Profit And Loss Accounting

Posted on December 05, 2011 by Admin
Profit And Loss Accounting

Profit And Loss Accounting

Completing a Profit & Loss Statement is a highly charged activity at the end of the financial year. It is what shareholders and prospective investors anxiously wait for as it determines the division of profit amongst shareholders. This article will examine the nature of the Profit & Loss Account and its presentation as a statement.

The Parameters of the profit & Loss Account

Unlike the Balance Sheet which presents the state of affairs of the business at a given point in time, the calculation of profit/loss is based on the activities of the organization over a given period of time, this being the financial year of the business. It is thus labeled as The Profit & Loss Statement for the Year Ending 31/12/XX.”

How is Profit/Loss Determined?

A business engages in a particular activity to generate profit. This may be in the form of delivering a service such as car washing or selling products which are either purchased or manufactured by the business. The selling price reflects the revenue received. Profit is calculated by deducting the expenses incurred in earning that revenue. These could include costs such as wages, fuel and motor expenses, rent of premises, electricity and so forth. These are the everyday running costs of the business and very different to the set up costs of starting a business where assets are purchased.