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    Profit and Loss Account

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    Murad Shah Patel
    The document provides an overview of profit and loss accounts and balance sheets. It defines profit as the incentive for business and reward for taking risks. Profit also signals how resources should be allocated. The main task of accounting is to monitor and measure profits using a profit and loss account, which records revenues and costs. A balance sheet provides a snapshot of a business's financial condition by listing assets, liabilities, and equity. It can identify trends to analyze financial strength and cash flow.

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    Profit and Loss Account

    Uploaded by

    Murad Shah Patel
    358 views9 pages
    The document provides an overview of profit and loss accounts and balance sheets. It defines profit as the incentive for business and reward for taking risks. Profit also signals how resources should be allocated. The main task of accounting is to monitor and measure profits using a profit and loss account, which records revenues and costs. A balance sheet provides a snapshot of a business's financial condition by listing assets, liabilities, and equity. It can identify trends to analyze financial strength and cash flow.

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    The document provides an overview of profit and loss accounts and balance sheets. It defines profit as the incentive for business and reward for taking risks. Profit also signals how resources should be allocated. The main task of accounting is to monitor and measure profits using a profit and loss account, which records revenues and costs. A balance sheet provides a snapshot of a business's financial condition by listing assets, liabilities, and equity. It can identify trends to analyze financial strength and cash flow.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    358 views9 pages

    Profit and Loss Account

    Uploaded by

    Murad Shah Patel
    The document provides an overview of profit and loss accounts and balance sheets. It defines profit as the incentive for business and reward for taking risks. Profit also signals how resources should be allocated. The main task of accounting is to monitor and measure profits using a profit and loss account, which records revenues and costs. A balance sheet provides a snapshot of a business's financial condition by listing assets, liabilities, and equity. It can identify trends to analyze financial strength and cash flow.

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    Profit/Loss account

    Meaning of profit

    The starting point in understanding the profit and loss account is to be clear about
    the meaning of "profit".

    Profit is the incentive for business; without profit people wouldn't’t bother. Profit
    is the reward for taking risk; generally speaking high risk = high reward (or loss if
    it goes wrong) and low risk = low reward. People won’t take risks without reward.
    All business is risky (some more than others) so no reward means no business. No
    business means no jobs, no salaries and no goods and services.

    Profit also has an important role in allocating resources (land, labour, capital and
    enterprise). Put simply, falling profits (as in a business coming to an end eg black-
    and-white TVs) signal that resources should be taken out of that business and put
    into another one; rising profits signal that resources should be moved into this
    business. Without these signals we are left to guess as to what is the best use of
    society’s scarce resources.
    Profit/Loss account
    The Task of Accounting - Measuring Profit
    The main task of accounts, therefore, is to monitor and measure profits.
    Profit = Revenue less Costs

    So monitoring profit also means monitoring and measuring revenue and costs.
    There are two parts to this:-

    1) Recording financial data. This is the ‘book-keeping’ part of accounting.


    2) Measuring the result. This is the ‘financial’ part of accounting.
    Profits are ‘spent’ in three ways.
    1) Retained for future investment and growth.
    2) Returned to owners eg a ‘dividend’.
    3) Paid as tax.
    Parts of Profit/Loss account
    The Profit & Loss Account aims to monitor profit. It has three parts.
    1) The Trading Account.
    This records the money in (revenue) and out (costs) of the business as a
    result of the business’ ‘trading’ ie buying and selling. This might be buying
    raw materials and selling finished goods; it might be buying goods
    wholesale and selling them retail. The figure at the end of this section is the
    Gross Profit.

    2) The Profit and Loss Account proper


    This starts with the Gross Profit and adds to it any further costs and
    revenues, including overheads. These further costs and revenues are from
    any other activities not directly related to trading. An example is income
    received from investments.

    3) The Appropriation Account. This shows how the profit is ‘appropriated’


    or divided between the three uses mentioned above.
    Uses of Profit/loss account
    1) The main use is to monitor and measure profit, as discussed above. This
    assumes that the information recording is accurate. Significant problems
    can arise if the information is inaccurate, either through incompetence or
    deliberate fraud.

    2) Once the profit(loss) has been accurately calculated, this can then be used
    for comparison ie judging how well the business is doing compared to
    itself in the past, compared to the managers’ plans and compared to other
    businesses.

    3) There are ways to ‘fix’ accounts. Internal accounts are rarely ‘fixed’,
    because there is little point in the managers fooling themselves (unless
    fraud is going on) but public accounts are routinely ‘fixed’ to create a
    good impression out to the outside world. If you understand accounts,
    you can usually (not always) spot these ‘fixes’ and take them out to get a
    true picture.
    Proforma of P&L A/C
    Balance sheet
    A balance sheet is a snapshot of a business’ financial condition at a specific
    moment in time, usually at the close of an accounting period. A balance
    sheet comprises assets, liabilities, and owners’ or stockholders’ equity.
    Assets and liabilities are divided into short- and long-term obligations
    including cash accounts such as checking, money market, or government
    securities. At any given time, assets must equal liabilities plus owners’
    equity. An asset is anything the business owns that has monetary value.
    Liabilities are the claims of creditors against the assets of the business.
    A balance sheet helps a small business owner quickly get a handle on the
    financial strength and capabilities of the business. Is the business in a
    position to expand? Can the business easily handle the normal financial
    flows of revenues and expenses? Or should the business take immediate
    steps to bolster cash reserves
    Balance sheet
    • Balance sheets can identify and analyze trends,
    particularly in the area of receivables and payables. Is
    the receivables cycle lengthening? Can receivables be
    collected more aggressively? Is some debt uncollectible?
    Has the business been slowing down payables to
    forestall an inevitable cash shortage?
    Balance sheet Proforma
    THANK U

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