                                            __________________________________Rs.
Capital in the beginning
Add: Additional capital introduced during the year
Less: Drawings during the year

Actual Capital that ought to be in the business
Less: Capital at the end
Profit or loss subject to adjustment (a)
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(a) If the actual capital (opening capital with adjustments of additional capital and drawings) is more than the capital at the end, the result is loss and profit if vice versa.

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