Profit and Loss Account
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Profit and Loss Account

Profit and loss account Meaning : Profit and Loss Account is the account which is prepared to calculate the net profit or net loss of the business for a given accounting period. It may be defined as a financial statement that matches the gross profit and indirect revenues with the indirect expenses during an accounting period to show the net profit or net loss earned by a business firm. In common terms profit and loss account is an account which determines the surplus of gains over the losses or vice versa.

Profit and loss account

Meaning : Profit and Loss Account is the account which is prepared to calculate the net profit or net loss of the business for a given accounting period. It may be defined as a financial statement that matches the gross profit and indirect revenues with the indirect expenses during an accounting period to show the net profit or net loss earned by a business firm. In common terms profit and loss account is an account which determines the surplus of gains over the losses or vice versa.

Profit and Loss Account is prepared after the Trading Account has been closed. It starts with the gross profit transferred from the Trading Account. Gross Profit and all indirect revenues are credited to the Profit and Loss Account. Similarly, Gross Loss and all indirect expenses are debited to this account. The difference of the two sides of this account is either net profit or net loss. If the total of the credit side exceeds the total of the debit side, there is net profit. In case, the total of the debit side is greater than the total of the credit side, the difference represents net loss. Net profit or net loss is transferred to the capital account. Profit and Loss Account is a nominal account.

Need of Profit and Loss Account

Profit and Loss Account is required for the following reasons.

(i) Knowledge of Net Profit or Net Loss : Profit and Loss Account provides information about the net profit earned or net loss suffered by the business during a given accounting period. It shows the net outcome of business operations and every businessman wants to know this result.

(ii) Comparison with Profit of Previous Year: The net profit calculated from the Profit and Loss Account for a particular accounting year can be compared with the net profit of the previous year. Such comparison is helpful in judging whether the efficiency of the business is increasing or decreasing.

(iii) Control over Expenses: An analysis of the various expenses included in the Profit and Loss Account and their comparison with the expenses of the previous year is helpful in exercising effective control over the expenses.

 

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Comments (1)

very informative.thanks for sharing

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