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PROFIT & LOSS

ACCOUNT

No one was ever ruined by taking a profit.


-Stock Exchange Maxim

Dr. Jatin Pancholi


Email: email@jatinpancholi.com
Website: http://www.jatinpancholi.com
Dr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class discussion rather
than to illustrate either effective or ineffective handling of a management situation. The handling of a management situation
requires personal guidance by a professional. To obtain copies, request permission to reproduce and to send feedback,
please send email to email@jatinpancholi.com. Visit website http://www.jatinpancholi.com. Those wishing to co-author next
edition of this handout are requested to contact via email.
Introduction
 Annual Report – Financial Statement
– Balance Sheet
– Profit & Loss Account
 Balance Sheet is a ‘position’ statement.
 P&L A/c is a ‘flow’ statement.
 Companies Act:
– A Balance Sheet as on the last day of the
financial year
– A Profit & Loss Account for the financial
year.
P & L A/c
 P&L A/c is also called ‘Income
Statement’.
 Income is calculated as the difference
between revenues and expenses.
– Revenues: from operations
– Expenses: specific product/service/period
 Accountants have agreed to use the
accrual basis of accounting rather than
the cash basis.
Revenues and Expenses
 Revenues - gross increases in
owners’ equity arising from
business operations/delivery of
goods-services to customers

 Expenses - decreases in owners’ equity


that arise because goods or services are
delivered to customers
TRANSACTION

INCOME EXPENDITURE

Revenue Capital Revenue Capital


Income Income Expendi Expend
ture iture
P & L TRANSACTION
A/c
Income (Revenue Income)
Less
INCOME (Revenue Expenditure)
Expenditure EXPENDITURE
NET PROFIT/LOSS 

Revenue Capital Revenue Capital


Income Income Expendi Expend
ture iture
BALANCE SHEET
TRANSACTION
SOURCES OF FUNDS (Liabilities)
(Capital Income)
INCOME EXPENDITURE
APPLICATION OF FUNDS (Assets)
(Capital Expenditure)

Revenue Capital Revenue Capital


Income Income Expendi Expend
ture iture
TRANSACTION
INCOME EXPENDITURE

Revenue Capital Revenue Capital


Income Income Expendi Expend
ture iture

BALANCE
SHEET P & L A/C
P & L A/c CONCEPTS
 ACCOUNTING PERIOD
– Expenditure during A/c period which are
also expenses of that period. –
– Expenditure during the A/c period which
will become expense only in future periods
– Expenditure during the previous A/c period
which will become expenses during the
current A/c period
– Expense of the current A/c period which
have not yet been paid
The Accounting Time Period
 Companies also prepare statements
for interim periods, generally on a
quarterly or monthly basis.
P & L A/c CONCEPTS (contd.)
 REALIZATION CONCEPT
– ‘point of time’ or revenues earned
– recognition of revenues
 ACCRUAL CONCEPT
– profits are measured by change in Owners’ equity
– revenues increases OE, expenses decreases OE

 MATCHING EXPENSES WITH REVENUE


– relevant period
Revenues and Expenses
 Income (profit) - the excess of revenues
over expenses
– Revenues - Expenses = Profit

 Retained earnings - additional owners’


equity generated by income or profits
– Revenues increase owners’ equity.
– Expenses decrease owners’ equity.
Recognition of Revenues
 Recognition - a test to determine
whether revenues should be recorded in
the financial statements
THE DUET: BS & P&L
 BS provides a snapshot of an entity’s
financial position at an instant in time.

 The P&L A/c provides a moving picture


of events over a span of time and
explains the changes that have taken
place between BS dates.
Hang in there! Half
course is over… Thank You

Yeah, that’s
easy for you to
say!

Dr. Jatin Pancholi


Email: email@jatinpancholi.com
Website: http://www.jatinpancholi.com
Dr. Jatin Pancholi has compiled and prepared this teaching note from various sources, as the basis for class discussion rather than to illustrate either
effective or ineffective handling of a management situation. The handling of a management situation requires personal guidance by a professional. To
obtain copies, request permission to reproduce and to send feedback, please send email to email@jatinpancholi.com. Visit website
http://www.jatinpancholi.com. Those wishing to co-author next edition of this handout are requested to contact via email.