Profit & Loss Account

The account through which annual net profit or loss of a business is ascertained, is called profit and loss account. Gross profit or loss of a business is ascertained through trading account and net profit is determined by deducting all indirect expenses (business operating expenses) from the gross profit through profit and loss account. Thus profit and loss account starts with the result provided by trading account.

The profit and loss (P&L) statement is a financial statement that summarizes the revenues, costs and expenses incurred during a specified period, usually a fiscal quarter or year. The P&L statement is synonymous with the income statement. These records provide information about a company’s ability or inability to generate profit by increasing revenue, reducing costs or both. Some refer to the P&L statement as a statement of profit and loss, income statement, statement of operations, statement of financial results or income, earnings statement or expense statement.

The particulars required for the preparation of profit and loss account are available from the trial balance. Only indirect expenses and indirect revenues are considered in it. This account starts from the result of trading account (gross profit or gross loss). Gross profit is shown on the credit side of the profit and loss account and gross loss is shown on the debit side of this account. All indirect expenses are transferred on the debit side of this account and all indirect revenues on credit side.  If the total of the credit side exceeds the debit side, the result is “net profit” and if the total of the debit side exceeds the total of the credit side, the result is net loss. As the net profit or net loss of a certain accounting period is determined through profit and loss account, so its heading is:

                                                   Name of Business

                       Profit and Loss Account for the year ended 31.12.2005

                                   (if accounting period ends on 31.12.2019)

Features of Profit and Loss Account

1. This account is prepared on the last day of an account year in order to determine the net result of the business.
2. It is second stage of the final accounts.
3. Only indirect expenses and indirect revenues are shown in this account.
4. It starts with the closing balance of the trading account i.e. gross profit or gross loss.
5. All items of revenue concerning current year – whether received in cash or not – and all items of expenses – whether paid in cash or not – are considered in this account. But no item relating to past or next year is included in it.

Conclusion

• The P&L statement is a financial statement that summarizes the revenues, costs and expenses incurred during a specified period.
• The P&L statement is one of three financial statements every public company issues quarterly and annually, along with the balance sheet and the cash flow statement.
• It is important to compare P&L statements from different accounting periods, as the changes in revenues, operating costs, R&D spending and net earnings over time are more meaningful than the numbers themselves.
• Together with the balance sheet and cash flow statement, the P&L statement provides an in-depth look at a company’s financial performance.