• In accounting world, an Income Statement is called as "Profit and Loss Report". In addition, the word Revenue is often used in place of the word Income. An Income Statement is used to inform you about the income earned, expenses incurred, and the total profit or loss in a particular period. Two common periods for creating an income statement are monthly and annually.
• This report summarizes all Income (or sales), the amounts that have been or will be received from customers for goods delivered or services rendered to them, and all expenses, the costs that have arisen in generating revenues.
• Normally Income Accounts accounts are used to track income earned during the process of operating your business. The income of a business comes from sales to customers or fees for services or both. Some of the common names for income accounts are: Income from Sales, Income from Freight, Income from misc. sources as property, shares.
• As discussed in last post ^[1] Balance Sheet is a ‘position’ statement whereas Profit & Loss Account is a ‘flow’ statement.
• The need of P & L report is enforced because of companies Act, which enforce to produce Balance sheet and P&L account.
• A Balance Sheet as on the last day of the financial year
• A Profit & Loss Account for the financial year.

Profit and Loss A/C

What you suppose to remeber is :

• 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

The term Revenue and expense

• Revenues - gross increases in owners’ equity arising from business operations/delivery goods-services to customers
• Expenses - decreases in owners’ equity that arise because goods or services are delivered to customers

In term of accounting, this can be described as:

Revenue Account :This is the income account. Whenever a revenue account balance is changed, it leads to a change in the Assets / Liabilities account. Revenue account is not a control account, it’s treated as an operative account. At the beginning of a new accounting cycle, this account is turned to zero. Entire balance is transferred to the retained earnings account.

Expense Account : This is the operations expenditure account. Whenever an expenditure account balance is changed, it leads to a change in the Assets / Liabilities account. This account behaves just like the Owner’s equity account as an increase in this account essentially means a decrease in owner’s equity. Expense account is not a control account, it’s treated as an operative account. At the beginning of a new accounting cycle, this account is turned to zero. Entire balance is transferred to the retained earnings account.

Spliting the above , the balance sheet can be drived on the basis of these. You can see the details in one of last post ^[1].

where as Profit and Loss report can be best build and understand as:

Profit and Loss A/c Concept

Profit and Loss can be based out of these basic concept as discussed in one of my post ^[2] .

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

REALIZATION CONCEPT

What is important here is

• ‘point of time’ or revenues earned
• recognition of revenues

ACCRUAL CONCEPT

Normally companies measure there profits by change in Owners’ equity , revenues increases OE, expenses decreases OE

MATCHING EXPENSES WITH REVENUE

• 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.

Balance sheet and P&L- Driven by Transaction

In last post we have seen BS provides a snapshot of an entity’s financial position at an instant in time., where as 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. This can be best described as below figure.

1 Comment To "Understanding “Profit and Loss (P&L)” from Techies Mind"

#1 Pingback By R12 Report Manager goes user-friendly | OracleApps Epicenter On October 2, 2008 @ 9:04 pm