WHAT IS THE PROFIT AND LOSS STATEMENT?
Profit occurs when income over a given period is greater than expenses. Loss will occur if expenses are greater than income.
Income can be regarded as any proceeds from the sale of goods or services offered by the business. Other forms of income can include, interest paid on bank accounts, interest derived through money investment in stocks (as dividends), donations, etc.
Expenses are all payments made in conjunction with the production of the income. Such things may include labour, rates, rent, power, licences, registrations, raw material costs, advertising, etc.
Every time income is received, the proprietorship is increased. Every expense decreases proprietorship. If a profit is achieved over a given period, the proprietorship is increased.
A new equation could then be suggested:
Assets = liabilities + original proprietorship + profit (– loss)
or, this could be described as:
Assets = liabilities + original proprietorship + (income - expense)
The profit and loss account in the general ledger has the purpose of closing off revenue and expense accounts on balance day. This closing off is necessary because balances in such accounts are not relevant to the following accounting period. As part of this closing off procedure, the profit and loss account also works out the profit (or loss) for the period. This process, however, takes place in the general ledger via the general journal. This is the final step in the double entry accounting system at the end of each accounting period.
The Profit and Loss Statement is a report prepared at the end of each accounting period to report on such items. It uses the same information as that contained in the profit and loss account, except that it is set out in a more informative manner. As a general rule, accounting reports are expected to convey meaningful information to the user of the reports. The profit and loss statement should be prepared so that it can be easily understood by those who are not accountants.