Importance Of Profit And Loss Account

Introduction

It has been explained that the accuracy of the books of accounts is determined by means of preparing a Trial Balance. Having determined the accuracy of the books of accounts every businessman is interested in knowing about two more facts. They are :

I. Whether he has earned a profit or suffered a loss during the period covered by the trial balance

II. where does he stand now ?

The determination of Profit or Loss is done by preparing a Trading and Profit and Loss accounts. While the financial position is judged by means of preparing a Balance sheet of the business. The two statements together , i.e., income statement and the balance sheet, are termed as Final accounts. As the term indicates, Final accounts means accounts which

the cost of purchasing and the price at which he can sell the goods are governed largely by market factors over which he has no control. he can control only his operating expenses.

2. He can calculate his Gross Profit Ratio and compare his performance year after year. A fall in the Gross Profit Ratio means increase in the cost of purchasing the goods or decrease in the selling price of the goods or both. In order to maintain at least same figures of gross profit in absolute terms, he will have to push up the sales or make all out efforts to obtain goods at cheaper prices. Thus, he can prevent at least fall in the figure of his gross profit if he cannot bring any increase in it.

3. Comparison of stock figures of one period from another will help in preventing unnecessary lock-up of funds in

It does not take into account the other operating expenses incurred by him during the course of running the business. All indirect expenses and indirect incomes like depreciation, salary, etc. In order to ascertain the true profit or loss which the business has made during a particular period, it is necessary that all expenses and incomes should be considered. profit and loss account considers all such expenses and incomes and gives the net profit made or net loss suffered by a business during a particular