WHAT IS A PROFIT/LOSS ACCOUNT ?
Income Statement, also known as Profit & Loss Account, is a report of income, expenses and the resulting profit or loss earned during an accounting period.
It is popularly known as P&L A/c. . It is often the most popular and common financial statement in a business plan as it quickly shows how much profit or loss was generated by a business.
OBJECTIVE OF PROFIT/LOSS ACCOUNT
- Profit and loss account provides trading results by ascertaining net profit or net loss of the business.
- It helps to know selling and distribution expenses and office and administrative expenses for the particular period.
- It facilitates comparison between the profit and loss of current year with that of previous years.
- It also reveals money spent or cost incurred in an organization’s effort to generate revenue, representing the cost of doing business.
COMPONENTS OF PROFIT/LOSS ACCOUNT
Profit and loss account comprises the following main components :-
REVENUE :- Revenue is the money an entity receives from the sale of goods or services. It is reported at the top of the income statement and are referred as net sales, or sales revenue .
COST OF GOODS SOLD :- Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.
GROSS PROFIT :- Also known as gross income or gross margin, the gross profit is net revenue excluding costs of sales.
OPERATING EXPENSES :- Operating expenses are administrative, general and selling expenses that are related to running the business for a specific period of time. This includes rental expenses, payroll, utilities and any other expense required to operate the business. Also included are non-cash expenses such as depreciation.
OPERATING INCOME :- Operating income is equal to revenues minus cost of goods sold and operating expenses. In other words, it measures the profits or losses of the day to day operations of the business. Another name for Operating Income is Earnings Before Interest and Taxes (EBIT).
NET PROFIT :- It is the total amount earned after deducting the expenses. It is calculated by deducting the total expenses from the gross profit.
Thus, in simple words, Profit and Loss Account is a type of financial statement which reflects the outcome of business activities during an accounting period (i.e. Profit or loss).