Importance Of Profit And Loss Account Essay

The Profit and Loss Account is a Financial Statement which summarizes a company's revenue and expenditure for a specific period of time, usually prepared annually or quarterly. These statements provide information that shows the ability of a company to generate profits by increasing its revenues and reducing costs. The Profit and Loss Account is also known as a "Statement of Profit and Loss", an "Income Statement" or an "Income and Expense Statement".

Importance of profit and loss account

Profit and Loss Account represents a company's ability to generate income through their business operations. Many times businesses will need financing to help create the facilities for their operations. Smaller companies usually obtain bank loans that are based on the amount of income a company has earned from past operations. Solid Profit and Loss history is essential for getting the best loan terms. Profit and loss statements are important also because many companies are required by law or association membership to complete them. Apart from this, a profit and loss statement will help the company to understand their net income, which may be helpful in decision-making processes. That is, it gives one the information needed to grow or expand his business.

Key items of the profit and loss account

• Income from Sales
• Cost Of Goods Sold
• Gross Profit
• Operating Expenses
• Net Profit from Operations
• Other Income
• Other Expenses
• Net Profit

Standard structure of a corporate profit and loss account

Profit and Loss Account for the year ended

• To Gross Loss
• By Gross Profit
• To Salaries
• By Interest Received
• To Rent
• By Commission Received
• To Rent and Rates
• By Other Receipts
• To Discount Allowed
• By Etc., Etc.
• To Commission Allowed
• By Net Loss (Transferred to Capital Account of the Trader)
• To Insurance
• To Bank Charges
• To Legal Charges
• To Repairs
• To Advertising
• To Trade Expenses
• To Office Expenses
• To Bad Debts
• To Travelling Expenses
• To Etc., Etc.
• To Net Profit (Transferred to Capital Account of the Trader)

Profit and Loss Account for the year ended (Statement Form)

Income From Sales:

• Less: Sales Returns
• Sales Discount
• Net Sales
• Stock as on 1stJanuary
• Purchases
• Less: Purchase Returns
• Net Purchase
• Cost Of Goods available for sale
• Less: Stock as on 31stDecember
• COGS (Cost Of Goods Sold)

Operating Expenses:

• Selling Expenses
• Sales Salary
• Advertising Expenses
• Insurance Expenses - selling
• Store Supplies Expenses
• Sundry Selling Expenses
• Total Selling Expenses

General Expenses:

• Office Salaries
• Taxes
• Insurance Expenses - general
• Office Supplies Expenses
• Sundry General Expenses
• Total General Expenses
• Total Operating Expenses

Net Profit from Operations

Other Income:

• Rent Income

Other Expenses:

• Interest Expenses

The profit and loss account of Tata Steel Limited

(This will help us understand the purpose of a Profit and Loss Account and also enable us to understand how a Profit and Loss statement is made.)

Profit & Loss - Tata Steel Ltd

How the profit and loss account helps the corporate decision makers to shape their decisions?

A Profit and Loss account provides a collection of operating data that can be used by corporate decision makers to improve corporate operations. Regular review of this statement can help the entrepreneur to adjust the strategic paths of the company based on the prevailing economic conditions. A Profit and Loss statement also helps outside investors to measure a firm's economic viability in the long run. Also:

Analyzing a statement of profit and loss gives corporate leaders the tools necessary to measure competitors' progress in the market, hence improve their market share.

The Profit and Loss account gives a clear view of all the expenses and incomes of the firm, hence a regular analysis of these statements help firms cut down their expenses.

Creating a forum through which business unit leaders discuss and help top leaders set performing segments apart from activities that generate less than mediocre revenue. By reviewing the firm's revenues and expenses, management can decide which segment to sell.

A profit-and-loss report indicates to the rest of the world the corporate segments that are thriving, emphasizing products that positively affect the corporate bottom line.