Profit and Loss Account is a type of financial statement which is prepared in order to determine the net profit or net loss that occurs during an accounting period for a business concern. Profit & loss a/c is popularly known as P&L A/c. It is also called as Profit and Loss Statement or income and expense statement. It shows a company’s ability to generate sales, manage expenses, and create profits.
Preparation of profit and loss account is the second stage in the creation of final accounts.
OBJECTIVE OF PREPARING PROFIT AND LOSS ACCOUNT
Profit and loss account is prepared to ascertain whether the business is making profit or loss for a given period. It also helps to find out the performance of the company in financial terms. It helps an organisation to take the right business decision like where should we do the cost-cutting, from where can a business generate more profit and in which part business is suffering the loss.
HOW TO PREPARE PROFIT & LOSS ACCOUNT ?
The profit and loss account is prepared on the basis of “ accrual system of accounting”. Hence, all the operating expenses are debited and the gross profit & other operating incomes are credited. The resultant effect is either net profit or net loss.
If the amount of operating expenses are more than gross profit & all the operating incomes, the difference will be treated as Net loss.
Similarly, if the amount of gross profit and other operating incomes is more than the operating expenses the difference will be treated as Net profit.
The balance of Profit and Loss Account which represents either net profit or net loss is transferred to the balance sheet.
The following items usually appear on the debit and credit side of a Profit and Loss Account.
On the debit side:
- Gross Loss (Transferred from Trading Account)
- All Indirect Expenses
On the credit side:
- Gross Profit (Transferred from Trading Account)
- All Indirect Revenues
Thus, in simple words the profit and loss statement/account is one of the fundamental financial statements for accounting, along with the balance sheet and cash flow statement which helps in knowing the net profit/loss generated by a concern during a particular period.